Should Biopharma C-Suites Still Engage With China? A Harvard Business School Healthcare Alumni Association Q&A with Professor F. Warren McFarlan

Professor Warren McFarlan has had a significant role in introducing materials on Management Information Systems to all major programs at the Harvard Business School since the first course on the subject was offered in 1962. 

With Professors Regina M. Abrami and William C. Kirby, Professor McFarlan co-authored Can China Lead? Reaching the Limits of Power and Growth. Professor McFarlan earned his DBA and MBA from the Harvard Business School and his AB from Harvard University.

Q: Similar to how technology’s strategic importance has dramatically grown since you joined the Harvard Business School as a research assistant in 1961,¹ China’s transformation has had a comparable trajectory becoming the world’s second largest economy.

With 2019’s Fortune 500 list recognizing that Chinese companies secured more rankings than any other country, it’s not surprising that China provides opportunities and challenges for biopharma C-Suites. As these executives refine their 2024 priorities, what should they be considering given your long-time engagement with China’s government and business leaders?

McFarlan: While I have been engaged with China for decades, let me share some of the on-the-ground insights when I was a Guest Professor and Co-Director of Case Develop-ment (2011 to 2016) at Tsinghua University, often referred to as the “MIT of China.”

Specifically, the country transformed itself in nearly 40 years from a closed society during Mao Tse-Tsung’s (former Chairman of the Chinese Community Party) era (1949-1978) to an economic powerhouse under Deng Xiaoping, who famously said, “It doesn’t matter whether a cat is black or white, as long as it catches mice.”

Deng Xiaoping (era from 1979 to 2013) was referring to the fact that as long as an economy works, it is good. He gave permission to encourage capitalism in a communist country. And indeed, baby boomers have the historical context of China’s third world status during the 1960s to contrast with its recent decades of double-digit annual growth. Still, many projections that China’s economy would overtake the U.S. by 2040 or earlier have now been strongly challenged in the past several years as growth has stalled.

And frankly I’m not that surprised given China’s progress since 2013 when my colleagues and I published an article in the Harvard Business Review where we noted five specific challenges that China must address by 2034 to be a global leader including: ”…dealing with the environment; successfully making the shift from an infrastructure state to a consumer society; becoming an innovation economy; having a positive impact on the world order, and finally and most importantly, making a transition from Xi Jinping’s (President of the People’s Republic of China) initial “Seven No’s” to a more open political model.”²

China has made progress with its environmental goals such as in 2021, the capital city of Beijing met its own air pollution targets for the first time and increased the number of blue sky days. Much work, however, remains.For example, as much as 90% of the country’s groundwater is contaminated, with 70% of its lakes and rivers to be unsafe for human use.³

Shifting to a consumer society is challenging in that China’s per capita GDP is only ranked 78th in the world, far less than one would expect and less buying power. With over 25% of the under 30-year-old population unemployed, it is a challenging time to grow internal consumer demand. As for innovation, for the past four decades, China has spawned very successful entrepreneurs.

There is now, however, a deep concern as success in the private sector is not highly regarded by Xi Jinping and his minions. Many technology leaders noted the sudden disappearance for a year of national business icon Jack Ma following his criticism of the Chinese government. Party loyalty, not business success, is rewarded; not good for innovation. Consequently, China is experiencing a brain drain of some of its best and brightest, who have elected to emigrate from China to other countries as the NY Times recently shared.⁴ The turmoil in Hong Kong is another facet of this challenge.

Finally, control over university classrooms by stationing monitors in the back of classrooms to report deviant comments by faculty is reminiscent of Mao’s era. Xi Jinping’s 2023 appointment for an unprecedented third five-year term as President of China and his plans to be President for life, clearly undo the reforms made in 1978 to prevent the rise of another Mao. Tough central Party control and adhering to orthodoxy is today’s mantra. These dynamics force your C-Suite readership to plan in their China activities in ways that were not anticipated in 2013.

Q. As the Wall Street Journal pointed out this past summer, “…Big Pharma Bets Big on China…as Western drug makers have aligned themselves with Beijing’s health priorities and are tapping local startups for innovative medicines.” Given the risks that you described, what are your top three recommendations for biopharma C-Suites and their boards to consider for their 2024 plans?

McFarlan. First, protect your intellectual property. Intellectual property theft risk has been an ongoing pain point in China for the past three decades. Since the country’s key “Made in China 2025” plan was first surfaced under Xi Jinping, China has invested heavily in one of the initiative’s key targeted areas, biopharma and advanced medical products. Given this expropriation risk, shaping a realistic collaboration model for a global biopharma firm is both critical and not easy.

Second, consider the possibility that big parts of your investment in assets could be “stranded.” This past summer, U.S. Commerce Secretary Gina Raimondo noted to Chinese officials that U.S. businesses might stop investing in China unless their leaders take prompt action to address complaints about worsening conditions due to raids on market research firms like Bain, unexplained fines, and unpredictable Chinese official behavior. Raimondo emphasized, unless these pain points are addressed, China may become “uninvestable.”

Finally, if the potential benefits still seem to outweigh the risks that I have shared, recognize that you will need to have top talent who understand and can effectively deal with the historical human dynamics associated with China. During my near 90 business trips to China since 1978, trusted friends there have coached me on the ever-present underlying tensions stemming from the reality that many Chinese leaders still feel pent-up rage for China’s humiliation during the 19th and early 20th centuries delivered by the Western powers, following millennia of China’s leadership in innovation and longevity.

Appreciation of this mindset of a chip on their shoulder when engaging with China’s leaders can help navigate complex business opportunities and potential collaboration. They are a proud people with inner self-confidence of their destiny as leaders.

About the Author

Michael Wong is an emeritus board member of the Harvard Business School Healthcare Alumni Association.

References

1. McFarlan W. Technology Changes the Way You Compete. YouTube. https://www.youtube.com/watch?v=ao_7IePryoM&t=29s. Published May 15, 2016. Accessed November 16, 2023.

2. Abrami, Regina M., Kirby, William C. and McFarlan, F. Warren, Five Challenges China Must Meet By 2034, Harvard Business Review, November 27, 2013.

3. Igini, Martina, Top Five Environmental Issues in China for 2023, Earth.Org, March 10, 2023.

4. Yuan, Li, China is Suffering a Brain Drain. The U.S. Isn’t Exploiting It. The New York Times, October 3, 2023.