Saturday 23 September 2017

Guest Editorial: How Chinese Medical Device Manufacturers are Entering Western Markets

How Chinese Medical Device Manufacturers are entering Western Markets

Guest Editorial: Dr. Camilla Storaa 

The Chinese economy has grown to be the second largest in the world. Chinese companies are buying Western ones and who doesn’t own a laptop made in Chongqing or a smartphone assembled by Foxconn? In this era when China is starting to influence us wherever we turn, what is the outlook for their medical devices industry?

There are more than 3000 manufacturers of medical devices in China today. Most of them, however, are only small companies catering to the home market, which is estimated to be worth around USD 11 billion – only about a 10th of the US market size. Yet, quite a few companies are starting to aim for selling their own brands in foreign markets. The typical strategy is to enter into the Middle-Eastern and South American markets first to gain experience and first revenue. But this does not mean that the ambition to enter into the Western markets does not exist, and companies are getting both CE markings and FDA approvals for their products.

The new manufacturers in China are well aware of the reputation ‘Made-in-China’ has in the West. They know and understand that the products they wish to take to the market here must meet the expected quality standards. Some of them have long experience from joint ventures with and OEM production for famous Western medical device manufacturers (MDMs ) and have been able to learn what quality means throughout the production process. There are many examples of Western companies ending up in trouble when sourcing from China, but the ambitious Chinese MDM should not be confused with the manufacturers that can be considered mere suppliers and who don’t see the end-customer relation as their business.

The new breed of Chinese MDMs is concerned about building their brand equity. They know that in order to earn trust they need to show that their products meet the demands and are reliable decade after decade. They simply haven’t had the time to do this yet as they were founded in the 1990s or later. These – new-to-us – MDMs also have an expressed strategy of acquiring companies abroad.

The Chinese MDMs are competing with products that are cheaper and simpler versions of the devices the Western markets have become accustomed to. They have grown in a country where the hospitals cannot afford the latest Western design; hence they have been forced to supply the hospitals with inexpensive products. The low price is in part based on low labor cost, but is mostly a result of the products being simpler with fewer features. This can be seen in all types of imaging/ER/OR equipment. Probably the stripped down versions developed for China cover most of what the smaller clinics and general practices require, even in the US/EU. From a price and functionality perspective the Chinese products are aimed at mid-level, but the modern Chinese MDM aiming for Western markets will not compromise on reliability and quality. As healthcare costs are strangling the budgets of the West and with the Eurozone in crisis the potential for bringing in equipment in this segment, at maybe half the price, is definitely there.

Another interesting issue in this development is whether the large, Western companies have the business models to handle lower cost products with lower margins, or if they have grown too dependent on selling the latest incremental advances to customers who want it at whatever the cost. All of the American and European giants in the industry are present in China and most of them have both manufacturing and R&D here with the intent of producing in China for China. So while the Chinese companies are learning Western manufacturing the Western companies are developing their business models for the new environment, and they are definitely preparing themselves for a completely changed battle ground.

Still both Chinese and Western consumers prefers Western equipment as long as they can afford it. The question might quickly become, can we? The Chinese manufacturers already know how to get their CE and FDA approvals. They are quickly learning to maintain the quality levels required, they are eager to take their shares of the Western markets, and most likely their products meet the functional requirements of most clinics and hospitals. They can offer cheap products at a time when governments are strapped for money.

With the deep skepticism in the West towards Chinese appliances, the medical field will probably be the last one to accept Chinese products. Hence, I don’t expect to see the Western hospitals flooded with Chinese devices anytime soon. Still I would not be surprised if my children were to grow accustomed to examinations with Mindray MRI or Wandong X-ray machines or if I would be given a Naton hip implant the day I start needing replacement parts.

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Dr. Camilla Storaa has been working with application and business development in the medical devices industry in Norway and Sweden for 10 years. She 2010 relocated to Beijing to pursue an MBA at the Tsinghua University where she is presently writing her master thesis there on the topic of the internationalization of the Chinese medical devices industry.

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2 comments

  • Rob Osborne | March 6, 2012 at 8:48 pm | Reply

    Dr. Storaa,

    Thank you for sharing. I particularly found the following interesting: “So while the Chinese companies are learning Western manufacturing the Western companies are developing their business models for the new environment, and they are definitely preparing themselves for a completely changed battle ground.”

    Would you be willing to share specific company names (local Chinese manufacturers and Western manufacturers) to add some additional credibility to the information?

    Respectfully,
    Rob Osborne

  • Camilla Storaa | March 8, 2012 at 9:28 am | Reply

    Dear Rob,

    Thank you for your interest and your question. The textbook example (that you probably are familiar with) of how the old companies are changing in the new market is the GE development of an ultrasound system in China for China where the entire cost of the new system (Vscan) was lower than the sales commission alone on an old system (Logiq 9). Clearly the compensations, revenues and profit margins for these two products will be very different and require different business models.
    There’s a good article on this in Harvard Business Review:
    http://hbr.org/2009/10/how-ge-is-disrupting-itself/ar/1
    It is also touched upon in an article from the In Vivo magazine that you can download for free:
    http://www.pwc.com/us/en/health-industries/publications/the-changing-face-of-medical-technology-innovation.jhtml

    Concerning my own interviews in China I would not like to disclose any sources. Anyhow, someone representing a Western company complained about the very fragmented and poorly coordinated structure of the market here in China. Each hospital is only buying for themselves in small volumes as opposed to the West were there may be governmental procurement or large purchasing groups. Hence their previously developed selling structures were not applicable to the Chinese market and new models had to be invented, which they were in the process of doing.

    What the Western MDMs will take back to the old markets will depend on how they develop, but I do believe that the experiences from building up sales in a less affluent market will prove useful as the demography of the West also changes and a smaller workforce will have to provide more healthcare for babyboomers growing old. I think there is a high likelihood that there will be less money in the Western healthcare in the future.

    An example of the other way around, a Chinese company learning from Western manufacturing, would be Naton as I mentioned earlier who has a JV with the German orthopedics implant company Waldemar Link and who is a distributor for DePuy. Naton was producing implants before they entered the JV, and they claim that their own brand of implants are of the same quality as Link’s. If nothing else, the JV and the connection with DePuy gives them a clear benchmark when it comes to quality in all parts of the production process as well as in the final product. Other famous JVs include Phillips/Neusoft, GE/Shinva, and Medtronic/Weigao.

    I hope I have understood your question correctly and that this is in line with what you were asking for. If not, please let me know.

    Best regards,
    Camilla

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