The China Conundrum
China has traditionally presented a complex mix of threats and opportunities to the pharmaceutical fine chemical industry, as it has to most other industries. Cost of operations, quality of manufacturing, environment and safety standards, corrupt business practices, and corrupt local authorities are widely tolerated as threats by western firms interested in the overwhelming opportunity of doing business in and with the world’s second-largest and fastest-growing economy.
Lately, however, a new threat of doing business is in the news—the threat that strict environment, site licensing, and anti-corruption laws will actually be enforced. With the advent of President Xi Jinping and the start of the new five-year plan, crackdowns are on a real upswing. Worldwide coverage of the corruption trial of Bo Xilai, a former member of the Central Politburo, has only slightly distracted from coverage of GlaxoSmithKline’s travails. Chinese authorities have accused the British drug major of funneling as much as $500 million to travel agencies to facilitate bribes to doctors in order to boost the sale of drugs.
I sent several e-mails to executives at fine chemical firms operating in China this week, inquiring on the new enforcement regime. I received two replies and spoke with one of the respondents, an executive at a European firm who, like many others that have spoken on China in the press recently, asked not to be identified. The second respondent, Oliver Ju, CEO of Porton, a company based in Chongqing, China, sent a detailed e-mail. Both see the changes underway as extremely important to active pharmaceutical ingredient (API) manufacturers in China.
From a follow-up interview with my first source, I gleaned that the new environment of investigation and enforcement is the latest episode in a kind of cat and mouse game in which authorities, well aware of the complexity of regulations and the slow process of licensing and other approvals, generally turn a blind eye to businesses that can’t wait years for the system to work before getting to work themselves. With every new change in leadership and new five-year plan, there is a crackdown. It is a kind of cyclical cat and mouse game.
Under Xi, however, it seems there is a more thoroughgoing enthusiasm for rooting out corruption and enforcing laws that impact manufacturers in a variety of ways. Energy conservation is high on the docket, as the country reacts to the cost of its huge urban and industrial development programs. Somewhat bizarre enforcement practices have included edicts that if the air conditioning in a hotel brings the temperature in any room below a designated degree, all power to the building will be shut down until further notice. Industrial parks are told with no warning that necessary power shutdowns will be implemented. Management at companies in these parks is encouraged to give employees a little vacation time.
Bribery is prominent on the radar screen as well. Chinese New Year celebrations were curtailed this year in order to assure that government officials were not unduly entertained.
In essence, given business practices that have gone on in China for a long time, cracking down on corruption will be like shooting fish in a barrel. Companies will seem to be randomly targeted. But as my source, who has operated in China for many years, says, everything in China happens for a reason.
Ju contends that recent developments have to be viewed in the context of a wave of economic reforms proposed by China’s new leadership. “Otherwise,” he writes, “it’s difficult to understand what’s going on and how to do business in China in the next decade.”
He notes that a meeting of the Plenary Session of the 18th Central Committee of the Communist Party of China in November may yield more information. “But the direction and priority is already seen since early this year,” he writes. “In my view it’s quite clear that the new leadership strives to transform China into a more market-oriented economy.” The top priorities, he says are a leaner but more effective government, greater law enforcement, and a lowering of barriers to market entry. The latter will provide entry by private companies into banking, energy, and telecommunications.
“I believe API and drug companies will be impacted inevitably,” Ju writes. This will include greater enforcement of current good manufacturing practice standards in API manufacture.
For fine chemical companies, the major practical concern will be flexibility of manufacturing operations, according to my source in Europe. “For you to get approval to build a plant, you must describe the products, the processes, and the quantities,” he says. “It will take you three years for approval, but nobody waits. Think of the speed with which China is growing! How could you be in such a licensing environment? Obviously nobody is in compliance.”
Xi has been extremely vocal in his vow that corruption will not be tolerated. But so has every leader since Mao Zedong. The show of force in recent months may be a sign of a major shift, or it may be another antic swing in the game of cat and mouse. “It remains to be seen whether they just pick on one or two situations to showcase,” says my source, “or whether it percolates everywhere, and people have to come up with the goods.”
Either way, it highlights the conundrum of operating in a vital, but still-developing country where laws and law enforcement are in flux and industry advances at a rapid pace.