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China’s Pharma Manufacturing Monopoly
Competitive advantage can often be gained by acquiring control of important chokepoints; that’s especially true when the value chain involves essential but low-margin activities, which are scale sensitive. In fact, it’s the ability to make capital investments and defer profits in those areas, which enables a predatory enterprise to drive competitors from the marketplace. Since the 90s this has become a hallmark of China’s competitive strategy.
A notorious example involves the market for rare-earth elements. Here, China first became the “low-cost producer” and then the monopoly producer. Jointly, the United States, Japan, and Australia could and can produce all of these raw materials at a price just slightly higher than China’s. The problem is that it requires serious capital investment and regulatory adjustments, which are impossible to justify in a world flooded with inexpensive exports from China. Not surprisingly, the U.S. was, until recently, lulled into a vulnerable position by China’s mercantilist strategy designed to keep non-Chinese competitors out of the rare-earth market through aggressive pricing.
China has tried using a similar tactic to make Huawei a critical supplier of 5G telecom infrastructure around the world. In that case, the chokepoint is created when it becomes impossible for Western nations to transmit data through Huawei-equipped networks without becoming vulnerable to Chinese cyberwarfare. Under this plan, subsidized low prices and quick delivery are intended to motivate western nations to compromise their national security in order to save money and expedite 5G implementation. Recognizing Huawei’s close ties to China’s PLA, the United States is already investing diplomatic and economic capital in preempting the company’s strategy.
In both of these cases, western countries plus Japan and South Korea were slow to respond because neither rare-earth elements nor telecom infrastructure represented big opportunities for short-term value-capture. The assumption was: as long as China obeys the conventional rules of business, all will go well. Meanwhile, building innovative consumer electronic devices and cutting-edge Internet services are the big opportunities western companies prioritize. So, it’s easy to forget that these and other high-margin businesses are vulnerable to low-profile chokepoints like rare-earth elements and insecure telecom infrastructure. But as we’ve discussed previously in Trends, the United States and its allies are now haltingly working to eliminate those vulnerabilities.
However, it was not until the coronavirus outbreak put stress on the China’s health care supply chains that Americans began to recognize the far bigger strategic threat related to China’s manufacturing of most of the pharmaceuticals and other commonplace medical products used by the U.S. This includes 97 percent of all antibiotics and 80 percent of the active ingredients used to make other drugs we use. For instance, almost all of America’s penicillin, ibuprofen, and aspirin comes directly or indirectly from China.
And the risks associated with this dependence are already becoming apparent. In January, the medical supply firm Cardinal Health recalled 2.9 million surgical gowns which were“cross-contaminated” at a plant in China and the blood pressure drug valsartan also saw shortages recently, thanks to tainted active ingredients at a Chinese plant.
Last year, manufacturing of intermediate or finished goods as well as pharmaceutical source material in China, accounted for
- 95 percent of U.S. imports of ibuprofen,
- 91 percent of U.S. imports of hydrocortisone,
- 70 percent of U.S. imports of acetaminophen,
- 40 to 45 percent of U.S. imports of penicillin, and
- 40 percent of U.S. imports of heparin.
While much of the actual formulation of finished drug capsules and tablets are done outside China, often in India, the raw and intermediate chemicals are most often sourced in China. Moreover, the U.S. generic drug industry can no longer produce certain critical medicines such as penicillin and doxycycline without these chemical components.
According to a recent report from the US-China Economic and Security Review Commission, China’s chemical industry, which accounts for 40 percent of global chemical industry revenue, provides a large number of ingredients for drug products. In most cases, China is the exclusive source of the chemical ingredients for these source materials. Consequently, this creates a potential chokepoint in the global supply chain for these critical medicines.
The report also notes that China is “the world’s largest producer of active pharmaceutical ingredients and the United States is heavily dependent on drugs that are either sourced from China or include active pharmaceutical ingredients sourced from China. The report further explains that although India is the world’s leading supplier of generic drugs, India gets 80 percent of its active pharmaceutical ingredients directly from China. The United States also imports 80 percent of its active pharmaceutical ingredients from overseas (primarily from India and China). Meanwhile, a substantial portion of America’s generic drugs come either directly from China or from third countries like India that use active pharmaceutical ingredients sourced from China.
In other words, almost all pharmaceutical roads lead to China. And people in the know recognize the problem, even if it’s seldom discussed. For instance, China’s success in monopolizing the U.S. drug market with its anti-competitive trade practices was reportedly cited by former Trump economic adviser Gary Cohn as an argument against Trump’s early efforts to fight back against China’s trade violations. Cohn invoked a Commerce Department study showing that 97 percent of all U.S. antibiotics come directly or indirectly from China saying, “If you’re the Chinese and you want to really just destroy us, just stop sending us antibiotics.” And while this has not happened, the coronavirus itself has exposed the frailty of global supply chains and the fallacy of intercontinental supply chains and just-in-time inventory management for such indispensable products.
Furthermore, the US-China Economic and Security Review Commission report cited earlier notes that China’s dominance of the chemical industry and global manufacturing of active pharmaceutical ingredients means that “the world is becoming increasingly dependent on China as the single source for life-saving drugs.”
In fact, the report states, “The U.S. generic drug industry can no longer produce certain critical medicines such as penicillin and doxycycline because the active pharmaceutical ingredients needed to make these antibiotics are sourced from China.”
China achieved this dominance in the pharmaceutical industry by using the same methods it employed to dominate the steel industry. Those include anti-competitive trade practices that dumped cheap state-subsidized products on foreign markets to drive competitors out of business.
According to Rosemary Gibson, senior advisor at the Hastings Center and author of the book China RX, the United States is losing its ability to produce generic drugs because Chinese drug companies have dumped low-price products into the global market, which is in turn pushing U.S., European, and Indian producers out of the generic drug manufacturing business. According to Gibson, China is seeking to disrupt, dominate, and displace U.S. pharmaceutical and other medical-industry companies, and in doing so limit U.S. ability to produce its own medicines, including antibiotics such as penicillin and even generic aspirin. Gibson believes the United States could see its generic drug industry made totally uncompetitive within five to ten years due to the Chinese government’s policies, including subsidies and export incentives, which allow Chinese pharmaceutical firms to undercut prices and drive U.S. firms out of business.
Hypothetically Gibson asked, “What would happen if there was “a coronavirus outbreak in the United States and a lot of people ended up in hospitals with severe cases?” The medicines needed to care for them if they can’t breathe and are on a ventilator - including fentanyl and propofol - [are all made in China]. - If they go into shock, the epinephrine and dopamine we need to care for them depend on China. - If they have bacterial infections, we depend on China for the antibiotics.”
America has already lost much of its manufacturing capabilities for medicines to China via globalization. As Gibson explains, “With our medicines, it’s not just the active ingredient [that is made in China]. It’s the raw chemicals, the molecules, the white powdery stuff, that we also depend on China for. That’s where China has real global chokehold.”
Generic drug manufacturers around the world are dependent on China for raw materials. As Gibson also reported, India is the top generic drug producer in the world but even India depends on China. Its generic industry would shut down within weeks or months without those core components. Already the Indian press is concerned about this because the coronavirus in China is really disrupting supply chains to India. Furthermore, China is moving downstream to capture much of the market now served by India. Therefore, Gibson believes China is going to overtake India in generics in five to ten years unless something changes.
As explained earlier, China uses predatory mercantilist policies - including dumping - to undercut American, Western, and now Indian drug manufacturers, just as the communist state did with steel and other commodities.
In her book, Gibson documented the incredible story of China’s penicillin cartel and how the United States lost its penicillin manufacturing plants. These are huge industrial fermentation facilities. China knocked them out in the U.S. and even India by dumping penicillin on the global market at really cheap prices, keeping it low for several years and then letting the price go back up.
As a result, the United States can’t make penicillin and most other antibiotics. We’re talking about last-resort antibiotics as well the ordinary antibiotics we give to kids for ear infections or take if we have a toothache. We also can’t take aspirin and vitamin C, anymore.
As explained in China Rx, one of the reasons for their cheap prices is that Chinese companies assume no liability for the quality of their products. Several years ago, when there was a huge recall of blood pressure medicines in the U.S. and around the world, it was because of a single company in China that made the active ingredient with carcinogenic rocket fuel compounds and then knowingly sent the product to the United States. This went on for four years before we picked it up. And that speaks to a broader problem, we’re not only seeing our supply of medicine all coming from China, but the quality is diminishing, and the FDA’s leverage to protect the public is falling apart.
What’s the Bottom Line?
America’s dependence on China for medicines and medical devices creates a least three potential choke points:
1. Disruption of production via natural disasters, such as when the current coronavirus crisis shuts down factories in places like Hubei province.
2. Quality control and contamination problems. Contaminated food and drugs, faulty devices, and mis-formulated products are all too commonplace in China. Unlike toys, dog food, and industrial chemicals, faulty healthcare products can cost human lives and undermine trust in the system. And,
3. Intentional retaliation by a hostile foreign power. As the geopolitical interests of the United States and China diverge, Gary Cohn’s concern about China using its “near-monopoly” in antibiotics and many other health-related products as a weapon becomes increasingly likely.
In most potential areas of conflict, including energy, strategic minerals, financial markets, and cyber-security, the United States has already begun taking preemptive action to minimize vulnerability. However, in the arena of medicines and medical devices, we’re just beginning to understand the scope and scale of the problem.
Given this trend, we offer the following forecasts for your consideration.
First, shocked by the fallout from the coronavirus, Congress and the administration will launch a comprehensive investigation of America’s dependency on Chinese drug manufacturers, this year.
In recent testimony before the Senate Homeland Security Committee, Scott Gottlieb, a physician and former Food and Drug Administration commissioner in the Trump administration, urged Congress to give the FDA “the authority to uncover hidden monopolies.” The Federal Trade Commission already has this research authority, it just doesn’t use it very often. And the United States Trade Representative has information on our dependencies on China because when they threatened tariffs large numbers of companies came to them during a “notice and comment period” whining about how such dependencies hurt their business. Across these three agencies, we already have a lot of information about the scale of the problem. Just not enough insight to take comprehensive action. Such a complete study will help us quantify risks, prioritize actions, and galvanize public support.
Second, the United States will finally treat China’s de facto monopoly on medical products as a national security vulnerability.
Rosemary Gibson, the author of China RX, has proposed a federal industrial policy to renew the domestic manufacturing of medicines and medical products. Under this plan, the federal government would invest in helping to rebuild our pharmaceutical industrial base using advanced manufacturing technology that can produce our medicines much more cheaply, safely, and with less of an environmental footprint. The objective would be to produce everything from core raw materials to finished drugs here in the United States.
Third, we will find that free-market solutions alone will not correct China’s mercantilist undercutting of Western drug and medical supply manufacturing.
Some say, ‘Let the free market fix it.” However, the Chinese have already used mercantilist strategies to destroy the global free market in medicines. As Gibson puts it, “They cheated [with] subsidies to these Chinese companies, so it’s [now] very hard for any U.S. or Western company to compete because you’re competing not with Chinese companies, you’re competing with the Chinese government. So, just like nuclear submarines, aircraft carriers, and ICBMs, we need to think of our medicines as a strategic asset, not as something cheap that we can outsource to a country that has a lot of problems.” And,
Fourth, even a crash program will not eliminate America’s drug-related vulnerability overnight.
There are no short-term solutions to restore America’s medical manufacturing capacity. We have lost so much of our industrial capability for making our own medicines that we can’t recreate that overnight. Today, 90 percent of the generic drugs sold in the United States [are linked to China]. These include birth control pills, antidepressants, and HIV/AIDS medicines, as well as medicines for Alzheimer’s, Parkinson’s, epilepsy, and diabetes. Fortunately, bringing pharmaceutical manufacturing back to the United States gives us an opportunity to create a state-of-the-art industry that will be cost-competitive with any global rivals.
References
1. The American Prospect. FEBRUARY 12, 2020. DAVID DAYEN. The Coronavirus Outbreak is an Economic Red Flag.
https://prospect.org/world/coronavirus-outbreak-china-economic-red-flag/
2. Council on Foreign Relations. August 14, 2019. Yanzhong Huang. U.S. Dependence on Pharmaceutical Products From China.
https://www.cfr.org/blog/us-dependence-pharmaceutical-products-china
3. The American Conservative. JUNE 27, 2019. Michael Hogue. America’s Monopoly Crisis Hits The Military.
https://www.theamericanconservative.com/articles/americas-monopoly-crisis-hits-the-military/
4. Health Leaders. January 31, 2020. JOHN COMMINS. CARDINAL HEALTH BEGINS RECALL OF CONTAMINATED SURGICAL GOWNS.
5. Prometheus Books. 2018. Rosemary Gibson & Janardan Prasad Singh. China Rx: Exposing the Risks of Americas Dependence on China for Medicine.
https://www.amazon.com/dp/B07465CNKD/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1
6. Breitbart.com. February 14, 2020. ROBERT KRAYCHIK. Expert: China Has ‘Global Chokehold’ on Medicine, Can Shut Down Our Pharmacies, Hospitals in Months.
7. Breitbart.com. February 13, 2020. Rebecca Mansour. Coronavirus Outbreak Exposes China’s Monopoly on U.S. Drug, Medical Supplies.
8. Economic Times. Aug 08, 2019. US senator seeks unannounced inspections of foreign drug manufacturing units in India and China.
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