Establishing a Medical Device Presence in China? Be Very Careful

By Ames Gross, President and Founder of Pacific Bridge Medical

This article was also published on MedTech Intelligence.

In my past articles and blogs, I talked about the main issues medtech companies face in exporting to China, including a difficult product registration process, finding a trustworthy partner, etc. In addition, some foreign device companies will want to set up their own offices there. When you look at opening an office in China, you must take a macro approach to make sure all the building blocks are in place.

A few weeks ago, a U.S. medical device company gave us a list of Chinese hospitals and asked us to figure out which ones we would recommend doing their clinical trial with. When I asked them why they had chosen these specific hospitals on the list, they told me that was not the help they needed. Being a conscientious consultant, I wanted to get the big picture of their China plan before we would recommend the right Chinese hospitals.

I asked this device company what their overall China market access program included. They told me they wanted to set up their own office in China to do a clinical study and register their product with the CFDA. They also told me they were looking for a large office space in either Shanghai or Beijing via a global real estate firm. Then I thought about whether they even considered the Chinese incentives that are available in different cities via the local governments for doing a large, long-term office lease including tax rebates, etc. When you pick a location to set up an office or factory in China, it is always best to play one city off another (or one location off another) to maximize benefits in advance. Of course, not knowing China, this was not something they even considered.

When I asked them who was going to do the clinical trials and registration, they replied: “We will do this on our own.” Since they did not currently have an office in China, I wondered who was going to do this work. Recruiting talented RA and Chinese clinical trials executives for a new mid-sized Western medical device company who was setting up a China office for the first time would not be easy. I stated that RA and clinical trial executives that speak English are already working at bigger medical companies and it will not be easy to recruit these people. Also, if they were fortunate to find some good executives, the pay would be very high. Today, good RA executives that speak English and have experience (more than years) for a large medical company are paid more than $200,000 per year in China. Senior clinical trial professionals that speak English with 10 years of experience at a large foreign medical company or CRO in China are receiving similar compensation. Hence, to pry these experienced people away from their large medtech companies to join a relatively unknown start-up in China might require a 40% premium over their current $200,000 compensation. I doubted they would be successful if they proceeded this way and told them so. However, again they replied: “We are only hiring you to identify the best hospitals to do our clinical studies in China. We do not need any other strategic advice for our new China operation.” I guess many Westerners believe they can do everything in China like they do in the United States on their own. Go figure!

In another situation, a device company contacted us about setting up a new large operations center in China. In this case, the device company already had established a wholly owned foreign enterprise (WFOE) in several cities in China exclusively for marketing and sales. This company wanted us to work with the local government executives to maximize benefits and incentives that foreign device company could possibly get for their new operations center.

On starting the project, we quickly learned that this client had already chosen a city in China to build their new operations center. When I asked why they chose this city, they responded that its educated hi-tech population was geared to their new operation. Since the new location was already determined, we could not negotiate a number of upfront incentives for them. Again, normally on picking the location in China, it is best to play one city off another to get the maximum benefits.

In addition, we learned that the specific building in the Chinese city had already been picked too and final negotiations on the lease had commenced already. Again, we asked them whether they selected this building in this city and negotiated with several buildings in the area to get best deal possible. After the city and specific building to be leased had already been decided, we were limited to the incentives we could help this company get upfront.

When setting up a new medtech operation up in China, it is crucial to get to know the local government officials (who can influence your business plan) in the different cities you are considering for your new operation—and not after the city and building have already been determined. Given such late notice, we started the networking process to determine who were the key government officials. We met with the government official of the District Bureau of Commerce and other local key officials. After explaining our client’s business plan, we learned that once the facility was up and running, our client would be eligible for certain incentive programs. In this case, the annual tax contribution from the new medtech venture would be the key to be eligible for such incentives.

In conclusion, doing clinical studies or setting up a new operation in China requires a lot of preparation in advance. Companies that do not learn from the two examples in this column will find the process difficult and likely lose money.