Last week I wrote an article for pharmaphorum on China’s new 5 year plan and the impact this will have on patient care and the life science industry. You can read “China’s 2015 healthcare prescription – investment, infrastructure & innovation” here.
If you are involved in a startup in China and are looking for investment then you should check out the ChinaBio Investor Forum in Jinan from 13th-14th July. ChinaBio are looking for 20 biotech companies to sponsor at the event and are accepting applications now. Click here for more information.
Previous ChinaBio Investor Forums, including the ”most promising” emerging companies can be found here.
If you have been following developments in China you will have no doubt seen the amazing designs of new science parks and hi-tech bio-cities that look like something out of a science fiction film. However, science parks have been operating in China for many years now and are one of the main ways that China has sought to embed its drive towards innovation at the grass-roots level. They are also a key way in which the central government has attempted to differentiate certain regions through directing them towards specific industries. By understanding how science parks first developed and the current centres focussed on life sciences we can get a gain insight into the best places to conduct life science business in China.
The Chinese Silicon Valley
The Beijing Zhongguancun Science Park was opened in 1988 and is in the Haidian District, North West of Beijing. It is composed of the Haidian Development Area, Fengtai Development Area, Changping Development Area, Electronics Town Science and Technology Development Area, and Yizhuang Science and Technology Development Area. Although best known as a centre for electronics and styled on the silicon valley concept, the zone also includes a Life Science Park, extending for 249 hectares. The life science park houses Chinese research institutes such as the National Institutes of Biological Science, the State Biological Chips Engineering Research Center and six other biological research institutes as well as R&D centres for Novo Nordisk and Genzyme.
The park has a stated strategy of: 1) attracting investment from within the top 500 pharmaceutical companies, 2) attracting Chinese biotech companies to undertake R&D, 3) establishing a small and medium enterprise (SME) business centre to support the growth of indigenous companies and 4) establishing an incubator to support new company growth. In order to meet these goals, the science park managers have various mechanisms by which they seek to attract foreign investment. These include attractive financial levers such as preferential tax rates, for example a reduced corporation tax and not having to pay income tax for the first three years after establishment.
Hi-Tech Development Zones (HTDZ)
Some of the other earliest science parks were the Xi’an Hi-Tech Development Zone (established in 1991) and Zhangjiang Hi-Tech Park (in Pudong district of Shanghai, established in 1992). The Zhangjiang park was one of the first to attract many of the major pharmaceutical and biotech companies and now boasts R&D centres for the majority of world’s leading pharma companies. Indeed, according to a survey undertaken in 2009, there are 319 life science companies undertaking R&D in the park, employing 20,000 scientists, with 42 research facilities, hospitals, and many supporting small and medium-sized businesses. The Zhangjiang HTDZ now stretches for 10 square miles, after originally being set up in only 1.6 square miles. This type of industrial-academic-medical interplay is exactly what China is seeking from its science parks and has enabled it to position Shanghai as the place to be for international pharmaceutical R&D companies.
The Zhongguancun, Xi’an and Zhangjiang parks are three of the most prominent Hi-Tech Development Zones (HTDZ), of which there are now 53 across China. These three parks represent half of the key zones selected to promote China’s international competitiveness, the other three being: Shenzhen HTDZ, Chengdu HTDZ and Wuhan HTDZ.
During my visit to China I was able to visit four of these parks in Shenzhen, Shanghai, Beijing and Chengdu. The scale of the parks is truly awe-inspiring both in the size and number of companies situated on the parks. When we assess levels of investment into R&D across the various parks we can begin to understand how important R&D is to the various parks. Research published in December 2007 by Guangzhou CCM Chemicals analysed the income and subsequent investment into R&D of the top 10 HTDZs. The following chart illustrates the level of investment that each park made into R&D in 2006: 
Clearly the Beijing park stands out as leading the way in investing in R&D, due to its large income. However, the other nine are roughly comparable in their investment as a percentage of income with an average level of 3.5%. Moreover, it should be noted that these figures only represent the level of re-investment made by the parks themselves, without taking into account the grants available from central and provincial government for new businesses.
Regional Life Science Clusters
In order to increase competitiveness and drive innovation, each HTDZ has a particular set of industry specialisms, with life science being one of the leading themes. When these capabilities are added to the industry of nearby cities within the broader environment, there are four large life science clusters within the country:
In addition to specific regions, a May 2010 publication from UKTI on China’s regional cities identified the following sub-sector opportunities for foreign investment: hi-tech medical devices, OTC medicines, pharmaceutical R&D, biotech manufacturing training & consultancy, drug discovery partnerships with TCM companies and clinical trials.
The opportunities in China are vast and sometimes overwhelming, but knowing where to start can be half the battle. Nothing can beat getting out there and visiting some of these places first-hand, and by doing a bit of research ahead of time, you can plan a targeted itinerary that can maximise the amount of time you have in the country and increase your chances of finding the right place, the right people and the right terms and conditions for your new Chinese enterprise.
“Made in China” is a familiar phrase for UK shoppers – for years we have become used to the fact that our clothes, electrical goods and toys have been produced in China. The country has leveraged its low cost base to position itself as the country of choice for these cheap goods. However, China has now recognised that part of developing a stronger, more competitive, economy is moving its industrial base from low-skilled to more highly-skilled jobs. China wants to be recognised for its knowledge economy as much as its manufacturing capability. Thus, it is seeking to shift from Made in China, to Made by China.
A great leap forward for this strategy came in January 2006, at the start of a new Five-year Plan (2006-2011), when Chinese President Hu Jintao announced China’s aim to build an innovation-orientated country by 2020. The following month, the State Council issued the National Guidelines for Medium- and Long-term Plans for Science and Technology Development (2006-2020). The goal of these guidelines is to accelerate the shift:
As a result high levels of investment have been put into R&D programmes, infrastructure and technology. But even before 2006, the had started its journey towards innovation. An example of the significant shift in China’s focus can be seen in the number of triadic patent families filed, one of the key metrics of a country’s innovation appetite. From less than 20 in the early 1990s the country filed nearly 600 patents in 2007, much higher than that of the other BRIC countries (source: OECD):
This dramatic increase demonstrates that all the activities aimed at driving innovation are beginning to bear fruit. Nevertheless, China’s filings were dwarfed by the number of patents filed in the US - with the number of Chinese filings being only 3% of the US’s and 29% of the UK’s total filings in 2006.
In a 2009 The Economist Intellegence Unity (EIU) conducted a global survey of innovation and produced an Innovation Index. This index was split into inputs and outputs, the former being an assessment of direct drivers and the broad economic, social and political environment, the latter being an assessment of the origin of patents granted by the EU, US and Japanese patent authorities. China was the biggest gainer among all economies, developed and emerging. The report found that its innovation performance had improved by 11% and it would rise a further 8 places by 2013. India will move up four places, whereas the rankings for the two other BRIC countries, Brazil and Russia, remain unchanged:
When we look at R&D intensity - the level of R&D investment as a proportion of GDP, we see that China is again moving up the rankings quickly. A September 2010 report by Goldman Sachs had China investing $100bn, third behind the US ($325bn) and Japan ($123bn). This equates to an R&D intensity of 1.5% – the target for 2020 is 2.5%, equating to a $300bn annual investment in R&D. Interestingly, 70% of this investment into R&D is coming from industry, indicating the high level of corporate investment into future business opportunities.
When we look at the individual company level, there are a number of key factors for the Chinese industry when they want to promote innovation within their companies. In a 2009 survey of 185 Chinese senior executives, the top three factors that they considered to be very significant to innovation within their companies were:
Thus, while protection of IP remains a key issue in China’s attractiveness to foreign firms (and a theme we shall come back to soon), encouragingly, innovation-intensive Chinese companies also recognise the importance of IP protection to securing the returns on their investment.
Conclusion
The arrival of China as a powerhouse of innovation in only a matter of time. The levels of sustained investment into its intellectual capital are beginning to bear fruit in market leading companies and internationally recognised academic institutes. As the country charges towards its 2020 target more new products and services will reach the global marketplace from China.
Howeover, the country will also experience the downside of innovation, and that is that true innovation is costly, hard and high risk. This I believe, is the only question mark over the long term future of innovation in China – once the incentives and rebates run out (which they must eventually do) and the easy targets are developed, will the country as a whole have the patience and determination to progress with a culture of innovation when they are used to extremely fast development times? Will innovation become part of Chinese culture for the long term? Whatever the future for innovation post-2020, by this time China will have suceeded in reshaping the global landscape forever.
Over the course of 2011 I will be writing a series of posts on China’s life science industry and forecasting how it could look by 2020. In 2010 I was fortunate to visit China to meet with scientists, business people and government officials to understand the current state of the life science market. I produced a detailed market report covering all aspects of the healthcare industry in China. I also spoke to many people in the UK involved in conducting business with China. This opportunity gave me a passion for seeing the two countries work more closely together in areas of mutual opportunity and fired my desire to share my insights with a wider community for the benefit of both countries.
I also aim to respond to recent industry news and will post my comments on important developments in the Chinese market.
Check back soon for the first installment!
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