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West Pharmaceutical Services - tapping into China's growing healthcare industry

China's enormous population has a relatively high consumption of pharmaceuticals per capita. While the pharmaceutical market is currently heavily price controlled by the government, it is moving toward a free economy and the government is allowing foreign investment. As a result, it is becoming a very attractive destination for foreign companies involved in the pharmaceutical industry.

West Pharmaceutical Services manufactures primary packaging for pharmaceutical products, primarily injectable medicines. The company has factories throughout the world, and its established reputation for uncompromising quality has secured a market share above 60 percent in regulated markets globally. However the company did not have a significant presence in unregulated markets such as China.

"China was a new challenge for us," says Jeremy Layman, Vice-President for Sales and Marketing, Asia/Pacific. "We predominantly supply to large multinationals, but the majority of drugs in China are locally produced for local consumption, and there has not been a high level of quality control in the market.

"But the level of regulation is rapidly changing, and companies are beginning to demand the high standards used in regulated markets. And as manufacturing becomes more sophisticated it is also reasonable to predict that China will begin to produce pharmaceutical products for export. So as standards tighten, we would like to take a bigger part in that market."

The challenges

Targeting domestic Chinese manufacturers is a significant change for West Pharmaceutical Services. Multinationals demand the same high standards no matter where in the world they manufacture, but the accepted standards for domestic Chinese manufacturers are different.

One challenge the company faces is producing price competitive products. Unlike in other markets where consumers pay a premium for high quality products, the price of drugs is controlled by governments. Because the market is price controlled, manufacturers demand packaging products at low prices to manage profit margins. "Chinese pharmaceutical companies manufacture their products at a very basic cost," says Layman. "This can rule out the use of our products. We are not expensive because we demand a large profit, we are expensive because our high quality inputs are expensive. And that makes it much harder to bring your price down."

To supply the Chinese market and balance profit with maintaining standards, the company is focusing on obtaining reasonably priced raw materials, developing efficient manufacturing processes and securing economies of scale through market size. The company also made the decision to manufacture in China.

The right entry strategy

Establishing this manufacturing presence continues to be a significant challenge. Some of the products the company wants to manufacture fall into the government's restricted category, meaning the company had to obtain a licence. However, with 40 companies already operating in the market, the government was not allowing any new licences. To gain access to a licence the company had to find an established Chinese manufacturer with an appropriate licence and form a joint venture (JV).

As part of his research into the market, Layman attended an Australian Business International Trade Services seminar on China. There he met Sara Cheng, client manager, China, and quickly realised the assistance she could provide. Though the company had an established China Manager based in the country, establishing a joint venture was proving to be resource intensive. Cheng was a source of experience and cultural understanding that boosted the company's resources in China. Layman and Cheng developed a proposal which would see Cheng assist the company through the process of selecting a potential JV partner.

Establishing a joint venture

After building a list of possible partners, Layman and Cheng developed a list of criteria required in a partner, which ranged from close location to a port to manufacturing capabilities. Cheng then researched each company against these criteria, and whittled the list down to 14.

A questionnaire was devised to reduce the list even further. Cheng contacted each of the companies, reached the person who was knowledgeable enough to answer those questions and reduced the possible partners to just five. The company then sent a manufacturing team to China to visit each of those five factories which identified two possible partners. Negotiations with one company were not successful, however a second company accepted the offer from West Pharmaceutical Services and a JV has now been established.

"Sara really impressed me," says Layman. "She understood that the relationship we wanted with our JV partner was not just about manufacturing, but also marketing, sales and distribution and, very importantly, networking. We wanted to build a relationship, not just a manufacturing partnership, to strengthen our chance for success.

"But it wasn't just Sara's excellent knowledge of business, it was her knowledge of the acceptable cultural practices that impressed me. It would not have been easy to call those companies, get to the right person and ask the questions we needed her to ask. And she was very professional, maintaining anonymity for our company through the whole process.

"Her ability to complete the task so well was partly her skill, but it was her cultural awareness that was key. You can read all the books you can find, but you will still only be a student of Chinese culture. Sara's instinctive understanding was a valuable resource."

Lessons learned

Establishing the JV was unfortunately not the end of the journey for West Pharmaceutical Services. "Since establishing the JV we have had to gain government approval for the JV, find an appropriate site for our factory, gain an investment agreement, and secure a business licence," says Layman. "Unfortunately we have to wait before the land will be released, so we have not been able to start construction yet."

Layman says bureaucracy such as this is the greatest frustration he has faced. "Everything takes a lot of negotiation," says Layman, "and a lot of the decisions, even legally based ones, have not been black and white. What one level of government says can be reversed by the next.

"As a result you have to take the best possible advice, from lawyers, government departments and other business people such as your joint venture partner, combine that with common sense, and do what you feel is the right thing. But you don't often feel certain about your decision."

Cultural differences have also been a challenge for the company because the difference between Western and Chinese cultures is so great. "There are differences between Australian and American cultures, for example, but you have a good understanding of what those differences will be and how to manage them," says Layman. "Not knowing what to expect in China means managing the differences becomes very difficult.

"Even things like cues from body language can be different, so there is quite a period of time where the relationship is very formal. It takes time to develop a relationship where you can comfortably go out to dinner. But the relationships you do develop are doubly valuable because you work so hard on them."

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Sara Cheng
Senior Manager, China Practice
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Mike Liu
China Trade Advisor
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