This article was also published on Medical Device Daily
Across Asia, rapid economic growth has fueled the growth of a new middle class. These people — from China to India to Indonesia — are spending more and more money on healthcare. In 2000, for instance, Chinese citizens spent an average of $45 per year on healthcare. By 2010, that number had risen almost five times to $220 per year.
Medical device markets across Asia have posted average growth rates of 15 percent per year since the mid-2000s. While such growth is impressive, barriers to market entry are high. In addition to regulatory barriers, language and cultural barriers abound. This is especially the case in Korea and China.
KOREA: A DOUBLE-DEALING GM
Some years ago, the division president for a large medical device MNC contacted me for help. He wanted to know if I could come to his company office. After I arrived, the president explained that he was having some trouble with his Korean subsidiary.
The president told me that the Korean GM was not following his directions. Furthermore, the GM often responded late to his e-mails and phone calls, if he responded at all.
I asked how the Korean subsidiary had gotten its start. The MNC president said that his company had purchased it several years back for $25 million in cash. They had given the former owner a contract for two years, at an annual rate of just under half a million dollars. As it turned out, the former owner had deposited the $25 million into his bank account. Furthermore, he was not going to listen to a bunch of Americans from the Midwest.
So I asked the president why he had bought the company. The president explained that this was one of two factories in the world that could make a very specific component for medical devices. This was a key component in the final device product manufactured by the MNC. Both factories, in fact, were located in Korea.
I asked how the Korean GM had started his company. According to the MNC president, the Korean GM had initially worked at the one other factory that made the same device component. Late one night, he unbolted some key equipment from the factory floor. He loaded up a flatbed truck, which he then drove 100 miles south of the capital city to start his own factory. At this point I was surprised. Why would the president even consider buying the factory, given his GM’s history? I made a few pointed comments, and the president politely asked me to leave. He didn’t want his superiors finding out he had made this kind of mistake.
CHINA: A STAR FALLS
Nearly 20 years ago, a large medical device company based in the US decided to hire a local Chinese to run the small but growing China business. Back then, it was uncommon to put a local in charge like this. But the local Chinese GM turned out to be a catch. Working closely with the US head executive, the GM grew the company’s sales from $1.5 million in 1995 to more than $22 million by 2005.
The American executive understood how important relationships were in China. He tried to support his Chinese GM by meeting with him often and supporting his MBA. When the Chinese GM came to the US, the two men spent a great deal of time socializing outside the office. In the ten year period that the GM worked for the American company, his pay rose from about $25,000 to $195,000.
The Chinese GM knew most of the buyers for his company’s products. He knew which products were blockbusters and which were duds. He decided to go it alone.
In 2005, the Chinese GM quit, and embezzled nearly half a million dollars. Before doing so, he had set up his own competing factory about an hour west of the MNC’s sales and marketing operation. The MNC tried to go after its ex-superstar GM in China’s court system. The proceedings were so delayed that the MNC’s American executives finally decided they had no way of winning the case.
The ex-GM was now making several similar competing products that he sold to the MNC’s former buyers. His new products were 75 percent as good as the MNC’s products, but at half the price. Unfortunately, this kind of problem is common in China’s medical device manufacturing sector.
Although medical device markets in Asia present many opportunities, it is critical for Western business executives to understand completely the dynamics of the Asian marketplace.