According To Frost & Sullivan, Higher Value-Added CMO Will Grow Faster Than Industry Average
Contract manufacturing, an agreement signed between two parties to create or process raw materials into a product, is most common in the pharmaceutical market. In 2007, revenues reached over USD70 billion in China. Contract Manufacturing Organizations (CMO) for pharmaceutical markets include the sourcing of raw material, intermediates, APIs, and formulation of chemical or biological drugs. CMO is also common in electronics, agrochemical, dyes, surfactants, and coatings industries. The majority of these CMO products are for export to Europe and the US.
According to Frost & Sullivan's China Manager for Chemicals, Material & Food Practice Julia Zhu, in the past, pharmaceutical companies outsourced a drug for manufacturing predominantly due to capacity constraints. "Now contract manufacturers are looking to integrate themselves into the supply chain of pharmaceutical companies by offering value-added product and service. Primary CMO which includes the sourcing of raw material, intermediates and API is very active in China," she said.
The global economic slowdown is forecasted to cause a certain amount of demand to shrink. She continues, "For example in the electronics application, the future trend for LCD is in obscurity, as developed countries which are major product destinations, have witnessed obvious retail sales fall. On the contrary, impact to the largest application of pharmaceuticals is considered to be limited, as demand in this sector is basically rigid. Other applications besides these two are estimated to be too small to affect the whole market growth."
The regulatory environment in China is also favorable for CMO, especially high-end patent primary CMO, to develop its business within the country. China's Eleventh Five-Year Plan Outline for Chemical Industry Technical Development, which was released in late 2006, listed specialty chemicals industry as one of the six priorities.
"For example, IP rights and technical standard strategy have been implemented to develop high-tech products with independent IP rights. Focusing on the targets and strategic tasks of the 11th Five-Year Plan, China encourages domestic and overseas partners to conduct cooperation in investment in high-tech industries, high-end manufacturing processes, infrastructure facilities and ecosystem protection. In November 2008, the Chinese government carried out some policies to offset the negative impact of a global economic slowdown on China's growth, including tax and finance regulations preferred by technological innovation enterprises," said Zhu.
In terms of industry specifics, CMO with high research & development level and patent product focus are likely to survive and expand. High-end products are hard to replace by other competitors due to technology restraint. Strong research level also brings long-time cooperation with clients and an increasing number of new customers.
"Due to cost concerns, more outsourcing is expected to happen as China has obvious cost advantage compared with developed countries. However, if the supplier cannot meet the technology or quality requirements, it is going to lose the opportunity. India, a CMO base with longer history, is considered the biggest competitor for China," continues Zhu.
She continues to say that industry consolidations are likely to be facilitated by the recession. Small suppliers are likely to rely too much on a small number of customers, or have financial trouble during the tough times. Market leaders are forecasted to further dominate the market through capacity expansion, joint venture or M&A activities forcing some low-end suppliers to be displaced.
The global economic recession is likely to impact the CMO market, mainly through the downstream markets slowdown. "Though pharmaceuticals is an application with rigid demand and strong pressure resistance, pharmaceutical companies are going to face heavy cost pressures. They are forecasted to increase the CMO purchase in developed countries to lower the manufacturing cost, especially in the increase of pharmaceutical intermediates to grow in this difficult economic environment. The CMO market in China is estimated to upgrade through the economic recession," she adds.
Zhu continues, "Due to higher customer requirements, CMO with higher added value, such as patent CMO, primary CMO and fluorinated CMO, are forecasted to grow faster than the industry average." Fluorinated specialty products are valued for its high temperature stability, low refractive index, strong solvency and chemical resistance, which help application in pharmaceuticals, electronic chemicals, agrochemicals, and many other industries.
"The popularity of fluorinated specialty chemicals is gradually expanding market revenues as a whole with growth over 20 percent annually. The abundant fluoride resource and comparatively lower labor cost are attracting additional investments in the Chinese fluorinated specialty chemicals industry. This industry is very much technical orientated and have stable demands from developed countries," she adds.
Shanghai Chemspec Corporation, leading supplier of fluorinated CMO business in China, has stated that it has seen no impact of recession this year. The company has been awarded The 2008 China Frost & Sullivan Award for Growth Excellence in December 2008 with over 60 percent annual growth, increasing customer base, and high-level R&D and quality control.
About Frost & Sullivan
Frost & Sullivan, the Growth Partnership Company, enables clients to accelerate growth and achieve best in class positions in growth, innovation and leadership. The company's Growth Partnership Service provides the CEO and the CEO's Growth Team with disciplined research and best practice models to drive the generation, evaluation and implementation of powerful growth strategies. Frost & Sullivan leverages over 45 years of experience in partnering with Global 1000 companies, emerging businesses and the investment community from 31 offices on six continents. For more information, please visit http://www.frost.com.
SOURCE: Frost & Sullivan