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AGROCHEMICALS: CHINA BECKONS Slow-growing industry pins hopes on China but faces high hurdles to success Jean-Francis Tremblay C&EN Hong Kong
T
he world's agrochemical industry is not doing well. Sales are growing slowly, employees are being laid off, and life sciences companies are considering selling off their agrochemical operations. Against this backdrop, China beckons. It has a large population—more than 1.2 billion people—80% of whom make their living from agriculture. Arable land represents only about 10% of the country's land area, so a need exists to maximize yield per acre. The government gives a top priority to food production in each of its five-year plans. Furthermore, there is increasing demand for more diversity and better food quality. Best of all, there is no backlash against genetically modified crops in China—public debate on the issue is discouraged. Nonetheless, China is an extremely difficult and disappointing market for agrochemical producers, whether Chinese or foreign. Most agrochemicals and feed additives traded in China are generic. Prices are perhaps the world's lowest. Worst of all, despite an urgent need to raise quality, the proliferation of counterfeit or copied crop protection products means that foreign companies refuse to bring their most advanced products into China. 'The top strategists in the big [international] firms see China as a great, big country," says Michael Chan, Novartis' national marketing manager based in Shanghai. "One simply needs to consider the market size, the large population, and the diversity of the main crops, which include wheat, fruit, vegetables, rice, cotton, and others. Moreover, China wants to develop its agricultural economy, which means that it is important to find ways to raise the yields. From this point of view, there is a big future here. But that is a long-term perspective. There is a great contrast be-
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tween what the future could be and the reality in the short term." Next year, China aims to produce 490 million metric tons of grain, including rice, wheat, corn, and other cereals, says Kosuke Tsuda, managing director of Sumitomo Chemical's Shanghai subsidiary. A lower target set for last year was achieved, he says. But because of an expected increase in the size of the population, food production targets have been set higher for the next fiveyear plan, running from 2001 to 2005. Surprisingly, the market for agrochemicals in China has been stagnant for the past several years, according to Guilford S. Ide, who is serving this year as the chairman of the Crop Protection Association of China, a group of 16 international manufacturers marketing products there. Ide is also business manager of DuPont's agricultural products in China. 'The market in China is about $1 billion for agrochemicals, and it's been flat for the past couple of years," Ide says. "A lot of that is related to the capacity for local synthesis, and formulation is about two times demand. Although there are 1,300 [Chinese-owned production] facilities, many of them are running at very low levels. As they all struggle and
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compete in the market with too much product, the product price just keeps decreasing." Estimates of the size of the Chinese market for agrochemicals vary. Sumitomo's Tsuda says it was worth between $700 million and $1.6 billion in 1997, depending on whose market research report one consults. Novartis' Chan says his firm uses fairly sophisticated estimation methods to determine that Chinese agrochemical producers sell about $1 billion worth of products annually, whereas foreign firms sell $300 million worth of products in China, either imported or produced locally, for a total of $1.3 billion. Tsuda adds that what matters really is the trend. Although the market has not been growing recently, potential and vast opportunities arise from the rationalization of China's domestic agrochemical industry, the phase-out of hazardous pesticides, and market requirements for more abundant, diverse, and better food. Tsuda cites one study that forecasts that by 2002, China's market for agrochemicals will grow in value by 5.8% per year, which is double the world average. One oddity in China is the large number of producers. The Chinese Crop Protection Industry Association has 250 members—a fraction of the total number of producers. These companies control between 70 and 80% of China's agrochemical market, leaving the rest to foreign firms. Tsuda says the Chinese government is reviewing the profitability of its agrochemical producers to determine which should continue operating. In the U.S., Chan notes, the top 10 agrochemical producers control 90% of the market. One reason for the dominance of Chinese-made products is that foreign products are more expensive. Chinese companies manufacture a large quantity of products with undesirable characteristics, Chan says. He explains that this year, the market is made up of about 60% insecticides, 22% herbicides, and the rest fungicides. The vast majority of insecticides are organophosphates, about half of which are highly toxic. The "high-risk" compound methamidophos is the most widely sold insecticide in China, he says. Sumitomo's Tsuda says that China is eager to remove the highly toxic and widely used compound parathion from the market, but a high-technology, more benign alternative is too costly. He adds that China is one of the few countries still producing and exporting DDT. Because
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asia-pacific some of the insecticides produced in China are so dangerous that they are about to be banned by the United Nations Environment Program and the U.N. Food & Agriculture Organization, additional opportunities exist for foreign companies to introduce safer alternatives, he says. Foreign producers have made £ impressive efforts both to establish f their brands in the Chinese market ^ and to build production facilities in §• China In some cases, the compa- S. nies seem to have taken a redly | long-term perspective. "If we look £ at the performance of foreign agro- | chemical operations in China," €. Chan says, "the chief executive officers cannot be smiling." Firms are making big bets. In Jiangsu, Zeneca is building an $85 million facility to make the herbicide paraquat. The facility will export to the rest of Asia. Citing rosier estimates than other companies, Zeneca estimates that the Chinese herbicide market is worth $450 million and that it is growing at 20% annually. The
company explains that being in China will allow it to develop a more cost-effective distribution network. Other foreign companies with plants in China are Novartis, DuPont, Rhone-Poulenc, AgrEvo, Rohm and Haas, and FMC.
Ide (left) and Chan
In terms of training Chinese farmers in the safe use of pesticides, Ide acknowledges that foreign firms are spending more than profits warrant. "We all try to make big up-front invest-
ments in things like safe use, because a really great product can disappear because it was misused—[perhaps] a crop was damaged, or the result was not as expected, or in the worst case, somebody was harmed." The government, Ide says, offers nofinancialsupport for the firms' training activities. But that is a minor irritant compared with counterfeiting and trademark infringement. The problem seems to be more serious for foreign companies than local ones because foreign companies generally invest more in R&D and brand development. In the 1970s and '80s, Sumitomo developed and introduced into the Chinese market its pyrethroid insecticides Sumicidin and Sumi-alpha, which are based on the active ingredients fenvalerate and esfenvalerate, respectively, Tsuda says. Sumi-alpha, sold under the Chinese name Lai Fu Ling, is a household name in China because of a widespread television campaign, Tsuda adds.
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OCTOBER 18,1999 C&EN
Sumitomo's brand names and packaging are now widely copied all over China, Tsuda says, and he documents the claim byfillingseveral office folders with an incredible number of counterfeit labels. Products are counterfeited in various ways, Ide explains: 'The first category of fakes is where the company gets the packaging identical andfillsit with clay. So, there is no active ingredient inside. The second type is where they match the package identically, and then put some agrochemical in there. Maybe it is close to what we would sell, but typically it never matches." Ide explains that penalties for counterfeiters in China are proportional to the degree of faking. Novartis' Chan says that mechanisms to prevent a company's productfrombeing copied do exist. He says that before 1993, it was possible for a foreign company to request "administrative protection." Once the administrative protection mechanism was activated, Chan notes, it was illegal for Chinese companies to copy the product that the foreign company manufactured locally. Without administrative protection, Chinese firms could legally copy products made by foreignfirms,but they couldn't use the same trademark. Ide says that DuPont's Londex benefits from administrative protection, but two Chinese plants that were producing Londex' active ingredient prior to 1992 were allowed to legally continue. Administrative protection simply made it illegal for other plants to begin producing Londex. In 1993, China implemented a more stringent patent protection law. Ide comments: "We should distinguish that, in terms of IPR [intellectual property rights] protection for agrochemicals, we would say that the legal structure is okay. It's the enforcement that doesn't work—or, at least, it works very poorly." Two years ago, foreign agrochemical producers formed the Crop Protection Association of China (CPAC) in Hong Kong. The organization, which now has an office in Beijing, has 16 members— AgrEvo, American Cyanamid, Zeneca, BASF, Bayer, Dow AgroSciences, DuPont, Elf Atochem, FMC, Monsanto, Nissan Chemicals, Novartis, Rhone-Poulenc, Rohm and Haas, Sumitomo Chemical, and Uniroyal. Ide insists that local companies are welcome into the association. At present, the issue of IPR is given top priority by CPAC because it is the prime obstacle to the introduction of more advanced crop protection prod-
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asia-pacific ucts into China. 'We have a technology [at DuPont] that we are quite certain could benefit one of the key crop areas that needs improvement in terms of quality," Ide says. "But you know, it's too sensitive. It's too much risk to bring the technology into [China] when you are uncertain about control of it." By and large, transgenic crops have not been introduced in China. Monsan to is conducting some experiments with transgenic cotton in Hebei Province near Beijing. But this remains limited.
What prevents the wholesale introduc tion of engineered seeds into China is an IPR issue rather than government or consumer concerns. "Related to trans genic crops, there is the seed law," Ide explains. "Seed law in China does not permit majority share by a foreign enti ty. . . . That is a practical limitation to bringing transgenic crops in or bringing the research element in." Without ma jority ownership, foreign companies have no assurance of maintaining con trol of their technologies. Tsuda displays part of his collection of counterfeit labels.
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OCTOBER 18,1999 C&EN
CPAC is also concerned by what it perceives as unequal treatment of foreign companies. 'The government requires more data, more studies, and more time for us to register a product as opposed to a local company," Ide says. For Beijing, food production is a very important priority, but protecting China's agrochemical producers is also a con cern. Many of the policy measures that hinder the progress of foreign agrochem ical producers in the Chinese market are aimed at shielding Chinese makers of crop protection products from foreign competitors. Additionally, limiting im ports is one of China's considerations. "In 1999, the [import] quota system changed from being administered by the National Planning Commission to being administered by the State Eco nomic & Trade Commission," Ide notes. "When that transition occurred, it creat ed a big difference in terms of the imple mentation of the quota system. This year a quota has been very difficult to find. It's a system that seeks some level of balance for the local companies ver sus the foreign entities, [although] I suspect you are probably looking at Chi na being concerned about managing the outflow of funds." He estimates the total quota to be worth $200 million. Conditions in China are not perfect, and the stakes are high, Chan com ments. "If China were a small country, we wouldn't care about these little prob lems. But it's a big country." Philosophically, he adds: "In 20 years, China has changed dramatically. If we re main confident that it will continue to im prove in the future, we will stay. But if we see a negative tendency, we will be less interested. Compared with the U.S., com petition in China now is barbaric. But compared with China 20 years ago, it's an enormous improvement."^
