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Get Four
|  | DECEMBER 7, 2004
By Bruce Einhorn Big Pharma Has a Friend in Guanxi Influential officials are realizing that it's in Beijing's best interests to lean on intellectual pirates -- most of the time, anyway China is notorious as a haven for counterfeiters, with low-cost pirated versions of Western brand-name products all too easy to find. For Western drugmakers interested in selling medicine in the world's biggest country, that's a big worry. The fact that both Pfizer (PFE ) and GlaxoSmithKline (GSK ) have suffered embarrassing setbacks in China with regard to their intellectual-property rights recently hasn't helped matters, either (see BW Online, 12/13/04, "Go East, Big Pharma"). Yet a growing number of drug companies believe they can tap the nation's potential by relying on another truism about the Middle Kingdom. Yes, China has big problems with counterfeiters, but it's also a place where you can get things done if you have the right connections -- guanxi. Ever since Deng Xiaoping opened China's doors to the West in the late '70s, businesspeople have realized that the lack of a transparent business environment requires cultivating relationships with top officials. MR. FIXITS. Beijng's entry into the World Trade Organization three years ago was supposed to make China more of a rule-based system, where guanxi would have far less influence, and also improve its legal system to make its rules easier for companies to understand. Yet guanxi remains important in China. Just ask Andreas Tschirky, head of the new research center in Shanghai for the Roche Group, the Swiss pharmaceutical company. He says the local and central governments understand the importance of beefing up protection for intellectual-property rights (IPR) -- and one sign of their commitment is the relationships that Roche now has with their representatives. "We have a specific person in the Shanghai government to whom we can address all of our issues," says Tschirky, who adds that Roche has "direct access" to officials from the central government. Others in the industry also say they've had encouraging contacts with officials. That's one reason that many drugmakers are focusing on the Chinese market, which is among the top 10 in the world today and will probably grow to the top three within the next 10 years. "I'm optimistic," says Steen Kroyer, head of China and Hong Kong for AstraZeneca. "We get strong support from the central government." PIRATES' NEST. One reason for the good feeling: the relationships that Big Pharma is building with Chinese cadres. Because China's system isn't developed enough to ensure intellectual-property protection in a widespread way, companies' best hope is getting a commitment from individual officials, says Philip Leung, a partner with Bain & Co. in Hong Kong. When it comes to preventing unauthorized generic drugs or outright fakes, guanxi still matters. "You have people who believe [patent problems] won't happen to them because they are better at the game," he says. "There are just some companies that are more systematic at managing regulatory relationships in China." The goal, he adds, is "finding common ground." That means "understanding what is important to the Chinese government, having the right personal relationships with decision-makers, and articulating why it's important to have the right intellectual-property protection -- and why it's important for the Chinese pharmaceutical industry." That means guanxi alone won't accomplish much, not unless government officials feel it's in China's interest to crack down on abuse. That's where the pharmaceutical industry is taking its cue from the West's big software outfits. China doesn't have any software companies comparable to hardware powers Huawei and ZTE -- companies that can compete globally. Not coincidentally, China also has one of the world's worst track records for counterfeit software. Almost all the PCs in China today still run on pirated copies of Microsoft Windows, according to the Business Software Alliance, an industry lobbying group. THE KEY ISSUE. Beijing has been trying to fix the problem -- thanks in part to lobbying efforts of Western software companies, which emphasize that China has little hope of developing a software industry of its own unless it deals with the counterfeiting issue. Chinese companies won't be able to make any money if their products are counterfeited. For instance, Kingsoft, a software concern in Zhuai, the city adjacent to Macao, is a market leader in office software, but it has suffered badly because of piracy. As a result, it has shifted gears and puts more focus on developing its online gaming business, since that's an area where it's harder for pirates to gain ground. If China wants a local software industry, it needs to deal with the piracy problem. The same is true of a local drug industry, which the West's Big Pharma knows China's leaders want. That's why they emphasize the importance of boosting intellectual-property protection for China's growth. "It's well understood by the government that IPR protection in our field is key -- not just for multinational companies but for local companies as well," says Tschirky. "It's not multinationals on one side and locals on the other [anymore]. We are one industry." But no matter how good relations are with local officials, getting them to crack down on scofflaws isn't easy. That's especially true of China's large pharmaceutical business. The country has 6,000 drugmakers, many of which are law-abiding companies. A number are state-owned and employ lots of workers -- and have guanxi of their own. BABY STEPS. Given the severe unemployment problem in China's cities -- unofficial estimates put the jobless rate at 8%, double the official rate -- Beijing has to proceed cautiously when taking steps that could put companies out of business. Some of them make unauthorized generic drugs and would suffer if the government were to become overly aggressive about protecting intellectual property. Still, people who follow the industry are, for the most part, optimistic that China has made progress and that things are moving in the right direction. "The Chinese government has become much more sophisticated in understanding the importance of intellectual property," explains Leung. And you can count on Big Pharma executives to keep on reminding it.  Based in Hong Kong, Einhorn is Asia economics editor for BusinessWeek. Edited by Patricia O'Connell
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