RISING COSTS IN CHINA
CMOs and CROs in China usually have been thought of as having labor cost advantages relative to US and European providers.
However, a variety of factors appear to be pushing labor costs up in China, including industrial actions by Chinese workers;
moves to increase the minimum wage and enforce tougher labor, worker safety, and environmental laws; the high cost of living
in major cities like Beijing and Shanghai; and labor shortages across the country.
The rising wages are being accompanied by an appreciation of China's currency, the renminbi, as the Chinese government looks
to drive production growth for domestic consumption and control inflation.
European and North American service and materials providers will be inclined to welcome the rising costs in China, because
it will improve their cost position relative to their competitors in China. A 25% increase in labor costs, combined with a
10% appreciation in the renminbi, would raise the cost of sourcing in China by 25–35%. European providers may get an even
bigger gain in competitiveness in light of the rapid devaluation of the Euro and British Pound. After adding in the additional
costs of managing long-distance sourcing relationships, bio/pharmaceutical companies will see the cost advantages of sourcing
from China narrow and may stick with more local providers.
The second order effects of the rising wage costs, however, may cause service providers in mature markets even more pain than
they are facing today. That's because Chinese service providers and manufacturers will respond to their eroding competitive
cost position in starting materials and simple chemistry by moving to higher value-added products and services such as formulation,
advanced chemical intermediates, and biologics. This move to higher value-added services is exactly the strategy that North
American and European companies have used to stay in business in the face of low-cost competition from the BRIC countries
(Brazil, Russia, India and China). They will now be looking at lower-price competition in more sophisticated services and
technologies that have been their refuge in recent years.
The rising costs aren't likely to diminish global bio/pharmaceutical companies' interest in China either. China remains the
world's fastest growing major economy, and rising living standards are expected to increase demand for high-value pharmaceuticals.
IMSHealth has projected that spending on drugs in China will grow 20% annually over the next five years. Bio/pharmaceutical
companies will continue to be drawn to the opportunities of that rapidly-growing market.