Central China Gets in Gear

Chinese products are not known to be innovative, but that is starting to change. Fine chemicals produced with technology developed in China are becoming more commonplace. Firms based in Wuhan, a city in central China with a population of more than 7 million that is home to numerous universities and research institutes, illustrate this emerging trend.

"The people on the coast of China are naturally good in business; we're more academic around here," says Zhong Jiacheng, a professor of chemistry at Wuhan University. Zhong heads a newly formed institute, IR Lab, that licenses the technological know-how to produce new types of nanomaterials. He's willing to work with companies in China and abroad, but so far all his potential customers are Chinese.

Wuhan University is known as China's third best after Beijing University and Tsinghua University. In the city of Wuhan as a whole, there are about 800,000 university students, 48,000 of whom are at Wuhan University. The university's graduates are world-class: About one-quarter of them go abroad for advanced studies, a proportion that rises to 50% for science graduates.

With its high concentration of scientists, the city of Wuhan is breeding entrepreneurs who launch fine chemicals companies serving both domestic and international markets. Wuhan is less developed than Shanghai or Nanjing, but that does not make it a less attractive location. Ships can sail up and down the Yangtze River to deliver products to Shanghai and the rest of the world. And on a map of China's highway and rail networks, Wuhan looks to be the central hub.

GOVERNMENT OFFICIALS spotted Wuhan's potential several years ago. In 1997, the government of the province of Hubei, where Wuhan is located, approved the creation of the Hubei Gedian High & New Technology Industrial Development Zone. Located in the Wuhan suburb of Gedian, it is China's only biopharmaceutical industry park, according to Sheng Yaohua, the park's administrator.

So far, unlike elsewhere in China, growth in Gedian has not been explosive. The park's spokesman, Tu Feng, says it will take more than 10 years to fully utilize the 10 sq miles of space available at the park. Up to now, the 129 companies established or planning to move into the park have been using only a quarter of the area. But growth will continue. Several firms are moving into Gedian to comply with Wuhan's strict environmental standards. The park is completing the construction of an effluent treatment plant. It also operates its own 3 million-kW power station.

One company that has set up in the park is Hubei Gedian Humanwell Pharmaceutical. The firm cooperates with a pharmaceutical institute in Nanjing to develop products that compete with those of foreign firms, notably Schering-Plough. Gedian Humanwell, which mostly makes steroid pharmaceutical ingredients, opened its doors two years ago. Its Chinese Good Manufacturing Practices-approved facilities are spotless and in vastly better shape than many other Chinese chemical plants.

Gedian Humanwell is a subsidiary of Wuhan Humanwell High Tech, a pharmaceutical group listed on Shanghai's stock exchange. Gedian Humanwell Plant Manager Zheng Cheng Gang, who has been with the Humanwell group for 13 years, says the group mostly hires university graduates.

"We want to build a strong foundation for our future growth; that is why we hire good people," he says. Gedian Humanwell's sales last year amounted to $1.2 million, and Zheng says they will likely grow to $2.2 million this year. He expects that cyproterone acetate, a pharmaceutical active compound that his company will start to produce next year, will add $5 million to annual sales.

But not all companies gravitate to industrial parks. New companies in Wuhan can be located in unexpected places. One such company is Wuhan Xinjing Chemical, a recently formed venture that has its warehouse and offices in an ugly Wuhan neighborhood where old state-owned chemical companies are shutting down one after another. Xinjing's annual sales are about $5 million, and its chief competitor is BASF.

Xinjing's main product is glutaraldehyde, a chemical used as a broad-spectrum biocide. Xinjing developed its technology with Tianjin Nankai University and Shanghai Ligong University. The company also makes its own equipment and employs six people in R&D. To boost competitiveness, Xinjing produces its own supply of the raw materials vinyl methyl ether and acrolein. Since its first plant opened in 2000, Xinjing has seized about one-third of the Chinese market, and it exports about half of its output.

Fu Zhong Zi, one of the company's four owners, is unperturbed about grabbing market share from BASF. "We are not a threat to BASF; we're much too small," he says. But he admits that BASF had to lower its prices in China after Xinjing entered the market, something that cannot have pleased the German giant.

Xinjing's relationship with BASF has become fairly complex. Before 2000, Fu says, Xinjing was buying and distributing BASF's glutaraldehyde in China. After the plant came on-line, the two companies became competitors. But now, BASF is considering buying the product from Xinjing to supplement the output of its plant in Ludwigshafen, Germany.

Another surprisingly located firm is Wuhan Yuancheng Chemical Manufactory. Its offices are in a busy part of Wuhan in an entertainment complex housing a hotel, several restaurants, and a karaoke bar.

The company's chairman, Ye Chuan Fa, dresses exceptionally plainly, a practice he adopted in the 1980s, when it was not clear whether China would embrace its new entrepreneurs or throw them in jail. A man who grew rich in the early days of China's opening to the world, Ye has learned to avoid ostentation. Before fine chemicals, Ye's main businesses were real estate development and hospitality, something that explains the company's unusual address.

TRAINED IN PHARMACY, Ye says he set aside his real estate business a few years ago to focus on fine chemicals. By making use of technology developed in collaboration with a research institute in Shanghai, he says, Yuancheng has become particularly competitive in cinnamaldehyde and other cinnamic acid chemicals. Yuancheng also produces active ingredients for health supplements such as melatonin, l-carnitine, and thiamine.

The Yuancheng group actually began producing fine chemicals only last year. Fine chemicals sales this year will likely amount to $7.5 million, or 40% of group sales. Yuancheng also produces paint as well as decorative items such as Greek statues and religious icons.

Yuancheng's managers are proud of their facilities, built just outside Wuhan on a site that was occupied by a state-owned factory they knocked down. Yuancheng's facilities are clean, tidy, and spanking new. Acting as a guide during a tour of the site, International Sales Manager Hu Zhenxin claims that Yuancheng produces cinnamaldehyde that is more than 99% pure, or 3% purer than what most other producers offer.

Yuancheng is expanding its product range. It is completing construction of facilities to produce benzaldehyde, the key raw material for cinnamon chemicals.

The company has also nearly completed building a plant to extract up to 150 metric tons of natural vitamin E per year. Ye says production has not yet started because his technical staff has been too busy with other projects.

Yuancheng is not the only producer of natural vitamin E in Wuhan. A subsidiary of Wuhan Kaidi Electric Power, Wuhan Kaidi Fine Chemical Industrial has been in this business since 1999. The company's office is located in an old and decaying building with an entrance that is difficult to find.

Kaidi has annual capacity for 350 metric tons of natural vitamin E. World capacity is 4,000 metric tons, according to Michael Liao, Kaidi's marketing manager. He adds that 90% of Kaidi's output is exported, mostly to advanced countries, through trading companies. The company's annual sales of $6 million are growing at 30% annually.

Liao says Kaidi is the only company to use a supercritical carbon dioxide extraction process, which it codeveloped with a research institute in Jiangsu province. The process is nonpolluting and yields high-quality products at a low cost, according to company literature. Liao says demand in China is rising, in line with consumers' incomes. Kaidi also produces fatty methyl ester and the nutraceutical phytosterol, which, like vitamin E, is extracted from rapeseed and soybean oil. Liao says the products are all certified by Chinese authorities as free of genetically modified organisms.

It is not clear if processes adopted by Kaidi and other Wuhan producers are truly innovative. But they are clearly competitive enough for these companies' sales to grow rapidly. The bad news for Western fine chemicals companies is that Chinese firms are still at an early stage in their development. The competitiveness of China-developed technologies will likely increase in coming years as Chinese entrepreneurs gain a better understanding of foreign markets.

Also helping Chinese companies are students trained abroad who are returning home to China in greater numbers than in previous years. At Wuhan University, Zhong does not mind that he loses the most promising graduates to foreign universities. "It's true that our best brains go to the U.S., but the U.S. nurtures them further," he says. He adds that either through educational exchange or by the graduates returning to live in China, these workers eventually use their their foreign experience to benefit China.

PROFILE

Making Amino Acids From Human Hair

Shenzhen Hubei Baofeng Industrial makes money from an unusual source. It extracts cysteine from human hair.

Liu Lianjun, one of Baofeng's managers in Wuhan, says Baofeng buys its raw material from wholesalers who gather it from hairdressing salons throughout China. He reckons Baofeng is only the fourth or fifth largest Chinese producer of cysteine. Still, when Baofeng buys hair, it buys 20,000 metric tons in one go.

Baofeng has three cysteine plants in China. The smallest one, in Wuhan, has an annual capacity of 5 metric tons. A plant in Shandong can produce 40 metric tons, and the third one in Jiangsu produces up to 30 metric tons per year.

Liu says it's better to have several plants that are geographically spread out in order to facilitate the sourcing of hair. Shandong province is home to the largest plant because it has a plentiful supply of hydrochloric acid, one of the materials used to extract cysteine.

China is the only country that still produces cysteine, Liu says, for one simple reason: There is more cysteine in Chinese hair than in any other potential source. The amino acid is an ingredient in a variety of products claiming to slow aging or promote hair growth. Almost all of Baofeng's production is exported.

Baofeng uses a production process that it obtained from Wuhan University. Profits in the cysteine business are low, Liu says, and a few producers have gone bust due to oversupply. Baofeng has been able to remain in the market because of its process. In addition to cysteine, Baofeng sells leucine and tyrosine, two by-products. Much of the company's waste, rich in ammonia and active carbon, is sold as fertilizer. The company's total sales amount to $10 million per year.

Hubei Baofeng is a subsidiary of the Baofeng group, headquartered in the city of Shenzhen near Hong Kong. Liu says the group's founders are from Wuhan, but most of the group's operations are in Shenzhen, where the company owns an industrial park and produces animal feed, clothing, and food preservatives.

The number of hair salons that provide hair to wholesalers is too large to estimate, says Liu, who has been in the cysteine business for 20 years. "Hair collection is a big business," he says.