Let a Hundred Flowers Blossom: A Deeply Decentralized Framework
China has always had a deeply decentralized political structure, where ancient emperors could often hope for little more than
loosely administering the many far-flung provinces. The modern Chinese government is somewhat more centralized, however,
aside from military and foreign affairs, regional and local governments often have vast and far-reaching jurisdiction. Decentralization
has played an important role in China's rapid economic growth, spurring intense competition to attract investment. Less positively,
decentralization has spawned a vast array of policies and standards across the country. These regional differences have a
distinct impact on all economic activity, and particularly on heavily regulated industries such as pharmaceuticals. To begin
with, there is no Chinese pharma company with nationwide operations. The largest Chinese firm is Hayao, based in the far
North Eastern city of Harbin, but it remains a distinctly regional player. Some distributors have attempted to build nationwide
scale through acquisition, such as Sinopharm and Shanghai Pharma, but they are quite far from operating as a single entity.
These firms function as holding companies comprised of independent, and at times competing, regional players. David Ricks,
General Manager at Eli Lilly observes, "people talk about the country in terms of cities, and there's a reason for this: the
cities behave differently. There is not one China. I think of it more like four Europes, which in population and differences
between markets is roughly right." Regional policy variations impact every aspect of the business, from sales and marketing
to the design of manufacturing facilities. Hooker Cockram, a construction firm headquartered in Melbourne, has extensive
experience working with multinational pharmaceutical firms. The company has developed a consultative approach to help multinationals
navigate the complexities of China's provinces' ever-changing rulebooks. Hooker Cockram General Manager, Greg Mithen, believes
"The SFDA (State Food and Drug Administration) rules are more like guidelines, as the interpretations in Jiangsu Province
and Tianjin Municipality could actually be completely divergent. When we create a design, we have to do it on a basis of
what we think will work in China but when we put it through the actual process, we need to adjust our plans based on each
province's characteristics." The SFDA itself is quite decentralized with independent branches that execute policy in each
of the leading urban markets. Thus, many foreign firms tend to approach the Chinese market with an array of regional strategies
as opposed to conceiving of the country as a single market.
Christian Grapow (Solvay)
The Search for the next Growth Center: The Rural Question
It is often said that there are two Chinas, a sophisticated urban and modern China, close to or on par with the developed
world, as well as a rural and poor China that is still very much a part of the 3rd world. Of course the truth is far more
nuanced. Major cities such as Shanghai, Beijing and Guangzhou have large, wealthy populations and are experiencing steady
growth, while the markets in lesser-known cities such as Zhengzhou and Chongqing are undergoing booming expansions. As quickly
as the recent boom markets have emerged, new ones will necessarily take their place and companies are constantly on the lookout
for the sudden emergence of the next growth engine. However, it is not only a search for new physical locations, but also
for new market segments. There are certainly many options to choose from as outlined by Michael Ryde, General Manager of
Lundbeck. "The market is extremely fragmented; in a way it is as if there were several coexisting small markets for different
groups of patients such as those paying out of pocket, city workers, farmers, etc."
Pan Aihua (Sinobioway)
Drug portfolios must be carefully tailored to these fragmented market dynamics, especially to the huge potential in lower
market segments. Eli Lilly still sells Prozac in China, which is actually one of the key markets for the ageing drug worldwide.
However successful penetration of these segments comes down to more than careful portfolio selection. Marketing carryover
is sharply lower than in Western markets, meaning that drugs are far more promotionally responsive. Portfolios need to be
sustained with constant investment, but on the other hand, new drugs can grow far more rapidly than in Western markets. Lilly's
GM, David Ricks, comments, "We know that if we don't invest, it will slow down, and if we do invest, it will grow stronger.
A manager can't be so clever with their money in China: they have to make a business case product by product."
Liam Condon (Bayer)
One of the big challenges in creating the right marketing strategy is timing. The opportunities are staggering and in some
ways obvious, but timing market penetration is not. Some companies have even suffered from premature investment in this market.
Ryde remarks, "one of the keys to success in China is to have a lot of patience and long-term perspective." In this vein,
Lundbeck has been working to increase sophistication in the marketplace and has recently opened a branch of the Lundbeck Institute
to help train doctors in the field of Alzheimers and other Central Nervous System (CNS) diseases. Mr. Ryde sees this as particularly
important in fighting misperceptions, such as the idea that Alzheimers is an unavoidable 'old man's disease' as opposed to
a treatable, chronic condition. Bayer is also taking a proactive approach to market creation through its doctor training
program, but on a vastly larger scale. While most other innovative pharma companies are content to take a wait and see approach
to the health care reform's community health centers, Bayer is committed to building a presence in this area. Liam Condon
describes Bayer's program, which is conducted together with the Ministry of Health. "There are a lot of people in rural parts
of China that call themselves doctors, often it is a role handed down by families, but in reality they have undergone no formal
education." Simply educating doctors is vital to improving care in rural regions, while improving these centers will also
alleviate pressure on the overall system. Condon continues, "One of the main problems in China is that people who feel sick
flock immediately to the big hospitals and specialist centers. Of course this leads to a very chaotic and inefficient system
in which patients can wait half a day or more in overcrowded centers just to see the doctor for a couple of minutes and then
walk out with a bag full of antibiotics. So what the government wants to do is set up a gatekeeper type of system in which
community healthcare centers play a key role." Bayer's investment in the public health infrastructure and its cooperation
with the Ministry of Health will certainly give it a favorable position in this segment, laying a foundation for the day the
rural market becomes profitable for MNCs. However, as the number one multinational pharmaceutical firm in China, Bayer is
probably one of the few firms to have the scale and experience to engage in such an undertaking. At this point, most MNCs
are sticking to the urban centers and trying to capture market share in China's booming Tier Two cities.
Eric Bouteiller (Beaufour Ipsen)