China IPOs: A Look Ahead

An important dynamic that is fueling China’s growing middle class is an increasing access to global capital, not just for large state-run enterprises, but for small entrepreneurial businesses that continue to draw more people from the countryside, driving urbanization. The first half of 2010 saw over 200 Chinese business go public. Despite a slower pace of new offerings in the second quarter of 2010, the number of Chinese IPOs still could hit 400 for 2010.

Although big IPOs such as that of China Agricultural Bank dominate the headlines, many of the offerings that are driving China’s growth occur on the Shenzhen Stock Exchange (SZSE) rather than the better known Hong Kong and Shanghai markets. In May of 2004, the Small and Medium Enterprise Board (SMEB) was launched in the SZSE to provide small and medium sized enterprises greater access to capital and liquidity. In October of 2009, the ChiNext board was launched, for the purpose of meeting the capital needs of independent innovation and growth enterprises. As of June 2010, over half the companies listed on the SZSE are either on the SMEB or ChiNext board.

In 2009 and so far in 2010, the majority of the IPOs occurred in the manufacturing sector (although the most money was in financial due mostly to the $22B raised by China Agricultural Bank) however this is likely to change as the government plans to place greater emphasis on new areas that include alternative energy, biotech, IT/Internet and advanced materials. Alternative fuel automobiles is another likely area of focus for the government’s next five year plan.

Although the IT/Internet industry in China has received substantial attention, surveys by the China Venture Capital Association indicate that foreign investors have put more money recently into alternative energy, consumer goods and services and healthcare. Success stories in the Internet sector, such as Tencent and Baidu are tempered by not just by the stringent regulations that govern Internet use in China, but the complexity of complying with them. Internet companies in China must comply with laws set by multiple agencies, and failing to comply with any one agency can result in penalties. One well-publicized example was the shutdown of the popular World of Warcraft game, in which Netease was accused by China’s General Administration of Press and Publication (GAPP) of charging users without proper approval despite a blessing its Ministry of Culture.

Looking ahead, we can expect to see a growing level of IPO activity in China with a continued short-term focus on materials, finance and manufacturing, and a gradual transition towards alternative energy, consumer goods and healthcare. Internet IPOs also will grow, but unless there is some reform of how Internet regulations are enforced the pace could be slower than in other sectors. Some companies to watch in 2011 include:

• China Huadian Corporation one of China’s largest energy state-owned energy firms that should debut on the Hong Kong exchange
• Jinchuan Group, Ltd., a nickel and ferrous metal mining and chemical company that produces close to 90% of the nickel and platinum produced in China
• China Huarong Financial Leasing Co., a state-owned asset management firm initially set up to manage non-performing loans
• Jiang Tai Insurance Brokers, Ltd., China’s first comprehensive insurance broker
• Spring Airlines, an independent budget air carrier that could become the first independent Chinese LCC to list in Shanghai
• Oak Pacific Interactive, an Internet conglomerate that produces social games and networks, and consumer oriented network services

Latin America is Booming, Costa Rica is Sustainable

China’s huge investment in Latin America has been well-documented, but the region’s export and foreign investment growth also has been bolstered quietly by another source: the Middle East. Trade between Latin America and the Middle East hit nearly $19B in 2008, a threefold increase since 2000. Approximately $12B of the $19B is composed of imports by Middle Eastern nations such as Iran, the United Arab Emirates (UAE), Syria and Kuwait. Trade between Brazil and Middle East alone is expected to reach $6.6B in 2010.

Although some Middle Eastern investment in Latin America is driven by a need for arable land and food to support a growing population, some is speculative. Arab real estate investors are seeking new havens for cash, after the recent economic downturn left numerous construction projects either unfinished or cancelled. Most of the investment is in Brazil, but other areas including Guatamala and the Caribbean coast have seen money from the Middle East.

It is true that Latin America has experienced an economic recovery as a result of its deepening ties with China and the Middle East and expected 40% to 50% increase in direct foreign investment, but concerns that the long-term benefits will be limited are discussed in the report "Latin America and the Caribbean in the World Economy 2009-2010: A crisis generated in the center and a recovery driven by the emerging economies”, published by ECLAC (Economic Commission for Latin America and the Caribbean).

According to the report, “Natural resources have been the region’s most dynamic exports over the past decade, especially in South America. This pattern of growth has created the conditions for a recommodification of the regional export structure. After falling from some 52% of total exports in the early 1980s to a low of 26.7% in the late 1990s, the share of raw materials has risen over the past decade to reach almost 40% of the total in the last two-year period (2008-2009).” This recommodification is being driven by the growing influence of emerging markets such as China and the Middle East, who seek to purchase land, raw materials and food versus manufactured goods, particularly those with a high added value. The figure below from the report shows the decreasing proportion of high and medium tech manufactured exports.

Mikio Kuwayama, in his paper, “Quality of Latin American and Caribbean industrialization and integration into the global economy”, points out that “Irrespective of growing manufactured exports, the Latin American economies have not experienced the kind of dynamic restructuring of domestic production and export patterns that would allow investment to become an engine of growth.” This is true for many Latin American countries, but there are exceptions. Costa Rica provides an example of how economic policy can create a basis for increasing manufacturing value added.

Two important steps that Costa Rica took to become a manufacturing leader in Latin America were to invest in education and develop free trade zones that provide substantial tax breaks to foreign investors. Since the 1970’s, Costa Rica has invested more than 28% of its national budget on elementary and secondary education. As a result Costa Rica, has one of Latin America’s highest literacy rates.

Costa Rica’s free trade zones have attracted many high tech and medical device manufacturers who know they will enjoy long-term economic benefits while having access to a skilled and trainable workforce. Businesses that have leveraged Costa Rica’s educated population and business friendly policies include Intel, Boston Scientific and Baxter Healthcare.

Costa Rica’s neighbors would be well-advised to look for ways to invest their current influx of foreign money on their best source of long-term economic growth, their populous. If they take the additional step of emulating the economic policies that have made Costa Rica one of Latin America’s leaders in manufacturing value added, then the region overall can reduce its dependence on commodity exports and increase its chances for sustained economic growth.

Compulsory Licensing in India Can Change Pharmaceutical Markets

Regulations in India, one of the world’s largest pharmaceutical producers and consumers are changing the industry’s market landscape in ways that are likely to result in greater competition and potentially more choice for patients in Africa and Asia. The impact will be felt globally as multinational companies such as Pfizer and Abbott seek to strengthen their positions in these countries.

Since India passed the Patent (Amendments) Act in 2005, MNLs have increasingly sought out Indian pharmaceutical firms for low-cost manufacturing expertise, and as a way to mitigate some of the risks associated with bringing new drugs to market. This is resulted in a combination of acquisitions and alliances between MNLs and Indian drug and API (active pharmaceutical ingredient) manufacturers such as Dr Reddys, Aurobindo, Strides Arcolab and Claris Life Sciences.

The cornerstone of the Act is the recognition of product (or composition of matter) patents for chemicals (including drugs), and provision of a 20-year term from the filing date of such applications. Previously, patents were only issued for methods of producing products (also referred to as compositions of matter), but not for the products themselves (i.e., pharmaceuticals). This allowed one to commercialize a drug that was a proprietary product of another as long as one’s own method of producing that product was used. Furthermore, the term of an Indian patent for chemicals, food, and drugs was seven years. While patent abuse in India still exists, the Act reduced the risk enough to attract substantial new investments from MNLs.

MNLs are now facing a growing risk in India that could slow future foreign investment in pharmaceuticals, and create new opportunities for emerging Indian drug manufacturers. The Indian government is considering the use of Compulsory Licensing (CL) as a way of ensuring that its growing population of AIDS and cancer victims has access to low cost treatments. CL essentially allows a government to choose one or more companies to manufacture and supply a drug whose patent is owned by another party, if it believes that the patent holder is not providing the drug cost-effectively, or to those who need it.


The use of CL is sanctioned by the WTO, and governed by a number of agreements including TRIPS (Trade-Related Aspects of Intellectual Property Rights) and the Doha Declaration of 2001. These agreements provide for royalties to be paid to patent holders in the event of a CL, however the rules are fairly broad and subject to interpretation by each participating country.

The increasing potential for CL use in India poses the threat of substantially decreased revenue for MNLs that are seeking to market their drugs in India.  It will not stop new alliances between MNLs and Indian drug manufacturers, but could slow them down until it becomes clearer how and when the Indian government will apply CLs. 

New opportunities for smaller businesses that are able to manufacture a patented substance under CL may also emerge. Should enough such opportunities be created, companies that take advantage of CL could become strong competitors inside of India while generating cash to increase their export capabilities, resulting in a larger number of global competitors and greater market fragmentation. It is likely that the external focus of Indian companies who benefit from CL would be on emerging Asian and African markets, resulting in lower drug prices and greater choice in those regions.


Some established competitors already are looking for ways to use CL to their advantage. Cipla, who has been accused of patent violations by a number of MNLs, currently provides its versions of patented drugs domestically at a low cost and is ready to “share the technology with the government to meet local demand.” Tapan Ray, director-general of Pharmaceutical Producers of India (OPPI), an industry body representing foreign drug maker present including Roche and Bayer said, “As patent itself means sharing detailed information about the innovation and the technology for producing any new chemical/ molecular entity with the government, irrespective of the seriousness of any disease, I am afraid I could not make out what is really new in this approach.”

Investors in pharmaceutical companies everywhere would be well-advised to keep an eye on India's CL policies , as they are large and influential enough to set the tone for other emerging pharmaceutical markets. Investors also would be well-advised to watch smaller Indian companies like Healthy Life and evaluate how they may fit into India’s CL strategy.

Genetically Modified Foods: A Growing Market and Cultural Divide

For most people, the word “biotech” conjures up images of companies like Genentech developing the next great diabetes, HIV or cancer treatment. For some, however “biotech” may be considered either a socially conscious business opportunity that can help eradicate famine or the scourge of “frankenfood”.  The long-running debate over genetically modified (“GM”) foods has been rekindled after the recent food riots in Mozambique and discontent about rising prices for staples in other areas of Africa.  Participants in the battle over GM foods and crop production include commercial producers including Monsanto, Mahyco, and Syngenta, environmental groups such as Greenpeace, scientists and advocates like the ISAAA.

Although GM foods are not uncommon and the genetic sequences for crops such as corn and rice have been decoded over the past ten years, there is still substantial resistance to adoption in areas where food supplies are most likely to be at risk. Governments and environmentalists are concerned not only about the potential impact on future crop growth, but the economic implications and business models behind GM seeds.  Additionally, governments in developing regions have suffered an inability to fully develop the legislative and financial infrastructures needed to test and commercialize GM crops. According to Dr. Simon Gichuki, head of biotechnology research at the Kenya Agricultural Research Institute, "What we do not have are regulations to take the technology from confinement to farmers' fields, commercialize it." Dr. Gichuki added, “There is government funding but it is not enough," and went on to point out that most biotechnology activities across the world are private sector led and are motivated by profits.

One way that GM seed producers have sought to protect their intellectual property and maximize profits is by developing seeds with sterile offspring, or whose offspring lack the same genetic traits as their predecessors. Supporters say they these “terminator seeds” or “suicide seeds” stop farmers using seeds they haven't paid for and that their genes cannot spread to conventional crops, unlike other GM seeds. But critics say that terminator seeds will make poor farmers dependent on big companies for seeds. Anti-GM activists further complain about selling practices used by GM seed producers, claiming that programs such as AfriCan, an alliance between Syngenta and U.S. based company Pannar, incorporates farmers into a contract-farming scheme linking them to credit, GM seeds and chemical inputs, leaving them with unaffordable debts.

Despite the beliefs of many anti-GM activists the gap between GM seed producers and farmers in developing countries is primarily cultural, and both must overcome this divide if they are to leverage scientific advances to solve the food crisis and create business opportunities in emerging economies. Professor Seyoum Gelaye, a native of Ethiopia points out that, “GM seeds require heavy input of chemical fertilizers, pesticides, and complete modification of our cultural practices.” Seed providers do need to find ways to integrate new farming practices into diverse cultures in order to maximize the chances of successful harvests and profitability for their smaller rural clients. This means that strong local alliances with community leaders are just as important, if not more so, than relationships with national governments. Careful change management that fits within the local culture is needed as much as product education. GM seed providers are starting to recognize this, but the process of change will take time.

The controversy over GM seed planting and intellectual property rights will continue for years to come and barring an unforeseen disaster, the use of new seed strains that are resistant to drought, salt, pesticides and bugs will continue to expand, particularly since China is now likely to enter the fray. Governments are still figuring out how to best regulate GM seed usage, but in the face of global food shortages, resistance will eventually wear away. What is needed now is to better integrate old cultures with new science, continue to develop more repeatable testing processes and improved metrics, and to remove the emotion from the discussion.