Mixed news for service providers
European and North American service and materials providers will be inclined to welcome China's rising costs because it will
improve their cost position relative to their competitors in China. A 25% increase in labour costs, combined with a 10% appreciation
in the renminbi, would have the effect of raising the cost of sourcing in China by 25–35%. European providers may obtain an
even bigger gain in competitiveness in light of the rapid devaluation of the Euro and the British Pound. After factoring in
the additional costs of managing longdistance sourcing relationships, bio/pharmaceutical companies will see the cost advantages
of sourcing from China decreasing and may be more inclined to stick with more local providers.
However, the second order effects of the rising wage costs may cause service providers in mature markets even more pain than
they are facing today. Chinese service providers and manufacturers will respond to their eroding competitive cost position
in starting materials and simple chemistry by moving to higher value-added products and services, such as formulation, advanced
chemical intermediates and biologics. This move to higher value-added services is exactly the strategy that North American
and European companies have used to stay in business in the face of lowcost competition from the BRIC countries, and they
will now be looking at lower-price competition in the more sophisticated services and technologies that have been their refuge
in recent years.
Shifting economic balance
In a recent essay posted on the Project Syndicate website,3 two distinguished economists, Mohamed ElErian, CEO of investment giant PIMCO, and Nobel Prize winner Michael Spence, stated
that if global trends continue "not much more than a decade is needed for the share of global GDP generated by developing
economies to pass the 50% mark when measured in market prices." This is a fundamental transformation of the world economy
and a dramatic shift in where the greatest opportunities for growth will be in coming years.
Surprisingly, pharmaceutical service providers, especially those offering nonclinical development and manufacturing services,
have been slow to recognise this shift in the world balance of economic power and to respond to the new opportunities it presents.
Most continue to maintain an 'us versus them' mentality, and ignore the fact that their most important customer base, the global bio/pharmaceutical companies, are
making major commitments to the emerging markets. The roster of western API and dose manufacturers that have embraced the
emerging market opportunity is small, but those companies that have embraced it have a head start on exploiting the new opportunities
that the emerging markets offer.
The rising costs of doing business in China and other emerging markets may provide a momentary competitive reprieve to pharmaceutical
service providers in North America and Europe. However, those companies may end up being sorry that they got what they wished
for because the response to those rising costs may be even more challenging. Rather than fighting the tide, they need to learn
how to rise with it.
Jim Miller is President of PharmSource and a member of Pharmaceutical Technology Europe’s Editorial Advisory Board.
Chinese Workers Get Raises, and Clout, 8 June, 2010.
IMS Forecasts Global Pharmaceutical Market Growth of 4–6% in 2010; Predicts 4–7% Expansion Through 2013, 7 October, 2009