Opportunities in the Chinese Medical Market

Any device company that is looking to expand onto new markets should consider China. Although a relatively small market compared with developed markets – US industry figures put the Chinese market for healthcare technology products at around $400 million – the dynamic growth in the economy is expected to result in increased purchasing of medical equipment. Around 60% of market requirements are imported: in the past five years China has spent between $250 million and $350 million on imported medical equipment annually. Imports are projected to grow by around 8%.

Traditionally, China has imported a relatively limited medical product range, including radiology equipment, medical instruments, electro-medical apparatus and clinical laboratory equipment, with the majority of these products geared toward diagnostic applications. While a strong demand for diagnostics products will continue as China’s medical industry further develops, its needs for therapeutic and patient monitoring equipment will increase. Furthermore, Chinese medical purchasers will begin to supplement their expenditures on durable equipment with purchases of a variety of medical products such as disposables, one time surgical products and specialized chemical reagents.

The country is experiencing the world’s biggest economic boom. Its economy grew 12% last year with industrial output up by more than 20%. By 1994, China’s economy is expected to be four times larger than it was in 1978 – the year the economic reforms were initiated. If China’s economy grows as fast for the next 20 years as it has since economic reforms were implemented 15 years ago, it will be the biggest economy worldwide. Increased prosperity and economic growth will lead to a greater demand for improved healthcare and foreign medical technology. With 1,200 million people, 2.2 million hospitals beds and 65,000 hospitals, China’s healthcare system is a huge potential market for Western medical manufacturers.

Eight percent of imports come from the US, Japan, and Germany. Advanced Western medical technology has been in demand due to the low level of existing know-how and technology in China. Nevertheless, Western medical exports have been limited due to a number of factors, including:

1) China has a protectionist policy towards domestic production, importing only medical equipment that it cannot manufacture itself.
2) There are relatively high import duties or taxes on many types of medical equipment;
3) Import approval procedures can be complicated.

While some Western medical manufacturers have been successful in China (US companies achieved sales of $107 million in 1991), most are not involved with China. Others have had less successful due to inflexible pricing strategies, an inability to take a long-term approach to penetrating the market, and low profiles at local seminars or conferences. In addition, some manufacturers have pushed expensive, state of the art technology instead of less sophisticated, value-oriented technology more in line with local demand. Overall, Western medical products and medical know-how are regarded favorably in China. Importing Western medical products is also seen by China as a way to counterbalance Japanese domination in the region.

… how the system works

The Chinese healthcare system is dominated by the Government. There is a large network of central and decentralized purchasing of medical equipment.

  • The Ministry of Public Health (MOPH), which sets overall policies and research in the medical sector, is the lead agency. It oversees 11 medical colleges, including three teaching colleges, and purchases much of the medical equipment for these organizations.
  • The People’s Liberation Army (PLA) provides healthcare to three million soldiers and their families and operates 300 hospitals and three teaching colleges.
  • The State Pharmaceutical Administration (SPA), set up in 1979, oversees production, marketing and distribution of domestic pharmaceutical and medical equipment.
  • Industrial ministries provide healthcare to specific individual industries such as railroads and electronics.
  • There are also public health bureaus with thousands of hospitals administered by provincial, municipal and county governments.

Fifteen years ago the healthcare system was rigidly centralized by Beijing, but today it is more decentralized – individual hospitals and other health care systems have greater autonomy at provincial and local levels. Despite a more decentralized overall system, obtaining a product approval or import license may require going through four or five layers of government agencies. Where a license is not needed to import medical equipment, a hospital will have to apply for a foreign exchange allocation and then seek import approval from a number of the following government bodies – the State Economic Commission, SPA, MOPH, State Bureaus and local bureaus.

If the medical equipment costs less than $20,000 per unit and is not produced locally, it is fairly straightforward to get an approval by going through the proper channels outlined above. If the equipment is over $20,000 per unit and is not produced locally, an import license as well as an import approval is needed. Import licenses are generally approved by the Ministry of Foreign Economic Relations and Trade (MOFERT). Some sophisticated medical equipment can only be purchased via central authorities, needs special import licensed and is processed by a special committee that reviews each product on a case-by case basis. Medical equipment which can be manufactured locally can be imported only with extremely high tariffs, making such goods uncompetitive in the local market.

Today, many individual Chinese hospitals are making their own purchasing decisions with limited supervision from government health entities. Chinese hospitals buy foreign equipment with fee income from patients, insurance system funds or banking financing, all which needed to be backed by various government authorities at the local level. Loans can be obtained if the revenue projections for specific pieces of equipment meet required levels. In some instances, hospitals workers have bought shares in various types of medical equipment in anticipation of future revenues or profits.

… market entry strategies-exports

While a number of Chinese hospitals and other medical entities make local decisions on purchasing equipment, most Chinese end-users cannot import directly. Importation of medical devices normally occurs throughout MOFERT-authorized quasi-government import-export corporations which act primarily as agents for end-users. These are located in almost every province and municipality in China. In some instances, they also act as trading companies, using their own money to buy and sell equipment.

Western manufacturers can deal directly with authorized import/export corporations, although it usually takes a long time to develop meaningful relations and language (the lack of English) can be a major barrier. Another alternative to selling to authorized import/export corporations is to work with a Hong Kong or Taiwanese group that distributes products in China. The advantage of this strategy is that these groups normally have had experience with working with Western companies. On the other hand, another layer in the distribution process will probably mean less profit for the medical manufacturer. Perhaps the most comprehensive way to get a foothold and distribute products in China is to set up a joint venture with a Chinese company.

Whichever strategy is chosen, Western medical companies must understand that the Chinese medical industry requires sophisticated service, support and education. Pre-installation training and service, post-installation service and engineering are keys to winning competitive sale. Lack of funds in China means that medical technology is used longer than in the US and Europe, so Western medical companies that can provide upgrades to existing products will do well.

… joint ventures in China

Perhaps the best log-term strategy to penetrate the Chinese market is through a joint venture which may include assembly, manufacture and/or distribution of the imported product. China is anxious to upgrade its domestic manufacturing technology and limit the outflow of foreign exchange. Joint-venture manufacturing helps foreign companies overcome quotas and avoid taxes on the value-added portion of the product that is produced in China.

Foreign investment figures show that in the first six months of 1992, actual investment totaled $3,380 million- a 130% increase over the same period the year before. Pledged investment grew even more spectacularly to a record $14,670 million, more than three times the figures for the first half in 1991. The upset in joint ventures is expected to continue for at least the next five years. A number of Western medical firms are currently in joint-ventures with Chinese manufacturers to produce technology such as MRI, X-ray and ultrasound equipment, and fetal monitoring products.

While setting up a joint venture in China has many advantages (including low-cost labor), there are also potential complications. Currency exchange has been eased but problems still exist. While there are more formal procedures for trademarks, patents legal disputes, China’s intellectual property laws are still at elementary levels compared with Western laws. However, medical products are more difficult to copy than other products and the technology involved changes quickly.

Finally, many of the problems encountered in a joint venture in China relate to the interaction of the joint venture and the state-planned economy’s impact on material supply, distribution and transportation.

… cultural sensitivities

Companies that want to do business in China must make an effort to understand the country’s culture, customs and history, and recognize that China does not operate in the same way as Western business. For example, the negotiation process is almost always longer than in the West because the Chinese place more value on personal relationships – they really want to know their future partners.

Companies should find out whether their Chinese partners have the legal authority to conduct a negotiation or conclude a deal whether they fully understand all aspects of the transaction. Differences between Chinese and Western contacts need to be understood. Contracts should be in both Chinese and English to make sure all points are clear.

Chinese business concepts also differ from those in the West. For example, a Chinese-Foreign joint venture usually involves two or three parties, each owning a certain percentage of shares. The Chinese concept of shareholders however is very different from the concept in the Western common law tradition. The party with the largest block of shares may not necessarily be the one that runs the company. The percentage of shares owned has the most direct impact on distribution of profits and incurring liabilities.

Sometimes the composition of a board of directors may not precisely reflect percentage ownership. Having a majority position in a joint-venture company may not be as meaningful as foreigners think it should be, and it may still be necessary to reach a consensus between the parties for effective implementation of corporate policies.

Ames Gross is president of Pacific Bridge Inc, a Washington, DC, consulting firm which assists US medical companies in penetrating the Asian marketplace.

Chinese Medical Equipment Imports, 1991

Medical/surgery/veterinary instruments 33.8
Other medical apparatus based on x-ray 25.4
Patient monitors 20.6
Computed tomography (CT) scanners 19.4
Parts for x-ray machines 18.7
Ultrasonic diagnostic equipment 15.4
Optical Fibre endoscopes 14.2
Centrifuges 14.0
Other radiological equipment 13.8
Electronic instruments for physical analysis 12.3
Mechanical instruments for physical 11.7
Physical therapy equipment 7.9
Dental instruments and appliances 6.6
X-ray tubes and intensifiers 6.3
Anaesthetic apparatus and instruments 5.8
Magnetic resonance imaging (MRI) apparatus 5.3
Breathing appliances 5.1
Laboratory hygienic pharmaceutical glassware 4.4
Dialysis apparatus 3.7
Biological laboratory strerilisers 2.1
Medical laboratory strerilisers 2.0
Orthopaedic appliances 1.3

Source: China’s Customs Statistics