Outsourcing From China:

Tips for Success

Posted: January 8, 2007

API Manufacturing and Pharmaceutical Manufacturing

Hardly a day goes by now and we don’t here about another product recall from products produced in China. Whether its toothpaste, toys, tires, pet food or any number of consumer goods or raw materials the issue of quality control and assurance are all serious requirements in the pharmaceutical industry. PCI sources and produces a host of products and materials from both India and China. Our logistics team has spent years developing procedures, key suppliers and agents to successfully import millions of dollars worth of materials annually. At the same time we have been able to keep many of our QA/QC issues to a minimum by following a few simple guidelines and rules of thumb.

No matter how cheaply supplies can be purchased from China, it often ends up feeling like one is not quite satisfied with the end result. Issues in general tend to include overall quality, packaging, proper documentation, sampling protocols, and/or delivery schedules. China’s economy has come so far, so fast that it is not a surprise that there are still many opportunities for improvement. The pharmaceutical industry as a whole has no choice but to work with China in sourcing many of the required raw materials and intermediates due to the many real advantages that China has.

The combination of low labor costs as well as significantly less stringent environmental regulations keeps their costs at a level which is extremely hard for western companies to compete with. However, there are some distinct disadvantages of using China as well. For many of PCI’s customers the risk of sending one’s IP to China is a real concern. The rules, common practices, and judiciary system in most of Asia has almost no resemblance to anything in the west. Keeping your IP protected is not easy. Pursuing any type of grievances in court is nearly impossible. Most Chinese companies lack any formal project management capabilities which sometimes lead to unrealistic lead times and very optimistic ETA’s. To make matters worse, due to cultural and language barriers working directly with the factory involved is not possible so all pertinent information must go through agents and usually there are more than one involved. Information thus gets filtered and sometimes reported incorrectly back to the end customer. More and more the serious environmental concerns of Chinese production are not sitting well in the U.S. marketplace. In addition, most recently prices have shot up in China by between 8-13% due to a reduction in the DEPB (Duty Entitlement Pass Book), which has had a snowball effect on anyone doing business in China and India since India buys much of its raw materials from China.

With all the potential risks how does anyone wanting to start doing business with China be successful? First, align yourself with a reputable agent who has a long track record of working in China. Our most successful agents actually have offices in China. You may only deal directly with the US office but make sure they have people working for them on the ground. They act as your eyes and ears in China and would have the advantage of knowing the culture and how certain aspects of Chinese companies do business. Make sure specifications are clearly understood and in writing. Plan ahead so you can receive and test pre-shipment samples. Any reputable agent will not hold you financially responsible if your spec’s are not met. Try to visit the factories for large volume or multi-year supplied products. Be careful as there have been instances where factories won’t allow tours even after agreeing ahead of time that they would. This is another reason why a reputable agent is important as they would not let this happen. Build a long term relationship with your agent. Give them the opportunity to be profitable with more projects as they will not want to risk there relationship with you even with products that have little margin for them. Avoid using multiple agents for multiple projects. You want your agent as invested in what you’re doing as you are. It is also recommended to have a good domestic freight forwarder/broker who has dealt with incoming shipments from multiple countries. Remember, most of the import problems that arise from Chinese shipments are caught in other countries on the way here, and not in China. Last but certainly not least, know who you are going to contact ahead of time if there is a problem at your local airport or seaport. In the past PCI has had to use contacts at the US Coast Guard to get a shipment through customs that made it all the way to Boston and was almost shipped back to China. All in all for the right projects structured in the right way success can be had in China. Good Luck!

About the Author

Ed Price CEO of PCI Synthesis
Ed is the President and CEO of PCI Synthesis (PCI), he serves as a co-chair of the New England CRO/CMO Council and sits on the Industrial Advisory Board for the Department of Chemical Engineering at UMass, Amherst. Ed is also a long standing member of the American Chemical Society and advises the Bulk Pharmaceutical Task Force of the Society of Chemical Manufacturer’s and Affiliates (SOCMA).

Do you have questions? Talk to Ed.