China API Production & Supply Research Report points out that the API manufacturing sector, as a highly polluting industry, is facing mounting environmental regulatory pressure. Large enterprises with strong comprehensive strength have to invest substantial capital in environmental governance, while small-scale enterprises with poor management and non-compliant environmental standards are confronted with production restrictions or shutdowns.
In fact, most API manufacturers have long underinvested in environmental protection. Under current stringent environmental regulations, they are forced to make up for historical environmental deficits. This entails a sharp surge in corporate costs, leaving many enterprises unable to afford the high expenses of environmental retrofitting and treatment. Even for those financially capable enterprises, environmental upgrading cannot be accomplished overnight and usually takes about one year. Consequently, numerous small enterprises are forced to cease production.
Furthermore, overcapacity and severe homogeneous, redundant production have long plagued China's API industry. The industry reshuffle driven by environmental compliance will alter market supply and demand dynamics, and effectively drive capacity reduction. As a result, API products that had long suffered from oversupply and depressed prices have witnessed an overall upward price trend, which has been verified by API price movements in recent years. On the other hand, shortages of certain API products have emerged, and monopolies have even formed, triggering more severe issues. A typical case is the 58-fold price surge of an API within one month exposed by a CCTV investigation in August this year.
From the perspective of industrial development, survival of the fittest is a fundamental principle consistent with market laws. Therefore, it is inevitable that China's API industry will gradually achieve industrial concentration, transformation and upgrading under the combined effect of environmental requirements and other factors.
Notably, such transformation and upgrading are reflected in two aspects: products & technologies, and regional layout.
In terms of products and technologies, China's current API output is dominated by bulk chemical APIs represented by antibiotics and vitamins, which feature low added value and heavy pollution. Going forward, the industry must develop high-end specialty APIs and patented APIs, enhance product added value, reduce pollution, pursue green and innovative development, and achieve competitiveness through quality rather than output.
In terms of regional distribution, constrained by economic and transportation factors, API production was previously concentrated in China's first- and second-tier cities. However, with growing pressures from environmental protection and costs, first- and second-tier cities are no longer suitable as major API production bases. By contrast, third- and fourth-tier cities enjoy inherent cost advantages and have become more appropriate locations for API manufacturing. A large number of API enterprises have relocated in recent years. In addition, many third- and fourth-tier cities can foster industrial clustering through investment promotion and resource integration. While strictly enforcing environmental standards, they can develop the API industry into a pillar local industry, thus boosting local economic growth and development.
