China’s Pharma Manufacturing Monopoly

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China’s Pharma Manufacturing Monopoly

Competitive advantage can often be gained by acquiring control of important chokepoints; that’s especially true when the value chain involves essential but low-margin activities, which are scale sensitive.  In fact, it’s the ability to make capital investments and defer profits in those areas, which enables a predatory enterprise to drive competitors from the marketplace.  Since the 90s this has become a hallmark of China’s competitive strategy.

A notorious example involves the market for rare-earth elements.  Here, China first became the “low-cost producer” and then the monopoly producer.  Jointly, the United States, Japan, and Australia could and can produce all of these raw materials at a price just slightly higher than China’s.  The problem is that it requires serious capital investment and regulatory adjustments, which are impossible to justify in a world flooded with inexpensive exports from China.  Not surprisingly, the U.S. was, until recently, lulled into a vulnerable position by China’s mercantilist strategy designed to keep non-Chinese competitors out of the rare-earth market through aggressive pricing.

China has tried using a similar tactic to make Huawei a critical supplier of 5G telecom infrastructure around the world.  In that case, the chokepoint is created when it becomes impossible for Western nations to transmit data through Huawei-equipped networks without becoming vulnerable to Chinese cyberwarfare.  Under this plan, subsidized low prices and quick delivery are intended to motivate western nations to compromise their national security in order to save money and expedite 5G implementation.  Recognizing Huawei’s close ties to China’s PLA, the United States is already investing diplomatic and economic capital in preempting the company’s strategy. 

In both of these cases, western countries plus Japan and South Korea were slow to respond because neither rare-earth elements nor telecom infrastructure represented big opportunities for short-term value-capture.  The assumption was: as long as China obeys the conventional rules of business, all will go well.  Meanwhile, building innovative consumer electronic devices and cutting-edge Internet services are the big opportunities western companies prioritize.  So, it’s easy to forget that these and other high-margin businesses are vulnerable to low-profile chokepoints like rare-earth elements and insecure telecom infrastructure.  But as we’ve discussed previously in Trends, the United States and its allies are now haltingly working to eliminate those vulnerabilities.

However, it was not until the coronavirus outbreak put stress on the China’s health care supply chains that become a paid subscriber for full access.
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