[Comprehensive] This Time It's a Bio War... US Expands Domestic Production, China Excludes Foreign Equipment

[Image source=AP Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina, Reporters Lee Chunhee and Lee Jieun] The race for advanced technology supremacy between the United States and China is accelerating not only in semiconductors but also in the bio and medical device sectors. Since taking office, the Joe Biden administration, which has explicitly designated China as a strategic competitor and hinted at a 'supply chain exclusion,' has decided to invest more than $2 billion (approximately 2.788 trillion KRW) to expand domestic production in the bio sector.

China is also responding by excluding foreign medical equipment supplies from hospitals and relocating research and development (R&D) and parts procurement to its own country. As the U.S. and China, which rank first and second in the global bio market, engage in a full-scale leadership battle, Korean companies are expected to inevitably suffer damages.

◇U.S. Mobilizes Even the Department of Defense for Support

On the 14th (local time), the White House held a 'Biotechnology and Bio Manufacturing' meeting and announced a new investment plan to realize President Joe Biden's vision of expanding domestic production in the biotechnology field. This is a follow-up measure to the 'National Biotechnology and Bio Manufacturing Initiative' executive order signed by President Biden on the 12th.

The meeting was attended by senior officials from related departments including Health, Energy, Defense, Agriculture, and Commerce. These departments agreed to utilize a government budget of $2 billion to implement the executive order.

First, the Department of Defense will support the establishment of a domestic bio manufacturing production base with $1 billion over five years. Additionally, it will invest an extra $200 million to enhance facility security against cyberattacks. The White House explained, "This support will provide incentives for private and public sector partners to expand manufacturing capabilities for products critical to both commercial and defense supply chains, such as essential chemicals." Furthermore, $270 million will be invested over five years to support the development of biotechnology materials needed by the military and resilient supply chain programs.

The Department of Health and Human Services will invest $40 million in the production of raw materials used in antibiotics, essential medicines, and drugs necessary for epidemic response. The Department of Energy has allocated a budget of $160 million for R&D and commercialization needed to produce fuels, chemicals, and materials from biomass and waste. It will also collaborate with the Department of Transportation and others to provide domestic supply chains for chemicals and materials using bio-waste resources amounting to about 1 billion tons. The Department of Agriculture will invest $250 million to produce sustainable innovative fertilizers domestically.

The United States, leading the world in bioindustry R&D, prepared this measure out of concern over increasing dependence on China for advanced product manufacturing. This is also an extension of the explicit exclusion of China observed in the semiconductor and electric vehicle battery sectors. The importance of the bio industry has grown even more due to the COVID-19 pandemic.

During the meeting, remarks warning about China were reiterated. Jake Sullivan, National Security Advisor, emphasized, "To maintain and strengthen our geopolitical comparative advantage overseas, we must fill and revitalize the sources of national power domestically," adding, "Biotechnology is at the center of that effort."

[Image source=AP Yonhap News]

◇China Uses Only Domestic Parts for 315 Medical Components

China is also aiming to lead the global bio and biotechnology sectors following its semiconductor ambitions. After unveiling the 'Five-Year Comprehensive Plan for Bioeconomy Development,' it has recently been reported that China is moving to exclude foreign products from the medical device market.

According to the Nihon Keizai Shimbun on the 15th, local governments in Shanxi Province and Ningxia Hui Autonomous Region have been instructing hospitals within their regions since April to use Chinese-made medical devices. This move is in response to an internal notice issued by the Chinese government in May. The Chinese government had instructed related industries to prioritize the use of domestic products when procuring 315 parts used in the medical field.

Additionally, in July, the Chinese government announced a draft revision of the Government Procurement Law, requiring companies to relocate procurement of core parts domestically. The revision focuses on ensuring that the production of high value-added products, including medical devices, is carried out entirely within the country from design to development.

This movement is interpreted as China's attempt to break away from the U.S.-led supply chain amid intensifying U.S.-China hegemony competition in the bio sector following semiconductors. The newspaper reported, "As the U.S. tries to exclude Chinese companies from the global supply chain, China is strengthening its domestic-centered supply chain in response."

Some companies such as Japan's Hitachi High-Tech and Germany's Siemens are also pushing changes in production systems by assembling medical devices in China. However, with the U.S. recently including guardrail provisions restricting investments in China by companies receiving U.S. subsidies and showing an explicit China boycott stance, concerns are rising that this could further entangle the U.S.-China conflict.

◇Bio Industry: A Blessing in Disguise; Medical Devices: A Technology War

For the Korean bio and medical device industries caught in the middle of the U.S.-China conflict, finding appropriate response strategies has become a critical task. While there is hopeful analysis that the bio industry could turn this into a blessing in disguise, the medical device sector faces the risk of losing the key Chinese market without securing technological competitiveness.

In the bio sector, global big pharma companies are increasing their share of contract development and manufacturing organizations (CDMOs), and due to the high entry barriers of the industry, it is widely expected that the impact of the U.S. executive order will not be significant. Researcher Jung Yookyung of Shin Young Securities explained, "The immediate impact of this executive order will be limited," adding, "CDMOs are used to secure multiple production bases and outsource substantial volumes, so switching to production solely within the U.S. is not easy."

Jung Yuntaek, head of the Pharmaceutical Industry Strategy Institute, also said, "Unlike electric vehicles, bio-pharmaceuticals are not easily subject to active subsidy policies, so the impact on the domestic industry will not be significant," and predicted, "Since the U.S. has expressed a stance to actively promote industrial development, companies considering entry into the U.S. market may see this as an active investment opportunity." Samsung Biologics is reportedly reviewing new factory sites in California and Washington states.

On the other hand, the medical device industry is expected to suffer significant damage if China's policy to suppress foreign medical devices materializes. Not only advanced medical device countries such as the U.S., Japan, and Germany but also domestic companies accelerating their entry into the Chinese market are expected to be affected.

According to Korea International Trade Association statistics, as of last year, China's medical device market size reached 192 trillion KRW, growing to rival the U.S., which has the world's largest medical device market.

According to the Korea Health Industry Development Institute, medical device exports to China last year amounted to $728 million, ranking second after the U.S. ($916 million). Although exports slowed somewhat in 2020 due to the COVID-19 pandemic, they have continued to grow, increasing by 34.9% compared to the previous year. Exports have particularly increased centered on key items such as implants and ultrasound diagnostic equipment.

However, there are concerns that this growth trend will sharply decline if foreign medical devices are suppressed. An industry insider said, "Unlike pharmaceuticals, medical devices are closer to industrial goods," adding, "Since the Chinese government has emphasized increasing the localization rate of core medical device components for several years, import substitution is likely to occur rapidly."

In this regard, it is pointed out that domestic medical device companies will find it difficult to survive unless they maintain technological gaps. Another industry insider predicted, "However, for high-tech medical devices such as ultrasound and MRI, foreign companies still hold an 80% market share in China," adding, "For high value-added items like ultrasound, which are major export items to China, the impact may not be significant immediately."