As readers may know, for the past year I have been working with the National Bureau of Asian Research (NBR) on the research topic of China’s pursuit of a domestic life science sector. As conceived, the project is designed to evaluate China’s policies from a number of vantage points, ranging from how these policies will impact global R&D spending by pharmaceutical companies, whether China’s model fundamentally deviates from what Japan, South Korea and Taiwan have done during similar unsuccessful pursuits, whether current WTO protocols are adequate given the unique needs of the life science community, and how this all will impact the US-China relationship.
The original question that intrigued me – which was admittedly rough in how I conceptualized it – asked whether China’s approach to clean-tech might offer anything to the life science community and policy makers as lessons on how China thinks and acts once it sets about achieving one of its goals. During my own research on the question, one book I have found useful as a foundation to this question is Kelly Sims Gallagher’s book, The Globalization of Clean Energy Technology: Lessons from China.
Right out of the gate, Gallagher makes an important point about China’s clean tech policies, one that is relevant to the life science community. She writes about her response to seeing the new clean-tech factories being built in China, “I was surprised to see how few people were working in the factory; aside from the ingot production area, the factory was sparkling clean, white, sparse, and almost fully automated. Where was the so-called labor cost advantage in China?” This very quickly quashes one of the canards about the current status of China’s economic development model; specifically, that China always pursues policies designed to absorb lots of the low-cost labor the country has in seemingly never-ending supply.
What does motivate China? With respect to clean-tech it was at least two factors. One was environmental need: China’s central government knows it has a problem with pollution and is actively working to remedy the problem by investing in clean-technologies. However, the second goal is equally important in my estimation; namely, pushing China further along towards higher technology manufacturing. These comparisons are useful when framing our thoughts about China’s policies in the life science sector. Here, what China wants are at least two similar objectives: a domestic life science capacity that can be cost-effectively directed towards public health issues within China’s own borders and second, the ability for China to move upwards on the technology curve and position its economy as something more than a global factory, a country the developed world thinks of pejoratively as a “me too.”
There are important differences between China’s aspirations in clean-tech and biotech. Specifically, China had an immediate domestic and international export market for its clean-tech products (assuming the country’s practices were in compliance with WTO standards, which solar cells in particular did not prove to be the case). For bio-tech, this is less of a robust comparison as China’s short-term capabilities are likely to be limited to its own markets and other emerging economies if Chinese made products can work to supplant the brands India’s own pharmaceutical companies have established in the developing world.
You might be thinking, “doesn’t China account for something like 80% of pharmaceutical APIs already? And if that’s right, it really isn’t such a small step to see them exporting the finished product to America and the EU.” Fair enough, and it is obviously a mid-term opportunity for off-patent blockbuster drugs to be 100% manufactured in China and exported to the US, but thus far the relative organizational limitations of the CFDA and our own FDA’s limited capabilities in China are natural limits to how much China can achieve in this respect, at least for now. Longer term, especially as economic pressures in the US and EU relative to healthcare costs grow more severe, consumers, governments and insurance companies are all likely to become less hostile to Chinese made pharmaceuticals, but for now this consumer push-back is something of a limit on China’s aspirations, and an important distinction between where clean-tech versus bio-tech can take China.
Another important distinction between these two spaces is illustrated by the power of standards as mechanisms that can foster innovation when done properly, and construct barriers when done improperly (or, as seen from the point of view of a protectionist, actually a “proper” barrier). Clean-tech does not have the sort of robust standards that exist in the life sciences. The much better example in China is IT, where standard setting became an important factor in establishing ground rules between Chinese and American companies and government stakeholders (not that we exactly have that one 100% figured out either, just as Huawei). In the life science space, the lack of a science-based, fully transparent drug approval process in China is a major inhibitor for life science development that is done in China making its way overseas. It is also one of the major structural reasons that drives why China is experiencing a major drug lag relative to innovative therapies developed in MRCT compliant countries.
If there is one difference between clean-tech and life sciences that jumped out to me while I was reading Gallagher’s new book, it was the role of market scale in allowing either sector to ultimately be successful. As she writes, “Bigger market scale is critically important to the global diffusion of cleaner energy technologies. Given pervasive market failures, the demand for cleaner energy technologies is mainly created through market-formation policies at the national and subnational levels.” Does healthcare have pervasive “market failures?” It would be easy to say yes to this, given the difficulty all countries are having creating reimbursement schemes that provide cost-effective healthcare goods and services to their populations; however, the mountain clean-tech had to climb to create a market was higher than life sciences, and as such, the role of the government in China and the US was more important for clean-tech.
We could debate – and many have – whether a market for clean-tech anywhere would exist absent government subsidies; hence, the need for any government actor to create artificial conditions under which a market can emerge. It may also be that the government’s involvement in China’s clean-tech sector while necessary, actually prohibited some technologies from facing commercial pressures, and as such, squandered national resources in ways a more un-structured free-market approach would have required. Is there a fundamental market failure in China’s biotech sector that requires similar involvement? As seen simply from the cost point of view, one could argue that yes, there is a market failure; however, is this really guiding China’s life science policies? My suspicion is that prestige and a desire to reposition China’s technological capabilities higher up the value chain play a more significant role. That is, of course, one point we will wrestle with as part of the NBR project.
China has to prove that its own domestic life science policies in some way are fundamentally different than what South Korea, Japan and Taiwan all have done, with very little to show for it. Has China adopted a nuanced policy framework in life sciences that reflects meaningful insights about what these other countries did wrong? Or, is China simply leaning into this set of goals without a care about economic efficiency, believing that effort and investment alone can create the sort of public health and economic outcomes they desire. My guess is the latter, and as our research advances, we will be wrestling with these questions and the implications to pharmaceutical companies globally if China’s policies do not result in the outcome they anticipate.