Risking Ip in China

After years of concern over China's inadequate intellectual property (IP) protection, international agrochemical companies are increasing their activities in China. They are encouraged by improvements in the safeguarding of IP, the low cost of manufacturing in China, local demand for safer food, and the need to better understand emerging Chinese competitors.

Until recently, farmers throughout China were offered agrochemicals of uneven quality bearing brand names similar or identical to those of reputable foreign brands-but produced in China without authorization. This practice made the real thing hard to identify.

Worse yet, Chinese producers supplied local and international markets with agrochemicals based on active ingredients patented by other firms. One of the early horror stories in China was that of DuPont. The U.S. company found that it could not stop Chinese producers from manufacturing Londax, a patented herbicide that it had started producing in 1992 at a $25 million plant in Shanghai.

Such pirating still occurs, but it is less widespread than it once was. Yu Dahai, vice president and global general manager of agrochemicals and intermediates at Degussa in Germany, says the threat posed by pirating is manageable and that exaggerating it harms the expansion of international companies in this vast market.

“Counterfeiting is less of an issue in China for agrochemical companies than it is for consumer goods makers,” Yu says. The climate is improving, he notes, citing as an example Syngenta, which last year won a copyright case against two Chinese companies in a Nanjing court (C&EN, Sept. 27, 2004, page 7).

Degussa has a few crop protection products that it sells to farmers, but it is more active in the agrochemical market as a supplier of raw materials to other companies. It invested this summer in a Chinese manufacturer of cyanuric chloride, an agrochemical and dye intermediate, based in Liaoning province.

There are increasingly compelling reasons to invest in China. BASF notes that China is already the world's sixth largest agrochemical market, worth $1.5 billion. This is less than half the size of the Japanese market-the world's third largest-but Chinese demand is growing rapidly, thanks to higher income, better education, and a desire for safer food, BASF says. Affluent residents of major Chinese cities buy a growing portion of their food in supermarkets, and these stores in turn source their produce from reputable farms that comply with safety regulations on the use of pesticides.

These large farms are also major exporters. One trend supporting the Chinese agrochemical market is that, paradoxically for a country where pesticides like DDT are still used, China is becoming an exporter of premium fruits and vegetables. In the upscale grocery stores of Hong Kong, Seoul, Taipei, and Tokyo, tomatoes, apples, and even lettuce from China are sold alongside the best local and imported produce.

Considering the size of China and its low labor costs, it is not far-fetched to predict that the country is on its way to becoming a dominant exporter of fruits and vegetables, Yu says. BASF notes that it can sell agrochemicals directly to the large, reputable farms.

One of the problems of the Chinese market for agrochemical companies is that, large operations aside, most farms are run by poor peasants who have limited education and who will often opt for cheap and environmentally harmful pesticides invented 30 or 50 years ago, Yu says. The modern, more benign pesticides offered by the big international companies may be too expensive for them.

Yet international companies are less reluctant than they once were to sell their most advanced products in China. BASF, which claims to be offering some of the most advanced agrochemicals available from any company, says it launched in China this year its newly developed F500 series of fungicides. The firm insists that it is no longer refraining from introducing products into China for fear of IP infringement.

But one of the most compelling reasons for international companies to expand in China is emerging competition from local producers. Yu says foreign firms need to face Chinese agrochemical producers on their home ground or be surprised by their strengths once they go abroad.

Red Sun, an agrochemical producer headquartered in Nanjing, claims that its global sales already reach $500 million annually. Some Western managers are doubtful of that figure, but few doubt that competition from China is strengthening.

Multinational companies are expanding in China in various ways. In cooperation with a Chinese company, Sumitomo Chemical has built a plant in Dalian that will produce the herbicide Sumiherb for export. Degussa's plant in Liaoning province will mostly supply Chinese agrochemical producers and regional dye makers. In 2001, Syngenta inaugurated a plant in Jiangsu province producing the herbicide paraquat.

BASF says it conducted more than 100 technical training sessions with farmers in China so far this year and that it sources an increasing quantity of agrochemical intermediates from China. In Shanghai, meanwhile, Dow Chemical is building, and DuPont has set up, labs that will conduct a wide range of R&D, including in agriculture.

International agrochemical producers are increasingly willing to operate in China despite the risks of losses from IP theft. Degussa's Yu believes there is no choice. "If you want to maintain your pace, your market position, you need to be engaged in China," he says.