As China liberalises its trade with the rest of the world, new opportunities are opening up for global Chinese medicine players as well as for domestic companies. Pansy Yau reports.
China officially became a World Trade Organisation (WTO) member in December 2001, and among the commitments made by the Chinese government, those most relevant to the Chinese medicine industry and its future include liberalisation of the distribution of medicine, protection of intellectual property rights (IPR) and reduction of import tariffs.
In three years, the average tariff rate of pharmaceutical imports will be reduced by 60 per cent, and foreign companies will be allowed to participate in retailing and wholesaling pharmaceuticals. With its 1.3 billion population and its strong tradition in Chinese medicine, China is undoubtedly the largest market for Chinese medicine in the world.
Taking advantage of the new liberalisation, global players that have achieved significant results in developing medicines with herbal ingredients or based on Traditional Chinese Medicine (TCM) formulas will be attracted to the mainland market. This competition will put heavy pressure on the local players, but at the same time, this external force is expected to speed up the progress of modernising Chinese medicine in China.
The Chinese government has already identified modern Chinese medicine as one of the major focuses for economic development in the Tenth Five-Year Plan (20012005). The government will allow greater budget support for the modernisation of Chinese medicine.
Apart from the introduction and implementation of Good Agricultural Practices (GAP) and Good Manufacturing Practices (GMP) protocols, the government has also revised the patent law to provide greater protection for R&D in modern Chinese medicine.
Current Market Situation
Currently, the estimated size of the Chinese medicine market in China is about $5 billion, of which imported Chinese medicines account for $0.1 billion. At present, a majority (65.2 per cent) of Chinese consumers prefer Western to Chinese medicine. However, in response to the expected improvement in modern Chinese medicine and reflective of their growing demand for natural medicines, 73 per cent of the respondents to a consumer survey indicated they would depend more on Chinese medicine in the future.
Compared with Western medicine, TCM is generally accepted as curing illness rather than merely relieving symptoms, and as being low in toxicity and having few side effects. Chinese medicine is believed to have the ability to strengthen the function of our body systems and increase health. However, due to the drawbacks of TCM remedies, such as their often being bulky (e.g., several loose herbs wrapped in paper) and therefore troublesome to carry, and being time-consuming to prepare and slow in effect, many of the new generation Chinese have deserted TCM in favour of Western medicine.
For many years, due to a lack of IPR protection, many experienced Chinese medicine doctors were not willing to release their secret formulas. Many valuable formulas were not documented and just vanished with their inventors. Also, in order to retain the secret of their special formulas, many manufacturers failed to state on labels or anywhere else the ingredients and content of their processed drugs, hence undermining the confidence of consumers in these drugs.
And until now, the Chinese medicine sector has largely remained in the stage of a traditional industry. Most of its processed drugs are poor in medical effects and low in technology level and safety standards. For example, the levels of heavy metal and bacteria found in the drugs approved in China are much higher than in those approved in the US. Thus, imported medicines that are proven better in effects and quality standards should have good market opportunities in China when their costs decrease as a result of tariff reduction.
Moreover, due to substandard production by many Chinese manufacturers, they are not strong enough to compete with international manufacturers, even in the domestic market. It is believed that as China gradually liberalises the import and distribution of Chinese medicine according to its WTO commitments, global Chinese medicine players, given their competitiveness, will be able to expand their market share further in China.
Apart from exporting to China, foreign Chinese medicine manufacturers also may consider investing in production within the country. China has accumulated significant research expertise in modern Chinese medicine, and the research costs are low. With these advantages, international investors will find it rewarding to invest in R&D and production of modern Chinese medicine in China to tap both the domestic and export markets.
In fact, foreign investors from Hong Kong, the US and other countries have already invested in developing and producing modern Chinese medicine in China. A Sino-US joint venture in a company in Jinan, Shandong province, is a good example. The company's capsule developed to cure kidney inflammation has proved to be effective and has obtained recommendation from the Shandong government to apply for state funding under the project "commercialisation of modern Chinese medicine."
In its commitments to liberalise the distribution sector, China agreed to allow direct investment by foreign investors in the retail and wholesale business of medicine beginning in 2003. At present, foreign pharmaceutical manufacturers have already gained a strong foothold in China, and when distribution of medicine is also open for foreign participation in 2003, it is expected that many international players will be attracted to this lucrative market.
China currently has some 17,000 medicine distribution companies, but many of them are small in size and/or are poorly managed and therefore may not be able to meet the GSP requirements. Reportedly, a third of these companies were in debt, even though the total sale of medicine (of Western and Chinese medicine combined) by wholesalers exceeded $13.3 billion in 2001.
Given this state of affairs, large international players are expected to stand a good chance to gain market share in China. Furthermore, as a WTO member, China will have to comply with the TRIPS agreement, under which IPR protection will be enforced, and manufacturers are not being allowed to counterfeit pharmaceutical drugs that have been given a patent right. As a result, it is expected that both R&D and commercialisation of modern Chinese medicine (including imported medicine in China) will be encouraged.
As for import tariffs, the Chinese government will lower the average rate for pharmaceutical products from more than 20 per cent currently to 5.5 to 6.5 per cent within the next few years.
A number of global players have achieved significant results in developing medicines using herbal ingredients or Chinese medicine formulas. They should have a good chance in the import market to sell their products in China. But, considering the wealth of resources and strength in modern Chinese medicine development in China, the largest growth area for global players should lie in R&D and production in China. Though the Chinese government has frozen the issue of new licenses for pharmaceutical manufacturing, foreign pharmaceutical companies will have a chance to enter the Chinese market by acquiring or investing in existing manufacturing enterprises.
Restructuring The Chinese Medicine Industry
China has more than 1,000 processed Chinese medicine manufacturing companies, of which 92 per cent are small- and medium-sized enterprises, and their production standards are low and diverse. By March 2001, only 76 of these manufacturers had obtained the GMP accreditation. To strengthen the competitiveness of its manufacturers and enhance their ability to export to the Western market, China requires that all medicine manufacturers must obtain the GMP accreditation by the end of June 2004. As estimated by the trade, because most small manufacturers are not able to meet the requirements of GMP standards, about one-third of them will be eliminated. Not surprisingly, many of these manufacturers would like to have investors bail them out.
Apart from taking measures to speed up the GMP restructuring of its manufacturing enterprises, the Chinese government will encumber a greater budget line to support modernisation of Chinese medicine and support a number of medium- and large-sized enterprises to become global players.
Building on the current developments and achievements, the Chinese government has tentatively confirmed five major tasks in the coming years:
- To positively support standardisation and a larger scale of growing (GAP) botanicals and of their extraction;
- The further development and standardisation of ready-to-take Chinese medicine preparations and promotion of large-scale production;
- The rejuvenation of selected renowned traditional processed Chinese medicine products;
- The commercialisation of selected important newly developed products;
- The production of rare Chinese medicine plants and those threatened with extinction using modern biotechnology.
Apart from the introduction and implementation of GAP and GMP, the Chinese government also has revised the patent law to provide better protection for research and development in modern Chinese medicine.
Responses Of China's Domestic Enterprises
Since GMPs were first included in China's medicine supervisory regulation in 1985, a number of large manufacturers have obtained the GMP accreditation and have been listed on the stock markets. To increase their competitiveness and market share, many of them have been active in introducing new medicines and increasing the processing technology and science-based content of their products. Many TCM products have now been transformed from their traditional forms, like powders and small pills, into capsules, tablets and syrups.
Moreover, some large manufacturers have formed strategic partnerships with Chinese universities and research institutions to develop new and modern Chinese medicines, and many of these medicines have proven effective and been successfully commercialised. But no manufacturer in China can be considered a dominant player, since none has a market share exceeding 10 per cent. In fact, the total market share of the top 10 manufacturers in China was less than 24 per cent in 2001.
The three largest manufacturers are Tong Ren Tang, Tai Ji Group and Hui Ren Pharmaceutical Company. Rising stars include San Jiu and Tai Tai. All of these companies are actively preparing to meet the competition and expand their market share.
Meanwhile, revolutionary changes are also expected to take place in the distribution of Chinese medicine. According to a study conducted by the Chinese Medicine Distributors Association, OTC sales of medicine have recorded very large growth in recent years. At the same time, retail outlets have moved toward large-scale and chain operations. Expecting increased competition from foreign players, major local retail companies like San Jiu, Tai Ji, Tong Ren Tang and Shanghai Pharmaceuticals have already embarked on aggressive expansion programmes to seize the market before it is thrown wide open.
To cope with the expected rise in competition from foreign players, the Chinese government has reportedly planned to groom, within the next three to five years, five to 10 mega distribution enterprises with annual turnover amounting to $500 million and 40 regional distribution enterprises with annual turnover amounting to $250 million.
Pansy Yau is assistant chief economist for Hong Kong Trade Development Council
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Sales Of Chinese Medicine In China In 1999
Raw Material Buyers
Raw Chinese medicine materials
Processed Chinese medicine
Chinese medicine drink tablets
Source: Zhong Guo Jing Ying Bao
Demand Of OTC Drugs By Chinese Urban Consumers In 2000
Mainly purchased western medicine
Mainly purchased processed Chinese medicine
Mainly purchased raw Chinese medicine