Big Pharma has been stampeding into China, aiming not only to capture a share of that fast-growing drug market, but also to supply themselves with APIs and lower their manufacturing costs, either directly or via outsourcing. After all, labor is cheaper and overhead costs are lower in China. But what if China lost its place as the low-cost production center?
That's the question asked by consultants at A.T. Kearney. Right now, production in China costs 30 percent to 50 percent less than it would in many other locales, thanks to that cheap labor and low overhead, but also because of certain government tax rebates and because the yuan is undervalued. But all these cost advantages are in danger. Kearney's folks say the cost differential could drop by half, to somewhere between 13 percent to 25 percent.
Why? Wages are going up; they've grown by 19 percent annually over the past five years, and that trend is likely to continue for another four to five, the Kearney report says. Meanwhile, the government is likely to slash the current VAT rebate rate of 13 percent; China hiked those rebates to help companies weather the recession, but had been cutting them before the downturn hit. Another government move that would affect pharma's cost savings: yuan appreciation. Kearney predicts that China will allow the yuan's value to climb by up to 15 percent over the next three to four years.
Kearney has some ideas for combating these trends. Suffice it to say that, whatever drugmakers aim to do in China, it's not going to be quick and easy.
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