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.
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.
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.
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.
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.
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.
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.
Copyright, 2007 © Runckel
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