In search of a healthy growth model

Updated: 2012-03-12 08:02

By Liu Jie in Xi'an (China Daily)

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In search of a healthy growth model

A traditional Chinese medicine shop in Nanjing, Jiangsu province. Despite the robust growth of the sector, China is facing multiple challenges in exporting TCMs. [Yang Duoduo / for China Daily]

Manufacturers of TCM are adapting to survive in the global marketplace

Beijing Tongrentang Group Co Ltd opened its first Middle East pharmacy in Dubai, the luxury port in the United Arab Emirates, in October.

Covering more than 300 square meters, the pharmacy of China's leading company in traditional medicines is situated in the Dubai Healthcare Center - a free zone for comprehensive medical and healthcare treatment - which has attracted investment of $1.8 billion.

In addition to selling TCMs, including some medicinal sliced herbs and nine formulary medicines that have been granted local authority approval, the pharmacy also offers an onsite health consultancy.

Meanwhile, the building also doubles as a museum, displaying TCM processing tools, such as mortars and pestles, while old photos depict both TCM culture and Tongrentang, a Chinese brand with a history of 343 years.

According to Ding Yongling, deputy-general manager of Tongrentang, the company has also joined hands with Confucius Institutes in Abu Dhabi and Dubai to conduct lectures on traditional Chinese healthcare and offer free TCM consultancies. Confucius Institutes are non-profit academies aimed at the global promotion of Chinese language and culture.

"We combine our products with history and culture to help foreign people get a real understanding of TCMs, and to help establish our premium brand in the international market," said Ding.

Tongrentang started its overseas expansion in 1993, when its first non-mainland outlet opened in Hong Kong. It now runs 64 pharmacies in 16 nations and regions, including the United States, the European Union and Asia.

The Beijing-based company is now China's largest exporter of formulary TCMs by volume after its combined exports registered annual double-digit growth for 15 consecutive years, reaching $28 million in 2010.

"Despite our robust growth, we are facing many challenges and uncertainties in the international market," said Mei Qun, Tongrentang's general manager, at the end of 2011. He cited a lack of internationally unified technical standards for TCMs, constant changes to the registration rules, difficulties in research and development and the current global economic slowdown as examples of the problems the company faces.

While the development of Tongrentang reflects the growth of the TCM sector, the difficulties it has experienced are also causing headaches for many other exporters of TCMs.

Robust growth

China exported TCMs valued at $2.33 billion last year, an increase of 36.2 percent compared with 2010. At the same time, the export volume increased by 14 percent and prices by 23 percent.

The 2011 figures follow on from several years of expansion: China's TCM exports increased to $1.8 billion in 2010 from $600 million in 1996, according to the China Chamber of Commerce for Import & Export of Medicines and Health Products. TCMs include formulary medicines, raw materials and medicinal sliced herbs, plant extracts and healthcare supplements.

"The renminbi's rate of appreciation in 2011, which was about 7 percent, helped the value of TCM exports to hit a record last year," said Liu Zhanglin, vice-president of the chamber, adding that the export value is expected to rise by more than 10 percent annually during the next five to 10 years.

He attributed the continuous growth to the increasing demand in the international market as more Westerners adopt a "green and natural" lifestyle and regard TCMs as a safer and greener alternative to synthetic pharmaceuticals.

According to the World Health Organization, global sales of organic medicines totaled $60 billion in 2010, accounting for around 30 percent of global pharmaceutical consumption. The WHO has predicted that consumption of organic treatments will see annual growth of more than 10 percent over the next decade, with the international trade in TCMs increasing by around 10 percent annually over the same period.

Tongrentang said it will expand its overseas chain to 100 pharmacies by 2015 and maintain its dominant position in China's formulary TCM export sector.

Challenges ahead

For China's TCM exporters, the main challenges are technical standards, which are especially stringent for formulary TCMs, and registration in developed markets.

In terms of raw materials, sliced medicinal herbs and plant extracts, each product has its own individual characteristic, and so the task of formulating technical standards and obtaining market registration isn't too difficult.

However, the formulas for TCMs are complex, usually involving several or possibly dozens of ingredients, each with its own individual characteristic. That means that drawing up a unified industrywide code of standards and establishing a standard for each medicine is virtually impossible.

Because of their limited knowledge of TCMs, many overseas authorities apply the standards relating to synthetic medicines to TCMs, thus necessitating chemical indexing and data garnered from clinical trials. However, scientific research into TCMs, especially into compound formulary medicines, only started in the mid-1980s and so no long-running databases are available.

"In addition to using modern technologies to carry out pharmaceutical studies into raw materials and formulary TCMs to provide the data required by foreign medical authorities, we also have to combine the popularization of TCM culture with product promotion," said Tongrentang's Mei, adding that helping to improve foreign consumers' knowledge of TCMs will be a crucial requirement in the internationalization of the medicines.

In addition to the technical problems, new rules concerning market registration are also hindering Chinese companies' attempts to enter some overseas markets. In May 1994, the European Union imposed new registration rules for TCMs, which required a registration period of seven years. During that probationary period, the health department tests and retests the effectiveness of formulary TCMs. However, the strict data requirements and high registration fee - nearly $1.3 million for a formulary TCM containing only a small number of ingredients - mean that few Chinese companies have bothered to register.

"I don't think the EU is setting barriers and intending to make TCMs withdraw from its market," said Guo Fanli, a pharmaceutical analyst at China Investment Consulting Co Ltd. "The EU government is aiming to standardize the market to meet the increasing demands of European consumers in terms of both health and safety, and Chinese companies should actively adapt to the mechanism."

A number of Chinese government departments, including the Ministry of Commerce, the Ministry of Health and the State Food and Drug Administration, have been in negotiations with EU health authorities. They have selected 10 medicines made by three large TCM companies in an attempt to secure registration. In this way, they hope to explore a practical and efficient way for TCM products to re-enter the EU market.

Liu from the import-export chamber said that TCM manufacturers are making strenuous efforts to upgrade their technologies, optimize their export structures and establish brands that will support expansion over the long term.

Technological upgrading

Located in the Chengdu High-Tech Zone, Sichuan Neautus Traditional Chinese Medicine Co Ltd is virtually indistinguishable from every other high-tech company in the district: the only difference is the bittersweet herbal smell emanating from its premises.

Founded in 2001, this well-known processor of medicinal herbs moved from a small factory in rural Chengdu, where production was undertaken mainly by hand, to modern buildings in 2009. In the new complex, there are not only machine-dominated workshops, but also labs for research and development and quality supervision.

The company's annual production of medicinal sliced herbs was 400 tons six years ago. During the past two years, the annual output exceeded 5,000 tons. Now, the capacity is 8,000 tons and the facility can produce more than 1,000 varieties of sliced herbs.

"We pay great attention to maintaining, but also innovating, traditional processing techniques, while promoting standardization. We have employed a number of sophisticated, experienced pharmacists to conduct research into the production process and to study the international standards," said Jiang Yun, chairman of the company, which has become one of China's top 10 exporters of medicinal sliced herbs.

As the traditional importers of sliced herbs, such as South Korea and Japan, have raised their quality thresholds, many small businesses have quit the market. In response, Neautus has initiated an alliance with some smaller producers of sliced herbs.

"We help them increase their technological capability and raise quality to meet the new standards overseas, and they help us meet the orders. It's mutually beneficial," said Jiang.

The company declined to disclose any financial details because it's in the process of applying for an IPO on the Chinext, China's Nasdaq-style second board, but insisted that its export growth is stable.

Guo of China International Consulting said that combining with other companies to raise quality and realize industry upgrades is one way that Chinese producers of sliced herbs can maintain their businesses in the international marketplace.

The pace of growth of exports of medicinal sliced herbs and other raw materials with lower added value, is slowing. According to Liu of the import-export chamber, China exported $767 million of raw materials and sliced herbs in 2011, a year-on-year increase of 17.7 percent. During the first nine months of 2010, the export volume of these products amounted to $509 million, a rise of 25.93 percent from a year earlier.

"Chinese companies are seeking more added-value products, such as plant extracts. This type of product is easier to transport and widely used in the whole healthcare industry, involving "energy" products, such as the drink Red Bull, nutritional supplements, pharmaceuticals and cosmetics," said Liu, who forecast that the sector will see annual growth of around 20 percent during the next decade.

New trend

Founded in 2013, Xi'an Hao Tian Bio-engineering Technology Co Ltd is a young TCM manufacturer and China's biggest exporter of plant extracts by sales. The company's export volume has increased by 50 percent annually during the last few years and hit 600 million yuan ($95 million) in 2011.

According to Zhang Chengwen, general manager of the Shaanxi province-based company, Xi'an Hao Tian plans to become a leading producer of herbal extracts, with five of its products each occupying more than 40 percent of their respective international markets within five to 10 years.

Zhang said that the global demand for plant extracts is currently valued at between $1.5 billion and $2 billion, and the figure is expected to increase by around 10 percent annually in the next few years.

In 2006, Xi'an Hao Tian developed Coenzyme Q10, an oil-soluble, vitamin-like substance, which also occurs naturally in the body. The move broke Japan's monopoly on the product, which is used in the treatment of cardiovascular and metabolic diseases.

"China's plant-extracts industry is based on traditional Chinese theories as well as rich plant resources and cultivation experience, advantages that are unique," said Zhang.

The company is keeping a close eye on the fluctuating global economy. "The slowdown in the developed economies may result in a drop in demand for some types of products, including healthcare supplements, which will force us to adjust our export structures and reduce costs," he added.

Meanwhile, India and Brazil have also entered the international market for plant extracts. "We need to speed up and explore more local plant species, while working within the framework of environment protection and biological conservation," said Zhang.

As more competitors arrive on the international scene, TCM manufacturers are also exploring emerging markets, such as Australia, Russia, Eastern Europe and Africa.

In 20011,Guangzhou Pharmaceutical Holdings Limited joined with two Australian counterparts to establish a registration and sales center for traditional herbal medicines in the country. "Australia, the US and the EU are multi-recognitional in terms of the registration of medicines, thus we hope to take a shortcut and enter the US and EU markets via Australia," said Li Chuyuan, the general manager of Guangzhou Pharmaceutical.

In September, Liu's import-export chamber organized a visit to Russia for officials and companies. The trip included negotiations with local governments and trading agencies. "We discovered that the local people are very interested in TCMs, and the Russian government has implemented policies to help Chinese TCM makers introduce their products and services to the nation. I believe Russia will become a promising market for Chinese companies in the future," said Liu.

With regard to Africa, Liu said the expansion of TCMs will depend on local economic development and it will take some time for Chinese TCM makers to turn a profit on the continent. Meanwhile, Guo said the government's policies in support of Sino-African trade and economic cooperation will pave the way for Chinese TCM makers to enter the African market.

In search of a healthy growth model