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Feature Articles : Mar 1, 2012 (Vol. 32, No. 5)

Myths about Doing Business in China

This Large and Growing Country Provides Many Opportunities for Companies in the Know
  • David Jiang, Ph.D.

China is growing fast, along with demands for Western products. Since 2000, U.S. exports to China have grown 468%. At $92 billion in 2010, China is now America’s third largest export market.

General Motors held its first board of directors meeting in China in 2011. The company sold more light vehicles in 2010 in China than it sold in the U.S. At the end of October 2011, Starwood had 84 hotels in China and was planning to develop 100 more. In order to be closer to future customers, Starwood’s CEO moved his entire management team and board to Shanghai for a month. It is not too late to enter China, but several myths need to be dispelled before taking this step.

Myth 1: Companies go to China because of the cheap labor

During the past several decades, Western companies benefited greatly from taking advantage of cheap labor in China. Now, cost savings is no longer the primary motive for Western companies to set up research and manufacturing facilities in China. More companies now make the move to China to take advantage of the swift speed to market and the access to talent. Most importantly, by developing and manufacturing products in China, companies gain access to a large, rapidly growing market.

As China develops, new business models focus on selling to the growing middle class. The new model will encompass “Made for China” in addition to “Made in China.” China already has the world’s second largest economy, and it is continuing to expand. China contributed 19% of global economic growth in 2010. China is already the largest auto market, largest cell phone market, the second largest luxury market, and the third largest pharmaceutical market globally.

Myth 2: Most people in China cannot afford and do not want Western medicine

With rising earning power, the Chinese can afford and are demanding high-value products. According to the Boston Consulting Group, there are over a million millionaire households in China. Some estimate that in the next decade as many as one billion Chinese will be in the middle class. With this economic growth, people are expecting and demanding top quality medicines and products.

In addition, the Chinese Central government committed over $120 billion in 2009 to provide healthcare for people living in rural areas. With this government help, more people can afford and have access to Western medicine. Furthermore, many Chinese patients and physicians prefer Western medicine; Western brands are perceived to be high quality, trustworthy, and efficacious.

Myth 3: Minimal or no innovation occurs in China

In the next five to ten years, we will see a major paradigm shift from “Made in China” to “Discovered in China.” The government has committed $308 billion to invest in science and technology development over the next five years, with a focus on biotechnology.

In addition, many highly educated, ambitious, Western-trained professionals are returning to China to take advantage of better career opportunities at home. They play a major role in starting new innovative companies, and they are leading the development and commercialization of new products in China.

I predict there will be a surge of Sino-U.S. life science partnerships in the coming years. Selling traditional Chinese medicines and generics no longer satisfies many Chinese companies. To stay ahead of the competition in a market where growth is 25–30%, Chinese companies are actively seeking partners in the West to co-develop innovative medicine.

In the U.S., many groundbreaking products are currently shelved due to lack of resources for further development. Biotech companies are searching for partners to provide the much needed capital for costly research programs and clinical trials.

This environment creates an excellent opportunity for win-win partnerships. A common model is for a U.S. company to find a Chinese partner that will share the R&D costs and risks to co-develop a new product. The Chinese partner earns the commercial rights in China, while the U.S. company retains the global rights outside of China.

Myth 4: Minimal or no IP protection exists in China

Since China joined the WTO in 2001, Intellectual Property (IP) protection has improved significantly. IP protection in China still has many areas to improve compared to Western standards, but it has already come a long way. The government has made concrete and deliberate efforts to protect IP with significant outcomes. As a result, many leading pharmaceutical companies have increased their research investments in China.

Additionally, Chinese companies now value IP protection to a greater extent due to their own innovation and their acquisition of Western technologies and products.

In 2010, China ranked fourth in number of patents filed under the Patent Cooperation Treaty (PCT), filing 12,339 patents. This represents a 56% growth from the previous year. This growth is expected to continue; according to Tian Lipu, the State Intellectual Property Office (SIPO) Commissioner, “By the end of the 12th Five Year Plan (2011–2015), invention applications received by SIPO every year are expected to double over the current number.”

Myth 5: The same business logic in the West can be applied successfully to China

Although many business principles from the West can be applied to China, not everything is transferable. For example, the patent cliff that is common in the West is far less severe after IP expiration in China. Glucobay, Bayer’s 17-year-old, long off-patent drug, only sold $12–15 million in the U.S. in 2010, but its sales in China surged by 22% to $283 million. Bayer CEO Marijn Dekkers said, “We’re still winning market share” with Glucobay in China. Glucobay’s commercial success can be attributed both to the rapid spread of type 2 diabetes in China, and to Bayer’s clever marketing strategies. Due to the Chinese preference for Western brands, many Western pharmaceutical products continue to do very well after IP expires.

To conclude, China’s great rise was built through a series of small and cautious steps. Progress has been made “crossing the river by feeling for stones,” as Deng Xiaoping put it. The Chinese government launches a small pilot program, pauses to iron out any problems and then, if successful, expands the program on a much larger scale.

Western companies hoping to succeed in China may also consider this approach. No one doing business in China should expect overnight success; some growing pains are inevitable. It takes time to fully understand the importance of the cultural differences, the dynamics of the business relationships, and the unique challenges and opportunities associated with doing business in China.

There are many opportunities in China, but companies must proceed with care, patience, and persistence. In addition to industry-specific risks, such as product approvals from regulatory authorities, there are general risks, such as high inflation, the real estate bubble, labor unrest, growing disparities between the rich and the poor, etc. It is essential to pick a trusted local team to navigate and lead during both good times and bad. The new challenges and experiences that arise as part of doing business in China are what make the eventual success even more rewarding.