China-Plus-One strategy: Indian API firms start to reap benefits

Rising Chinese labour costs, geopolitics, pandemic-stricken uncertainties have forced global players to derisk

The pandemic-stricken supply disruptions and the extant geopolitical tensions have benefited Indian active pharmaceutical ingredient (API) players the most, claims the industry. As multinationals (MNCs) pursue a China Plus One strategy to derisk dependency on the world’s second-biggest economy, Indian players are steadily emerging a clear favourite.

Says Siddharth Mittal, chief executive officer and managing director (MD) of Biocon, “Our customers want an alternative source, assuming Indian companies also offer at the same price. More and more customers are seeking a long-term derisk and shrugging off Chinese reliance. We are also taking steps to ensure we can lock in vendors who don’t want to buy from China.”

This process will, however, be long-drawn-out. The company has to qualify a new API (for its product) before it can completely switch over (to a new source).

“From a development point of view, our APIs qualify, but commercialisation will take a while. We see a high single-digit growth in our API business,” says Mittal. Likewise, Manish Dhanuka, MD, Orchid Pharma, says: “Bearing in mind the geopolitical situation, buyers from the West want to derisk their supply chain from China’s and are looking towards India to fill this gap. Orchid has succeeded in developing customers who wanted to mitigate this risk.”

Meanwhile, Chinese costs have been increasing, claims its local industry.

“China has steadily been increasing the prices of APIs and intermediates. A typical example is China-controlled Penicillin G. India imports about 8,000 million tonnes per annum of this key raw material for antibiotics. In the past few years, the price has shot up from about $14 to $34 per kilogram,” says Dhanuka.

Therefore, with increasing Chinese prices and its global dominance in the antibiotics API market, Indian manufacturers must become competitive internationally. “The monopoly of Chinese manufacturers has them dictating worldwide supply and prices. It is crucial for India to have a fully backward integrated supply chain for life-saving drugs,” he adds. Indian players have, in fact, started supplying to China as well.

“Chinese drug regulator National Medical Products Administration has raised the drug standards of China to the level of the West. Many home-grown Chinese players are unable to meet these standards, opening the door to companies like Orchid Pharma, that have been selling in the US markets for decades, to supply their products to China as well,” says Dhanuka.

Another leading API maker Glenmark Life Sciences noted in its 2021-22 annual report that wages in China have risen to a much higher level than India’s since 2007 due to a shift in demographics and economic reforms.

“India’s manpower costs are currently lower than China’s, and this cost-effective skilled labour supply advantage is expected to continue in the future. The cost of labour in China has more than doubled, from 5.2 per cent of the total direct manufacturing cost to 10.6 per cent, while in India, it has decreased from 6.1 per cent to 5 per cent (2015 data),” it said in the annual report.

In 2020, an estimated 40 per cent of all factories in China had closed, resulting in supply disruptions and higher costs. This is when the global formulation makers realised the importance of derisking their dependence on China and reshuffle their API import source.

 

An industry source in the Indian API industry says, “It may not be a priority for European and US formulation makers to diversify the source immediately, but adding India to their list is on everyone’s mind. This is a relatively protracted process, but there has been a significant move towards this direction in the past year or so.”

Dishman Carbogen Amcis, a leading API and contract manufacturing player based out of Gujarat that has plants across the world, including China, said in its annual report that the “Covid outbreak and China Plus One strategy being pursued by global MNCs have only affirmed the position of India as the most preferred destination for outsourcing research and development and manufacturing due to its proven track record of high-quality research capabilities, in addition to its competitive cost structure”.

“Indian API companies have been the biggest beneficiary due to the pandemic-led supply chain disruption and the anti-China sentiment and stand to gain significant market share in the years to come. There has been an increasing trend of backward integration in the industry for input materials, thereby reducing import dependence,” said Dishman.

The global API market was estimated to be around $181.3 billion in 2020 and is expected to grow at a compound annual growth rate of 6.2 per cent to reach about $259.3 billion by 2026.