China’s Medical Device Market: 2005

INTRODUCTION – ASIA

The expanding Asian economies and growing medical markets offer considerable opportunities for US companies. While the medical markets in the US and Europe are well-established and mature, many US medical companies are experiencing their highest growth rates (in terms of sales) in the Asian markets. Moreover, most US medical companies are struggling to keep up with the high costs of R&D, clinical trials and manufacturing in the US. In order to stay afloat in such a competitive global market, US medical companies are now, more than ever, also exploring new outsourcing opportunities in Asia.

Many Asian nations are experiencing increased Gross Domestic Product (GDP), per capita income and overall wealth. People in Asia are living longer and demanding better healthcare products and services. A number of the Asian governments are implementing more stringent medical device regulations, as they are prepared to spend more money for higher healthcare standards. Moreover, many of these Asian countries are placing a greater importance on international regulatory standards in order to export their medical products globally.

Country
Medical Device Market Size
China
US $3.5 billion
Hong Kong
US $500 million
Philippines
US $75 million
Indonesia
US $150 million
Japan
US $24 billion
Malaysia

US $300 million

Singapore
US $410 million
Korea
US $1.4 billion
Taiwan
US $900 million
Thailand
US $500 million

 

OVERVIEW OF CHINA AND ITS MEDICAL DEVICE MARKET

One of the fastest growing economies in the world today is China, growing at a rate of around 9 percent per year. The country’s medical device market is currently worth approximately $3.5 billion. Following China’s entry into the World Trade Organization (WTO), the State Food and Drug Administration (SFDA) is making greater efforts to create a better medical device regulatory environment. In August 2004, the SFDA implemented new registration requirements, simplifying the device application and review process. Moreover, exporting to China is becoming easier for foreign companies, and tariffs on most medical devices have been reduced to less than four percent as of January 2005. The US is the leading exporter of medical devices to China, contributing nearly one-third of all China’s foreign imports.

MEDICAL DEVICE REGULATORY INFORMATION

Overview

Medical devices are regulated in China by the State Food and Drug Administration (SFDA). The SFDA is the Chinese equivalent of the US Food and Drug Administration (FDA). The General Administration of Quality, Supervision, Inspection and Quarantine (AQSIQ) is another Chinese agency that regulates imported medical devices. AQSIQ conducts mandatory safety registration, certification and inspection for certain devices. Companies who want to import medical devices into China must register their device with the SFDA.

Medical Device Classification

As in the US, medical devices are categorized into three classes, each with specific regulatory requirements. The classes are as follows:

– Class I: Low risk devices, regulated by provincial governments
– Class II: Modest risk devices, regulated by provincial governments
– Class III: High risk devices, regulated by the SFDA

Product Registration Requirements

In order to register a medical device, a total of 12 documents must be collected and submitted to the SFDA in both Chinese and English, as announced by the SFDA on March 22, 2005. The required documents are summarized as follows:

  1. SFDA registration form
  2. Legal Production Qualification (e.g., US FDA registration)
  3. Business license for the Chinese agent registering the product (The agent must be located in China, have a valid license, and have a letter of commission from the manufacturer)
  4. Marketing approval from government of country of origin (Certificate to Foreign Government as well as 510(k), pre-market approval (PMA) application for US-made devices issued by FDA or Free Sale Certificate)
  5. Product Standards (ISO, CE, AAMI, etc.); include an authorization letter to a Chinese agent to translate and reformat the product standard according to Chinese regulation
  6. Operation Manual (Product instructions)
  7. Test report issued by SFDA-certified test center (only required for Class II and III products that have not received ISO9000 certification)
  8. Clinical trial report (only required for certain types of devices; manufacturer may submit clinical trial data that was submitted in the country of origin)
  9. Quality guarantee letter (certifying that the product being registered and sold in China is identical to the product approved in the country of origin)
  10. Authorization letter to a Chinese agent, responsible for reporting adverse events accrued in China (includes an authorization letter from the manufacturer, and a promise letter from the Chinese agent, the agent’s qualification document)
  11. After-sales authorization (this includes an authorization letter from the manufacturer, a promise letter from the after-sales agent, and an after-sales agent qualification document)
  12. Self-guarantee declaration (to vouch for truthfulness of submitted documents)

 

Previously, all documents executed in the US had to first be authenticated by a Chinese Embassy or consulate before they were eligible for use in China. As of March 22, 2005, authentication by the Chinese Embassy or consulate is no longer required. Additionally, copies of government certificates, i.e. Number (4) above, will be accepted by the SFDA, but should be notarized.

Product Registration Procedures

On August 9, 2004 the SFDA issued new regulations for the registration of medical devices in China. These new regulations have (to a certain extent) simplified the application and dossier review process for medical devices. Additionally, the Medical Device Clinical Trial Regulation, effective April, 2004, has laid out more detailed requirements for clinical protocol, clinical hospitals and clinical reports in China.

Previously, a company prepared a dossier (with all required documents) and then applied to the SFDA for a specification validation (for approval of the specifications of the device to be imported). Once the specification validation was reviewed and approved, the company was then required to send samples to a testing center. A company would then file its dossier, with the approved specifications and the official testing report, to the SFDA. The SFDA would review the technical documents and judge whether to issue product approval.

The new regulations have combined the dossier preparation and specification application into one step. Companies no longer need to apply to the SFDA for specification validation. Instead, they may use their own specifications as a basis for a testing agency to provide testing. The company then includes these test results in its completed dossier and submits it to the SFDA. The SFDA sends this dossier to the Medical Device Evaluation Center (MDEC) to review the specifications, dossier, government certificate and clinical report, if needed. The MDEC sends their conclusion to the SFDA and if everything is acceptable, the SFDA will issue the product approval license. While these new regulations have somewhat streamlined the process, they have not significantly altered the timeframe for medical device registration in China.

However, there are now several situations that can lengthen the new registration process. First, if the MDEC requires a supplement dossier, companies must complete the supplement and re-submit it to the SFDA within 60 working days. Second, since the specification validation is not required before testing, the testing is completed based on the company’s specifications. It is possible that the MDEC may request the company to revise its specifications and re-test, adding additional time and money to the registration process.

Product registration is valid for four years. In order to change manufacturing locations or add a new manufacturing location, a new product registration must be submitted. To change basic information, such as the manufacturer’s name, product name, or name of the manufacturing location, etc., an amendment to the product registration can be submitted. Requests for renewal of product registration must be made 6 months before the initial registration expires. Along with renewal forms, a copy of the original registration must be submitted. Product quality follow-up reports must also be submitted.

Medical device import licenses approved by the SFDA:

2001 2002 2003 2004 1st Qtr 2005
1,104 1,890 2,050 4,029 1,200

China Compulsory Certificate (CCC Mark)

The China Quality Certification Center requires that certain categories of medical devices obtain a CCC mark to ensure their safety. The CCC mark applies to several types of medical devices, including medical diagnostic x-ray equipment, haemodialysis equipment, hollow fiber dialysers, electrocardiographs and implantable cardiac pacemakers. Manufacturers can apply for the CCC mark directly to an Authorized Certification Body (ACB) or through a Chinese agent. Products requiring the CCC mark that are not properly marked may be held at the border by Chinese Customs and may be subject to other penalties.

Medical Device Regulation Updates

On July 8, 2004, the SFDA issued new regulations regarding inserts, labeling, and packaging for medical devices. This was the first regulation of this sort to exist in China. The new regulation contains detailed requirements for product inserts, labels and packaging. All medical devices exported to China must include this information in Chinese. Moreover, the inserts must be reviewed and approved by the SFDA during product registration. Following approval, the content of the insert cannot be changed. If any changes must be made, the insert must be resubmitted to the SFDA for approval again.

The SFDA released a second draft regulation for new diagnostic device registration procedures on July 29, 2004. The regulation only applies to diagnostic products categorized as a medical device, not those categorized as drugs. Registration requirements for some diagnostic devices are now similar to those for medical devices. The regulation requires three test batches of the diagnostic device for registration. However, the draft does not mention whether clinical trials will be required and this is normally determined on a case by case basis.

DISTRIBUTOR SEARCH

Overview

Companies that are new to the Asian market and those already engaged in exporting often sell their products via a network of distributors. This network will be fundamental to the success of the US medical company exporting to China. Distributors generally provide services such as warehousing, shipping, sales, marketing, and service support. When building a distribution network, a foreign company should keep several things in mind.

Relationships are key in finding and qualifying distributors—and, ultimately, in successfully selling a product. The best way for a medical company to find a new distributor is to investigate distributor groups to which company executives have been introduced by a trusted personal acquaintance, business colleague, or professional third party. Signing up distributor groups that a company representative might meet at a trade show or through cold calling generally does not work. In some Asian countries including China, if a real relationship with the exporting company has not been established, the distributor groups can, by Western standards, lie, cheat, and steal, without doing anything wrong according to the customs of the home culture. In addition to establishing a solid relationship with a distributor, the foreign company must keep in mind that face-to-face meetings are crucial; e-mail correspondence and phone calls alone are not sufficient.

Finding a Distributor

Finding and qualifying a distributor in China can be a tricky undertaking. Previously, all medical device distributors in China were state-owned companies, which were highly bureaucratic (due to the old communist system) and not very market-oriented. Over the last 7-8 years, private medical device importing companies have begun to emerge. These groups tend to be more aware of marketing issues and can perform work faster than state-owned entities. On the other hand, most are relatively small and not well financed. Moreover, many still lack expertise in the selling of Western medical device products. In addition, there are not many distributors that cover the entire country. Thus, a medical company may need to sign up 2-4 private companies to cover China.

When identifying a distributor, foreign companies should always use “local insight” to obtain the real background on the distributor. It can be difficult for a foreign company to determine if the distributor truly knows the medical regulations and has financial staying power. If possible, a foreign company should contact other foreign companies that already employ the prospective distributor, or utilize a consultant who has people on the ground in China. Additionally, it is crucial to determine the amount of time and effort a Chinese distributor is willing to spend on your products.

Distributor Contracts

The contract should account for the differences in each country’s culture and legal system. Westerners tend to draft lengthy contracts and focus on small legal details. Conversely, the Chinese conduct business among friends and consider their relationship to be more valuable than all of the details that are found in a Western contract. Oftentimes in China, a US company may find itself discussing points of contention, such as sales targets and product service clauses, even after the distributor contract is signed.

Distributor Problems

If distributor problems arise, a foreign manufacturer should not be hasty and fire a distributor too quickly. Foreign companies who decide to end partnerships with distributors may find that they have acquired a tarnished reputation in China and may have trouble securing a new distributor in the future. Therefore, when problems occur is it best to hold face-to-face meetings and try to come to a mutual agreement, avoiding legal action whenever possible. Lawyers in China, as well as most parts of Asia, are generally not held with the same esteem or used in the same capacity as in many Western countries.

POTENTIAL FOREIGN BUSINESS STRUCTURES IN CHINA

Overview

Despite the implementation of more-relaxed restrictions on registering and exporting medical devices, foreign companies still face many difficulties when entering the Chinese market. Local procurement policies, testing requirements, protection of intellectual property and restrictions on the types of business activities in which foreign firms can engage are all potential challenges for foreign medical device companies.

If a foreign medical company is interested in setting up a representative office or more extensive operation in China, there are a number of structures that are possible.

Representative Office

A Representative Office can be established by foreign company in China for the purpose of conducting market research, product promotion (but not direct sales), acting as a liaison, or for other functions that do not involve the operational activities of the business.

Joint Venture Structures

There are three main types of Foreign-Invested Enterprises (FIEs) in China: (1) Equity Joint Ventures (EJVs), Contractual Joint Ventures (CJVs) and Wholly Owned Foreign Enterprises (WOFEs). FIEs have numerous advantages, such as: (1) they help foreign medical device companies gain access to China’s domestic market while still maintaining more control over their activities; (2) they help foreign companies take advantage of China’s relatively well-educated, low-cost labor force; (3) they improve access to local resources; and (4) they generally receive favorable treatment from the Chinese government (tax exemption, obtaining financing).

In the past, foreign investment in China was typically done in the form of a joint venture and most were initially set up as 50/50 joint ventures (or 51/49) between the foreign and Chinese company. But, restrictions on foreign ownership in China have eased and there are perceptions that the Chinese side has less to offer than promised. Therefore, foreign companies who enter joint ventures today typically control 80-90 percent; the Chinese company holding only 10 or 20 percent. A foreign company should consider their long-term goals and conduct extensive research before deciding on a particular type of business structure.

Equity Joint Venture

An EJV takes the form of a limited liability company with Chinese person legal status. In this type of structure, parties invest and manage together, sharing risks and losses in proportion to their contributions. The foreign party’s contribution must be a minimum of 25 percent and neither party may reduce their contribution during the venture.

Contractual Joint Venture

When establishing a CJV, the parties determine the manner of operation, management, obligations, risk, profit sharing, etc., through an upfront contract. This flexibility allows companies to establish a CJV quickly in order to take advantage of short-term business opportunities. In most CJV’s, the foreign party provides most or all of the funding, technology and key equipment. The Chinese party provides land, natural resources, facilities and labor. However, the CJV may not have legal person status or may have limited liability if the enterprise is judged to be undercapitalized by the State Administration of Industry and Commerce.

Wholly Owned Foreign Enterprise

WOFE’s are enterprises in which all the funds are provided by foreign investors. These have become more prevalent in China over the last few years. A certain percentage of the manufactured products produced by WOFE’s are required to be sold abroad. Sometimes a separate approval may need to be obtained to sell locally. Establishing a WOFE offers several advantages over a joint venture. First, the foreign company has tighter control of their business and interests including intellectual property protection, since they do not need to compromise and share information with Chinese partners. Second, the WOFE can hire its own people and not inherit “dead wood” employees from a Chinese joint venture company. Nevertheless, WOFEs also have several disadvantages. For instance, the foreign company has no Chinese partner in which to tap resources such as an existing distribution network. WOFEs are also sometimes subject to a higher corporate tax rate than EJVs.

OUTSOURCING OF MEDICAL DEVICES

Overview

As discussed in the beginning of this report, more US medical companies are now outsourcing manufacturing to China to reduce their costs. Chinese device manufacturers have made significant improvements in medical device technology and product quality. However, identifying the right factory in China can be a challenge.

Identifying Manufacturers of Your Product

Presently, one of the best places to begin searching for potential medical device manufacturers in China is on the Internet. In the past, Chinese manufacturers often used government-approved trading companies in order to export their products, so manufacturers typically did not have their own ability to sell their products overseas. However, as restrictions on import and export regulations have eased, Chinese manufacturers have begun doing their own direct sales and marketing, often via the Internet. Now, there is a wealth of information on the Internet for foreign companies interested in building relationships with manufacturers in China. Moreover, Chinese manufacturers are becoming more and more comfortable working and interacting with foreign companies and are accustomed to using English (albeit sometimes broken English) in many of their business dealings.

A good place to start your search is on a basic search engine. This will provide you with an initial list of manufacturers and is a relatively quick process. There are numerous websites that provide sizeable lists of manufacturers and often include contact information and a brief description of each manufacturer. However, this type of search should only be a starting point and should not be considered as a thorough investigation.

Once several potential manufacturers have been identified by the Internet search, each manufacturer’s respective website should be examined. However, it is common for the Chinese version of the website to be much more detailed than the English version. In order to establish an accurate idea of the company, both websites should be viewed by a person fluent in both Chinese and English. Additionally, foreign companies should keep in mind that all the information on the Internet or an individual manufacturer’s website may be misleading or inaccurate. It is vital for companies to take further measures in order to confirm the manufacturer’s claims.

The Initial Contact

Once a list a Chinese manufacturers has been compiled, each of these manufacturers should be contacted directly. Many Chinese manufacturers today will have an English-speaking employee in their sales office. Nevertheless, it is always best for a foreign company to have a Chinese speaker available in order to make the communications go more smoothly. Initially, emails and phone calls should be used to establish trust and a good business relationship between the foreign and Chinese companies.

Trust is crucial to successful business in Asia, so this initial step should not be taken lightly. These emails and phone calls can also be used to answer initial questions and confirm the manufacturers’ production capabilities. A foreign company should ensure that the manufacturer can produce their products to their specifications and required standards. Moreover, it is not unheard of for a Chinese company to claim that they are manufacturing a product, when, in fact, they are purchasing the product from another company and selling it for a higher price. Therefore, emails and phone calls are not 100 percent sufficient in deciding whether to pursue business with a company or manufacturer in China.

Determining the Price

After establishing a good business relationship and flow of communication with a manufacturer, the next step will be to obtain a price quote for your product. If you have a “standard” product, the price quote should be fairly straightforward. However, if your product has somewhat unique features or specifications, or if you are requesting atypical quantities, a general price quote may not be very useful. In this case, it may be necessary to ask the Chinese manufacturer for an itemized quote. US companies should also keep in mind that Chinese manufacturers tend to use metric units and may not be familiar with inches or pounds. It is also important to ask the manufacturer how long they will honor their price quote. With a quickly growing economy, prices in China are often increasing, so a price quote may only be valid for a short period of time. Foreign companies must also add a number of other expenses into the overall costs of purchasing medical products from China. International and domestic shipping, customs duties and possible travel expenses need to also be included in the total cost of sourced products.

Trading Company vs. Factory

Even though Chinese manufacturers are increasingly exporting directly overseas, trading companies are still very common in China. Trading companies act as a “middleman,” purchasing products from a Chinese manufacturer and selling the products to a foreign buyer.

Trading companies offer several advantages. First, these companies tend to have a wide variety of products available for purchase. A foreign company with numerous product lines may be able to use one trading company for most of their products, as opposed to a Chinese manufacturer that could only produce one or two lines. Second, trading companies can often purchase products for better prices since they already have well-established relationships (and may make larger purchases) with manufacturers in China. These prices, in some instances, may even be less than if a foreign company goes directly to a Chinese manufacturer. Third, it is usually easier dealing with a trading company since they tend to have more experience communicating with foreigners (many trading companies have English speakers) and more experience working with foreign companies. In general, trading companies offer short-term profits and business relationships with these companies can be established in less time.

Depending on a foreign company’s objectives, trading companies are not always the best way to outsource. If a foreign company is looking to establish a long-term business relationship in China, direct contact with the Chinese manufacturer may be more beneficial. The foreign company can develop a long-standing relationship with a Chinese manufacturer, while also having more control over their product design and quality. By avoiding trading companies who may cut off your supply at any time, a direct relationship with a manufacturer will give the buyer a stronger sense of control and hopefully more leverage on prices as the relationship and volumes grow.

Due Diligence

At this point in the manufacturer investigation, most major problems should have already surfaced. However, there may be smaller problems that could still cause potential problems for the foreign company. Therefore, prior to visiting Chinese factories or making a final decision on which factory to visit, due diligence should be conducted by a local person in China. Local people visiting Chinese factories can be very helpful. This investigation should include confirming that the factory has the necessary business licenses and/or registrations, complies with the required labor laws and working conditions, and that its operations meet the standards of the foreign company. If the factory uses a great deal of manual labor, as opposed to machinery, quality control could potentially be an issue.

Buyers Beware. A Chinese company could claim to have a very large manufacturing operation with hundreds of workers when, in fact, it is a trading company with a few people acting as go-betweens in a small office space. Or, a Chinese manufacturer could initially offer excellent and speedy service, while actually experiencing financial trouble and frequent power outages.

Visiting the Factory

Face-to-face meetings are very important in Asia and crucial to developing a good working relationship. Once the factory investigation is completed by a local Chinese and things seem as they were advertised, the foreign company should arrange to visit the factory in China and begin solidifying the business relationship. During the visit, it is important to spend time with the key people at the factory, deciding whether they will be good and honest business partners. These people also tend to display their business, SFDA and GMP licenses in their office, so this will be a good opportunity to verify the licenses and ensure they are valid and up-to-date. If any licenses are missing, this may indicate that the factory lost their license or never held one at all. It is also a good idea to ask whether the factory has passed any international requirements (GMP 13845) or ever filed a 510(k).

It is also important to get a sense of the factory’s financial background and status. Many medical device manufacturers have converted from state-owned enterprises to private companies or joint ventures. However, the details on ownership and financial contribution can be unclear. If a factory is owned by a single person, it is best to determine the source of the factory’s initial funding when possible.

Regulatory Requirements

Chinese medical device manufacturers exporting to the US are required to meet specific US FDA regulations. These regulations can cause compliance problems for Chinese manufacturers, making it difficult to source from certain factories. Many medical device manufacturers in China have obtained China GMP, CE marks or ISO certification. However, many of these factories are not able to comply with the US quality system regulation (QSR), posing a problem for many US companies. Additionally, any medical device manufacturer that does export to the US must register with a US Agent and provide this information to the FDA.

Contract Negotiations

Generally speaking, a contract prepared for a Chinese manufacturer can be similar to the one normally used with another US company. The contract should include a fair amount of detail and certain aspects of the agreement should be carefully spelled-out. In particular, the contract should specify how long the price quote is valid for and the shipping terms should be well-defined. In trade, the International Commercial Terms are most common, describing who is responsible for the goods during each step of the production and delivery process. Chinese tend to use the term free on board (FOB), specifying that the foreign medical company is responsible for the products once they reach the dock. It is best to solve sticky issues and problems via direct face-to-face meetings. However, it is also important to include a dispute resolution clause in the contract. The clause should define the law to be applied, such as PRC contract law or Uniform Commercial Code and establish a procedure for dispute resolution. Arbitration is almost always a better option than a lawsuit in China.

Quality Control

The best method for ensuring quality of the products is to implement a quality assurance system in China. Depending on the shipping terms defined in the contract, the purchaser may have to pay 100 percent of the cost of the products before they reach the US. Therefore, it is preferable to inspect the products prior to shipping. It is possible to hire a local quality control company in China to conduct an inspection, though this company too should be closely examined prior to enlisting their service. On the other hand, the majority of Chinese manufacturers will not object to a visit from their customer’s own quality control team. This second option involves higher costs, but may be more reliable and easier to arrange in some instances. It is always a good idea to select multiple samples from a production run for testing prior to paying 100 percent of the purchase. If the Chinese manufacturer is aware of these planned visits or tests, they may be more conscientious of the factory’s quality control methods from the beginning.

CULTURAL ISSUES

Business procedures in China are sometimes very different from business procedures in the US. Companies planning to do business in China must make an effort to understand the country’s culture, customs and history in order to establish a sincere presence in the country.

Western Approach
Asian Approach
Do a deal
Build relationships
Maximize short-term profits
Establish long-term foundations
Be frank
Don’t deliver bad news
Make changes quickly
Move when ready

Personal connections are crucial in China, and essential for conducting successful business. A foreign company should make a great effort to earn the respect and trust of a Chinese manufacturing company or distributor before any “real business” is done. Of course, if possible, it is always best to have a mutual friend serve as the intermediary when meeting a Chinese company for the first time.

At the time of the first introduction, business cards should be exchanged. The cards should be passed with both hands and the names of the cards should be readable by the receiving party. During the meeting, business cards should be laid out on the table, as opposed to being placed in a coat pocket or briefcase. Traditionally, the Chinese give a lot of gifts, so time should be spent choosing an appropriate one before visiting a Chinese company. If one gift is given, it should be presented to the head of the Chinese group at a dinner banquet or at the conclusion of a business meeting. If numerous gifts are given, they should all be of roughly equal value. When receiving a gift, a humble acceptance and a few words of appreciation are appropriate.

In Chinese society, an emphasis is placed on family, humility and courtesy, and the concept of “face” is very important. When asked to do a favor or go out of their way, the Chinese will usually avoid saying “no,” since doing so causes them to lose face. But, if a request cannot be met, the Chinese may say it is inconvenient, under consideration, or ignore it altogether. Unless the request is urgent, it is best to respect these subtleties and not press the issue.

The negotiation process is almost always longer in China than in the West because the Chinese enjoy negotiations and want to get the best deal possible. They realize that foreigners oftentimes like to go home with a deal done, so the Chinese may stretch out the time to do the deal. In order to carry out successful negotiations, US companies should keep the following differences in mind. First, Americans value straightforward dialogue, while the Chinese are masters of the oblique. Second, at least one member of the US team should have full knowledge of every aspect of the business. Third, the Chinese may appear indifferent to the success or failure of the meeting during the negotiations, and then make excessive demands. In this situation, it is best for the foreign company to remain calm and consider giving the Chinese company some leeway over a specific issue – it may result in far greater benefits in the future. Finally, every detail of the business partnership should be covered verbally at least twice before the contract is signed. The contract should be written in English and Chinese to make sure all points are clear.

CONCLUSION

The medical device market in China presents a huge opportunity for foreign companies whether they are outsourcing, establishing a new business entity, or selling their medical product in China. As China opens its doors wider and makes greater efforts to increase its presence in the global medical device market, the benefits for foreign companies in China will continue to grow. However, extensive research, careful planning and a firm commitment are necessary to be successful in the China medical device market.