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Costs Rise In China

Reduced export subsidies and stricter environmental standards are making life difficult for companies

by Jean-François Tremblay
July 23, 2007 | A version of this story appeared in Volume 85, Issue 30

Changing their tune
Credit: Jean-François Tremblay/C&EN
Chinese pharmaceutical chemical producers are increasingly visible at international trade shows, where they seek to sell higher-value-added products as their own manufacturing costs increase.
Credit: Jean-François Tremblay/C&EN
Chinese pharmaceutical chemical producers are increasingly visible at international trade shows, where they seek to sell higher-value-added products as their own manufacturing costs increase.

THINGS ARE NOT as easy as they once were for Chinese chemical exporters. On July 1, the Chinese government reduced the tax rebate it provides to exporters of many types of products, including most chemicals, from 13% to 5%.

This reduction in what effectively is an export subsidy has added to the pressure that chemical and pharmaceutical producers have been feeling recently. The government has also increased its enforcement of environmental standards, and China's currency has been appreciating in value.

China has established itself as a fearsome producer of a wide range of chemicals produced in batches. Chinese salaries are low, and production equipment, such as reactors, is cheap as well. Many Chinese producers of chemicals and pharmaceutical ingredients have lowered their costs further by skimping on environmental protection and worker safety practices.

China now supplies a substantial portion of the materials used by the world's pharmaceutical industry, be it the active pharmaceutical ingredients (APIs) found in generic drugs or the raw materials that international companies use to make APIs and finished drugs.

Several companies that buy materials from China have announced price increases since the export tax rebates were reduced. Degussa said it would increase the prices of all its peroxodisulfates produced in China by 13% and the price of its China-made organic peroxides by 8%. Pittsburgh-based Calgon Carbon, also citing the cut in rebates, said it would raise the price of its Chinese-made activated carbons.

Speaking with C&EN during the CPhI China trade show held last month in Shanghai, Xu Xinliang, chairman and president of API producer Apeloa, said Chinese pharmaceutical chemical companies are under pressure from rising production costs. In response, they are increasingly promoting to customers in developed countries their capabilities as suppliers of medications in finished form, rather than of the bulk drugs that they now typically supply.

Apeloa is a Zhejiang-based company that is part of China's Hengdian Group. The U.S. Food & Drug Administration inspected the firm's Zhejiang plant earlier this year, clearing the way for it to supply APIs to the U.S.

Xu noted that there is more to be earned by producing finished products than by supplying bulk APIs. Only a handful of Chinese companies have received FDA approval to supply finished formulations to the U.S, he said, but many more will soon be approved. Already, he said, finished Chinese drugs are sold in Southeast Asia.

The lowering of the export tax rebate is just one of the challenges faced these days by Chinese chemical and pharmaceutical producers. Xu said the value of China's currency, the renminbi, has increased 9.5% against the dollar in the two years since foreign exchange controls were relaxed. However, India, China's main competitor in pharmaceutical ingredients, will not gain a competitive advantage from China's appreciating currency because the Indian rupee has also been rising in value, he noted.

A BIGGER CHALLENGE for many Chinese companies is the government's crackdown on violations of environmental regulations. For example, following an outbreak of algae in some waterways earlier this summer, the Jiangsu province government announced that it would order the closure of 2,150 factories near the heavily polluted Lake Taihu before the end of next year.

Oliver Ju, president of Porton, a producer of chiral intermediates in southwest China, said environmental controls at his plant are very strict. The local environmental protection agency has an online system tracking all of Porton's emissions. "They can see if we emit where we say we do," he said. Porton's plant is in the Chongqing Chemical Industry Park, a new site that aims to attract major international companies (C&EN, Oct. 30, 2006, page 23).

Tang Suhan, chief manufacturing officer at the contract research company Wuxi Pharmatech, noted that environmental inspectors normally call in advance before visiting the Shanghai plant where Wuxi produces pharmaceutical ingredients for clinical trials. But even though inspectors have refrained from surprise visits, he said, heavily polluting companies are no longer operating in the Shanghai area. "It's been strict in Shanghai for some time," he noted.

According to Tang, increased environmental inspections are a good thing because China would become an unlivable country without them. Moreover, he maintains that stricter environmental controls will force China's pharmaceutical chemicals industry to change for the better. "People are used to buying in China because it's cheap, but in the future, it will be for the quality and reliability," he said.

Apeloa's Xu expects that many marginal companies will not be able to change their ways. Better-led firms will continue to benefit from the low costs of labor and building manufacturing facilities in China, but the recent cost increases due to currency exchange rates and other factors will lead to the disappearance of hundreds of producers operating on tight profit margins. "Small companies that produce commodities, those without stable customers, those that don't yet comply with environmental standards, they will die," Xu said.



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