A country with 1.3 billion people, a GDP of over USD 5 trillion and slated to be the third largest pharmaceutical market by 2013. These are indeed impressive statistics about China. Take on the other hand, the global pharma powerhouse – India, a country which prides itself in filing the most number of ANDAs and US DMFs; an industry which has taken the global generic market by storm gaining respectability in US and elsewhere; and an industry which has acquired companies globally making some of the companies truly transnational in nature. With both the countries situated next to each other, one would think that it forms an ideal match for engagement. However, the reality points in another direction. The Indian pharma industry is either ignorant about the market China is or wary about operating there. Many a time, the main official line of reasoning has been that since the industry is doing so well in other “transparent and English speaking” markets, they will not want to spread the resources thin by going to a tough market like China.

According to one estimate, export of China’s APIs, intermediates and chemicals to India in 2010 touched USD 3.3 billion while India’s exports in the same sector struggled to reach USD 500 million. This in fact is in harmony with the bigger picture where trade between India and China is indeed growing and has reached USD 60 billion in 2010 but it has been primarily led by China’s exports to India which totalled USD 40 billion. The two sectors where the Chinese feel that India is ahead of them are IT and pharmaceuticals. And in both the sectors, the Chinese govt has laid out a well structured programme to learn from the best including India, to become competent, if not the best in the world. In IT, Indian companies have made a move to at least invest and operate from China. How big it will evolve to be, is a question for the future. From time to time, Indian trade delegations have raised the issue of complex entry barriers in pharmaceuticals in China; but one needs to really introspect whether we have tried enough in that country. The answer probably is “no”.

In terms of commitment of company resources to the China business, the less said the better. What are the chances of China figuring as a potential geography in the top management or board meetings? What are the chances of the company’s brightest talents being posted in China vis-à-vis US or Europe? What are the chances of the company’s CEO or equivalent visiting China more than once in a year? What are the chances that a company has a dedicated business development manager for China? And many more such questions…The answer to all would tend towards a minimal value. A future top 3 pharma markets, looked from this perspective is a sure path to failure collectively for the industry. Unless, of course the industry thinks that China is not a business destination.

According to IMS health, China will be the 3rd largest pharma market by 2013. Sales will increase by USD 40 billion in the next five years. The government is also pumping in USD 125 billion to ensure universal health coverage by 2020. Today China spends just 4.5% of its GDP on healthcare. It looks at increasing this substantially. US spends around 16% of the GDP on healthcare. Hence, the trend is clearly evident. While the market is itself highly fragmented, MNCs are investing in the market with long term ambitions. According to one estimate while half of the top 10 pharma companies are present in China, none have a market share more than 2.5%. And the Indian companies do not figure in the discussion list.

So what is it that makes things so ominously difficult for Indian pharma in China? Having worked in China for 3 years, I take the liberty of putting together my own perspective.

In the last 15 years or so, some Indian pharma companies have dared to invest in China through primarily the JV route. This has been in intermediates, API as well as finished dosages. However, the often repeated story has been the few Indians ploughing a lonely furrow, trying to convince and educate the head office of the Chinese way of doing business. This step motherly treatment has resulted in poor results which in turn reinforces the board room view of China being a dirty rather than tricky market to operate in. And the followers who want to establish something in China, look up to these pioneers and what do they see –  Ranbaxy which divested their stake in Guanghzhou, a DRL which is always sorry about their investment at Kunshan, an Aurobindo which seems too eager to get out of China than build, and an Orchid which seems to have forgotten that they have an ongoing JV in Shijiazhuang!

Sourcing to marketing
This is again a perception and thought process which has been inbuilt into the Indian psyche over a period of time. The pharma industry is no exception. Chinese have built their name by supplying cheap intermediates and raw materials for many years now. There is nothing wrong with capitalizing or using this access for creating value or profits for one self in other markets like US or Europe as Indian companies have done. The problem starts when one sees this as the end and nothing more. During late 1990s noise was already being created about China becoming an API hub. This was underplayed under the reasoning of lack English speaking skills, poor regulatory knowledge and sub-par quality compliance. During the last decade not only has China begun filing US DMFs but also conducted the spectacular Olympics with all the handicaps, readily being attributed to it! The last five years has seen talk of China becoming better at finished dosages, again with a simultaneous down playing by the Indian companies or so called experts.

Every student is a teacher too  
China looks up to India in two sectors i.e. IT and pharmaceuticals. Now let us look at what they have done in these two sectors. In IT, the major Indian IT companies including Infosys, TCS and Wipro have established multi centre bases in China employing more than 10,000 people. NIIT is the most established training organization in China. In pharmaceuticals, under the name of joint ventures China has given a red carpet welcome to all the big pharma to set up ventures in the country. With India, they have been open to employing Indians to set up and scale up key technologies in different areas. Quality and regulatory compliance is another area where knowledgeable Indians have made China their work place. On the other hand, I have not known of any Chinese being employed by an Indian pharmaceutical company in India in any technical capacity. While on one hand questions could be raised on the patriotic intent of these Indians, the bigger learning is the openness of the Chinese to learn everything which is better from anyone in the world. Contrast this with the Indian attitude of believing that we are the best and if at all something needs to be learnt, it has to be from the workplaces in US and EU. This attitude has prevented Indians from learning and measuring the strides made by Chinese in pharma technology including areas like fermentation, biotech etc. I am reminded of what the current Indian ambassador to China Dr S. Jaishankar said in one of the interactions with the Indian companies in Shanghai “While Indians feel we are competing with the Chinese in every sphere, the Chinese are like the drivers who look in front of the car to see how fast they can overtake the car in the front, which is the US. They do sometimes see the rear mirror to see how India is faring at a distance!” The ambassador has been a very vocal proponent of Indian business excelling in China and has been a motivating factor for businesses. The Indian companies and the managers need to be a student at all times and learn from the positives China offers. To paint China with only the pitfalls may be to forego the opportunity of learning some very crucial things for succeeding in the changing world.

“Holier than thou” syndrome  
Indians are seen to be argumentative by many and sometimes highly opinionated too. I have found this streak at times inhibiting Indian companies from engaging with the Chinese counterparts effectively. You talk to a QA audit team of an Indian company which has visited a Chinese company, and you will get a list of issues and gaps. Add to it, you will also hear comments like manipulation and hiding of data, the antiquated processes being followed etc. Many a time, I feel that these are probably the same remarks used by a Western company auditing an Indian facility 10 years back. One has to understand that an industry evolves leading to a more standardized way of doing things. Like India, China too has its large share of companies which are not up to the mark.

The other major issue I have seen while looking at investments into China, are subjects related to language, law and corporate governance. One does encounter investment proposals, which raises questions of legality, ethics and accounting issues. China is indeed an evolving country with its share of corporate governance issues. That would indeed be the reality and one would operate in China for certain business advantages which negate the mentioned complexities. I have at times been surprised to see that Indian companies select to be unaware of such practices or developing convenient selective amnesia when they assess potential targets! It would seem as if India was a Utopian state where corruption, accounting malpractices, managing pollution boards are unheard of. As always the key is not to be opinionated but to do a proper due diligence and then take a decision based on best assessment of facts available. Half hearted attempts will take companies nowhere and not the least in a complex market like China.

Compare this with the line taken by Chinese companies. Haier India is eyeing at a sales turnover of Rs 1200 crore in 2012. Huawei has already crossed USD 1 bn in sales from India alone and are investing in India continuously. I am sure that they keep coming across hurdles, which they try to surmount in the interest of building a long term sustainable business in India.

Top management time
To succeed in the most challenging market will not only need your best team to play but also be supported by the top management who are aligned to the challenges and issues faced by the operational team. This cannot be a quarterly review exercise at least till the time the venture earns profits. Also needed will be the top management to fly east a few times in a year and get their eyes and ears embedded in the realities of China. As a culture too, China places a premium on the visits and interactions of the top bosses. This paves way to local government doors, friendlier policies and business breakthroughs. One company I have seen this happening though not in the pharmaceutical space is Infosys. At least one person from the senior management team visits China every quarter which not only motivates the operational team but also enables the eyes and ears of the board room to be aligned to market realities.

As things stand today, China as a market is virtually non-existent in the minds of the Indian pharmaceutical companies. It continues to be a sourcing destination. How much it continues to be, will have to be seen, with China’s drive to get into value added products, government’s policy to cut down on pollution, increasing wages, and above all an appreciating Reminbi. With a huge population, growing incomes, and the government push, one thing is for sure – China will edge towards being the second largest pharma market and be an attractive destination for all the big pharma companies of the world, if not for the Indian companies. Ultimately it will not be China’s loss, but India’s for sure. Does anyone care?

Indian companies will finally have to answer a few questions with regard to China. Will China be a potential country to operate in, 5–10 years from now? If the answer is yes, then they have to start investing in the country from today in terms of various kinds of resources. (the most important being people). Only then will any organization have the required streak of Chinese DNA to operate and succeed in China in say 2020. Till then the Great Wall of China will continue to stay as a mere tourist destination and a subject for students in history books!