China's contractor shine losing luster

The promise of 30 percent to 50 percent cost savings by sourcing starting materials, intermediates, APIs, and even finished drugs from China has proven an effective lure for Western drugmakers. But those cost advantages are beginning to erode already and are expected to erode even more in the coming years, according to A.T. Kearney consultants. By 2015, they project, the cost benefit may be negligible or even gone in some cases.

Factor that into your budget spreadsheets now, say Vishal Bhandari, Axel Erhard and Saurabh Tejwani, in Life Science Leader. And find additional low-cost sources elsewhere. It takes 18 to 36 months to move drug manufacturing sources.

Inflation is on the rise in China, and its currency is appreciating. The favorable trade environment--currently tilted by government investment and tax rebates--is evolving, driving down those 50 percent savings to the teens and low twenties in the next few years.

Ops strategists need to think of their suppliers in China as an extension of their network rather than low-cost country sources, the consultants say. Drugmakers have options in how to maintain cost-competitiveness, which come with varying degrees of reward and implementation complexity.

For example, use suppliers across multiple low-cost countries. Doing so will not only keep costs down, it will help to minimize production risk. The consultants say that India and several Southeast Asian countries, as well as Eastern Europe, are candidates. Also, maintain close collaboration with suppliers well past the qualification phase to ensure that productivity improvements are being fostered to counter the increasing costs.

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