Exiting China When the Risks Don’t Justify the Rewards

This article in Forbes is a useful example of a multinational that has decided that China is no longer an attractive business opportunity.

Actavis, one of the world's largest generic pharmaceutical companies, has decided to exit the market in China, despite the market expected to to generate revenues of around $80bn by 2015.

The article quotes Actavis' CEO Paul Bisaro making this crucial evaluative comment:

“If we’re going to allocate capital, we’re going to do so where we can get the most amount of return for the least amount of risk. And China is just too risky.”

What does Bisaro mean with his view that China is "just too risky"?

On the one hand, it might be a reference to the specific problems being faced by some major pharmaceutical firms in China. In particular, GSK remains under investigation on anti-corruption charges, as is Sinopharm, a leading domestic Chinese pharmaceutical distributor.

On a broader level, Bisaro might be reflecting on a concern expressed by an increasing number of firms in the West that China is becoming less hospitable to foreign businesses and increasingly favours domestic competitors. It is estimated that China still has around 145,000 State-Owned Enterprises ("SOEs") which the Chinese government can favour or support directly.

However, you might also consider whether Actavis' decision to exit China simply reflects a lack of competitiveness by the business. There is evidence in the article that Actavis has not performed well in China despite the rapid growth of the pharmaceutical market there. The Board at Actavis, like any multinational, will have considered whether the rewards from further investment in China is worth the risks (investment appraisal) and whether that investment might earn better rewards in alternative markets. For Actavis, the alternatives to China look more attractive.

As we always say in our BUSS4 exam coaching workshops, "strategy is choice"!