The Doom of Xi’an Janssen

Years ago， Xi’an Janssen， a branch of U.S.-based Johnson & Johnson （J&J） in Xi’an， Shaanxi， wanted to absorb the essence of Shanghai J&J. However， this enterprise which used to take the leading place in the OTC market of China now has to see its core business OTC be integrated into Shanghai J&J， its younger brother.

The difference between the two J&Js rests with the shareholdings. Shanghai J&J is 100% controlled by J&J in the U.S.， which only has 71.8% shares of Xi’an Janssen. In the past few years， J&J tried vainly to get the full shareholding rights of the Xi’an company.

Such a move is considered to be J&J’s final action to integrate its business in China. On one hand， all the core businesses under the brand of J&J were put under its fully-owned branch， preventing anyone else from sharing the profits. On the other hand， the action told the other shareholders of Xi’an Janssen that they’d better quit the joint venture so that it can have a full hold of this branch.

The Abandoned Xi’an Janssen

The integration came out suddenly and unexpectedly.

The feud between Xi’an Janssen and Shanghai J&J has lasted for a while. The seed of the feud was buried when Shanghai J&J was founded. In 1992， J&J found Shanghai J&J with Shanghai No.1 Biochemical Co.， Ltd. The joint venture served as an agent to sell J&J’s OTC products. At that time， Xi’an Janssen， which was founded in 1985， already climbed to the top places in China’s OTC market. The repeat of the OTC business at last forced J&J to integrate its business in China.

Once for a while， most experts believed that Xi’an Janssen would devour Shanghai J&J. 15 years ago， when Xi’an Janssen was climbing up fast， J&J wanted to integrate the OTC business of its Shanghai branch into Xi’an Janssen. However， such an attempt ended with a failture.

In 2011， J&J integrated the BondAid into Xi’an Janssen， showing its recognition of this branch’s importance. However， Xi’an Janssen began to slow down and even decline after over 20 years’ fast development. In 2012， the sales revenue of Xi’an Janssen amounted to RMB 5.132， 1.12% less than the previous year. Though the decline was small， it was rather extraordinary compared with the annual 20% growth rate in the Chinese medicine market.

Actually， Xi’an Janssen’s descent began to decline in 2006. At the same time， Shanghai J&J gradually rose. In 2005， Shanghai No. 1 Biochemical quitted Shanghai J&J and said that the joint venture was continuously suffering loss and did not see profits in the past ten years”.

However， Shanghai J&J began to earn profits after being completely owned by J&J. Its sales revenue jumped from RMB 385 million in 2005 to RMB 1 billion in 2012.

In spite of the fast growth， Shanghai J&J is still far behind Xi’an Janssen in terms of the size as Shanghai J&J’s sales revenue only accounts for 1/5 of that of its counterpart in Xi’an.

Now， J&J took away the OTC business from Xi’an Janssen and gave it to its Shanghai branch. Such a move is considered to show J&J’s reluctance to share its profits with its Chinese partners. The depression of global economy intensified foreign companies’ desire to take the profits exclusively as the multinational drug companies all happened to see the drop in the profits.

Yuan Jianjun， a famous strategic management expert and bestseller author， says that the different identities of Xi’an Janssen and Shanghai J&J determine the different patterns of sharing profits. During the time of depression， it is reasonable for J&J to monopolize the profits by putting all “eggs into the basket of its fully-owned subsidiary company”.

Yuan Jianjun says that Xi’an Janssen’s business development began to slow down in 2007. its star products Domperidone and Daktarin have already been in the decline of the life period of products and are hard to get better performance in the future. At the same time， J&J stopped the supply of products and technologies to its Xi’an Janssen. After introducing Titanoreine in 2001 and Tpiatop shamppo in 2002， Xi’an Janssen never had new OTC products brought into China.

When the sale of OTC began to fall， J&J wanted to turn Xi’an Janssen into an Rx production and distribution company in China. Zhuang Xiangxing， former president of Xi’an Janssen， said in 2005 when the company met its 20th birthday that Xi’an Janssen is going to introduce the new drugs targeting tumor， cardiovascular disease， central nervous system disorder and rheumatism. Thad Huston， the current president of Xi’an Janssen， said in 2010 that the company was going to introduce over 20 kinds of new products in different fields. However， such promises turned to be void later.

The Conflict of Shareholding

Xi’an Janssen’s complicated shareholding structure is the main reason for it to lose the favor to Shanghai J&J.

It was founded in 1985， a result of the cooperation among U.S.-based J&J’s Belgian branch Janssen with four Chinese pharmaceutical companies. The five partners invested RMB 290 million in total to found Xi’an Janssen. J&J took 52% of the joint venture based on the 50-year cooperative contract. The headquarters of the joint venture was located in Beijing while the plant was established in Xi’an. The Chinese company did not participate in the operation and management and can share dividends every year.

In the past few years， J&J hoped to increase its shareholding in Xi’an Janssen. In 2007 it began to buy back the shares from Chinese investors. After two massive repurchase， J&J’s shareholding of Xi’an Janssen increased from 52% to 71.8%.

However， different from Shanghai No. 1 Biochemical which gave up the 10% shares of Shanghai J&J willingly， the Chinese shareholders of Xi’an Janssen was forced to reduce their shareholdings of the lucrative company. Thus they set up hurdles for J&J to buy back the shares.

After getting full control of Shanghai J&J， J&J was more eager to be the only owner of Xi’an Janssen. But it met great difficulties after getting 71.8% shares of the joint venture. After being rejected by the Chinese shareholders， J&J stopped the support for Xi’an Janssen， and then finally peeled the OTC business of Xi’an Janssen and integrated it into Shanghai J&J， which is considered to be a local choice.

Speaking of Xi’an Janssen， it is necessary to mention its sixth president Zhuang Xiangxing. He was appointed vice president of Xi’an Janssen in 1991 and was promoted to the president in 1997. He stayed in this position for six years before moving back to the U.S. headquarters of J&J. During his tenure， Xi’an Janssen got good performance and established an excellent management team. In the company a special kind of culture featuring “eagle， wild goose and beaver” was formed.

The stable management environment once led to the excellence of Xi’an Janssen. The corporate culture was still viable as the legacy of Zhuang for a long while after his leaving. Yuan Jianjun says that such a culture asks people of Xi’an Janssen to be dedicated and endurable. The employees of Xi’an Janssen at that time were much more loyal to the company than the current ones.

In recent years， Xi’an Janssen could still collect the billions of yuan of sales amount based on its former name. But the conflicts of shareholding right gradually wore out the company’s essence. The corporate culture that has been there for 20 years also began to disrupt.

The shakeup of senior executives

One of the most obvious signs of the disruption of the corporate culture is the frequent change of its senior executives.

The frequent change of senior executives led to the frequent change of the sales strategies. In 2002， Christian Velmer， a German， was appointed president of Xi’an Janssen. He worked out the strategy， requiring the“OTC products of Xi’an Janssen to be sold in every place where mineral water is sold”. He asked the salespersons to extend the distribution channels of Xi’an Janssen to the most fundamental level.

Velmer did not spend too much time in that position， but his successor continued his measure.

In 2006， Xie Bingfu was appointed president of Xi’an Janssen. As a veteran in another pharmaceutical company， Xie was good at the marketing of OTC. He thought the previous distribution strategies too disperse and costly. Therefore he enlisted 20 major cities as the main focus of Xi’an Janssen’s sales strategy. Such a strategy cuts off Velmer’s policy before the latter got any apparent results.

Xie Bingfu only worked for Xi’an Janssen for two years. His successor was Park Jae-ho， a Korean who was known for his skill of running prescriptive drugs. He put more efforts into the distribution of prescriptive drugs， online sales channels and sales terminals. For the OTC products， Velmer’s strategy was restored.

Along with Xie Bingfu’s leaving were the resignations of many senior executives. In 2008， Liang Weiqiang， general manager of the prescriptive drug department， Xu Ning， director of medicine department， and Xi Min， PR director， left Xi’an Janssen. In 2009， Hou Jianzheng， director of public affairs and Ren Wei， HR director， chose to leave as well.

The current president Thad Huston was the same with Park， which focuses on the development of prescriptive drugs and new market. A source close to Xi’an Janssen says that Huston is going to be replaced in the coming future but the successor remains unknown.

When Xi’an Janssen was undergoing frequent changes of senior executives， Shanghai J&J just got all its executives prepared， which laid the foundation for the integration of businesses.

It is known that J&J’s global business is divided into three parts： consumer goods， medicine， medical and diagonal devices. Xi’an Janssen and Shanghai J&J all belong to the section of medicine.

At the beginning of 2009， Xu Wencheng from Taiwan was appointed president of Shanghai J&J. He came from Johnson & Johnson Asian-Pacific Region and has direct contact with the U.S. headquarters.

This August， We Renwei， former president of J&J Consumer Goods Asian-Pacific Region， was appointed board chairman of J&J China， which has been independent from the AsianPacific branch of J&J. His management scope covers both Xi’an Janssen and Shanghai J&J. So he immediately moves the OTC business of Xi’an Janssen into Shanghai J&J.

In Yuan Jianjun’s opinion， the move can further boost the development of Shanghai J&J and ensure that all profits from the OTC business in China can be moved to the U.S. headquarters. However， he doubts whether the OTC business can still keep performing well.

“The business might have a short fall after the integration. The new organization need to get used to the new business. So are the corporate culture， market and clients，” he says.