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Datwyler in 2012: Emerging Markets

This case was made possible through the generous co-operation of Datwyler Pharma NV. The case waswritten by Dr. Yusaf H. Akbar and Pieter Coppens and intended as a basis for class discussion ratherthan to illustrate either effective or ineffective handling of management situations.

2013 CEU Business School. No part of this publication may be copied, stored, transmitted,reproduced or distributed in any form or medium whatsoever without the permission of the copyrightowner.

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Datwyler in 2012: Emerging Markets

Introduction

Flying back from a visit at the American subsidiary of Datwyler Pharma in

Pennsauken NJ, Dirk Borghs, Vice President Special Projects, was wondering

how to remain competitive in the low cost segment of manufacturing rubber

closures for pharmaceutical glass containers.

Datwyler Pharma was highly successful with innovations in the high end of

the market such as the Omniflex 3G coated closures (exhibit 1) for the

biotech sector and manufactured all products in own facilities in Europe and

North America with high labour costs. The minimum requirement for a low

cost manufacturing plant was to produce at the same levels of quality as theircurrent plants in Europe and North America. Dirk gained foreign experience

during the expansion of the activities in the US but had never worked in an

emerging country. Assessing different locations, Dirk also wondered if

Datwyler Pharma could make this leap alone.

Datwyler Group and Pharma Packaging

The Datwyler Group has diversified holdings in niches with potential for

differentiation and a distinct market positioning. It is shielded by relatively

high entry barriers caused by fixed assets and patent protection. It also

benefits from strong growth in their sector. The Group is split into four

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new product takes 5 to 10 years and, together with the high level of

necessary know-how, forms a barrier to entry. 60% of the market is shared

between Datwyler and its two main competitors.

Datwyler Pharma currently ranks number two after West Pharmaceutical

Services (key financials in exhibit 5 ). West realized EBIT of 110 million USD on

1,200 million USD revenues in 2011 and grew at a compounded annual rate

of 5% between 2006 and 2011. Headquartered in Exton, Pennsylvania and it

currently employs 6000 people worldwide. Datwyler knew that West was

stronger in aluminium closures for containers and had a higher market share

in the more advanced, coated, rubber stoppers. Historically, it had a larger

presence in the Americas (including emerging Brazil) and roughly the same

level as Datwyler in Europe and Asia. Both were active in all three areas of

pharmaceutical closure components. West however grew through

acquisitions (notably in 2005). The company now also produces packaging

systems for the pharmaceutical industry, medical devices and personal care

and consumer products. By expanding from components towards delivery

systems, it entered in direct competition with clients. At the same time West

became less present in the low-cost segment of medical disposable devices

where price pressure is the highest.

Datwylers other main competitor is the family-owned Stelmi company that

focuses on its French home market. Its 500 employees realized EBIT of 15

million euro (20m USD) on a turnover of 78 million euro (102m USD) in 2011 1.

Stelmi doesnt compete in the segment for aluminium closures for containers,

advanced coated rubbers or medical disposable devices. Competition

1 http://www.score3.fr/entreprise.shtml?siren=642040000 and

http://www.verif.com/bilans-gratuits/TRANSFORMATION-ELASTOMERE-MEDICAUX-IND-642040000/

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beween Datwyler and Stelmi therefore is limited to the middle and low end

of rubber closures for injection systems and containers.

Last but not least, for the low-cost segments, Datwyler also faces increasing

competition from numerous smaller emerging market companies who

compete with them on lower production cost and affordability.

Options for expansion

Alongside the cost of raw materials, labour is the largest component of

manufacturing cost in the rubber closures segment. Thus the motivation to

offshore production was to benefit from a lower cost location. However, the

decision to start a manufacturing base in a low cost environment would also

be influenced by the potential local market and synergies with other

companies from the Datwyler holding company. In addition, any location

selected by Datwyler would need to meet certain basic conditions including

access to adequate logistics and availability of fresh water used for

production of components and finished products.

Dirk had three potential locations in mind when deciding on where to invest:

China, India and Mexico. All three locations had their advantages and

disadvantages. Datwyler considered investing in three different ways:

through acquisition, joint venture or greenfield operations. Having looked at

the three options, his initial strongest preference was for India but he still had

an open mind on the other two.

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Mexico

Mexico had some important advantages in Dirks mind. First, Mexico scores

relatively high on the Ease of Doing Business and has labour costs of only

20% of those in Western Europe (see exhibit 6). Second, Datwyler Sealing

Technologies already had a production site in the Mexican state of

Guanajato, allowing the Pharma division to benefit from the existing

knowledge and available services. Third, its proximity to the US market

offered favourable logisitics too. Fourth, the investment climate in Mexico

was favourable because of regulatory systems that were quite well

developed. However, there were also some potential problems with it. First,

the use of existing machinery in the current plant is limited due to the

specificity of the processes to make rubber for the pharmaceutical sector.

Second, a ramping up of the production of price sensitive products (as part

of the strategy) requires more space than what may be available at Datwyler

Sealing technologies. Therefore it would be possible to transfer only a part of

the operation or to invest in additional building space for full scale

operations. Third, current activities of Datwylers US plant are highly complex

and cannot be consolidated in a new full-scale operation in Mexico. Lastly,

relative to the China and India options, the Mexican market has limited

potential to sell products locally and the main growth for the industry is

located in Asia.

India

There were several supportive factors to choose India for an investment in

the pharmaceutical sector. The most important benefits related to personnel

costing only 5% of the current levels in Western Europe and Indias emerging

reputation as centre of excellence for production of generic pharmaceutical

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Special Economic Zones provide a preferential policy framework and a single

window of clearance was supposed to limit the bureaucratic hassle. The

Indian operation could be used as a logistics hub to improve lead-times of

imported products for locally based clients too.

Potential business risks for Datwyler were the willingness of non-Indian

customers to buy products made in India and of Indian customers to pay a

higher price than the local Indian market that currently offers a lower quality.

Back in Europe and the USA, there were fears that price pressures from

Datwylers customers to benefit from lower labour costs in China, India or

Mexico could lead to a faster transfer of production and deplete the current

plants leading to job losses.

Entry Mode

Acquisitions

Datwyer Pharma initially visited 2 local producers but considered an

acquisition unviable mainly because of unrealistic acquisition prices; too wide

a gap in technology and the fact that the targets were present in non-

regulated markets only. This option was quickly eliminated.

Via a joint venture

Datwyler Pharma identified a long-term partner in India that could take up to

a 26 percent share in the Joint Venture. This gave the minority shareholder

strong legal rights and could slow down growth in case further investments

were needed. That partner would bring in experience in manufacturing for

the pharmaceutical sector; play a key role in the setup of the plant and

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manage the day-to-day operations. The partner currently focused on pharma

contract manufacturing; was one of the leading glass suppliers to the Indian

pharma industry and marketed Datwyler products in India.

Working with a local partner would limit the necessary support from the

European Headquarters by using existing Indian sources on a project basis.

The partner could also transfer reliable key people from current plants to take

up key positions in the new plant. The challenge would be to find the right

balance between freedom for the Indian entrepreneur and sufficient control

on the business exercised by Datwyler.

Due to the location of the partner, the area around Vapi was preferred. As

the envisioned partner did not have any space available in existing plants,

synergies would limited mainly to the previously mentioned expertise and

use of shared services.

The Gujarat region, where Vapi is located, is among the most industrialized

states in India. The region is strongly oriented to investors and has

developed Special Economic Zones (SEZ). SEZs are dedicated to thematic

activities such as chemistry and offer large tax breaks if exports represent a

large share of total revenues. They also offer advantages in terms of reduced

custom duties for imported components. The town of Vapi is 180 km north of

Mumbai, at the southern end of the Golden Corridor. The region had a

high concentration of chemical plants and servicing companies. The

downside was the related pollution, necessitating environmental due

diligence of the real estate and production surroundings. The region had a

sufficient availability of workers. Dirk felt that quality of life for expats would

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be a challenge here and so considered only short term and limited posting

for Datwyler managers from HQ.

Fully independent

A third option was the Pune area in the state of Maharashtra, which had a

significantly higher standard of living due in part to the presence of the IT

and automotive sectors employing numerous local employees. This option

would be exercised through a greenfield investment.

As there is no need to be closely located to a regional partner, there are

more options concerning implantation. This can lower the initial real estate

investment. A site selection by consultants hired by Datwyler identified a SEZ

near Pune as the best choice. Pune benefitted from strong manufacturing

industry and had a growing number of international flight connections. The

presence of manufacturing, more specifically automotive, was important as it

may attract a whole range of companies providing technicians and spare

parts needed to run a manufacturing plant of rubber stoppers. It is also well

connected via railway and expressway. Pune-Mumbai is one of the six

biotechnology clusters in India. There appeared to be sufficient workers

available and the international environment with hotels, universities and other

international businesses is more attractive to expatriate staff than in Vapi.

However, the risks of venturing alone carried with it several disadvantages.

First, not having a local partner required additional support from the

headquarters or hiring local consultants raising cost and complexity. Second,

labor unions were more militant in the state of Maharashtra than in Gujarat

presenting a risk of labor disputes. Dirk was concerned to learn of an 85 day

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strike in 2009 at the factories of Bosch and Brembo in Pune 2. Third, any

greenfield investment would require longer lead time before the plant could

come fully online thus pushing back the cost advantage that Datwyler would

gain by investing in India.

China

Faced with the risks of an Indian investment, another option could still be to

re-investigate the option of China. Datwyler Pharma employed a business

development manager locally for some years and had been close to an

acquisition of a Chinese manufacturer there. The problems of doing business

in China were however well known: language, IP protection, trust and pricing

for assets.

Dirk realized the decision to invest would have a major impact on the

company and on his colleagues at Datwyler who would be responsible for

the implementation of the project. Developing a new plant in an emerging

market would be his most challenging project till now. There were also

rumours that West Pharmaceutical Services was searching for land to set up

an operation in India too. As the first mover advantage on the market is

important to impose standards of product and quality, the decision has to be

taken quickly.

2 http://www.imfmetal.org/index.cfm?c=21201

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Exhibit 1

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Exhibit 2Stock performance of Datwyler (1998-2011)

http://www.six-swiss-exchange.com/shares/security_info_en.html?id=CH0030486770CHF4

Exhibit 3Financials for the Datwyler Group and Datwyler Pharma!"#$ %"& (")"*+", - ./0 1234 #, 5 67 %( %+-8"$ 67 0+99:4;-" 1-AB CDE FG@A >EA AADA A>EC

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Exhibit 4Overview of Datwyler Pharma products

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Exhibit 5Financials of West Pharmaceutical Services

!"#$ %"& (")"*+", - ./0 1234 #, 5 67 %(

899: ;

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Exhibit 6Ease of Doing Business and hourly wages, table with main countries

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