Cleaner, Leaner And Greener
18 December 2008 Last year marked the beginning of China’s 11th Five-Year Plan, the central government’s written objectives and strategies for the upcoming half-decade. Right from the start, it was clear that the recently initiated Plan would be different from those of the past.
For one thing, the Five-Year Plan really isn’t a “plan” anymore; the Communist Party of China (CPC) changed the Chinese name in 2006, with the new word closer in meaning to “program” or “layout” than to “plan.”
The change was made to emphasize China’s new direction. The aims for the years 2006 to 2010 have the stated ambition of “putting people first” by scientifically establishing sustainable development; working towards environmental goals and lowering pollution; taking to heart China’s increasingly open market and the needs of its people; and “advancing the economic society’s and people’s all-round development,” according to the 3rd Plenary Session of the 16th CPC Central Committee. This is a marked change away from the material goals of the past, which focused primarily on economic growth.
This direction from China’s leadership has already impacted agribusiness in the country, as a number of programs are underway to clean up China’s ag-chem industry, as well as its reputation overseas. This effort to improve, organize, and modernize is taking many forms, touching on issues covering environmental regulations, intellectual property rights (IPR), chemical discovery, the removal of older chemistries, and the consolidation of the industry by helping to foster the growth of larger, well-run enterprises, sometimes at the expense of smaller or less efficient businesses.
And like everything in China, when changes come, they come big.
Production Refocused
It may seem strange to think that an industry such as ag-chem production in China would require any changes in direction. In 2006, the country’s pesticide manufacturers produced a record-high volume of active ingredient (ai) with nearly 1.3 million tonnes, according to the China National Bureau of Statistics (NBS). This production is 20% higher than 2005 output.
But the effects of the 11th Five-Year Plan are felt in those numbers. As of the beginning of 2006, a dedicated effort was made through 29 government programs to eliminate and substitute newer products for five organophosphorus insecticides: methamidophos, monocrotophos, phosphamidon, methyl-parathion, and parathion. Prior to the onset of the programs, these five products combined to represent 27% of China’s total ag-chem output. In 2006, their production accounted for just 3%, according to the China Crop Protection Industry Association (CCPIA).
China’s world-leading pesticide output also featured more modern formulations in finished products, with the proportion of emulsion in water (EW), micro-emulsion (ME), suspension concentrate (SC), and water dispersible granule (WDG) formulations all rising, while older formulations such as emulsion concentrate (EC) and wettable powder (WP) decreased.
The country’s promotion of IPR and innovation also took steps towards becoming more of a reality. During the 10th Five-Year Plan (2001 to 2005), 24 pesticides with independent IPR were developed (seven insecticides, eight fungicides, eight herbicides, and a plant growth regulator), which was a big step in the right direction. In 2006, a novel fungicide (enestroburin, SYP-Z071) from Shenyang Research Institute of Chemical Industry; a novel insecticide (Fuxian, JS118) from Jiangsu Pesticide Research Institute Co., Ltd.; and a new insecticide (HNPC-A9908) from Hunan Research Institute of Chemical Industry all emerged from Chinese developers.
Further enhancing the Chinese industry’s modernization was another milestone in 2006: the establishment of the country’s first Good Laboratory Practice (GLP) certified research lab. Nutrichem Laboratory Co., Ltd. received the certification of compliance from the Belgian GLP Monitoring Authority in May; many more are likely to be joining it in the coming years.
At Home And Abroad
While pesticide production hit a new high, the trade balance in China shifted dramatically in 2006. Exports, which represented nearly 40% of China’s ag-chem output in 2005, represented 30.7% of the country’s output in 2006, with a measured decrease (7%) in export volume and a major decrease (29.8%) in export value. At the same time, the country imported 43,200 tonnes of pesticides (17.5% more than in 2005) worth US $212.7 million (16.5% higher than in 2005), according to the China General Administration of Customs.
Domestically, demand for 2007 is expected to hold at the same levels as 2006. Reports at the province level collected by CCPIA indicate that around 297,000 tonnes of pesticides will be required by Chinese farmers. The major products (those with demand exceeding 10,000 tonnes) are DDVP, acetochlor, copper sulfate, bisultap, and glyphosate. In general, demand for insecticides and fungicides is expected to remain at or near 2006 levels, while demand for herbicides is likely to grow by just over 5% to around 72,800 tonnes.
By geography, the provinces that will be the major consumers of pesticides (each consuming between 20,000 and 30,000 tonnes) are Anhui, Heilongjiang, Hunan, and Shandong. The next tier (those consuming between 10,000 and 20,000 tonnes) is made up of the provinces Fujian, Guangdong, Guangxi, Hebei, Henan, Hubei, Jiangsu, Jiangxi, Liaoning, Yunnan, and Zhejiang.
Market Dynamics Of A Dynamic Market
Along with steps to modernize the types of products being produced in the country, China’s producers are themselves consolidating to become larger, stronger entities. Perhaps the most notable of these was the acquisition of Heilonjiang Pesticide Co. by ChemChina Agrochemical Corp., which had already taken control of Sanonda, Dacheng, and Anbang, paving the way for the country to establish a major competitor to the multinationals.
There still is room for further mergers among China’s top companies. In 2006, the Top 20 pesticide companies by sales combined to generate total sales of US $3.226 billion, or a relatively small 34.4% share of the country’s total sales volume.
The trend toward a more consolidated industry is being supported by several government undertakings. For one thing, production expenses are increasing, making it more difficult for small companies to achieve registrations on their own. Since July, the cost for a manufacturer to acquire production permission has risen to approximately US $3.9 million for technical manufacturers and US $1.3 million for formulators.
The company also is changing its approach to regulating production. As one manufacturer told FCI, “There are 300 to 500 ai manufacturers in China, and many more formulators. Production has not been strictly regulated; the government has often looked the other way.” However, that could be changing as several controls formerly held at the provincial level move to the central government’s hands. Among those, changes to environmental regulations and licensing top the list, both efforts by the government to create a “green process and clean production.”
Those efforts are already being felt on the ground.
“There is more concern about the environmental system,” says Yang Zheng Yu, chairman of Zhejiang Tide CropScience Co., Ltd. – A Division of Tide International. “To set up new ag-chem plants, you now need approval from the Central Environmental Bureau. So far, quite a lot of requests have come from the provinces, but only a few were approved. The central government wants to grow some companies that can compete in the global market.”
Zou Weiping, Agrochem Dept. manager for Zhejiang Chemicals I/E Corp., agrees that the new regulations are likely to change the industry’s composition. “The environmental issue is creating a problem for all small manufacturers,” he says. “They need to invest in waste water management systems – that costs a lot. And they need to move to remote areas where there are already too many plants and too much competition.”
The licensing issue is another which could have the effect of driving the country’s many producers together. Tide’s Yang Zheng Yu explains: “China formerly had three types of registrations. One for life, one a primary registration for production, and one for the manufacturing of chemicals for export only. The government is cancelling the third type; you now have to prove your manufacturing is legal by government standards, and the government will check you out to see that you are legal.”
Of course, the remaining licenses are more difficult to attain than the license for exports only had been, and waste water management – which will be a requirement for all plants – are both moves that are expected to force more companies into mergers and acquisitions to clear the added hurdles.
Shocks To The System
While there remain questions on the minds of the Chinese industry, there are also improvements to be anticipated.
Ankin Lin, general manager of Sunglow International Marketing Co., Ltd., says that “the Chinese market could be a good market,” and thinks that consolidation could lead to a brighter future. “When the factories compete, the price falls, both here and internationally. Already, Ukraine and Russia are difficult because many Chinese factories are competing for market share and have driven down prices there.”
The changes could also lead to a better reputation internationally, if the successful businesses hold themselves to higher standards. Tide’s Yang Zheng Yu says that there are still areas where Chinese business needs to get up to speed.
“Payment remains a problem in China,” he says. “We insist on payment in advance; I prefer to make sales of $10 million I will get vs. $100 million I will never see.”He adds that there still is a lack of expertise – or worse, an outright disregard – for IPR in the country.
“People don’t pay a lot of attention to the patent issue at times,” he explains. “For example, for a certain herbicide, there is no patent protection. But for a safener that is used with it, there is – if you use the safener, you need to pay for it. Yet lots of formulators still don’t; they do black market formulations. If there’s money in it, they’re willing to take the risk.”
In the past, that has meant risky business for overseas partners. “We are feeling the effects of increased regulatory pressure during our contract supply negotiations for our US and European customers,” says Michael Feinman, president of Aceto Agricultural Chemicals Corp., a subsidiary of Aceto Corp. that sources pharmaceutical and ag intermediates and speciality fine chemicals from 500 Chinese factories out of its Shanghai office. “It is very important to have local representation to ensure that Chinese factories are in a position both technically and financially to comply with the new regulations. When millions of dollars are invested to secure a US registration for a post-patent seasonal product, we cannot afford to have a supply problem.”
A consolidated industry would create more trust among international partners – a necessary ingredient for good business, Yang Zheng Yu says, and points to an example of a problem that the Chinese strategies are hoping to eradicate. “One customer sent us a copy of a registration number and manufacturer name they were given by a manufacturer; it was all fake. The registration number was non-existent.”
He goes on to say that the government came down swiftly on the offending company, blacklisting it and stripping away every registration and certification that it possessed.
There have been several stories like this one described by different manufacturers, such as one in which a foreign company came to China to visit the office of a manufacturer which claimed to have sales of US $100 million per year. The foreign company arrived at the manufacturer’s office to find it consisted of one room with three tables.
Stories like these led Yang Zheng Yu to his opinion of what the final shake-out will be once in China, and what it will take for companies to survive. “You need to have quality. Everything is moving towards more quality – personal quality and product quality.”
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