China’s GNP—the fastest growing economy in the world’s fastest growing region—grew about 13 percent in 1993. This boom is expected to fuel significant increases in purchases of medical devices, equipment and supplies over the next 10 to 15 years. For each of the last five years, China’s imports of Western medical products have totaled almost $300 million and about one-third have been American-made. Though imports have been primarily diagnostic products, the demand for therapeutic and patient monitoring equipment, disposables and specialized chemical reagents should grow dramatically.
The best strategy to enter this market depends on how the Chinese view the product’s entrance to the market, current and future demand for the product, the manufacturer’s resources and commitment, and how quickly the product must be introduced. The fundamental strategies most often used are:
- A Hong Kong distributor,
- Direct distribution in China, or
- A joint venture.
The Hong Kong Connection
Perhaps the easiest, quickest way to get medical products on the Chinese market is to use a Hong Kong distributor, or possibly Taiwanese, who can identify appropriate Chinese end-users, import/export corporations and distributors. Some Hong Kong distributors have liaison offices in China that provide maintenance, service and repair assistance. A well-established Hong-Kong distributor is familiar with how business is done in China—including language, currency and shipping issues—and understands how Westerners conduct business.
CO-PRODUCTION AGREEMENTS IN CHINA (MEDICAL INDUSTRY)
|Chinese Party||Foreign Party||Product|
|Beijing Biochemical Instruments Factory||Erma (Japan)
Blood Cell Counters
|Shanghai Centrifuge Factory||Beckman Instruments (U.S.)||Centrifuges|
|Jingjin Medical Instruments Factory||(Dutch firm)||Computer-controlled blood analysers
Semi-automatic biochemical analysers
|Beckman Instruments (U.S.)||Biochemical analysers|
SELECTIVE LIST OF MANUFACTURING MEDICAL DEVICE (JOINT VENTURES IN CHINA)
|Joint Venture||Foreign Party||Chinese Party(s)||Product|
|Beijing Amsterdam Biomaterials Factory (Beijing)||Free University Biomaterials Science Centre (Holland)||Beijing Artificial Limbs Factory
Civil Administration Industrial Development Corporation (Beijing)
|Materials for artificial limbs|
|Tianjin Hanaco Co. Ltd. (Tianjin)||Hanaco Co. Ltd. (Japan)||Tianjin No. 2 Orthopaedics Medical Apparatus & Instruments Factory
Tianjin Economic & Tech. Development Zone Import & Export Corp.
|GN Danavox Xiaman Co. Ltd.||GN Danavox AS Biomedical Holding Ltd. (U.K.)||United Development Co. Ltd.
|Guangzhou Pacific Biomedical Products Ltd.||Pacific Biomedical Holdings Ltd. (U.K.)||Industry Development Co. Guangzhou Development Zone
Cardiovascular Research Institute Guangdong People’s Hospital (Guangzhou) (Tianjin)
|Artificial heart valves|
|Analogic Scientific Inc. (Shekou)||Analogic Corporation (U.S.)||Kejian Corporation under Chinese Academy of Sciences (Shekou)||Ultrasonic equip., patient-monitory equipment|
|Tianjin Medical Health Products Co. Ltd. (Tianjin)||Sino-American Health Industries Inc. (U.S.)||Tianjin Sanitary Materials Factory||Medical gauze|
|Shanghai Johnson & Johnson (Shanghai)||Johnson & Johnson, Inc. Products (USA)||Shanghai Hygiene Supply Works||Adhesive bandages (Bandaid)|
Source: Almanac of China’s Economic Relations and Trade
Unfortunately, Hong Kong distributors normally can sell directly only to very large end-users. In most cases, they must work with a Chinese group authorized to conduct foreign trade. This cost of an additional middleman may result in lower total sales in China’s price-sensitive medical products market.
Going through a Hong Kong distributor also may isolate the manufacturer from the customer in terms of knowing their needs. This knowledge can be captured if company representatives accompany the Hong Kong distributor on sales calls.
Hong Kong distributors tend to “skim the cream” for quick profits, decreasing total market penetration. It may also be unclear what Chinese markets or provinces the distributor actually targets.
Product service depends on the strength of the distributor’s operation in China and revenue collection depends on their clout. The manufacturer is also subject to importation tariffs and quotas.
Though many Hong Kong distributors of medical products say they are involved in China, only 7 to 10 are in any significant manner. And some of the large multi-product Hong Kong distributors currently successful in China may be focused on consumer products or other types of equipment—rather than on medical products.
The key to using Hong Kong distributors successfully depends on their dedication and ability to sell and service your medical products in China.
A Direct Route for the Long Haul
Due to decentralization and reform in China, there are now a variety of direct entry points for a foreign manufacturer, each with its own history and niche in the current formal Chinese trade structure. These options include Chinese foreign trading corporations (FTCS), industrial trading corporations (ITCs), independent entrepreneurial third-party trading companies, domestic distribution companies and end-users.
There is no middleman to create pricing problems as with distributors outside China and it is easier to identify customer needs. In addition, you can better know—and hopefully control—those markets in China that get sales coverage.
However, developing direct channels is logistically more difficult and time-consuming than distribution through Hong Kong. It requires research into each trading entity, the background of key management individuals and advantages and disadvantages of each to determine the appropriate route.
Foreign manufacturers must often develop their own service, maintenance and repair network. And FTCs, ITCs, independent trading companies and end users, like Hong Kong distributors, present problems like tariffs, quotas and collection and payment delays.
While meaningful, trustworthy relationships with direct distributors take more time to develop than Hong Kong distribution, direct channels are often a better strategy to pursue some segments of the Chinese medical product market.
Foreign Investment Enterprises (FIEs)—Joint Venture Opportunities
Medical product manufacturers set up joint ventures in China for several reasons. They offer some control over access to the domestic market, China’s relatively well-educated, low-cost labor force and local resources. They also offer greater ease with foreign exchange controls. The Chinese government looks to improve foreign exchange, industrial efficiency, import substitution and job creation. Chinese companies seek advanced technology, access to foreign markets, opportunities to succeed in the local market and additional R&D capacity.
The Chinese legal structure offers three distinct options, outlined below: equity joint ventures, contractual joint ventures and wholly foreign-owned enterprises.
Despite the structures for foreign investment, Chinese business laws may seem “underdeveloped” and business practices very different. For example, one party to a joint venture was shocked when a Chinese competitor’s personnel attended a technology transfer meeting. Their Chinese partner could not understand this reaction—a contractual clause does not mean Chinese partners understand confidentiality in a Western sense.
But joint ventures offer significant benefits for both the foreign entity and the Chinese party. The foreign company avoids tariff and quota issues and can gain more focus and control of product service and distribution, including greater penetration of the Chinese marketplace.
It is easier to stay in touch with end-users and prices should be more competitive as a result of local manufacturing.
CHINESE FOREIGN INVESTMENT ENTERPRISES (FIE’s)
Equity Joint Venture (EJV)
A limited liability corporation, with joint investment in and operation by Chinese and foreign partners. Approval procedures are specified.
Profits and Risks:
Corresponds to share of equity held by each partner.
In cash or kind, minimum foreign investment is 25 percent with no maximum specified (usual contributions are 50 percent).
Effective tax rate:
Usually 33 percent.
Joint ventures of ten years or more are exempt the first two profit-making years and receive a 50-percent reduction the next three profit-making years. Other reductions or preferential treatment may be offered due to location or type of project.
Contractual Joint Venture (CJV)
1) A limited liability entity with legal person status that closely resemble an EJV;
2) A business partnership without a joint management entity. Parties operate as separate legal entities with respective contractual obligations.
CJVs must follow the same approval procedures for an EJV.
Profits and Risk:
Profit sharing is based on a ratio specified by contract.
Need not be in cash or in kind. Labor and utilities have been allowed as contributions. No minimum/maximum levels are required.
Effective Tax Rate:
Limited liability entities are taxed as EJVs. Partners with separate legal entities are taxed on profits received. Effective tax rates range from 30 to 50 percent.
Wholly Foreign-Owned Enterprise (WFOE)
A limited liability entity solely owned and operated by a foreign investor.
By application to the Minister of Foreign Economic Relations and Trade or its local counterpart detailing all aspects of the project. On approval, the foreign company has 30 days to submit the approval certificate to the State Administration of Industry and Commerce for a business license. Separate land, utilities and labor contracts are drawn up with appropriate departments.
Profits and Risks:
The foreign investor receives all profits and bears all risks.
Effective Tax Rates:
WFOEs are subject to the Foreign Enterprise Income Tax Law with graduated rates from 20 to 40 percent plus a 10-percent local surcharge on the assessed tax.
A joint venture is probably the best long-term strategy for a medical product manufacturer if China represents a large growing market for its products. The advantages often override the complexities, length of time and the associated risks of this strategy.
MEDICAL DEVICES EXPORTED TO CHINA (1991)
|Product||Value $ millions|
|Medical /surgical/veterinary instruments||33.8|
|Ultrasonic diagnostic equipment||15.4|
|Optical fibre endoscopes||14.2|
|Electronic instruments for physical chemical analysis||12.3|
|Mechanical instruments for physical chemical analysis||11.7|
|Physical therapy equipment||7.9|
|Dental instruments and appliances||6.6|
|Anaesthetic apparatus and instruments||5.8|
|Laboratory hygienic pharmaceutical glassware||4.4|
|Medical laboratory sterilizers||2.0|
Source: China’s Customs Statistics
Many Paths to Different Destinations
The various strategies to enter the dynamic Chinese market for medical devices, equipment and supplies each offer advantages and disadvantages. Considering the factors discussed in this article can be a start in evaluating the best strategy for your medical product manufacturing company.
The evaluation is worth the effort because for many forward-looking companies, the opportunities in China are tremendous. Those who take advantage of them early will be in a better position to penetrate this huge growing marketplace.
|Population (in millions)||1,158.2|
|Population Growth (1984-1991)||1.4 percent|
|GNP Growth (1993)||13 percent|
|Per Capita income (in U.S. dollars/year)|
|Number of Doctors (in millions, approximately)||1.8|
|Hospital beds (in millions)||2.2|
|Hospitals (in thousands)||65|
|People per hospital bed||526|
(in years for 1978; 1993)
|Major Government health Care Regulators—State Pharmaceutical Administration (SPA) and Ministry of Public Health (MPH)|
*These figures must be “interpreted” in light of China’s socialist system.
Ames Gross is president of Pacific Bridge, Inc., a consulting firm that specializes in helping American medical product manufacturers penetrate the Asian marketplace. He can be contacted at Pacific Bridge, Inc., 1155 Connecticut Ave., N.W., Suite 850, Washington, D.C. 20036. Tel: (202) 467-5020; Fax: (202) 833-2279.