Prospering South of Shanghai

China is a poor country, but that is not immediately obvious in Zhejiang province on the east coast. In the capital city of Hangzhou, families crowd into fancy restaurants on the ground floors of newly built apartment buildings to feast on eels, roasted meats, and other delicacies. In the countryside, affluent farmers have built entire villages of three- or even four-story family homes. New highways cater to an endless flow of trucks filled with fat hogs, flat-screen displays, and oil products.

Zhejiang is also home to a flourishing fine chemicals industry. Companies in Zhejiang are world-class producers of dyes, beating formidable foreign competitors in global markets. Recently privatized pharmaceutical ingredient producers are still just starting to understand the requirements of foreign customers, even though they are already enjoying rapid growth in export sales.

"We have several contacts in Zhejiang and are particularly satisfied by one company there that is one of our suppliers," remarks Marielle Roger, manager in Aventis Global Purchasing.

"If the economy of Zhejiang is developing so fast, it is largely because of an orderly privatization process of state-owned companies," claims Li Chun Bo, chairman and general manager of Zhejiang Medicine. Located one-and-a-half hours from Hangzhou in Xinchang, Zhejiang Medicine was gradually privatized between 1992 and 1997, first by allocating stock to its employees and then by listing on the Shanghai stock market. The company produces pharmaceutical ingredients and intermediates for the Chinese and international markets.

"Zhejiang people are risk-takers," says Ansen Chiew, the sales manager of Cheng Yi Pharmaceutical, a company based in Dongtou, in southeast Zhejiang. Chiew can claim some objectivity about Zhejiang because he hails from Fujian province. He says Zhejiang is one of China's most capitalistic provinces and that its people are good at solving problems. Unlike those in other parts of China, Zhejiang companies have tended to grow without many government subsidies or infusions of foreign capital, he says.

Yet, through its policies, the provincial government responds to and even anticipates the needs of industry. Liu Yong Jiang, director of business development at the Zhejiang Hangzhou Gulf Fine Chemical Zone in the town of Shangyu, says the provincial government, in its master plan for the chemicals industry, undertook to set up three industrial parks. One is the fine chemicals zone, another aims to attract oil refineries, and the third focuses on basic industrial chemicals.

Like industrial parks elsewhere in China, the Shangyu fine chemicals zone is an ambitious undertaking. Established in 1998 with $150 million in provincial funding, it is designed as a production base for the dye, pharmaceutical, detergent, and specialty chemicals industries. It already covers an area of 7 sq miles, but it will grow to four times that size, Liu says.

The zone has been primarily attracting Chinese companies in search of space to expand. "You can't just set up anywhere or expand recklessly," Liu says, referring to stricter zoning and environmental standards coming into force in China. He adds that 118 companies have reserved space in the park and that 65 are already operating. In addition to the Chinese firms, other companies in the parks are foreign-invested joint ventures, a large portion of which are led by Taiwan or Hong Kong investors. In fact, the park contains a Taiwanese subzone.

Park officials have built common wastewater treatment facilities, Liu says. But he warns that companies with particularly dirty effluents will have to build their own treatment systems. Other than sharing infrastructure, companies setting up in the park benefit from convenient transportation infrastructure. The park has its own pier in Hangzhou Bay, rail is about 7.5 miles outside the park, and the road network provides easy access to major cities like Hangzhou, Shanghai, and Ningbo.

UNLIKE ELSEWHERE in China, electricity supply in the park is stable, says Zhu Ming Xing, vice president of pharmaceutical producer Xinchang Guobang. He should know. The production facilities adjacent to his office would blow up if the electricity were to suddenly stop. The company produces animal-feed antibiotics and pharmaceutical intermediates.

Owing to the rapid development of industry in Shangyu, one of the challenges local chemical companies face is finding enough workers. This is a paradox because, on the whole, China has an unemployment problem. Zhu says he needs to hire about 80 operators every year and he secures them with some difficulty. "The park is too new," he shrugs. In fact, much of the land in the park, though allocated, is still empty.

The largest and fourth-largest dispersion dye producers in China are already located in the park. Shangyu's fine chemicals zone accounts for half of China's dispersion dyes output and a quarter of the world's. This is mostly because the city of Shaoxing, the largest Chinese production center for textiles and clothing, is located 15 miles from Shangyu, Liu says.

Zhang Yun Bao, director of Zhejiang Longsheng, China's largest dispersion dye producer, says his company employs 3,000 workers. The company's offices in the Shangyu park are less than tidy and the labs look ancient, but Zhang insists that the company's focus on technology and excellent management of its production facilities are among its greatest strengths. Zhang estimates that Longsheng's sales grew by a third last year to $250 million and that its net profit grew to $25 million. The company exports about a third of its dyes.

Established in 1970, Longsheng has been privatized and is listed on the Shanghai stock market. Its largest plants are in Shangyu, but the company also has plants in Fujian, Jiangxi, and Sichuan. Initially a producer of fertilizers, the company began producing dyes in 1993. Although China's large production scale and low labor costs work in Longsheng's favor, Zhang maintains that product development is a major company strength. He notes that the firm's R&D staff of 120 works on a narrow range of products. Furthermore, he says the company has access to 500 R&D personnel, including the government research institutes with which Longsheng collaborates.

Shangyu Shunlong, China's fourth-largest producer of dispersion dyes, is much younger than Longsheng. Created in 2000 by entrepreneur Zhu Hai Gen, it was financed by private capital. Chief Engineer Liu Jin Bang says he was hired from Tianjin; he had been managing 3,000 people at a state-owned pigment manufacturer where he worked for 32 years. His staff at the more dynamic Shangyu is a tenth of what he's used to, but he doesn't seem unhappy with the change.

The company's first plant, Liu says, was set up in a residential neighborhood of Shangyu. The company moved into the park, he explains, because there was no room at the first site for the water treatment facilities that the company wanted to install as part of an expansion project. The company's production capacity is now 10,000 metric tons per year, but he expects this to double within two years. He attributes the company's fast growth to its creative use of technology, its operational excellence, and the ideas of the chairman. Most of the company's sales are to customers in Zhejiang province. Some 10% of product is exported.

Like its dyes business, Zhejiang's pharmaceutical industry is growing rapidly. Zhejiang Medicine's Li says his firm had sales of only $450,000 in 1986. By 1995, this had snowballed to $30 million, and Li says sales will likely reach $250 million this year, the company's 50th year of operation. The company's headquarters are still housed in an old and stylish building next to its production facilities, a sign that Zhejiang Medicine has not squandered the money from its 1997 initial public offering. "If all you do is build nice buildings, it doesn't mean very much to an enterprise," Li comments.

Over the years, Li says, the company has strived<br > to develop its own production methods, strikingly different from those of its foreign competitors. Several new products are under development, about which he prefers not to say anything. The firm's main products are vitamins, pharmaceutical ingredients, and enzymes. One of its strongest lines is its precursors to antibacterial drugs.

Li admits that the company's growth in the past decade has been remarkable. Even more remarkable is that he says he has strived to maintain the company's annual sales growth at below 50% in the interest of sustainability. Too many companies in China, he says, exhibit a short-term mentality. "I don't want to get a windfall one year from one project and then struggle the following year."

WITHOUT PROVIDING DETAILS, Li says several Western drug companies are holding talks with Zhejiang Med to form partnerships. With self-confidence at least equal to that of other Zhejiang managers, he says his firm attracts interest because of its operational excellence. A quick look at the company's vast facilities does indeed reveal that they are clean, well maintained, and fully operating. Li adds that foreign firms are also pleased by Zhejiang Med's environmental record. The company received ISO 14001 certification from a British organization, he says.

Cheng Yi Pharmaceutical's Chiew is frustrated by the poor image that Chinese chemical producers have abroad. He is particularly incensed by a recent case involving Zhejiang-based Hisun Pharmaceutical. As chronicled by the New York Times, the company killed two of its workers by illegally sending them to clean up toxic discharges. In the foreign press, the Hisun case was presented as representative of Chinese industrial practices. In China, the case also attracted much coverage, but as an extraordinary event. Such blatant violations of environmental and safety regulations are completely unusual, Chiew believes.

Cheng Yi is located on the island of Dongtou, opposite the city of Wenzhou in southeast Zhejiang. It was initially launched in 1966 by the People's Liberation Army as a formulator of cold medicines. The army left Dongtou in 1985, transferring ownership to the firm's employees. Full privatization was completed in 2001 when the company changed its name from Wenzhou No. 3 Pharmaceutical Factory. Despite its stodgy past as a state-owned firm, Cheng Yi projects a dynamic image through Chiew, a straight-talking professional who earned an M.B.A. degree in Australia before returning to China. Chiew's office is in a modern office tower in Shanghai.

Cheng Yi's main product is the antiviral ribavirin, Chiew says. There are several producers of the drug in China, but one of Cheng Yi's advantages, he says, is that its product has been certified for human use by the Australian equivalent of the U.S. Food & Drug Administration. The company is working on its FDA application. Chiew says there are positive aspects to being based in Dongtou. The island is relatively clean, he says, making it easier to produce in a dust-free environment. Another benefit is that employee turnover is very low. The company mostly employs local people who have few job opportunities. The island has yet to be linked by a bridge to the mainland.

But Cheng Yi's main expansion is not taking place in Dongtou, nor even in Zhejiang. The firm is investing $12 million in the construction of a plant in neighboring Jiangsu that will perform fermentation and chemical synthesis. Fermentation, Chiew says, requires cornstarch that is more readily available in Jiangsu. Commenting on the investment cost, Chiew notes that reaction vessels made in China cost only 5% of what they do in the U.S., keeping construction costs low.

More humble than other Zhejiang-based company managers, Cheng Yi's Chiew says one challenge his firm faces is to understand his potential customers. But this is unlikely to remain an obstacle for long.

Walking through the existing fine chemicals plants of Zhejiang province and those under construction, one gets the impression that a formidable new competitor is taking shape. China's fine chemicals plants were from the start designed to produce large quantities of pharmaceuticals and other materials for the Chinese masses at extremely low prices.

Foreign markets are now increasingly accessible to these companies. Zhejiang managers are quick to seize an opportunity when they see one. Their ambition to expand overseas is facilitated by government officials who are passionate about building new roads, railways, piers, airports, and all the infrastructure required to help goods move.

Zhejiang companies are still at the bottom of the supply chain in the global pharmaceutical industry. For these players, the only way is up.