Socialism with a Shanghai Touch

Less than two years ago, the main businesses of Shanghai-based China Worldbest Group were textiles and agricultural machinery. Now the state-owned company is China's largest pharmaceutical conglomerate. "Once we got into pharmaceuticals, we discovered the field's enormous potential," Worldbest Group Vice President Lu Yunliang says.

The group changed its focus in response to rapid social and economic changes in Shanghai. As incomes rise in the city and on the rest of the Chinese coast, there is more demand for health products. On the other hand, the Shanghai-area textile and clothing business is becoming uncompetitive because of the steady increase in production costs in the Chinese metropolis.

In the 1990s, China Worldbest already had several partnerships with major foreign chemical companies such as DuPont and BASF, Lu says. Worldbest's management noticed that these firms were divesting their textile operations. At the same time, leading chemical companies in Western countries were redefining themselves as life sciences firms.

Worldbest undertook its own transformation with the 2002 acquisition of a controlling 40% stake in state-owned Shanghai Pharmaceutical, which bills itself as China's largest pharmaceutical company. From a handful of people, employment in Worldbest's pharmaceutical manufacturing business jumped to nearly 4,000. The company now derives two-thirds of its sales from pharmaceuticals and related medical products.

On a day-to-day basis, China Worldbest's operations are independently run as 24 separate companies "with 24 different bosses," Lu says. He himself doubles as president of China Worldbest Life Industry, one of the group's largest companies. Four of the group's firms are independently listed in Shanghai. The companies have a total of 40 pharmaceutical manufacturing joint ventures with major foreign companies such as Bristol-Myers Squibb and Johnson & Johnson. The main function of the conglomerate's central management is to set the overall strategy of the group and to start up or acquire new businesses.

The group's top managers are communist party officials. This does not mean, however, that they are bureaucrats ignorant of market realities. The firm's chairman, Zhou Yucheng, is a frequent guest at international economic conferences. Rather than depend on government bank loans, the group typically gets its funding from the private sector. Worldbest raised $75 million from a new bond issue last fall.

Worldbest typically implements sweeping reforms in the companies it acquires, Lu says. Worldbest Pharmaceutical, for example, was essentially a producer of cosmetics when acquired in 1999. It has since become one of the world's top four producers of bulk vitamin C with a 12% market share, competing directly against firms such as BASF and DSM.

After acquiring Shanghai Pharmaceutical, Worldbest hired management consulting firm McKinsey & Co. for advice before proceeding to reorganize the firm into four businesses: antibiotics, over-the-counter drugs, traditional Chinese medicines, and pharmaceutical ingredients. Worldbest strives to reassign workers within the group instead of laying them off, Lu says. Some people were told to go, but this was kept to a minimum, he adds.

There is plenty of scope for reassignment within the group, as business is now expanding in numerous directions. The firm is beefing up its R&D operations, both by building new labs in Shanghai and by strengthening cooperation with Chinese research institutes. Worldbest is moreover keen to hire foreign-trained scientists who could help it launch research projects with foreign organizations.

The group sells much of its medicine in a growing retail network that includes 3,000 drugstores throughout China. Worldbest is still buying factories in Shanghai and other parts of China. It is building and acquiring hospitals in Shanghai, Beijing, and other cities. It is also manufacturing medical equipment such as X-ray machines and operating-theater instruments.

ANNUAL SALES in the pharmaceutical business amounted to $1.75 billion in 2002 and surged to an estimated $2.5 billion last year, Lu says, cautioning that this remains tiny by the standard of the global pharmaceutical industry.

Although the group is interested in expanding its pharmaceutical ingredients export business, it perceives that its biggest opportunities are in China. "Our international business is not developed yet," says Huang Cheng Long, chairman of group company Shanghai Worldbest Life Science R&D.

But the company is set to become increasingly well known within the international drug industry. Lu says he is in talks with a U.S. company on setting up a venture to produce anti-AIDS drugs outside China. Other companies are interested in teaming up with Worldbest to develop the Chinese market. With its manufacturing base in China's main city, national retail network, and well-connected managers, the group is in a strong position to take advantage of future developments.