Asian Medical Products Markets Take Aim for an Economic Bull’s Eye

The 21st century will be the “Pacific Century” and medical product manufacturers can target sales to the world’s fastest-growing markets by aggressively pursuing opportunities in the prospering countries of Asia. By the year 2000, the economies of East Asia—from Japan to Indonesia—will almost equal that of the United States. China’s fast-growing economy and Southeast Asian countries, with annual GNP growth of 6 to 10 percent over the last five years, are catching the attention of westerners.

As their purchasing power is boosted by swift economic growth, Asians are demanding more and better medical care. The sheer quantity of medical goods—both simple and sophisticated—required to meet this demand is an export dream for one of America’s strongest industries. To take full advantage of the opportunity, company executives here must understand Asian countries, their needs and how they do business.

Japan: Useful Changes in Import Requirements

Japan is the largest single market for medical products outside the U.S. In 1992, U.S. exports made up half of Japan’s total medical imports–$1 billion—a 13 percent growth in U.S. exports to Japan over 1991. The Japanese market continues to grow due to increased demand for better-quality products, an aging population and a socialized health-care system that covers every citizen.

It has become easier to penetrate this market. Contrary to popular belief, Japan today has no tariffs or quotas on medical products. Those that existed prior to Japan’s entrance into the harmonized system in 1988 have been eliminated. Imported medical products, like imports of any type, are subject to a 3 percent value-added consumption tax levied on CIF (cost, insurance, and freight) value.

While the registration procedures and approval process to import medical products to Japan are complex, specific changes, largely due to efforts by the U.S. government, have improved the process. In the past, if a company was not satisfied with their Japanese distributor, it was difficult to transfer the right to sell to another dealer. The Pharmaceutical Law stipulated a medical product could be sold only by the dealer who held the import approval and license. Today, medical product manufacturers can secure import approval for their products directly through an in-country caretaker. It is now simpler to change marketing strategy in Japan because the approval application is held by the manufacturer rather than the importer.

Know Who You Are Doing Business With—and Why

Beyond the tariff and quota system, the costs of long-term business relationships in Japan can be evaluated only when Japan’s keiretsu system is understood. This system, and business in general, revolves around the alignment of companies more or less coordinated to do business on a regular, often intimate basis. There are three types of keiretsu:

  • companies in diverse sectors revolving around a leading bank,
  • supplier companies to a particular manufacturer,
  • a manufacturing company and its distribution partners.

When setting up distribution or joint venture agreements, executives must know how the firm they are dealing with fits into a particular keiretsu system. For example, if a Japanese trading firm agrees to buy a product, are they doing so for resale profit—or to gain relatively low-cost technology to aid a “sister firm” in their keiretsu?

China: Economy on the Move

China is experiencing an economic boom. Its economy grew 12 percent last year with industrial output up over 20 percent. By 1994, China’s economy is expected to be four times larger than in 1978, when economic reforms were implemented. If growth continues at this pace, China will become the world’s biggest economy. With 1.2 billion people, 2.2 million hospital beds and 65,000 hospitals, China is a huge potential market for U.S. medical products manufacturers.

Some U.S. manufacturers have been successful in China—sales of U.S. medical products there reached $15 million in 1992. Lack of wide-spread success in China may have to do with ill-fitting market strategies, like inflexible pricing, short-term market approaches and low profiles at local conferences. Some manufacturers have pushed costly, state-of-the-art technology instead of less sophisticated, value-oriented products more in line with local demand.

Decentralized Market Maze

Beijing’s rigidly centralized health-care system has become more decentralized. Hospitals and other health-care systems have greater autonomy at provincial and local levels. However, obtaining product approval or an import license may require going through several government layers. And where a license is not needed, a hospital must apply for a foreign exchange allocation and seek import approval from the State Economic Commission, State Pharmaceutical Association, Minister of Public Health, and state and local agencies.

While many hospitals and medical entities make local purchasing decisions, most Chinese end-users cannot import directly. Authorized quasi-government import/export corporations act primarily as agents to import medical products. These corporations, located in almost every province and municipality, also may act as trading companies, using their own money to buy and sell medical products. Western manufacturers can deal directly with them but meaningful relationships take time. In addition, knowledge of the English language is less common throughout China than elsewhere in Asia.

($ millions)
Medical /surgical/veterinary instruments 33.8
Patient monitors 20.6
Ultrasonic diagnostic equipment 15.4
Optical fiber endoscopes 14.2
Centrifuges 14.0
Electronic instruments for physical and 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
Breathing appliances 5.1
Laboratory hygienic pharmaceutical glassware 4.4
Dialysis apparatus 3.7
Biological microscopes 2.1
Medical laboratory sterilizers 2.0
Orthopaedic appliances 1.3

Source: China’s Customs Statistics

(in millions)
Population Growth
Per Capita GNP $
People Per Doctor People per Hospital Bed Life Expectancy
1978 1993
China 1,158.2 1.4 390** na 389 64.8 70.2
Hong Kong 5.5 0.9 14,341 909 233 71.5 77.7
Philippines 60.7 2.4 na 6,400 770 59.1 64.4
Indonesia 185.0 1.9* 638 6,675 1,500 51.2 62.8
Japan 124.4 0.5 27,233 584 63 74.3 78.8
Malaysia 18.6 2.5 2,448 2,594 479 64.6 70.0
Singapore 2.8 1.4 11,845 857 280 69.7 74.3
South Korea 43.6 1.0 6,498 951 304 63.9 70.2
Taiwan 20.6 1.1 8,083 870 222 na 74
Thailand 57.6 1.5 1,604 4,473 617 60.6 65.9
*This figure is for 1988-1992
**This figure is for 1990; given China’s socialist system, this figure needs to be adjusted and compared with other Asian nations.

Source: United Nations social Indicators Index, 1992 and Far Eastern Economic Review – Asia 1993 Report

Alternate Market Access

Rather than selling directly to authorized Chinese import/export corporations, U.S. manufacturers can work with a Hong Kong or Taiwanese distributor that sells medical products in China. The advantage of this strategy is these groups have experience working with U.S. companies. But the added distribution layer can mean less profit for the manufacturer. Executives should weight both alternatives to decide the lowest overall costs.

Perhaps the most comprehensible way to get a foothold in China is to set up a joint venture to assemble, manufacture and/or distribute products. China is anxious to upgrade its domestic manufacturing technology and limit the outflow of foreign exchange. Such joint ventures help foreign companies overcome quotas and avoid taxes on the value-added portion of the product produced in China.

Foreign investment figures show that in the first six months of 1992, actual investment in China totaled $3.4 billion—a 130 percent increase over the same period the year before. A number of U.S. medical product manufacturers currently are in joint ventures to produce ultra-sound and fetal monitoring products.

Overall, U.S. medical products and know-how are regarded favorably in China. Importation of western medical products is considered a way to counterbalance Japanese domination in the region.

A Golden Economic Region

Other East Asian countries, including Indonesia, Thailand, Malaysia, Korea, Singapore, Taiwan and Hong Kong, also had superior growth over the last 5 to 10 years. This growth has led their governments to upgrade and build new hospitals and implement new health insurance programs—and increase purchases of U.S. medical products.

In 1992, U.S. exports of medical products to East Asia were about $385 million and the average annual growth is expected to be 10 to 15 percent over 10 years. Each region should be researched thoroughly for its unique characteristics. Here is a brief overview of two, Singapore and Indonesia.

After Japan, Singapore is the second most advanced medical market in Asia; approximately 30 percent of patients treated in Singapore’s private hospitals are from other Asian countries. A small island of about three million people, Singapore is affluent and westernized. These factors make Singapore a good location for regional headquarters of multinational companies. Singapore’s medical product market was $113 million in 1990, 60 percent of which were imported. U.S. exports were $58 million in 1991 and $69 million in 1992.

In contrast, Indonesia, one of the largest developing countries in Asia, has an underdeveloped medical system that is improving. Indonesia is a string of 13,667 islands with a population of 185 million people. The number of hospitals increased over 20 percent, from 1,200 in 1979 to 1,500 in 1989. Health-care allocations for the public and private sectors also are on the rise, from $800 million in 1991 to $907 million in 1992.

Despite such increases, as in poorer countries, most Indonesians have no insurance. If a family member is ill, necessary procedures often are paid for by extended family members. Thus, the market is better suited to basic low-cost products rather than more expensive state-of-the-art technology.

Serving the Asian Customer

Business is conducted differently in Asia than in the west. U.S. buyers and sellers may maintain an adversarial-like relationship. Buyers ask vendors to bid against each other to get a lower price while sellers seek out buyers who will pay a premium price. Buyers terminate relationships with sellers when monetary advantage can be found elsewhere.

In much of Asia, buyers and sellers form long-term relationships unaffected by one poorly priced deal. Asian sellers tend to over-serve their buyers because they can trust them to stay loyal. Even when times get tough, buyers and sellers look out for each others’ long-term interests.

Another contrast is communication styles. Western businesspeople are used to interacting with direct questions and answers while their Asian counterparts feel uncomfortable exchanging information through “taking turns.” When an Asian partner seems reluctant to respond to a direct question, a western partner should keep in mind cultural differences and not push for an immediate response. Ask the same question in new ways on different occasions. Questions not answered at one meeting may be answered later.

Finally, while it is important to understand the overall Asian business culture, it is as important to recognize the unique ethnic and cultural differences between a Chinese, Japanese or Thai businessperson.

Good Planning for a True Aim

As in any market penetration strategy, executives must differentiate the needs and ways of doing business in each Asian country. Time is of the essence and U.S. companies should come to know these competitive markets quickly. The challenge of a global economy means gaining market share and becoming profitable as a late entrant will be an expensive proposition in the Far East.