Why invest in automation? The answer to that question is often to cut cost — a straight up move to replace labour with capital. That has the obvious implication that firms in high-wage locales like the US should be willing to invest heavily in fancy machinery while those in lower-wage countries like India should be more cautious in doing so. That may not always hold, however. As the Wall Street Journal tells it, there is one Indian industry that is investing heavily in automation and it’s not really about shaving costs. The industry in question is generic pharmaceuticals and the driving force behind the capital investments is maintaining high quality standards (India’s Drug Makers Move Toward Automation, Jun 5).
Despite an abundance of low-cost laborers in India, all of [Dr. Reddy's Laboratories'] plants are moving toward fully automating their production process “to avoid good manufacturing practice pitfalls from regulators,” said Samiran Das, head of Dr. Reddy’s generic drugs manufacturing.
In the past decade, India’s pharmaceutical companies have blossomed into multibillion-dollar companies that now account for 40% of the generic drugs sold in the U.S. Those companies, however, have come under increased scrutiny in recent years from the U.S. FDA, for manufacturing, testing and other safety issues that are often the result of human error.
To ensure that their products don’t get banned from the U.S.—the world’s biggest drug market—many companies that can afford it are spending hundreds of millions of dollars to automate. …
Mr. Venkatanaryan, the head of the Dr. Reddy’s Bachupally plant, says the drive toward automation is meant to make the manufacturing process “mistake-proof.”
There are a couple of takes on this. I suspect that there some who would deem this governmental overreach and a barrier to trade. The FDA’s ability to shut out foreign plants from the US market can have very severe financial consequences and more or less harassing foreign firms until they upgrade their facilities could be seen as a way to drive up the cost of imported drugs. (The article reports that the FDA has shifted its enforcement strategy so that they expend more resources on firms with questionable performance.)
On the other hand, as an American consumer I am all in favor of the government’s efforts to allow me to take the quality of pharmaceuticals as a given. Further, given that the Indian firms as a whole have been successful in winning market share, the impact on their costs cannot be too bad. The article reports that the Bachupally plant has been able to reduce the number of workers it needs by 20% so they are also seeing some labor savings from their investments.
A final point to make is that the requirements for the production of commodities don’t really vary with where they are produced. The whole point of generic drugs is that they are supposed to be interchangeable with their branded counterparts and each other. That sets goals on purity and performance that must hold whether a pill is made in India or Indiana. Expensive machines may well be the only way to hit those standards. Thus while shifting production between North America and Asia may allow for considerable leeway in process design for some products, for others there is really only one way to get the work done and done right.