Guilt by association

Dr. Jean-Marc F. Blanchard's picture

At the beginning of April, Japanese pharmaceutical giant Daiichi Sankyo dumped its multi-billion US dollar investment in India’s Ranbaxy, losing billions of its US $4.7 billion investment in this prominent Indian generics firm, not to mention lost management time. Daiichi made its original investment because it saw the deal as a way to broaden its distribution channels, to gain new products, and to tap into the Indian market. Signs were abundant soon after transaction was announced, however, that the deal might encounter serious problems.

Specifically, the US Food and Drug Administration (FDA) imposed a ban on a number of Ranbaxy factories, nothing these factories had serious quality control problems. Thereafter, the FDA expanded the number of Ranbaxy factories it penalized and imposed millions in fines on Ranbaxy. Daiichi, which said it learned a lot from its experience, fended off critics of its Ranbaxy deal saying it had performed adequate due diligence. A continent away, Adidas and Nike, two well known sport shoe brands, currently confront problems associated with Yue Yuen Industrial (hereinafter YYI), a major athletics shoe producer in southern China. YYI is currently experiencing a strike by thousands of workers (tens of thousands on some days). News reports indicate workers are striking due to YYI making worker pension contributions on the basis of base wages rather than total income. Workers have gained strength for their claims not only from their numbers, but also support from the city government trade union. Both of these cases illustrate the necessity of foreign companies, whether they are investors or buyers, thoroughly gauging the politico-economy of their business relationships, surveying, among other things, the regulatory environment and local labor situation (beyond just checking factory working conditions), and, where relevant, exercising their ownership prerogatives. Failing to do so may be extremely costly financially and reputationally.