By relocating operations overseas, life sciences companies expect to save costs, enjoy government incentives, benefit from
modern industrial parks (as foreign governments make heavy investments in building incubators and industrial parks for the
life sciences sector), and profit from a highly skilled labor force composed of returnees—people who have returned to their
home countries after training in North America and Europe. With the wages of scientists 60 to 70% lower than those of their
American and European counterparts,1 many Asian vendors offer cost savings as high as 60% in areas such as basic chemistry or clinical trials.
China, of course, is a key location for offshoring. With a GDP greater than $8.8 trillion, China is now the third largest
economy of the world. At the same time, direct foreign investment in China has risen considerably in the last few years, to
almost $70 billion in 2003, as Western and Asian companies have moved some of their traditional industrial activities there.2
Thus, many Western companies believe there are numerous long-term benefits to offshoring operations. But companies entering
the Chinese market face a number of challenges. Besides the language and communication issues, there is an emphasis on short-term,
profits and an inadequate enforcement of intellectual property (IP) regulation,3 and heavy state intervention for projects setting up in China. These concerns have led many companies to choose an offshoring
strategy carefully before entering the Chinese market.4
Three major models have emerged for offshoring to China (Table 1). The first is the classical offshoring model, in which a
company works with a local partner who acts as an intermediary. In the second model, two companies work together through a
joint venture. The third model involves direct investment by the Western company, which acquires existing infrastructure or
constructs new facilities. The three case studies that follow illustrate these three models.
MODEL 1: CLASSICAL OFFSHORING
Quick Recap
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O-Two Medical Technologies (
http://www.otwo.com/) produces devices for emergency respiratory care. Although the company is based in Toronto, Canada, its products are distributed
worldwide, and the company has a long tradition of offshoring to Taiwan. Last year, it began sourcing product from China as
well.
O-Two has a classical offshoring process. O-Two supplies design specifications to its Chinese partner, who manufacturers the
products and sends them back to North America. O-Two has not made any capital investments but, as occurs in all Chinese collaborations,
there is a heavy investment in relationships.
Because the products offshored include proprietary devices, IP protection is key. "Copying is rampant in China, so you need
to spend a lot of time selecting your partner," says Win Van Voorst, O-Two's chief operating officer. To reduce this concern,
O-Two elected to work through a trusted Taiwanese partner who already handles O-Two's manufacturing in Taiwan. Van Voorst
has found that in his experience, Taiwanese business executives are accustomed to both Western and Chinese cultures, which
makes them ideal intermediaries. Thus, this collaboration not only helped alleviate IP worries, but helped sidestep communication
and quality issues as well.
