Sale of Bulk Pharmaceutical Chemicals

NHU was found in 1999 and is primarily engaged in the production and sale of bulk pharmaceutical chemicals, medications, health products, food additives, feed additives and flavors and aromas. The company's major products are Vitamin E/A, Vitamin H and aromas, and VE products are the largest profit generator among all the products.

NHU has been competed with other Vitamin E providers world-wide for years. The market seems saturated, as the four major suppliers, all companies make large profit over the past decade. Overall, NHU is in a stable situation with the other 4 major rivals in the Vitamin E industry, although competition from minor supplier exists. Sales kept increasing from 2009 to 2011; profit margin and net profit were stable with slightly increase, but the company had trouble in expending the market and facing the volatile market price of Vitamin E. The boarder of directors now needs a new strategy to help them go forward in the industry.

So far, both NHU and its rivals have not found an effective way to gain more market shares. By experiencing both subprime issues and Euro crisis, the export price of VE has dropped from the peak of ￥260/kilo at June 2008 to ￥105/kilo at July 2012. However, BASF, one of the major rivals just announced its price rise of VE products recently, which indicates a possible rebounding trend. In addition, Zhejiang Medicine has also announced a plan to invest on a new product line of VE, which shows that the major Chinese rival is going to battle with the rest of global VE providers on pricing. The company is facing a dilemma of either follow BASF to raise the price or compete with Zhejiang Medicine by boost its own output capacity.

Aside from the above industry incidents, NHU has made a tremendous success with providing VE products to the downstream market. However, the VE market indicates a volatile pricing risk since of the other economic factors. In addition, potential entrants never gave up breaking through the barrier of VE production technology. Once the technology is no longer the barrier, the market will eventually become a perfect competitive market.

To address the company's current issues and enhance its long-term competence, NHU has 5 major alternatives in 3 aspects to consider. Although it is necessary to consider either raising the VE product's price or boost the output capacity, we need consideration to evaluate the future effects on the company. The company should also consider its long-term strategy by choosing horizontal expansion or vertical expansion. Either path will make the company have a colossal change in the future.

This report, presenting a new vision, mission and marketing approach, clearly addresses the issues that NHU is facing. It outlines new strategies and operational plan the reference for the company.

External Analysis

According to the data provided by Wind Information, worldwide demand for vitamin E is about 55,000 tons a year and the total capacity of production is around 60,000 tons a year. Primarily as a result of the complexity of the chemical synthesis production process, only five companies currently own and operate large-scale Vitamin E production facilities since 2007. BASF, DSM, NHU, Zhejiang Medicine and SSPC have production capacities that represented approximately 25%, 34%, 20%, 18% and 3% respectively, of the global VE production capacities. Market shares based on sales volumes were similar to the production capacities over the past few years. A typical oligopoly is defined as the market situation.

Since the VE market was dominated by the key producers mentioned above in the first half year of 2007, they reached agreements on raising the price for 7 times over the rest time of the year. From November 2011 to September 2012, even though the subprime crisis in US and the Euro crisis resulted in a declining of approximately 30% in the monthly average price and the market was near to the historical bottom, the companies could still enjoy a high gross margin over 50% with their oligopoly pricing advantage.

Vitamin E used as an additive in animal feeds represents over 70% of the global market, with human food, pharmaceutical and cosmetics representing the rest of the market. Vitamin E demand growth is correlated with cattle and poultry production growth which is expected to range from 2.5 to 3.0% CAGR on a volume basis over the period of 2009-2015, according to Fountain Agricounsel LLC ("FA"). Thus, there's a robust demand of VE in the long run with relatively low price elasticity, as there's no substitution available for VE, and VE only accounts for 0.6% of total cost of animal feed. However, the demand could be influenced by other factors such as economic downturn and oversupplied downstream market.

For many years there was less overcapacity in the vitamin E markets which resulted in capacity rationalization and limited capital investment. However, in a typical oligopoly market, output volume adjustment is always the best competitive strategy among all producers in the long run. The recent announcement of Zhejiang Medicine's increasing production capacity decision has proved this fact. Aside from the factor of its rival's recent announcement, potential entrants never gave up breaking through into the market since of high profitability enjoyed by the emerging providers. Even though industry rationalists expect a supply-demand balance in vitamin E with only a small amount of excess capacity available over the next five years, we believe that the global producers and potential entrants are managing the business on output volumes rather than margin preservation which will cause overall pricing volatility in the long run.

Internal Analysis

NHU is primarily engaged in the production and sale of bulk pharmaceutical chemicals, medications, health products, food additives, flavors and aromas. The company's major products are Vitamin A, Vitamin E, Vitamin H, and aromatizes.

Vitamin E is obviously the dominant revenue and profit contributor in NHU's sales portfolio. During 2011, the company obtained approximately 56% of its total revenue from Vitamin E, and the company also enjoyed gross margin of about 60% from sales of Vitamin E, comparing with the company compound gross margin of 47%. Other Vitamin products contribute another 30% of the company's sales. The production process of Vitamin E synthesis is very complicated and involves more than 20 steps of chemical reactions, leading to a high technical barrier for potential participants.

NHU's synthesis technology has a great use in other fields. With the improvement of its synthesis technology, the company has developed a few aromas products. Now aromas products