Kamal K Sharma
Designation: Managing Director, Lupin
The Challenge: To enter the Japanese market, the world's second largest pharmaceutical market
How He Did It: By entering the market with a partner and using them to understand the nuances. Lupin eventually bought the partner out, but made sure no changes were made to its management or operations
In Japan, you just can't walk in and do business. It is a market like no other with its own nuances and cultural pride. So, in late 2005, when we decided to enter the Japanese market with our generic products, we made sure we did it through a partner—Kyowa.
The reason why we decided to enter Japan was because we had been a little stung by our late entry into the US market. By the time we entered the US market in 2003, we were behind other Indian generic companies like Ranbaxy, Dr Reddy's, Zydus and Wockhardt. As tailenders, we had to keep our risks and rewards at a manageable level and so we entered with a small basket of products.
When we went to the trade and showed them our small basket of products they almost said tongue-in-cheek, 'how do you expect to compete with this kind of offering?' What Lupin did to separate itself was create a brand portfolio in the US unlike our peers. Today, we are the 5th largest generic company in the US and the only Indian company in the top 10.
After our success in the US, we said to ourselves 'why can't we be first in some of the leading markets of the globe?' That is how we decided to enter Japan. We had no example of another Indian company to follow. We had to set our own.
From the word go it was apparent to us that the Japanese are a very brand conscious people. If you walk into a shopping arcade in a large Japanese city like Tokyo or Osaka, you will see how brands are far more popular in Japan than they are in some of the developed economies. More importantly, the brand badge is taken as a proxy for the delivery of quality and so there is a presumption that if you have a generic product it might not be of the same quality.
What has helped the generics' business is the emergence of DPC [diagnostic procedure combined] hospitals. When you go to the hospital you are diagnosed with the illness you have and there is a fixed amount the hospitals can charge for a particular illness. And because it is fixed, doctors are compelled to prescribe generics. There are 1,400 DPC hospitals.
The average hospital stay in Japan is 40 days a year, which is a lot. In India, you will run away from a hospital, but there, hospitals have a spa and people love parking themselves there. You can really recoup and recover!
The government has also started incentivising doctors to prescribe generics. They are paid Yen 170 each time they do so. Our products are distributed through orishis that are the national wholesalers and hansas who are the regional wholesalers. We deal with them and they distribute medicines to the pharmacies. This allowed us a smoother entry than if we had to set up our own distribution network.
When we went there, we found that culturally, language-wise, consumer appeal-wise everything had to be learned afresh.
Let's take quality. I remember the first meeting with the chairman of Kyowa. We had gone to Goa where we had a plant till last year. That is a plant we were very proud of as it supplied 95 percent of the production for Europe and US. We produced 10 billion tablets a year there.
We asked the Kyowa chairman how he liked the plant? As it was all automated we were proud of the machines. But what he said surprised me and also gave me a valuable insight on how the Japanese value quality. He took out a magnifying glass from his pocket and looked at the tablet and pointed out some roughness. I craned my neck, but I couldn't tell anything. The Japanese are paranoid about quality.
After working with Kyowa for almost two years we decided to acquire them. Once we took over, I met many senior government officers to introduce the new management. Mind you all this while we were keeping the face of the company as Japanese.
[Kenji] Watanabe was president then, [and] he remained president for two years after we took over before he retired due to ill health.
A lot of Indian entrepreneurs have this anxiety to change the management almost overnight. They will get at least their CFO. I have strong beliefs against changing the management. What is more important is to try to learn about their management qualities.
All management is still Japanese. So far we have only one Indian who is number three in the hierarchy in a business development position. When the finance director retired we replaced him with a Japanese gentleman and when Watanabe retired, we replaced him again with a Japanese national.
Since Kyowa was a family owned company there were some local practices that had crept in over the years and we worked on making those more contemporary with the practices being followed in Japanese management. When the founder started the company there were some feudal policies. In some cases people would be paid more than the market and in some cases less than the market. We got rid of those. But we did not impose any of our management policies on them.
You need to remember that in Japan every two years there is a price cut by the government based on the discounts given by the trade. The year before last it was a 16 percent cut and this year we are expecting a 12-13 percent cut. It is a nuisance that we have to contend with. The only way to do that is to gain market share for old products, launch new products and cut your cost base. If 14 percent goes from the topline, that straightaway reduces your margins. Kyowa could have done it without us, but they have not been doing it. That shows that somewhere our thinking is working. Kyowa has grown at 14 percent CAGR [Compound Annual Growth Rate] whereas the market has grown 7 percent.
The Japanese have a lot of pride and you have to work around it. When I went to meet government officers many of them told me, 'so you've come from India to take over a company from Japan. Many of our people will be jobless.' So much so that NHK, the national channel, ran a movie on me. When I landed, there was a crew at the airport waiting for me, when I left the office, there was a crew waiting for me. And in July [last year] they ran a long programme saying an Indian company has taken over a Japanese company.
One of the ways we allayed their fears was by not immediately shifting production out of Japan. We spent a lot of time looking at investment synergies, product synergies and cost synergies. We have a very hard nosed approach to this. At their plant in Osaka, we increased capacity by 40 percent by line balancing, cutting out delays and doing other things to raise efficiency. We didn't invest a great deal of money. Instead of 900 million tablets, they started making 1.3 billion tablets and only when that capacity was exhausted we moved production to India. This sent a strong signal.
There is one important cultural difference between the Japanese and Indians. We have a command-compliance kind of culture. We revere our seniors; if you say something has to be done, you take it for granted it will be done unless it is very complicated and requires your involvement. In Japan if they don't agree with you they will not do anything and will not show disagreement. They will only work once they build consensus.
I learned this at the first board meeting where there was some agenda setting and target setting. Everyone quietly listened. And then three months later when we checked nothing had moved. Building consensus is paramount.
Some things that would normally be very easy to do in a developed economy are harder to do in Japan. For example, if they are using old equipment that is approved by the authorities they will be loath to change it.
The reason is because the moment you change that equipment you have to go through the entire process of re-registering the product. You'll be surprised to know that when we are shifting production from Japan to India we are still ordering the old equipment for some of these factories. That still shows some degree of conservatism in their thinking. They would not upset the applecart just for some little advantage here and there. They have an absolute penchant for detail.
We talk of the fact that devil lies in the detail, but they really live this philosophy.
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