The future is bright for many foreign medical device products in the China marketplace. Such optimism is based on the following factors–(a) a growing economy, (b) a rising middle class with growing per capita incomes and (c) an increased awareness of the benefits of better healthcare. Over the last three years, the number of medical device companies exporting their products or setting up their operations in China has greatly increased. This report will discuss some of the business strategies available to medical device companies in China. Finally, China’s entry into the WTO will also help foreign medical device companies to penetrate the marketplace.
During 1978-1998, real GDP grew on average by about 9% per year, contributing to a near quadrupling of per capita income over the same period. The number of people below the poverty line was reduced from more than 200 million in 1981 to about 70 million in 1995. The rise in the income levels of both rural and urban employees have considerably improved the standard of living in China, and, at the same time, have brought about a rise in personal saving. The amount of savings of urban and rural residents has increased from 21.06 billion RMB ($2.63 billion) in 1978 to 1,520.35 billion RMB ($183 billion) in 1993, 71.4 times the 1978 figure
i. Within the last 20 years, the number of health care institutions has nearly doubled (Figure 1).
Today, the overall size of China’s medical device market is about $1.4 billion. While this market size is considerably smaller than the U.S., Japanese and some major European countries, the market potential is significant as China’s healthcare market improves and grows. In 1998, the U.S. medical device exports to China totaled about $240 million, which at about 35%, was the largest share
ii. Japan, Germany, France and Israel are the strongest competitors. While quality is an important factor in purchasing these devices, affordability is oftentimes more important
Figure 1: China Statistics, 1978 – 2010
|GDP, purchasing power parity||$1.1 trillion||$4.42 trillion||$8 trillion (projected)|
|% of World Economy China Accounts for||About 5%||About 12%||About 20% (projected)|
|Per Capita Income||$200-$300||$800-$900||N/A|
|Major Cities Per Capita Income||$900||$2300||N/A|
|Medical Device Market||N/A||$1.3 billion||N/A|
|Medical Device Imports from U.S.||N/A||$207 million||N/A|
|Number of Foreign Medical Companies in China||N/A||200+||N/A|
|Number of Healthcare Institutions||169,732||315,033||N/A|
|Number of Hospital Beds||1,850,000||2,903,000||N/A|
|Number of Hospital Beds per 1,000 persons||1.93||2.35||N/A|
Sources: CIA World Factbook; U.S. Department of Commerce; International Monetary Fund; Wen Hui Bao Daily (Chinese Newspaper in China)
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.
Foreign medical device 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 that want to export their products generally choose among state-owned distributors, private domestic distributors and foreign distributors. Foreign companies that have a physical presence in China can have direct distribution channels via their joint ventures and/or Wholly Foreign Owned Enterprises (WFOEs). 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 a Chinese distributor(s). As a result, they may designate someone in their corporate or Asian headquarters to meet with periodically and review the performance of their Chinese distributor(s). Below are the three main distributor options in China.
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 generally do not specialize in marketing (or promotion), but, rather, 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 than FTCs, but they are generally limited in their geographic focus.
Second, there are privately owned trading companies. These companies have emerged in the last 3-5 years and are often 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 generally also limited geographically and sometimes are not authorized to engage in foreign trade.
Third, a Hong Kong distributor will be familiar with both Western, as well as Chinese, business practices and can oftentimes identify appropriate end-users, import/export corporations and local distributors in China. Some Hong Kong distributors have good experience and knowledge about China business and since they normally know at least Mandarin or Cantonese, their communication can be effective. Hong Kong distributors, however, will normally take a sizeable margin, making the products they are trying to sell more expensive in China’s price sensitive market. They also tend to “skin the cream” while selling and often focus on quick, NOT long run profits.
Foreign medical device companies that want to stay “close” to their China distributors or have a local presence can do so via a representative office. A representative office can perform “liaison” activities in China, but is not supposed to engage in such profit-making commercial activities as importing and selling goods or issuing invoices. While the representative office staff in China will target and work with customers, the local distributor eventually finalizes the sale. Of course, enforcement of a representative office’s activities is often neglected.
Figure 2: Recent Distribution Agreements
|CARDIODYNAMICS INTERNATIONAL – www.cardiodynamics.com
(San Diego, CA)
|May 2000||BioZ.com||Chang Sheng Medical Equipment
|Exclusive Distribution rights in all provinces, excluding the five southeastern provinces and Hong Kong|
(North Point, Hong Kong)
|Exclusive distribution rights in the five southeastern provinces as well as Hong Kong|
|December 1999||CRYOcare System||Charlson International
|Opened up a training center at First Military Medical University Hospital in Guangzhou|
|February 2000||MRI (Echo)||Evergreen Imaging
|Part of the large distribution company, Evergreen|
|May 2000||Vascular access products||Chindex International
|Also started providing logistics services on June 6, 2000.|
Sources: Business Wire and PR Newswire
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, collect payment, and provide service and maintenance. While foreign companies may not be able to use existing FIEs to import and distribute products not made in China, in some instances they can set up “new” entities (i.e. holding companies) for such purposes. This regulation, however, will be altered with the WTO and is discussed later.
There are three types of FIEs in China: (1) Equity Joint Ventures (EJVs), (2) Contractual Joint Ventures (CVJs) and (3) Wholly Owned Foreign Enterprises (WOFEs). FIE’s in China are advantageous because: 1) They 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) They help improve access to local resources, 4) They receive favorable treatment from the Chinese government (i.e. tax exemption, obtaining financing, securing support) and 5) They can overcome the difficulties with foreign exchange controls with greater ease.
Figure 3: Foreign Investment Enterprise Structures
|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;
• Provide 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 for an EJV 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 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 percent 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;
• No Chinese partner with a stake in the success of the venture to assist with problems;
• Stricter foreign exchange balancing requirements;
• Higher corporate tax rate than equity joint ventures.
Source: Pacific Bridge, Inc.
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 WFOE 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 or WFOE, the time it takes to establish such entities and the associated risks involved.
Two examples of medical companies that have set up FIEs in China include Johnson & Johnson and Medtronic. First, Johnson & Johnson (J&J) has been steadily increasing its consumer products, pharmaceutical, and medical device operations in China. As of June 1995, its total investment in China through joint ventures and manufacturing facilities totaled $100 million, and as of 1996, the company had two wholly foreign-owned companies and three joint ventures in China. Several of these FIEs are described below.
• In 1985, Janssen Pharmaceutica, J&J’s Belgium subsidiary, entered the Chinese market in what was then the largest pharmaceutical joint venture in China’s history to date. Since then, Xian-Janssen Pharmaceutical Co. has been consistently named the top international joint venture in China.
• In 1990, J&J Shanghai Limited, a joint venture producing BAND-AID Adhesive Bandages, was opened in China.
• In 1995, J&J Medical (China) Ltd. opened its first WFOE in China when it opened a factory in Shanghai to produce Cidex Activated Dialdehyde Solution and Microshield Disinfectants for hospitals. The same year, J&J introduced in China its Surevue Disposable Contact Lens line and its Carefree sanitary napkins.
The company’s presence in China is also strengthened by numerous “PR” programs that educate the Chinese public about its products, provide training for medical professionals in the country, and develop stronger ties with the government.
Second, Medtronic is the market leader in China for pacemakers and several other product lines. It entered the Chinese pacemaker market in the 1970s and has been building relationships with key physicians there for over 20 years. Since the early 1990s, Medtronic has also been stepping up its activity in China, establishing a joint venture at Ning-bo. The Chinese partner in this JV was the government agency that administers the Ning-bo Economic Technical Development Zone, one of 17 established by the Chinese government to attract foreign investment and technology. In 1996, Medtronic announced the first human implants of the Medtronic Champion (Model 7302) Pacing System, the first implantable bradycardia pacing device designed exclusively for China and other developing nations that need affordable, reliable and easy-to-use products with minimal patient follow-up. Medtronic also set up a wholly foreign-owned enterprise (WFOE) $10 million manufacturing facility in Shanghai to produce its new, high-quality, inexpensive line of cardiac pacemakers for China and other developing countries. Medtronic believes that demand for its cardiovascular devices will continue to grow, especially since many physicians in major Chinese cities are rapidly adopting advanced western medical therapies and techniques.
World Trade Organization (WTO) Accession
China’s accession into the World Trade Organization (WTO) will also help foreign medical companies grow their businesses in China. Three relevant issues include:
1. Distribution: Before the WTO, foreign firms had no right to distribute products in China other than those that were manufactured in China. Foreign companies also could not own or manage distribution networks, wholesaling outlets or warehouses. China’s commitments in the WTO address distribution, retailing, maintenance, repair and transportation. Thus, U.S. companies will be able to distribute imported products as well as those made in China, opening up significant opportunities to expand U.S. exports of medical products. The Chinese government plans to phase out many other restrictions within three years. In addition, restrictions on services auxiliary to distribution (i.e. rental and leasing, air courier, freight forwarding, storage, advertising, technical testing and analysis and packaging services) will also be phased out in three to four years.
2. Tariffs: On U.S. priority industrial products, tariffs will fall to 7.1% with the majority of tariff cuts officially implemented by 2003. Specifically, these tariff cuts include wood, paper, chemicals, capital and medical equipment.
3. Insurance: China will expand the scope of activities for foreign insurers to include group, health and pension lines of insurance over the next five years. These lines of insurance represent about 85% of total premiums. In addition, while the U.S. agreed to China’s request to limit foreign equity participation in life insurance to 50%, China agreed to accelerate the elimination of geographic restrictions. Furthermore, instead of having the Chinese government choose JV partners, life insurers may now choose their own JV partner. For non-life insurers, China will allow branching, or 51% ownership on accession and will allow wholly foreign owned subsidiaries in two years. Also, reinsurance is completely open upon accession (100%, no restrictions)
Despite the many advantages of WTO to foreign medical device companies, some negative factors will continue to exist. For example, some foreign medical device companies already in China are attempting to renegotiate contracts with JV partners to take advantage of the WTO concessions made by China. As they try to restructure their business arrangements after China’s accession to the WTO, one of the major pitfalls is going to be regulatory approval. Like new contracts, changes in pre-existing contracts between foreign and Chinese parties must be approved by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) or by local authorities. The Chinese authorities complicate the process by being notoriously picky and unpredictable. Thus, obtaining approvals for amended contracts will be difficult, even after China accedes to the WTO
v . Furthermore, for importing products and distributing them domestically, foreign companies in China will probably have to set up new entities (i.e. holding companies) to do so. The Chinese government will most likely not allow foreign companies to use existing JVs in that capacity.
Company URL Listing
JOHNSON & JOHNSON—www.jnj.com
i) U.S. Department of Commerce, U.S. Commercial Services, 1999.
) Biomedical Market Newsletter 2000.
iv) United States-China Business, 1999.
v) ChinaOnline News, 2000.