This article was also published on Medical Device Daily
Despite a recent drop in economic growth, China’s economy is still growing. GDP growth in 2013 is expected to reach 7.3 percent, higher than anywhere in Asia. With the rise of the middle class, Chinese citizens are spending more and more money on medical device and pharmaceutical products. In the past five years, annual healthcare spending per capita has increased dramatically, from $122 to $262.
China’s medical device market is currently the sixth largest in the world. If current growth rates hold, it will be worth more than $28 billion by 2020. This would make it bigger than every medical device market except the United States and the European Union.
But along with these abundant opportunities come considerable pitfalls. Disloyal employees, counterfeiting and misunderstood negotiations are just a few described below.
THE DISLOYAL EMPLOYEE
Intellectual property rights and corporate theft are fluid concepts in China. However, it is crucial that your employees understand what you mean when you use these terms.
About a year ago, I was working with a large European medical device company to streamline their Asian business model. I met their head salesperson for the Asia region. Company executives all spoke highly of this man, a Chinese national named Ian Woo. In the minds of company executives, Ian was their “superstar.” He had increased sales in Asia by 12 percent each of the last five years. I did not mention to the executives that the markets for their device products were actually growing at rates of 20 percent per year. So Mr. Woo’s “star” performance was really not that stellar.
Over the course of several weeks, I learned as much as I could about Mr. Woo, since I needed to work with him to grow Asian sales at the company. In my short time with Mr. Woo, he struck me as a good international executive.
However, several months later, I met a fellow alumni and close friend who was working in the VC business in China. He told me about his newest investment — a Chinese company that made medical device products quite similar to those of my current client. He then mentioned the name of the GM in charge of this new outfit — Ian Woo.
The name struck but it didn’t ring a bell. I asked for a physical description. As my friend began to paint a picture of his Chinese GM, everything suddenly clicked. I realized that Mr. Woo now had two jobs — one as a sales manager for the large, European medical device company and one as a GM for this new competitor medical device venture company.
Mr. Woo already knew the European company’s buyers, so I am sure he thought it would not be difficult for him to bring them over to his new venture. The new company made similar products to the European one, but at a fraction of the price. Mr. Woo now had two incomes — one from his initial employer and one from his new, VC sponsored company.
THE COUNTERFEIT LICENSE
My organization was recently asked to perform due diligence for another European medical device company, regarding their potential acquisition of a China based medical device company. The European company had already done one round of due diligence through several global players. They called us to do additional due diligence.
From the very beginning, we found problems. First, after studying the Chinese company’s registration certificate and other paperwork — quality systems, ISO, etc. — we found that most of the certificates had expired. They had not been renewed.
Second, after looking at the company’s quality manual (which was written in good English), we visited the factory. When we walked the plant floor, we asked several production groups about their quality systems. They all gave us the same answer: they had never before seen the quality manual!
Finally, we checked to see if the business owner even had the proper license to run a medical device factory in China. He did, but it was the license approval from a friend’s manufacturing company, just down the street from his factory. This was obviously not an appropriate use of the license.
THE MISUNDERSTOOD NEGOTIATIONS
Not long ago, many foreign medical device companies were setting up joint ventures (JV) with Chinese companies 50/50. After setting up such agreements, however, many of these foreign device companies found their Chinese partners were unable to deliver half of the JV’s value. Chinese JVs today are mostly owned by the foreign company, and very few foreigners can set up 50/50 deals anymore. Today, the foreign medical device company has majority ownership and the Chinese partner has minority ownership. Even with these revised formulas, JVs with Chinese medical device companies can still be difficult. Hence, many foreign companies now prefer 100 percent ownership as their own foreign owned subsidy.
One problem that crops up with Chinese JV partners is misunderstanding during negotiations, especially when it comes to concepts like conflict of interest. A year ago, I helped set up a JV between a medium-sized medical device company from the U.S. and a medical device company from Shanghai. During our negotiations, I sat with the two representatives of the American company. Across from us were the Shanghai medical device factory owner, an officer from China’s Food and Drug Administration (CFDA) and the town’s mayor. Figuring out whose objectives we needed to meet was not easy.
Halfway through negotiations, a man named Mr. Zhang suddenly showed up to the Chinese side of the table. I asked who he was, and the Chinese factory owner said his friend was helping with negotiations. Before we had finished, I found out that Mr. Zhang actually worked at a competing company. Wasn’t his presence a rather significant conflict of interest, I asked. Wasn’t this a problem? Both the owner of the factory and the other Chinese officials struggled to get my point. They then explained that everything was fine, not really understanding the conflict of interest.
Even the most cutting edge market research cannot replace a thorough understanding of differences in culture and business tactics. This is certainly the case in China, where concepts like intellectual property and conflict of interest are very different from those in the West.
Not long ago, I was in a hotel in Shanghai, and I questioned the desk manager: “Is China communist or capitalist?”
She didn’t know the word “communism” in English, so she spent several minutes browsing through her dictionary. When she at last found it, she raised her eyes, laughing. “Mr. Gross, no!” she said. “Communism is for the old generation, not the younger generation.”
It’s true that Chinese often see themselves as capitalist. However, it is usually in a very different way from our understanding in the West.