Overview
China’s accession to the WTO presents U.S. medical device companies with an unprecedented opportunity to penetrate one of the largest markets in the world. Distribution by foreign medical companies in China has always been difficult, with problems ranging from commercial and legal obstacles, a poor physical infrastructure, an ambiguous regulatory framework and “unethical” trading practices. In short, before the WTO agreement, foreign firms (including foreign medical companies) were not allowed to distribute products in China unless they manufactured their products in China. According to bilateral agreements China has signed with the U.S. and E.U. in conjunction with its accession to the WTO, China will gradually allow foreign companies to perform services related to distribution, and ultimately, distribution of imported products. China’s government has also promised that other barriers formerly imposed (i.e.: tariffs, taxes, bias against joint ventures, etc.) will be cut back.
The overall size of China’s medical device market is about $780 million. Demand for advanced medical equipment, conventional laboratory instruments, dental devices, small Ultrasonic systems, and sophisticated X-ray equipment are expected to increase. While quality is an important factor for these devices, affordability is oftentimes more important. To enter this market, medical device companies should market their low to mid-range priced devices. It is difficult for China’s healthcare system to properly integrate high tech, high quality, and high priced devices into its “developing” medical institutions.
While China’s healthcare system is becoming more advanced as larger hospitals increasingly use more sophisticated equipment, 30% of the medical institutions are still equipped with medical devices from the 1960s and 1970s. Demand for better equipment is being driven by rapid economic development, increased per capita income in the cities and the launch of private medical insurance. Within the last 20 years, the number of health care institutions has nearly doubled as is illustrated in Figure 1 below.
Figure 1: Number of Health Care Institutions, Hospitals, and Hospital Beds in China
| Year | Number of Health Care Institutions | Number of Hospitals | Number of Hospital Beds | Number of Hospital Beds per 1,000 persons |
| 1978 | 169,732 | 64,421 | 1,850,000 | 1.93 |
| 1997 | 315,033 | 67,911 | 2,903,000 | 2.35 |
Source: Wen Hui Bao Daily, 1998
Chinese hospitals have a preference for U.S. medical equipment, although strong competition comes from Japan, Germany, France and Israel. In 1999, the U.S. had the largest market share of China’s medical device market, about 25% of the market, which was about $195 million. The relatively low export volume of U.S. medical device exports (compared to Taiwan and Japan in Figure 2 below) is a reflection of the problems plaguing trade with China as well as the fact that China is still in a development stage. Figure 3 illustrates Sichuan Province imports from the U.S. along with the U.S. respective market share for each device.
Figure 2: U.S. Medical Device Exports 1999 in 1,000 Dollars
| China | Taiwan | Japan | |
| Total Medical & Ophthalmic | 194,900 | 194,341 | 2,251,667 |
| Total Medical | 188,862 | 181,334 | 2,114,863 |
| Surgical & Medical Instruments | 30,560 | 63,112 | 750,604 |
| Dental Equipment & Supplies | 8,044 | 7,912 | 59,379 |
| X-Ray & Related Irradiation Apparatus | 57,326 | 20,205 | 249,977 |
| Electromedical & Electrothermal | 80,759 | 58,275 | 718,108 |
| Ophthalmic Goods | 6,038 | 13,007 | 136,804 |
Source: SIC 384 U.S. Import & Export Statistics—Medical and Dental, U.S. Department of Commerce
Figure 3: Sichuan Province Imports from the U.S. 1000s of U.S. Dollars/(U.S. percent share)
| Medical Device | 1996 | 1997 | 1998 (Jan-Sep) |
| Total | 4582 (60%) | 2463 (75%) | 703 (28%) |
| MRI | 346 (37%) | 0 | 0 |
| X-Ray Equipment | 922 (64%) | 0 | 0 |
| Anesthesia | 177 (86%) | 265 (100%) | 0 |
| Endoscope | 164 (28%) | 67 (17.6%) | 160 (32%) |
| Monitors | 2072 (64.3%) | 1894 (81%) | 464 (55%) |
| Hemodialysis | 48 (13.7%) | 212 (79.4%) | 79 (25%) |
Source: China: Medical Devices, Industry Sector Analysis. United States Foreign Commercial Service and U.S. Department of State, 1999.
Note from Source—Sichuan Province imports from the U.S. can also be used as a representative example for other provinces in China. Chinese statistics are historically incomplete and usually do not include the “gray market.”
Market Entry
A foreign medical device company must choose an appropriate market entry strategy for China, depending on a number of factors. These include: 1) how the Chinese “view” the foreign medical device company’s product entering their market, 2) the demand for its product, 3) the future growth of demand for that product, 4) the foreign medical device company’s resources and commitment to entering the market and 5) the time frame to enter.
Several years ago, Pacific Bridge, Inc. (Washington, DC) did a survey of 30 Chinese hospitals (20 large hospitals – over 500 beds and 10 medium-sized hospitals – 300 to 500 beds) to determine how the Chinese “view” foreign diagnostic equipment and what issues are important in purchasing diagnostic equipment. This is illustrated in Figure 4 below. Please note that percentages do not equal 100% because the hospitals could “vote” for multiple entries.
Figure 4: Major Factor Considered in Decisions to Buy Clinical Diagnostic Equipment
| Item | X-ray | CT | MRI | Centrifuge | Imaging | Film Processing |
| Financial Means(%) | 35 | 45 | 35 | 15 | 10 | 10 |
| Price (%) | 35 | 30 | 20 | 35 | 20 | 30 |
| Functions (%) | 35 | 30 | 15 | 30 | 25 | 35 |
| Quality (%) | 75 | 60 | 65 | 75 | 65 | 70 |
| Service (%) | 20 | 25 | 25 | 10 | 15 | 10 |
| Others (%) | 0 | 5 | 0 | 10 | 0 | 0 |
As noted earlier, it is important to do your homework when determining your market entry strategy. For example, FONAR Corporation (Melville, NY) examined the China market closely before entry. Before FONAR officially launched their product in China in early 2000, the product marketing manager for FONAR’s MRI spoke at the National Radiography Conference to present their technology to the Chinese scholars and professionals in the field. The marketing manager also conducted seminars and visited potential MRI customers, etc. With key market feedback, FONAR then signed a distribution agreement with Evergreen Imaging, which is a part of one of China’s largest distribution companies. FONAR’s key products include the Echo™, a compact, whole-body open MRI designed to sell at a low price and a new line of open MRI products with diagnostic and interventional functions. Since FONAR has such a versatile line of products, they are ideal for the diverse needs of China, where rural and urban needs can vary greatly.
Foreign companies selling in China and interested in covering the majority of the country should rely on a combination of distribution channels to reach end-users. This is true for both foreign companies exporting as well as those distributing locally made goods. Foreign companies generally choose among state-owned distributors, private domestic distributors, foreign distributors or direct distribution channels through the use of joint ventures, Wholly Foreign Owned Enterprises (WFOEs) and representative offices. Whichever strategy is chosen, targeted marketing and promotion to the Chinese medical community is crucial.
Distribution Options for Medical Device Companies Wanting to Export to China
Medical device companies that do not have the intent or resources to set up staff in China to establish and monitor their distribution networks usually opt to utilize the resources of Chinese distributors. As a result, they may designate someone in their corporate or Asian headquarters to meet with and review the performance of their Chinese distributors. Below are the three main distributor options in China to get your products into the Chinese market.
First, there are large China state-owned distribution companies. There are two types of state-owned distribution companies. Foreign Trading Companies (FTCs) are authorized, experienced groups that have an established infrastructure to deal with foreign trade. FTCs normally have a broad reach and can sell to multiple provinces in China. Unfortunately, these firms tend to rely on their existing network, rather than developing new business. In addition, they do not specialize much in marketing and end up functioning in many cases as “order takers.” Industrial Trading Companies (ITCs) are newer and smaller than FTCs and are administered by the respective industrial ministries and bureaus. ITCs have a better understanding of the specific products they are trading, but are generally limited in their geographic focus.
Second, there are also privately-owned trading companies. These companies have emerged in the last 3-5 years and are good alternatives to the state enterprises. They are, in general, more motivated, entrepreneurial and market oriented than state-owned enterprises. Despite these advantages, each private distributor group should be analyzed separately and carefully. Since privately-owned trading companies usually do not have large cash balances to inventory medical products, there is a risk that if one major client leaves the distributor, the entire trading company could collapse. These companies are profit-making commercial activities as importing and selling goods or issuing invoices. The representative office staff in Chinas will target and work with customers, however, the local distributor eventually finalizes the sale such as is the case with Endocare’s CRYOcare system. Of course, enforcement of a representative office’s activities is often neglected.
Distribution Options for Foreign Medical Device Companies that Manufacture Devices in China
The system for distributing medical device companies’ products that are made in China is more straightforward than the system for medical device companies that make their products outside of China. Medical device companies that make their products in China are able to avoid high import tariffs and have more control of their China business. According to various investment laws, Foreign Investment Enterprises (FIEs) may distribute any product they make in China. Manufacturing ventures may set up branches that serve as sales offices and hire their own staff. The venture may legally hold and transfer title (ownership) for the goods it makes: issue invoices for sales and value-added taxes (VAT), collect payment, and provide service and maintenance. While companies may not be able to use existing China joint ventures to import and distribute products not made in China, in some instances they can set up “new” entities (i.e. holding companies) for these purposes.
There are three types of FIEs in China: (1) Equity Joint Ventures (EJVs), (2) Contractual Joint Ventures (CJVs) and (3) Wholly Owned Foreign Enterprises (WOFEs). Joint ventures (JVs) in China are advantageous because: 1) JVs help foreign medical device companies gain access to China’s domestic market while maintaining more control over their activities, 2) they help foreign medical device companies take advantage of China’s relatively well-educated, low cost labor force, 3) JVs improve access to local resources, 4) they receive favorable treatment from the Chinese government (i.e.: tax exemption, obtaining financing, securing support) and 5) JVs can overcome the difficulties with foreign exchange controls with greater ease. The advantages and disadvantages of FIEs are outlined in Figure 5 below.
Figure 5: Foreign Investment Enterprise Structures
| Advantages | Disadvantages | |
| Equity Joint Venture (EJV) | • The EJV Law and implementing regulations provide a relatively complete structure of rules and procedures for establishing a venture in China; • Preferred investment vehicle of the Chinese government and many incentives are offered; • Provides a separate vehicle for selling to the domestic market; • EJVs may be included in the annual plans for raw material allocations and may procure goods at subsidized prices. |
• Negotiations may stretch out for years, generating excessive expenses; although some negotiations have been concluded in as little as three or four months; • Foreign medical device companies are restricted from withdrawing registered capital during the life of the contract; • Termination and liquidation of EJVs have only recently been fully addressed by laws and regulations. |
Contractual Joint Venture (CJV) |
• Maximum flexibility in structuring the assets, organization, and management; • Can recover registered capital throughout the life of the contract; • Can be established quickly to take advantage of short-term business opportunities and then dissolved with minimal legal restrictions. |
• Some detailed implementing regulations are still evolving; • 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 Foreign-Owned Enterprise (WFOE) | • Foreign medical device company has tighter control of proprietary interests; • Exclusive management control for investors; no need to compromise with partners; • Exemption from the 10% tax on dividends. |
• Implementing regulations have been promulgated, but are still evolving; • Fewer precedents to rely on during negotiations and operations; • No Chinese partner resource to tap for a trained workforce, and established sourcing, or distribution networks; • Stricter foreign exchange balancing requirements; • Higher corporate tax rate than equity joint ventures. |
If a foreign medical device company can determine that there is a large growing market for their products and is willing to invest and work to set up an FIE, then a joint venture or WOFE is probably the best long-term strategy to penetrate the Chinese marketplace. By physically being in China, foreign medical device companies can easily see the real needs of end-users, and prices can be more competitive as a result of local manufacturing. Such advantages may override the complexities of setting up a joint venture of WOFE, the time it takes to establish such entities and the associated risks involved.
Below, please see examples of FIEs in China in Figure 6.
Figure 6: Manufacturing Medical Device Joint Ventures
| Type of FIE | Name of FIE | Foreign Party | Chinese Party or location | Product Involved |
| Joint Venture | Analog Scientific Inc. (Shekou) |
Analogic Corporation (U.S.) |
Keijian Corporation under Chinese Academy of Sciences/Shekou | Ultrasonic equipment, patient-monitory equipment |
| Joint Venture | Guangzhou Pacific Biomedical Products | Pacific Biomedical Holdings (U.K.) | a) Industry Development Co. Guangzhou Development Zone b) Cardiovascular Research Institute Guangdong People’s Hospital (Guangzhou) ( Tianjin) |
Artificial heart valves |
| WFOE | Sysmex Corporation | Sysmex Corporation (Japan) |
Jinan Shangdong Province |
Blood analysis equipment and supporting products (i.e. disposable products used in the analysis and testing of blood) |
| WFOE | Medtronic | Medtronic (U.S.) |
Zhangjiang Hi-Tech Park near Shanghai | Pacemakers |
The future for medical device manufacturers is bright in China. As stated in the introduction, the bilateral agreements China signed with the United States and the European Union for its accession to the WTO allow foreign-invested companies to distribute imported products and provide services related to distribution (i.e. repair, maintenance, advertising, rental services, etc.). However, medical device companies already doing business in China that want to take advantage of the WTO and change their distribution strategy must keep the following in mind: 1) as foreign companies attempt to restructure their arrangements, one of the major pitfalls will be regulatory approval because changes in existing contracts must ultimately be approved by China’s Ministry of Foreign Trade and Economic Cooperation or by local authorities and 2) since Chinese authorities are picky and unpredictable, obtaining approval for amended contracts will be lengthy and difficult.
Bibliography
www.fonar.com
www.ecare.org
www.cardiodynamics.com
www.sysmex.com
Biomedical Market Newsletter (November 30, 1999)
Chen, Ling. (1999) China: Medical Devices. Industry Sector Analysis, U.S. Foreign Commercial Service and U.S. Department of State.
SIC 384 U.S. Import & Export Statistics – Medical and Dental (2000). U.S. Department of Commerce