The Advantages and Disadvantages on the Chinese Market - Term Paper Example

Introduction Since China initiated its 'open door' policy at the end of the 1970s, numerous overseas pharmaceutical companies have entered the economy of this populous country. This report analyses current pharmaceutical industry trends in China from the perspective of the foreign investor. The main question answered by the report is: "Whether we should invest into Chinese production facilities or" Additionally it analyses the situation on the Chinese market and gives recommendations concerning the operation on it. At first, the economic situation is discussed both for the whole China and for its pharmaceutical industry. Then the advantages and disadvantages of entering the Chinese market are described and analysed. Finally the comparison of benefits and drawbacks leads to a certain recommendations. The result of the analysis is that Chinese market is extremely attractive for investors; however it contains certain risks and dangers, which should be considered during the strategy development. General Economic Trends in China China has succeeded in strengthening its economy in recent years. The growth of about 8% annually has become a trend in the last 5 years. Assessment of the year 2004 has shown that overall measures are even better than in previous years. "Gross domestic product growth in the People's Republic of China accelerated from 9.3% in 2003 to 9.5% in 2004, the highest level since 1997, even though the Government took several steps to damp sectors that it considered overheated" (Asian Development Bank, 2005, p.20). The country continues to improve its economic measures rapidly, which of course must be seen as a positive factor when considering investment. Further on the development of external trade in China is seen by analysts as an extremely positive trend. China has already outrun the Japan to become the third largest merchandise trading country right after the USA and Germany. "Merchandise exports rose by 35.4%, with production at foreign-funded enterprises estimated at about 58% of exports. Merchandise imports grew by 36.0%" (Asian Development Bank, 2005, p.20). China's participation in WTO was followed by political reforms of reducing import tariffs and removing non-tariff barriers. All these trends along with strong domestic and external demand make China extremely attractive as an opportunity to invest funds. Pharmaceutical Industry in China Positive general economic trends have also influenced the pharmaceutical industry of China. The analysis of performance in 2004 has shown that "China's pharmaceutical industry continued to maintain a momentum of steady growth, achieving a stable rise in both output and sales revenues. Exports maintained a stable growth and there was a continuous improvement in the industry's international competitiveness" (Research in China, 2005). Chemical preparation industry has showed the greatest uptrend among the industry segments, while the raw chemical material industry grew slowly. Overall tendencies of 2004 indicate the shift from the race for greater market shares to more complex and comprehensive competition based on various factors. While the evaluation of recent performance of Chinese pharmaceutical industry has shown a considerable positive momentum, the forecast for this industry are even more optimistic. Despite the challenge of operating in China, it is the fastest growing pharmaceutical market, rising by 28% in 2004, versus 7% global growth. It is currently the ninth largest pharmaceutical market but at current growth rates China is likely to overtake Germany and France by 2015. (Business Insights, 2005) The government of China has realised the importance of pharmaceutical industry to the national economy and has taken pharmaceutics under central planning. Initiated reforms have influenced the pharmaceutical industry positively. Chinese medicine market is still poorly developed but it shows great potential due to its rapid improvement rate, which is by far one of the best in the world along with Indian. "China has made considerable progress towards an improved standard of living for its population, including better health, reduced levels of poverty, and strong macroeconomic growth. The market for high quality, patient-oriented healthcare services is small, but growing steadily" (Digital Vector 2005). Of course, those signs of perspective investment could not go unnoticed through a number of pharmaceutical companies. FDI perspectives Foreign direct investment into Chinese market has become a paramount objective for many companies operating internationally. The analysis of the whole Chinese economy in 2004 shows that the amount of FDI has raised higher than ever before. "China's FDI grew by over 53 percent in October, bringing the total for this year to more than the whole of 2003. Actual FDI has been calculated as US$53.781 billion in the first 10 months, up 23.47 percent year-on-year" (People's Daily Online, 2004). Such high rate may be used as an indicator of a great confidence of investors in the stability of Chinese economy despite the recent SARS epidemic. The report published by the Ministry of Commerce and the Academy of International Trade and Economic Co-operation in 2004 has illustrated the increasing value of China in foreign trade. "The report said that by year-end, China was expected to rank third in the world in terms of export value, moving one place up compared from year. The value of China's imports will remain third in the world" (People's Daily Online, 2004). Overall increase of foreign trade has also influenced the foreign trade in pharmaceutical industry. It is believed by many transnational pharmaceutical corporations that China is one of the most perspective markets in the world economy. Of course, the great amount of attention to Chinese pharmaceutical industry also has its disadvantages. Almost every major drug maker of the world seeks to strengthen its position in China. There are currently about 1,700 Sino-foreign joint ventures in the pharmaceuticals sector Most of the industry giants have some sort of marketing presence Local subsidiaries set up by Roche, Novartis, GlaxoSmithKline and Pfizer rank among the top 10 marketing companies in the country measured by sales. Many of the multinationals have also recently announced plans to expand their Chinese operations, in an effort to gain market share. (PriceWaterhouseCoopers, 2004, p.2) Such attention to Chinese market first of all means that there will be no easy expansion to this sector. Each company planning to invest into Chinese pharmaceutics should expect fierce competition from major companies of the world. Advantages All that was written above advocates the affinity of the Chinese market, while neither shedding light on the reasons of the success of pharmaceutical industry in China, nor unfolding its dangers, which certainly exist. The next part will bring more detail to the advantages of investing into Chinese pharmaceutical industry. One of the most promising advantages of China for pharmaceutics is its population. The investment into production facilities in China has become a well-known trend in recent decades due to low labor-related expenditures. On the other hand 1,3 billion of people with projected aging at a 3% per year (PriceWaterhouseCoopers, 2004, p.2) present a lot of space to grow for drugs market. Though current consumption of medicines is rather low comparatively to such well developed countries like USA, Japan and France, analysts forecast its growth mainly due to stable increase of wealth per capita. Global national income per capita in 2002 was US$24,500 in Hong Kong and US$960 in rural China. In 2003 those numbers increased to US$25,430 and US$1,100 correspondingly (FinFacts.com 2004). Note the great difference of income between urban and rural population of China. This also should be considered, because it affects consumption of medicines. While the population living in coastal urban areas of China can afford modern pharmaceuticals, people living in rural areas show much lower rates of drugs consumption. Nevertheless, the situation is forecasted to change in the next 10 years by making Chinese pharmaceutical market to become one of the biggest in the world. Another serious advantage of investing into Chinese pharmaceutical industry is its strong research base. Chinese market provides high-quality talents and abundant natural resources needed for medicines production. A lot of pharmaceutical companies place R&D facilities in Chins. "One of China's advantages in drug innovation is its natural herb resources and the record history of traditional Chinese medicine, which may greatly save time and costs in drug screening" (Yan, 2004). Moreover, a large number of overseas Chinese students and scientists come back to China, providing superb research specialists for biopharmaceutical sciences. Biopharmaceutical segment of industry shows great perspectives and is growing steadily. Additionally, holding clinical trials of new medicines is much easier than in most countries. "The region has a large number of previously untreated patients, and the cost of conducting clinical trials is much less than it is the West. Some estimates suggest that total costs are a third of those in the US" (PriceWaterhouseCoopers, 2004, p.5). Chinese doctors are more willing to participate in clinical trials. Their high qualification ensures the accuracy of clinical tests. As can be seen from the two paragraphs above, China has a superb base for R&D facilities. That is why many large pharmaceutical companies (e.g. Pfizer, Roche, AstraZeneca, etc.) place their research centers and clinical trial centers in China. Finally the Chinese trade policy regulations provide significant tax incentives for foreign companies that participate in R&D collaborations with Chinese research insititutes. "[High-Tech Development Zones] offer foreign biological and pharmaceutical companies substantial tax breaks, including reduced income tax and value added tax rates, and exemption from business tax, for a period of three years" (PriceWaterhouseCoopers, 2004, p.5). This also impels transnational companies to invest into Chinese R&D facilities for pharmaceutical industry. Disadvantages One cannot describe the advantages of the Chinese pharmaceutical industry without clarifying its drawbacks. The first serious obstacle for entering Chinese market is the current situation with the protection of intellectual property. China has very poor protection of intellectual rights, which has not gone unnoticed with the US Trade Representative: "This year, we are elevating China to the Priority Watch List for failure to effectively protect intellectual property rights and to meet its commitment to significantly reduce infringement levels, despite efforts by China's senior leadership to do so" (Office of USTR, 2005). This can serve as an example of the large size of risks related intellectual property protections in China. Every company investing into its pharmaceutical industry should consider this risk. The second problem with China is its complex regulations against foreign pharmaceutical companies. Mainly it is caused not with the legislation itself but with staff inexperience. "[SFDA, modeled on the US Food and Drug Administration] has a relatively inexperienced staff and got off to a rather slow start, and the resulting regulatory gap has caused numerous problems" (PriceWaterhouseCoopers, 2004, p.5). Another regulatory issue that hinders entering the Chinese market is related to conservative policy of recognising foreign research. The process of medicine registration with production and sales permits can take several years. The bureaucracy is very complex with overlapping authority of different regulators. China's policy in this aspect leaves much to be desired. Third issue is the drug-pricing policies. Government devotes much effort to keeping prices on medicines. Furthermore most of the pharmaceuticals are sold through hospitals. But because of the certain amount of corruption it is often impossible to win a bid for drug procurement. Additionally, hospitals prefer mostly small local companies (PriceWaterhouseCoopers, 2004, p.6). However there are still possibilities for multinational companies to break through these obstacles, mainly because the drugs distribution is currently made through an inefficient system of Chinese middlemen, which triples the prices of the initially cheap local medicines. Recommendations Despite certain dangers that await a company entering the Chinese market it is still too attractive to lose. Great perspectives of its future development make pharmaceutical industry in China extremely important for most of the pharmaceutical companies operating worldwide. So the main recommendation will be positive. China is great for investing. Nevertheless, it will not be an easy task because of the fact that almost every large or medium player of the pharmaceutical industry will be present on this market. Chinese market appears to be too big for small companies. That is why the board should devote great amount of attention and resources to developing a proper strategy of entering. For example, an investor company should not focus only on the Chinese market. Medicines produced in China should also be exported to other countries, where drug-pricing policies are less restrictive and consumption of medicines is much higher. The benefits of Chinese production process should be used for increasing competitive advantage throughout the world. Although, the main focus of this research was to identify the perspective for investments into Chinese production, one should not forget about the attractiveness of R&D investment. It was discovered during the research that moving R&D facilities to China will benefit the company because of a strong Chinese research base. That is why the board should consider investing into R&D as an option. The opportunities are great, and the risks are smaller. Yet they are big enough to make any small pharmaceutical company stay out of the battle for Chinese market without a well-developed strategy. Investing into Chinese pharmaceutical industry today can transform the company into pharmaceutical giant of tomorrow. References Asian Development Bank. (2005). Asian Development Outlook 2005. Hong Kong, China. Retrieved October 3, 2005 from http://www.adb.org/Documents/Books/ADO/2005/prc.asp Business Insights. (May 2005). The Pharmaceutical Market Outlook to 2015: Implementing Innovative, Long-Term Strategies for Sustainable Future Growth. Market Report. Retrieved October 3, 2005 from http://www.researchandmarkets.com/reportinfo.aspreport_id=302088&t=e&cat_id=16 Digital Vector. (September 2005). Chinese Pharmaceutical Industry: Strategies, Trends and Opportunities. Market Report. Retrieved October 3, 2005 from http://www.researchandmarkets.com/reportinfo.aspreport_id=305197&t=o&cat_id=16 Finfacts.com. (2004). Global/World Income per Capita/Head. Retrieved October 3, 2005 from http://www.finfacts.com/biz10/globalworldincomepercapita.htm Jing, Fu. (May 31, 2004). Prices of 400 Medicines Reduced by 30%. Retrieved October 3, 2005 from http://www2.chinadaily.com.cn/english/doc/2004-05/31/content_335284.htm People's daily Online. (November 16, 2004). China's Foreign Investment Soars in 10 Months. Retrieved October 3, 2005 from http://english.people.com.cn/200411/16/eng20041116_164038.html PriceWaterhouseCoopers. (November 2004). China: Prescription for Growth. Market Report. Retrieved October 3, 2005 from http://www.pwchk.com/home/eng/cn_pharm_growth_nov2004.html Research in China. (August 2005). Pharmaceutical Industry in China, 2004-2005. Market Report. Retrieved October 3, 2005 from http://www.researchandmarkets.com/reportinfo.aspreport_id=306683 Yan, Hu. (November 3, 2004). Drug Firms Bolster R&D Facilities. Retrieved October 3, 2005 from http://www.chinadaily.com.cn/english/doc/2004-11/03/content_388276.htm Office of USTR. (April 29, 2005). U.S.: China Has High Rate of Intellectual Property Infringement. Press Release. Retrieved October 3, 2005 from http://usinfo.state.gov/usinfo/Archive/2005/Apr/29-580129.html Read More