Recent regulations, quality and cost issues driving Pharma’s decision for site location.
We can’t look at the label and expect to find anything but a foreign country of origin for most products we buy these days. The same can be said for both over-the-counter medications in pharmaceuticals and for t-shirts and basic electronics. When the headline Pharma Abandoning East, Returning West for CMOs say GPCM Delegates appears on the July 2, 2013 edition of Outsourcing-Pharma.com, it caught my eye.
In the piece, author Dan Stanton describes “Pharma firms returning to European and North American manufacturers as quality issues and rising costs have lost India and China some of its “Eastern Promise”." One thing is for sure; what is true yesterday may not be true today, especially in the world of global commerce.
The issue of quality and rising costs in India and China are not new. Garment designers, ever mindful of costs, have moved from away China to Bangladesh, Vietnam, and other South East Asian countries in search for even lower costs to manufacture their products. And recently The Atlantic Magazine published a piece at the end of 2012 titled The Insourcing Boom, wherein author Charles Fishman describes General Electric’s CEO Jeffrey Immelt who tried to sell GE’s appliances division in 2008, stating in a Harvard Business Review piece that outsourcing is “quickly becoming mostly outdated as a business model for GE Appliances.” Four years after trying to sell the entire business, Immelt approved an $800 Million infusion to bring GE’s Louisville, Kentucky Appliance Park back to life. And frankly, I’m glad they made that decision. In my personal opinion, GE offers some of the best appliances on the market. They offer good value and excellent features. And even better, GE customers are now supporting American Jobs and a greener business model by saving on ocean freight and other transportation costs. Additionally, the division can respond more quickly to demand and inventory changes, and has less exposure to business disruption that stems from unforseen global events.
Among the key GE decision factors, The Atlantic magazine article describes the following.
Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.
So relative cost can be more favorable for domestic manufacture of appliances, and can also be true for Pharma manufacturers too, thus the new look at insourcing to save cost. But something else is going on here. Unlike garment and appliance manufacturers, pharmaceuticals, over-the-counter medications and supplements go inside our bodies. The potential liability of a poor quality, contaminated, or incorrect component or process can be immense. And regulators have been more active in overseeing these issues. Future pieces in this series will explore these and other aspects to complete the picture.