Doing Business in China

Traditional Chinese Medicine (TCM) is the oldest and most comprehensive system of human health care in the world, with over 3,000 years of documented use. China represents one of the largest natural health markets in the world with TCM sales in excess of US$5 billion, and large fastgrowing “MLM” businesses selling Western supplements and functional foods. China plans to remain a leading authority in the fields of TCM and to develop world class pharmaceuticals and biotechnology sectors.

China is also a low-cost source for more than 8,000 species of herbs, vitamins and minerals supplied by a variety of small and large local businesses and leading multinational corporations. Substantial investments are being made to upgrade local growing and production centers; however, there is a wide difference in standards between TCM producers and the pharmaceutical companies that produce “supplements” or modern forms of TCM.

Product quality, reliability, consistency of supply and efficacy remain key problems for most overseas buyers of Chinese products. The advances made in the field of chemical sciences have allowed some Chinese suppliers to introduce/substitute ingredients, the results of which are not identifiable using traditional profiling techniques. This has led to a significant level of product rejection due to adulteration.

Leading suppliers are familiar with this problem and go to extraordinary lengths to validate the quality and consistency of products. However, the issue of sterilization remains an important factor that is being overlooked by many companies. New sterilization methods, including the use of steam, have made many older sterilization techniques obsolete. Some common recent supply problems include the irradiation of chrondroitin sulfate and the increasing rate of rejection of crops that are found to be contaminated with pesticides and metal residues.

Weighing the Scales

The benefits of establishing operations in China to manufacture or source products are well known. First, you can shorten the supply chain with direct access to local growers, producers and manufacturers. This, in turn, lends the ability to provide international levels of quality control at source, resulting in improved reliability of supply chain. Economically, operations in China have the benefits of sustainable, low-cost labor, as well as access to local tax and export incentives.

However, for many foreign companies, doing business with Chinese companies has been problematic. These problems have many sources, often coming down to a fundamental lack of understanding and communication between the parties. This can be further complicated by lack of a common long-term vision for the business and the financial capacity of partners to fund the long-term business growth. Different business ethics or practices can lead to a lack of consistent quality control and audit trials; for example, some Chinese suppliers will substitute other suppliers’ products and “pass through” those certificates of analysis (C of A). Economic pressures from the U.S. market have also impacted the Chinese market, leading companies to seek ways to adulterate products to meet price points without regard to quality or consistency. Finally, there are major differences with regard to patent protection and basic corporate law.

Companies seeking to market Western products in China need to overcome the complex registration requirements and the costs of registration for each product. Also, obtaining mass market distribution is problematic because of the absence of nationwide distribution networks and the small level of penetration of existing retail chain stores, and other retail or “MLM” networks.

In doing business in China, experience has taught several lessons.

What is the Solution?

There are several parts to the solution. First, work only with reputable organizations or individuals with whom you have longterm personal relationships or have been introduced to by reliable sources. Next, be extremely patient. It takes time to find a suitable partner and to obtain alignment of vision, ethics, principles, etc. Focus on quality first and price second—the latter can be obtained later, but quality needs to be a core competency of the whole organization.

If establishing your own business and legal entity in China, first seek out and pay for the best advice available as the application of the rule of laws may be inconsistent and have different application from province to province. Then hire and train the best people possible. It is a smart move to follow the corporate structure and business structures of other leaders. Don’t try to do something new or it will add months to the approval process and most likely fail because the Chinese systems are not flexible. Further, abide by the rules, as there is zero tolerance for foreign companies breaching domestic laws. Finally, don’t try to shortcut the bureaucratic processes—just expect delays.

For knowledgeable investors, China represents a tremendous opportunity for market access and for sourcing of low cost, quality products and ingredients, and more recently of product development and clinical studies. But those less committed to managing the investment process and cultivating direct relationships will probably find outsourcing to existing organizations with strong infrastructure in China to be a better option.

David W. Turner is concurrently the chairman of Zuellig Group North America and BI Nutraceuticals. Turner lived for more than 17 years in Asia; his most recent posting was a regional director of Zuellig Pharma, the largest distributor of pharmaceutical and health care products in Asia Pacific. He is also a director of several life sciences companies and is an advisor to several government healthcare-related organizations. He is a successful entrepreneurial chief executive officer (CEO) and a U.K.-chartered accountant.