What Can We Learn From The Pharma Manufacturers Leaving China?

The Covid-19 pandemic has forced a moment of reckoning within the global pharmaceutical industry. At the height of the pandemic, when the need for drugs, testing materials and basic medical supplies was greater than at any time in generations, the industry couldn’t satisfy demand. Widespread shortages at the worst time possible exposed the pharmaceutical supply chain as less resilient than anyone expected. In response, industry leaders and health officials are beginning to question some of the basic assumptions that have guided pharmaceuticals manufacturing for decades.

 

Chief among them, the idea that China is the best and most viable option for drug making, particularly for making the active pharmaceutical ingredients (APIs) that go into name-brand therapeutics. For example, China produces 80% (registration required) of the global supply of the blood anticoagulant Heparin. That’s a lot of production to consolidate in one small part of the world. Alternately, it’s a lot of distance to put between production and consumers.

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The consequences of that distance became all too apparent with the outbreak of Covid-19. Consider what happened in Europe. The last European factory to produce the API in paracetamol closed in 2008, and Asia has been the primary source ever since. That meant when the pandemic hit, European nations had neither the leverage nor the logistics necessary to scale up paracetamol production. They had to accept whatever offshore suppliers could produce, as did many other pharmaceuticals manufacturers with an over-reliance on the East.

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The merits of Chinese manufacturing have been under debate for years now. Issues ranging from tariffs to compliance costs to intellectual property and safety concerns have led countless manufacturers to either leave China entirely or adopt a dual-source strategy. The pandemic hasn’t made Chinese manufacturing look any more appealing. On the contrary, I believe it has underscored the value of reshoring production closer to consumers.

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Those in the industry are feeling the push out of China and the pull to produce closer to home. Manufacturers in other industries (automotive, electronics, etc.) are making the same move for many of the same reasons. This could be the start of a massive shift in manufacturing. Therefore, it’s valuable to look at the lessons we can learn from the pharma sector. 

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The Lessons Of Leaving

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Based on conversations with industry veterans and my experience from offshore manufacturing, I anticipate 15-25% of drug production will leave China for North America or Europe in the coming years. Of course, most drug makers will stay where they are, but those who leave may compel others to follow.

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How might Beijing respond to a major departure of global producers? One option would be for China to try and reverse the exodus by improving standards for quality, transparency, competitiveness, etc. Those improvements would make staying in (or returning to) China more appealing to global companies. But China still wouldn’t be any more attractive geographically; it would still be half a world away, connected by complex (and fragile) supply chains.  

 

Another option would be for China to take up a protectionist position in response to so many global companies departing. Beijing might seek to give domestic drug makers an advantage by raising trade barriers even higher and pulling investment out of Europe and the U.S. This outcome could make reshoring (whether to North America or Europe) a savvy strategy, but it would also mean a more complicated and competitive landscape for all.

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One thing we can say for certain: leaving China doesn’t mean breaking free from its influence.

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The Lessons Of Returning

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Returning production to the same country or continent where the consumer base resides looks attractive for many reasons. And in the case of pharmaceutical manufacturers, governments could offer generous subsidies to prevent a repeat of what happened in 2020. However, the upsides can obscure the challenges that lie ahead.

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Obtaining financing to launch production, for instance, is a huge barrier in pharmaceuticals manufacturing. A big reason why most manufacturers aren’t leaving China is that they can’t fund an operation elsewhere. The high cost of production startup is one any manufacturer will have to account for.

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Timelines need to factor into that equation as well. Getting FDA certification for a brand-new pharmaceutical production facility can take years. And with a limited number of FDA inspectors to go around, it’s uncertain exactly how long it would take. Any manufacturer, pharma or otherwise, must consider the realities of compliance — and look for shortcuts.

 

“Should I stay or should I go?” Manufacturers were asking that question about China before the pandemic, and the answer remains as elusive as ever. What has changed is the urgency of asking. At this pivotal moment in manufacturing, everyone needs to reconsider where they operate and why.