Despite the fact that China outpaces India in economic development, the Indian pharmaceutical industry excels in the international market while Chinese companies lag behind. Why is this? What lessons may the Chinese learn from their neighbour in this regard?
COMPARING THE PHARMACEUTICAL INDUSTRY IN TWO ECONOMIES
Continuous economic growth has made China the factory of the world. Close behind China, India is accelerating reform and developing its economy, with an ambition to catch up to, and even exceed, China. The 2005 research result of A.T. Kearney indicates that India has become the second most attractive foreign direct investment destination in the world, behind only China (PAUL AND JONATHAN, 2005).
However, the economic development gap between China and India remains substantial. China's economy is twice that of India. China has enjoyed a long term GDP growth rate of 9% - 10% versus India's 6% - 7%, and China's per capita income is more than double India's. Moreover, China exports 6 times what India does (FORTUNE, Oct. 2005). The Indian economist, Dr. Swami, also an economics professor from Harvard University, believes that "the development of India is at least 10 years behind China". However, Indian pharmaceuticals companies have established markets globally for their products, which is far ahead of their Chinese counterparts. More importantly, some Indian companies, such as Ranbaxy, are positioning themselves as a world-class enterprise with a real global vision. According to Dr. Jing Zhongren, "In developing international markets, Indian pharmaceuticals companies are three to five years ahead of China".
Further examination finds that India has obvious advantages in regulation and registration, international marketing, overseas sales management and pipeline innovation. There is no Chinese product line or new chemical product that has been certified by FDA (Food and Drug Administration) while India boasts more FDA-approved labs and plants than any other country outside the U.S. ( FORTUNE, Oct. 2005). In India, more than 20 manufacturers have received FDA certification and more than 100 products have been approved by the FDA (XU, 2004).
Also, products exported by the two countries are of different added value. Exports of the Chinese pharmaceuticals industry consist mainly of raw materials and API (Active Pharmaceutical Ingredients), which comprise more than 50% of the total export of raw materials, medicines, biological products and medical equipment. However, India exports 60% of the products it manufactures, and 15% of finished products are sold overseas, making a higher profit margin. This is because the leading Indian manufacturers have solved the problems of registration and certification.
Moreover, the market structure is different. Indian companies not only establish their businesses in America and Europe, but also sell many products to developing countries in Africa and South America. Ranbaxy, for instance, sells its products in more than 100 countries including Brazil, Russia, etc. In the past three years, almost 50% of Ranbaxy's sales revenue came from overseas market, and one-third from America.
Additionally, Indian companies are pushing ahead in translating their generics-manufacturing-based experience into branded products innovation, while China is still labelled as a raw materials supplier. On one hand, in India many of the newly launched products or under trial products are the fat patents expired in EU and America, or top fifteen blockbusters expected to be expired in five years. On the other hand, some Indian pioneer pharmaceutical companies like Dr. Reddy's, invested 15.5% of their revenue in R&D to identify and screen new molecules.
IDENTIFYING THE CRITICAL SUCCESS FACTORS OF THE INDIAN PHARMACEUTICAL INDUSTRY
The critical success factors of Indian pharmaceuticals can be examined from both the macro level of industry environment and the micro level of enterprises.
Among the macro factors the first to consider is that the Indian economic development model is more suitable to the growth of the pharmaceuticals industry. China's economy has been relying on its industrialisation, investing in manufacturing capacity and supplying the national demand. However, India's development is based on economic systems, and has emphasised service segments. Therefore, the potential of the Indian economy is driven by: a British-heritage-based language, the societal system, managerial techniques and the culture, while development of the pharmaceutical industry is driven by societal development and innovation.
Second, the industrial environment helped boost the pharmaceutical business. The Indian government provides incentives for exporting API, and waives, or exempts, export taxations to establish the international vision. To investors, India is more attractive than China because of its better corporate governance, more regulated financial disclosure, more transparent IPR protection and more business friendly, legalistic environment. In 2002, foreign direct investment in the Indian stock market amounted to seven billion dollars. Actively-involved overseas investment, together with government incentives and enterprise aggregated resources all contributed to development of the pharmaceutical industry.
Finally, uniqueness lies in the exceptional patent protection regulations in India. Since 1972, Indian companies felt free, even encouraged, to copy patented products and produce the generic version without worrying about accusation and prosecution. Cipla, the third biggest Indian pharmaceuticals company, is a beneficiary. In 1993, Cipla started supplying AZT products at a price 1/5 of that of MNCs to support the poor HIV/AIDS patients in developing countries. Since then, Cipla developed a 'three in one' combined therapy for cocktail treatment, and further reduced the treatment cost to 1/12 and 1/20 of that charged by MNCs. With support and certification from the WHO, Cipla is now selling its products to more than 90 countries including Africa. Even though TRIPS took effect on Jan 1, 2005 in India, the accumulated expertise in manufacturing and state-of-the-art facilities make today's India competitive and well-equipped with ready-to-rocket potential in innovation.
On the micro level of enterprises, there are also huge differences between companies from China and India.
The ownership issue has to be addressed first. For China's SOEs (state-owned enterprises), unclear ownership and capital structure have prevented the enterprises from being revived. In recent years many POEs (privately-owned enterprises) have emerged. Due to the short history of POEs, most of them are facing difficulties such as inadequate industrial and managerial experience, weak technical preparation and inadequate capital aggregation. In India, more than 60% of listed companies have no government share and most big pharmaceutical companies are family-run but publicly listed, such as Dr. Reddy's. In such a context, the enterprise's property is directly related to private fortune and interests, therefore the resources are utilised better while the enterprise is more efficiently managed.
Second, different phases of development and entrepreneurship have obvious impacts on companies' vision and strategy. With a history of a market-oriented economy in India, private businesses were persistently encouraged and entrepreneurship was continuously revived with ongoing privatisation. As a result, Indian companies have a longer history and a deeper understanding of international markets. They make better use of the regulations and policies of international markets as a result. Indian companies understand innovation better and develop their vision and strategy based on their years of experience in the industry and the market. Over the past thirty years, they went through a "three-stage-development":
• Stage 1: Copying patents and producing bulk raw materials and generics. At this stage, Indian companies aggregated extensive capital and experience, together with growing expertise and multiplied formulation capacities.
• Stage 2: Developing international markets. By taking advantage of specialisation in the international markets, companies reformed the industry and reallocated their products and resources to cater to both domestic and international demands. During this stage, the big companies transformed themselves from bulk exporters to generics exporters and international marketers.
• Stage 3: Seeking extensive international cooperation in products and technology, including world-wide investing and financing (M&A), strategic cooperation (technology transferring), research cooperation (R&D or CRO) and manufacturing cooperation (licensed manufacturing and supply chain etc.). Meanwhile, they targeted R&D of new active molecules. For instance, in 2003 Ranbaxy acquired the ROG from Aventis, enabling entry to the French market. In 2004 Ranbaxy invested heavily on drug discovery as a part of its plan to increase the annual sales to $5 billion by 2012.
On the contrary, Chinese private business owners lack managerial experience and sufficient information on overseas markets due to the short history of enterprises. Although most of them have expressed different considerations or commitments regarding international expansion, they still have to seek help and expertise to further expand and sustain their business.
Third, Indian companies place a higher priority on applying technologies and expertise to business management which reward the companies with lower costs. For example, Ranbaxy has established a so-called 'superior-risk-management based on cost-effectiveness' model, which makes it possible to discover a new drug at the cost of $1,200-1,800 million, while their counterparts in the West would need a budget of $5,000-8,000 million.
Fourth, India has more talent available for business. The McKinsey report pointed out that India has more experienced executives and trained engineers available in terms of both quantity and international profiles. In addition to this, the Indians have the advantage of language background and deeper international understanding. In comparison, Chinese SOEs and booming POEs are lacking the resources to compete with MNCs in attracting and retaining savvy executives.
LEARNING LESSONS FROM INDIA AND PLANNING FOR CHINA
With a vision set on the international market, leading Chinese pharmaceutical companies declared "external learning from India, and internal learning from Hisun (Hisun is one of the largest bulk API manufacturers in China)" when planning their strategy. The question is: what are the lessons we can learn from India's success?
Core competence must be identified before entering the international market. In the three-stage-development process, Indian companies established different competencies and competitive advantages during different stages. From a realistic point of view, the core competencies of Chinese companies probably include special API, low cost R&D, upstream supply chain or off-shoring service. Tasly, a Tianjing based top pharmaceuticals company, is striving to establish its competence in TCM (traditional Chinese medicine), R&D and formulation expertise.
A clear strategy tailored to specific enterprises should be created and well defined. Most Chinese companies simply take some vague slogans as their strategy and therefore have neither a map nor a compass for their risky journey into the international market. Gordon R. Orr pinpointed the problem that international expansion is good, but not for every company, "to most, the least appealing choice is to continue along the present lines and run the risk of becoming, at best, a leading regional player". Specifically for pharmaceutical companies, most don't even understand their own enterprises well enough. Mr. Lu Chunming, selling anti-malarial Dihydroartemisinin in more than twenty African countries, has a better understanding of the looming challenges: the bottleneck of Chinese companies is more than the registration barriers, as registration is only the beginning. The product pipelines, international marketing, cross-cultural branding and distribution all have to be tackled by inexperienced Chinese players. Therefore, once deciding to go global, the Chinese pharmaceutical firms should be committed to the venture by investing in market intelligence, product innovation, and continuous quality improvement so as to improve their core competence. Here is another case. Artemisinin, a Chinese-owned intellectual property, and HIV/AIDS products made in China have not received any WHO certification yet; as a result they are not qualified to bid for Global Fund procurement. However, Cipla, an Indian company, has already received WHO certification for all its generic HIV/AIDS products and is supplying their products to more than ninety countries. Being unfamiliar with international game rules is still a barrier for Chinese pharmaceutical firms to further expand.
Learning from Indian experiences, Chinese companies should consider not only mainstream markets such as those in America, but also the niche markets in other continents and establish multiple alliances. Because the leading Indian companies have strategically extended their business in developing countries a big part of their overseas revenue comes from there. In the developing countries, barriers to entry are low while cost advantages are more obvious, with less competition, and higher profit margin. In China, Tiens and KPC China have found this strategy rewarding. In aligning partnership internationally, Chinese companies can refer to Dr. Reddy's business cooperation matrix.
Also, the shortage of talent has to be tackled. For complicated reasons, most Chinese enterprises don't have a system of nurturing, training and motivating talent. Rome was not built in one day. The ecosystem for professional executives can only be established by improving the management transparency, defining management boundaries and creating more space for career development. All in all, competitive compensation integrated with stakeholders' interest is both a benchmark in the market and a must-have for attracting and retaining the elites in management and research.(Roland Berger, 2005) According to a Roland Berger report, Chinese companies approach this in two ways: One is to attract and train talent, preparing them for overseas business expansion. They may either send staff abroad for training, or employ expatriates, or recruit the "Sea-Turtles" (Chinese coming back from abroad with qualification and experiences); another is to localise overseas managers and staff. Dr. Jing Zhongren from Fosun Group believes that it is critical to have a reasonable "mixture" of human resources after overseas M&A, for the localised sales force is better for marketing while Chinese research staff costs less.
COMPETING AND COOPERATING
Chinese companies also have some advantages. Some APIs and antibiotics made in China have a strong cost advantage. In the late 1990s, rivals from China began selling Norfloxacin in India for half the price of Dr. Reddy's. Executives at the Hyderabad-based company realised that they couldn't keep up and soon abandoned the Norfloxacin business. With continuous efforts, TCM from China is also expected to be a growth segment in the near future. Moreover, globally speaking, China has a leading advantage in biotechnology such as gene tests, vaccines research and production, and gene treatment.
We can expect the unleashing of even more of the potential of China's pharmaceutical industry due to its ongoing reform. During the GMP re-certification, the industry has witnessed large scale M&A and a flood of investments from the private sector. On one hand, the reshuffle and reform of the industry have brought out new sizable pharmaceuticals groups, which is good for developing core competence and making better use of resources. It is a more difficult and time-consuming task for the pharmaceutical industry in India due to its sheer size. There are 20,000 pharmaceuticals companies and company qualities are inconsistent. On the other hand, the established infrastructure, both physically and politically, creates a more solid foundation for further development of this industry in China. In the foreseeable future, it will gain more momentum with the improvement of corporate governance, the integration of industry with clear strategy in capital financing, technology and talents, more influx of Chinese "Sea-Turtles", and the practice of motivation mechanisms (for example, the ongoing experiment of stock options).
China and India will surely benefit each other by cooperation in this area, but competition is also inevitable. For example, during the past fifteen years India has raised the most (51%) dumping cases against China. However, as India is both an important buyer and supplier of Chinese raw materials, the two should strive to avoid a bitter pricing war and rather seek some kind of partnership. To make use of China's cost advantage and develop the China market, Ranbaxy and Dr. Reddy's have already respectively built their joint ventures in China. In the international market, Chinese pharmaceutical firms are also allying themselves with Indian companies. The Dubai-based joint venture between Holley China and Ipca India is a case in point. The business intention of this joint venture is to integrate the WHO certification and distribution channels owned by Ipca and raw materials and product formulation technology owned by Holley, so as to supply the products to Africa and cooperate in bidding for global procurements.
Cooperation, rather than competition, will not only be good for the industry but also for both nations. For instance, if a strategic alliance in biotechnology research and application is established between these two most populated countries, a series of exciting achievements will be made for human's common good: First, China and India can better identify the common application of biotechnology; Second, they can share the information, the talent and the limited biotechnological resources; Last but not the least, they can jointly develop differentiated biological products for common interests and application. Economically speaking, this will provide the best opportunity for both nations to materialise their goal of development.
(The author is CEIBS MBA05 student. The article is an abridged version, with most references omitted, of "International Expansion of Pharmas?India's Experience and Sino-India Cooperation", which won the first prize at "Knowledge@Wharton International Essay Contest". )
