Is China set to lose its low-cost appeal?

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Is China set to lose its low-cost appeal?

INICIO/Informes | Posted 10/09/2010 0 Post your comment

Over the last few years, with rising costs in Europe and the US, Western pharmaceutical companies have increasingly looked to outsource manufacturing to low-cost countries like China. However, inflation, rising costs and wage increases may change all this.

Exports from Chinese pharmaceutical companies have grown significantly over the recent years and were close to US$30 billion in 2009. Big pharma firms, such as AstraZeneca, Novartis and Eli Lilly, to name just a few, have moved manufacturing, especially of active pharmaceutical ingredients (APIs), to China.

In response to this China has invested heavily in manufacturing and currently has over 4,000 pharmaceutical manufacturers with good manufacturing practice certification. Of these, more than 100 are manufacturing APIs or drug products for US new drug applications and abbreviated new drug applications.

Cost savings of 30–50% have been the main reason for sourcing starting materials, intermediates, APIs, and (to some extent) finished drugs in China rather than in Europe or the US. Cheaper labour, tax advantages, undervalued currency and lower capital, and overhead costs all contributed to this exodus. However, all of these advantages are expected to disappear in the coming years as inflation in China rises, the currency appreciates, and tax rebates for pharmaceutical companies (increased to combat the recession) are reduced or removed.

China has also seen annual wage increases of 19% for the last five years, and the trend looks set to continue for the next five years, causing increases in overhead costs. It is also agreed that the Chinese currency is currently undervalued and its value is expected to increase by up to 15% over the next three to four years.

With these changes, China’s current cost advantage of 30–50% could easily go down to 13–25%. Take into account supply chain complexity (lead times and inventory implications), rising costs of quality assurance, and forthcoming stringent environmental regulations, and western pharmaceutical companies may start to think twice about outsourcing to China.

One silver cloud on the horizon for China though is the growth expectations of the domestic market. China is expected to become the world's third-largest prescription drug market by 2011 and its market is expected to double by 2013, according to an IMS Health report. Over the counter medicine sales are also expected to grow making China the world's second largest market for non-prescription medicine in 2010. Sales of prescription drugs in China are expected to grow by US$40 billion by 2013, making having manufacturing facilities ‘on-site’ so to speak a big advantage.

China is not the low-cost option in every category

References

Bhandari V, Erhard A, Tejwani S of A.T. Kearney. Will China Lose Its Cost- Competitiveness In Pharma Manufacturing By 2015? Life Science Leader, September 2010

IMS Press Releases. IMS Announces 17 Countries Now Rank as High-Growth ‘Pharmerging’ Markets; Forecast to Contribute Nearly Half of Industry Growth by 2013. 16 March 2010