This article was also published on Medical Device Daily
China’s $9 billion medical device market is growing very fast. It is now the sixth largest medical device market in the world, and analysts estimate it will grow between 15 – 20 percent annually over the next five years.
The country is home to nearly one-fifth of the world’s population. With 1.3 billion people and a burgeoning middle class, China has witnessed an unprecedented rise in healthcare consumption. More citizens are spending more money on healthcare, including sophisticated medical devices.
Further boosting demand is a growing number of Chinese with health insurance. From 2009 to 2011, China’s Ministry of Health invested $124 billion in the Chinese healthcare market. A large part of this went to bolster China’s expanding medical insurance system. That system, still poorly funded, now covers more than 95 percent of Chinese, including the nearly 900 million rural residents who previously lacked any real health insurance.
As the market has grown, so have available medical products and procedures. Now, sophisticated implantable devices are available, as well as advanced diagnostic imaging products. In 2010, these products made up half of China’s medical device market at 13 percent and 37 percent, respectively.
Competition for China’s medical device market is fierce. More Chinese medical device manufacturers enter the market every day, and local companies like Mindray, Microport and Lepu have quickly grown in size.
Revenues for Mindray, which makes low cost imaging systems and monitoring equipment, have gone up an average of 25 percent annually over the last five years. Sales for 2012 were more than $1 billion. The company got its start selling inexpensive medical equipment to low-tier Chinese hospitals. It ignored top-tier hospitals that bought premium equipment from companies like GE and Philips.
The idea that Chinese-made products are inferior is beginning to change. In spite of quality assurance problems and events like the 2008 heparin scare, overall quality systems in China are actually much better than five years ago. Most local medical device companies are ISO 13485 certified, and some even meet US FDA and EU Good Manufacturing Practice standards.
In the past, Chinese medical device manufacturers produced mostly Class I and Class II devices. But now, they are making more sophisticated Class III devices.
This is partly due to the adoption of global manufacturing standards. It is also due to the innovation of Western-trained Chinese returnees. Many Chinese math, science and engineering PhD’s who cannot secure H1-B visas in the US return to China for work, where they are now snapped up by local device companies.
Components, design records and raw materials used by Chinese manufacturers do not always meet Western standards, but they are getting better. Infrastructure for device and drug production — like clean rooms — has also improved.
Chinese made products can now in many cases compete with Western devices. And with local practices including kickbacks to help sales, China based medical device manufacturers are giving foreign companies in China a real run for their money.
WESTERN COMPANIES IN CHINA
Western medical device companies still sell some sophisticated products that Chinese device manufacturers cannot make yet. As long as they can maintain this strong technical advantage, they will continue to increase sales for top of the line products. But Chinese medical device companies are quickly catching up in terms of innovation (and copying).
Pricing is another concern. Prices for many Chinese-made devices are much lower than those of their foreign competitors. For example, ultrasound machines made by Mindray are up to 45 percent cheaper than similar machines produced by Philips. In the case of drug-eluting stents (DES), cheaper Chinese products have taken over the market. Five years ago, foreign DES imports accounted for 75 percent of the DES market. But today, those numbers are reversed – local Chinese made products make up 75 percent of the DES market, while foreign device imports have dropped to 25 percent.
In order to compete with Chinese products, foreign medical device manufacturers need to offer basic, low-cost versions of their A-line products. To do this, some of them have set up their own China-based manufacturing facilities. Others have acquired Chinese companies with broad product portfolios and decent market shares.
Recently, US-based Stryker paid $764 million to acquire Chinese spine products manufacturer, Trauson. While Trauson is highly profitable, commanding first place in China’s trauma market and third in the spine products market, several reports put Trauson’s real value at about $350 million. In addition, Medtronic paid $755 million for China Kanghui Holdings last year, despite its estimated value of about $490 million. Several analysts wonder whether Western companies like Stryker and Medtronic have made good deals.
As acquisitions continue, questions remain. Will Western companies post worthwhile returns on these investments? Will Chinese executives who have made big money via stock sales honor their non-compete agreements? Will very different business cultures be able to co-exist within the same companies?
One solution is for foreign device companies to provide Chinese consumers better quality locally made products with fewer defects. Often times the quality assurance and regulatory affairs staff working at foreign medical device companies in China have been very well trained by their western counterparts. However, these Chinese RA/QA executives working at foreign medical device companies with Chinese operations can now earn $150,000 per year. Where did the notion of cheap labor go?
THE GLOBAL DEVICE FIGHT
Outside China, Western device manufacturers are now also engaged in a battle with Chinese medical device firms. Large Chinese device makers are increasingly exporting to emerging markets like Brazil, India and Russia — countries where Western firms have also been trying to boost sales.
Lepu Medical Technology is one such Chinese company. Five years ago, none of its products were sold on global markets. But today, while 80 percent of its sales are in China, 20 percent are in the rest of the world.
In the short-term, foreign medical device companies still have an edge in China for sophisticated medical devices. Most Chinese who have money still prefer Western made medical devices. However, for the average Chinese making $5,000 per year, the use of devices made at local Chinese medical device companies will continue to grow quickly.
Foreign medical device companies will also have to nurture and retain their Western trained Chinese staff. In the future, as Western trained Chinese staff leave foreign medical device companies in China for local Chinese medical device companies, the fight over innovation, quality assurance, and know how will only get stronger.
In another five years, it is anybody’s guess who will win the Chinese device fight.