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Biotechnology Outsourcing: Which Country is Right for my Company?


- by Charles Runckel


Biotech is considered the next IT, with fortunes to be made and every major economy in Asia rushing to establish itself as a major player and prime destination for foreign investment.  While Japan and South Korea have long been, and still are, on the cutting edge of research on par with their Western counterparts, China and India have been making the biggest waves with loose regulations, legions of well-trained but cheap scientists and engineers, and enticing government incentives.  Into the mix comes Thailand and Vietnam, who now want to climb the outsourcing ladder from unskilled labor to manufacturing and into a knowledge economy.  Finally, Singapore rounds out the pack with permissive regulations and deep pockets to offset their high labor and laboratory costs. 

china
india
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China: Zhejiang Biotech Park, Deqing County, Zhejiang China. The initiative phase of the project covers 30,000 M2 land completed in April 2004.
India: Entrance Gate of SP Biotech Park at Genome Valley.
Thailand: BIOTEC was established under the Ministry for Science, Technology and Energy in 1983 and is now under the umbrella of the National Science and Technology Development Agency (NSTDA).

This article focuses on China, India and Thailand from the perspective of a biotech firm seeking to establish an R&D lab or processing facility in one of these countries.  Japan, South Korea and Singapore offer virtually no cost savings over the US and EU, thus are of limited value in outsourcing.  Vietnam is not yet developed enough for a biotech economy, which will be explored later, and should not be considered for any higher end R&D or processing.

One thing that must be made clear is that establishing a high-end biotech facility in any of these countries is no simple matter, despite what the government spokespeople claim in their info sessions.  This is not a plant your flag and let the riches flow scenario, and you must have a firm understanding of why, or if, you should be outsourcing and what is the best strategy to achieve your goals.  That said the cost savings for outsourcing biotechnology are enormous, to the tune of 80% on labor and 50-75% on facilities and equipment.  For any startup on a tight budget or a mature firm wanting to expand their operations, these are savings that cannot be ignored.  If outsourcing is right for you, the next step is to explore the pros and cons of each possible country.


thai airport
Picture above: Bangkok's new international airport, Suvarnabhumi.  The capacity and facilities of the new airport will reinforce Thailand’s position as the center of aviation in the region
Infrastructure and Geography


The major geographic constraint to where you locate your facility is the level of infrastructure to support your research.  In the case of Thailand, this must be in the capital city of Bangkok.  Bangkok is a sprawling metropolis with a well-earned reputation as a top tourist site in Asia for shopping, sightseeing, and luxury hotels.  Electricity is reliable and broadband Internet is widely available.  Bangkok boasts direct flights to most West Coast cities, as well as New York and several European hubs.  Practically, though you are allowed (and even encouraged) to locate in the provinces or other cities, the lack of vendors for equipment and the fact that virtually all scientifically-trained staff live in Bangkok make it very difficult to locate anywhere but the capital.


China’s infrastructure is a work in progress, with a meshwork of first and third world support, however industrial and science parks abound that will guarantee you power, water and internet access to high-level specifications.  While many cities offer support and incentives for biotech firms, the top destinations are still Beijing and Shanghai, where the intellectual workforce tends to congregate and where services are most reliable.  Locating in other cities is feasible, however, especially if your facility is self-contained (doesn’t need to work with government labs / other biotechs).  Beijing and Shanghai are connected by air to the West at least as well as Bangkok, though flights to other cities in China will likely have a transfer in one of the two.

India’s infrastructure is, optimistically, a decade behind China’s and will be a problem if you decide to locate there.  The Southern provinces are the engine of India’s biotech sector, with Bangalore, Hyderabad and Mumbai/Pune as the main destinations.  New Delhi is also a reasonable alternative.  In any city, you will deal with more problems setting up basic services than in China or Thailand, and reliability of even power is an issue.  In order to maintain the quality biotech research demands, this inevitably means more money is spent just to ensure basic facilities are in order.  India’s location is even farther from the US than China or Thailand, but closer to Europe.  As such expect fewer direct flights from the US but more from Europe, though Bangalore’s rising stature ensures good connections.

Real estate prices are highly variable, though you can certainly expect significant savings from the US or EU.  In all three countries, you can expect to pay more to locate closer to the city but will have an easier time recruiting staff if you do (applicable worldwide, but especially in Asia where your staff will likely not own cars).  You will also pay a premium for locating in a Science or Industrial Park, though the benefits in terms of utilities are worthwhile in China and essential in India.  There is also a boost to legitimacy in locating in a Science Park that can make it easier to recruit staff.

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Government Regulations and Incentives

All three countries have generous government incentives, though it can often be difficult to get a firm grasp of what is offered and to actually benefit when the time comes.  It must be appreciated that in dealing with any of these Asian governments, your firm will be faced with bureaucracy the likes of which the Western mind cannot fathom.  If you are exasperated in line at the DMV, it will be essential to find a good local agent.  Some even offer turnkey service for regulations or even your entire facility setup.  Make sure they are genuine, however, as many service providers lack any experience either with contacts in the government agencies or with biotechnology.  Do not assume a Westerner working overseas is an expert: many expats wash up in Thailand or China and offer their services in getting government incentives with little knowledge of what is involved or how to accomplish it.  Most incentive forms are in the local language and are especially a problem in China and Thailand.  These are often very low tech and usually must be filled in person, in triplicate or more.  At the very least some local staff devoted completely to dealing with the government are absolutely necessary in any of these countries, and an agent with experience in the field is your best bet.

The language barrier and red tape are compounded with the fragmented nature of incentive packages in China and India.  While both national governments offer some incentives, each state and city also offers its unique package as an add-on.  You may even find differences from Science Park to Science Park.  Thailand clearly takes the lead in the incentive field by offering a single package of incentives in a very easy to understand format.  Matching their socialist and capitalist backgrounds, the Indian incentives usually involve government support with pilot facilities and other project incubator functions while the Thai package is essentially a massive tax holiday.  The Indians also offer some tax bonuses and the Thais offer support, but only to a limited extent.  The exact benefits change quite often, but the current Thai incentives involve an 8 year income tax holiday after the initial profit is made with an additional 5 years at 50% if the firm locates in a Science Park, with no customs duty during that time for imported equipment.  In comparison, the Indian state of Himachal Pradesh offers one of the more generous tax incentives at a 5-year holiday while most states offer little or none.  China used to be quite competitive with Thailand, but has recently seen a reduction in incentives that is expected to reduce investment though some Parks in smaller cities will go so far as to offer you free land (on 50-year lease).  Chinese incentives are focused on export-oriented firms, however, so if you plan on servicing the Chinese market benefits will be scarce.  Again, incentives differ from province to province so it is a good idea to shop around and not assume what one city offers is true for the entire country.
 

Regulations regarding the development and sale of biotechnology products are a major point of divergence for these countries.  To begin with, the regulatory issues of actually setting up your facility for research are quite lax in all three.  There may be paperwork involved in setting up, however there are likely to be few if any inspections for safety or other lab oversight.  Requirements for basic systems like ventilation or water treatment are low, though most firms seek to maintain cGMP or ISO standards and thus setup their facilities to Western standards regardless of local requirements. 

Animal testing is China’s forte, where animal rights activists have more to fear than the lab rats.  If your research process involves lots of animal testing, and especially primate testing, China is a foregone conclusion.  Government regulations overseeing it are near non-existent, the local government won’t enforce any laws that do exist against a foreign investor and any form of activism against you will be dealt with very harshly.  Conversely, animal testing is very difficult in India and, to a lesser extent, Thailand.  This stems in large part from the Hindu and Buddhist backgrounds of these countries, and Greenpeace and other organizations have a strong presence in both countries.  This is not to say that some animal testing is not possible, but expect regulatory hurdles and public interference, especially with primates.

India and China are both embracing GMO crops, with India recently surpassing China for the most hectares planted (3.8 million hectares vs 3.5 million in 2006).  While there is red tape involved in getting a GMO product cleared for the market, the large sizes of these markets have attracted many GMO producers which has led to more standardized trials and approvals as well genuine efforts to reduce the bureaucracy.  Thailand, in contrast, is a much smaller market and has been skipped over by many GMO multi-nationals and thus still has an underdeveloped process for regulatory approval.  Thailand further is pursuing a green image, especially with exports of its fresh fruits to the US and EU.  As one of the few food net exporting countries in the world, Thailand is loath to give up market share in the EU by adopting GMO crops.  These factors combined with a general public rejection of GMO make it very difficult to get approval for new crops and to realize widespread use.

Human Resources

China and especially India often tout their millions of technical graduates and hundreds of thousands of postgraduates as they key strength, but those statistics in and of themselves are meaningless beyond points of politics and national pride.  Of their millions of technical graduates, it is important to keep in mind that most have the educational level of a mechanic or plumber in the United States.  For perspective, this year India produced 3 million technical graduates, 700,000 post-graduates and only 1500 bioscience or engineering PhDs.  While that is still an impressive number, it is not overwhelming when compared to the US or EU.  Further, the question the CEO of a biotech firm considering investing should ask is not “How many graduates does your country produce?” but “How hard will it be to fill a position and how much will it cost?”  Costs per researcher are detailed in the table, and for the most part are similar among all three countries with wide variation based on level of experience. 

Two disturbing trends for biotech firms have emerged in India, however, which should be kept in mind when deciding where to locate.  First, the availability of experienced PhDs as compared to lower level researchers and technicians is so low that the salaries of high-end researchers have shot up to near US levels. According to a Senior HR manager at one of the top three Indian biotech firms in March, 2007, his firm had been seeing a 60% turnover rate recently in these high end researchers with average salary increases of 15%/year.  While other labor costs are still cheap, this can substantially cut into your savings.  Second, the massive influx of investment has led to headhunting between biotech firms for experienced researchers at all levels.  This has led to an annual turnover of up to 20-30% in India’s biotech hubs, which is a disastrous situation considering the long project times in biotechnology.  Firms now are focusing on non-financial motivations for keeping staff, such as high-tech campuses and benefits packages.  At this stage, China and Thailand have not experienced either trend with low turnover and reasonable salaries throughout the field, and availability is excellent in that most positions can be filled within two months.

De-automation is the new goal of many outsourcing manufacturers, where processes previously automated at great cost are returned to the older, labor-intensive system and moved overseas where labor costs make it more cost-effective.  This is true with biotechnology as well, and biotech firms should re-evaluate their work processes when outsourcing to take advantage of cheaper labor.  Firms specializing in animal testing, plant work in greenhouses and anything involving cell culture or genotyping should especially consider de-automating their system.  Custom antibody manufacturers, marker-assisted selection plant and animal breeders and pharma animal testing firms are all excellent candidates.  The shifting labor equation also leads to different architectures in terms of lab composition; whereas in the US a research assistant with a Master’s degree is near the bottom rung of the ladder, in Asia such a research assistant often has assistants to do grunt work, though many labs inefficiently try to follow the western model. 

salary comparison
The cultural and language barriers are significant for any of the Asian cultures.  The Indians have a considerable advantage in this regard with substantially better English than the Chinese or Thai.  Further, one should expect better written or email English than spoken from these two groups.  Any bioscience researcher in the United States or EU will have had many experiences with Chinese and Indians scientists, so they will not be covered in depth.  Few researchers will have met a Thai scientist however, so some stereotypes and generalizations are in order.  Thais are extremely hierarchical, much like the Chinese, though they also tend to be very easygoing.  This means that you need to pay attention to office and lab politics, but if you do so things will be very smooth (you must have local advice on this issue).  Deference to age and gender dynamics can also be a minefield when recruiting staff, in that smart and better educated young employees will not give orders to older but lower ranking assistants.  Few Thais want to be a supervisor, preferring a colleague role and trying very hard to avoid conflict.

This, combined with the age issue, can make finding someone to run operations very difficult.  Thais are not as ambitious as the average Indian or Chinese and thus rarely splinter off to work for a competitor, but many Thais are simply spoiled and have been known to walk off the job with no notice.  As such, it is important to know which universities produce good staff and which pamper and spoil their students.  This is quite a reliable indicator, however, and after a couple burns most companies are satisfied with very low turnover rates.

Equipment

Most equipment a western scientist is used to is manufactured in the US or EU, with some from South Korea or Japan.  Thailand and some Indian and Chinese sites offer waivers on customs duties when importing equipment, especially within a Science or Industrial Park, so that the cost of this equipment is essentially the same as in the US.  Note that if you import yourself you will have a warranty but little local support, whereas if you buy from a local import vendor you can expect support and a 25-100% surcharge.  Another option is to use Chinese equipment, which is available in Thailand and some Indian sites through the same customs waivers and, of course, within China.  Chinese equipment suppliers are almost totally domestically oriented with very little web-presence and generally horrible English and marketing skills.  They are usually not well equipped for export, but are perfectly willing to do so and many outsourcing agents or consultants will have contacts within these suppliers.  The question that invariably follows is “How is the quality and how cheap is it?”  Chinese equipment generally involves savings of 50-75% over foreign equipment (more for low-end items like bench centrifuges and plastic consumables, less for high-end items like Real-Time PCR Machines).  Note that while the suppliers guarantee their products, practically it will be almost impossible to ship the item back and have them fixed so you lose the overbearing/comforting technical support you can expect when buying western goods.


table In terms of quality, Chinese Lab products are not at this point as good as their Western counterparts and it becomes an issue of “How good is good enough?”  Chinese equipment often has a quirk that isn’t apparent until weeks of use, and as a rule you can expect the item to perform as described and nothing more, whereas Western products are made to such exacting standards that they are more flexible with time and changing conditions.  Hybrid solutions between these two are often most suitable, for example Chinese water baths and Western thermocyclers.  If you are interested in buying large numbers of a machine, however, it is worthwhile to buy one Chinese model and test it to see if it meets spec rather than just using Western models.  India produces some equipment, but quality is abysmal and should be avoided.


Market Size

Firms that plan on running R&D or processing for export to Western home markets do not need to concern themselves with the markets of these countries, but if your firm plans on selling your product locally or wants to keep the option open for the future there are a number of concerns to be addressed.  The first issue is not to be dazzled by the thought of a billion-person market in India or China.  These are definitely must have markets, but few biotech firms make products that would be consumed by the average Indian or Chinese.  The income gap is huge in China between affluent city-dwellers and rural peasants or migrant workers, who make up most of that 1.2 billion.  The gap is even larger in India where the caste system’s shadow remains in force.  A similar situation exists in Thailand where Bangkok dwellers are better off than those in the provinces, but the gap is not as large and Thais are far more affluent per capita than Chinese or Indians. 

The main issue is what your market is, how perishable is your product and what are your expansion goals.  If your product involves agriculture, China and India are both safe bets, while Thailand is less attractive unless it involves organic farming.  For health care, Thailand gets top marks with a first world medical system and over a million medical tourists a year, while Chinese and Indians had best come to Bangkok for medical care.  For firms providing services to other biotechs, Shanghai and Bangalore are top locations whereas Bangkok lacks the critical mass of other biotechs. 

Intellectual Property and Rule of Law

Thailand has lost much of its formerly sterling reputation in these fields in the last year, especially with the compulsory licensing of HIV drugs.  While these are a concern, it will almost certainly not be an issue for potential biotech investors.  It should be kept in mind that when Thailand decided to force the patent on these drugs, they chose to import the generics from India, which had been producing them in violation of the patent for years.  In many respects, the shock that Thailand forced the issue was not that it infringed the patent but that it was the last hold-out in the region that respected the original patent – many other countries forced licensing years ago. 

Another point to keep in mind is that while Indians speak good English, this does not translate into Western values, especially in regards to Intellectual Property rights (IPR).  India is a Priority Watch county for IPR.  Enforcement of IPR is the major issue as it is in China.  India leads the world in producing drugs and GMO crops in violation of patents, often with harmful results for all consumers through improper use and the development of resistant strains.  The issue of whether or not an organism can be patented is a point of contention, with the law leaning against in India and ambiguously for in China.  Regardless, foreign companies hold patents for GMOs in both though they are often also ignored in both.  Thailand has too few GMOs to have tested the issue thoroughly.

A major concern for biotech firms is not just the infringement on their products but also the outright theft of their research data.  This is a huge concern in India, where ambitious researchers have left companies with work processes or data and started rival firms.  This is less of an issue in China, where the hierarchical culture and government pressure make this less likely.  Thailand is less likely still, for the same cultural reasons and in that the biotech sector is so scarce that is it difficult to build a company without foreign support.

Rule of law is strongest in India, with a well-established democratic tradition and western-style legal code.  The only major issue is the timeliness of legal proceedings, though this is more a problem in rural areas than the biotech hubs.  Though China’s Rule of Law may be weak, one can be sure the Government’s Rule is stronger than steel and officials can be counted on to support foreign investors on most small issues.  Thailand has an open and Western-style legal system and is not far behind India.  In all three countries, however, expect extreme bureaucracy in any legal action.

Conclusion

In each of the categories described above, Vietnam would fall dead last.  Vietnam is effectively the combination of all the worst attributes of each of the three countries, with India’s infrastructure, China’s government, Thailand’s small market size and few qualified staff overall.  For these reasons, Vietnam is not a viable option for most biotech firms seeking to expand into Asia, though there is hope on the horizon in Vietnam’s strong acceptance for GMOs, which puts it ahead of Thailand in that field.  Japan, South Korea and Singapore would conversely top most of the categories mentioned, with the exception of loose regulations and low cost of land and labor.  It is the desire for these qualities, however, that lead most firms to consider outsourcing, explaining why these nations are more often a source than a destination of outsourcing.

Each of the three has its benefits, however India falls short in most respects compared to the other two.  India’s infrastructure cannot compete and a gold rush to exploit India’s talent pool by western firms of all types has led to unrealistic costs for experienced staff, while intellectual property is threatened in a systematic way.  China can match India in almost every category, and is far superior in some.  Between China and Thailand, I consider Thailand a superior destination for most, but certainly not all, projects.  Costs of mid-level staff will be lower in China, however high-end staff is equivalently priced.  Land and equipment costs are equal, with easier access to western equipment in Thailand and local equipment in China.  Tax incentives are better in Thailand, however many Chinese cities will bargain hard and offer free land or reduced taxes.  Staff are easily hired in Bangkok and China’s major biotech hubs, however for China staff availability and strong incentives will not occur in the same place.

For firms intending to sell their biotech products, China’s larger market and lax regulations are very attractive.  Primate or large-scale animal testing clearly favors China.  Export oriented firms will be given more incentives than those targeting the Chinese market, however.  Developing, though not distributing, GMOs is better done in Thailand and research in biopesticides or biofertilizers are well suited.  Overall, R&D or processing costs in Thailand or China are roughly equivalent, however Thailand is easier in terms of setting up and running a facility and much safer in terms of intellectual property protection.  It is also far more pleasant to live or visit if your staff is required to train or supervise operations and many companies combine a business trip with a vacation for valuable employees.

The strongest endorsement of Thailand’s attractiveness for biotechnology is that when I started my own company, I weighed the options and chose Thailand over China, despite having lived in Beijing for several years and being familiar with the culture as well as living in Thailand and Vietnam.  Though establishing a company and building a facility has been very trying mostly due to the bureaucracy, the cost savings have been staggering and I am thrilled both with the facilities I have in place and with the excellent quality of my staff.  Both countries, however, are mature enough that outsourcing a facility is worthwhile and should be considered by any western biotech firm.

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