Health-Care Reform, China Style

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To counter criticism at home and to bolster the development of a domestic medical device industry, Beijing is pushing for hospitals to give preference to domestic companies when purchasing comparable items as long as domestic companies can provide said items within a reasonable price and time. China's Ministry of Health has also stated that it will place controls on purchases exceeding 5 million yuan (roughly $710,000) in an effort to reduce costs.

Right now most domestic producers focus on low-end devices, with 90% of high-end devices still being sold by foreign companies. The battleground is shifting, however, as investment from the stimulus package totaling about $9.2 billion filters to the R&D budgets of local firms like Mindray Medical International (MR).

Domestic Device Makers Playing Catch-Up

To be successful in capturing a share of China's growing medical device market foreign brands will have to find ways to combat the rise of domestic firms, price their products competitively, and at the same time maintain their brand position at the top of the market.

The current technology gap between domestic producers gives manufacturers from Germany, Japan, and the U.S. a chance to shape the market and cement their positions before Chinese companies can catch up. It also allows hospitals and patients leeway to choose foreign medical devices in more life-and-death situations despite increasing protectionism.

While companies cannot sell premium products in all markets they should consider selling premium brand-name products to magnet hospitals in cities like Beijing, Shanghai, and Guangzhou where the government is focused on showcasing world-class care and where patients are demanding international products. At the same time, companies can offer a more cost-sensitive second line of products designed for the new local clinics that the government intends to build in rural areas.

Companies like General Electric (GE) have used this approach as a way to gain market share. By joining with local partner Shinva Medical Instrument and creating Shinva GE Medical Systems, GE has been able to produce lower-cost products at a price point 15% below imported devices. Through its partnership GE is able to maintain its own brand image and target top-tier facilities that have the demand for high-end products while also cashing in on demand for less expensive devices in rural areas.

Teaming Up for Better Market Exposure

Partnerships with local players have the added advantage of lowering sales barriers and may also allow foreign medical device makers to sidestep Beijing's emphasis on "buy China." By partnering with domestic firms foreign manufacturers can still crack the mid-tier market.

Medtronic, the U.S.-based manufacturer of stents, has successfully partnered with Shandong Weigao to market Medtronic's spinal products and the Chinese company's orthopedic devices. Weigao already has strong access to 100 Chinese cities, making it easier for Medtronic to make gains in the market.

Medtronic is not the only example of foreign firms that have built partnerships in China. In April 2008, Philips Healthcare acquired Shenzhen Goldway Industrial, the second-largest Chinese patient monitoring device manufacturer, giving Philips access to both the high and low ends of the market.

The Obama Administration and Democrats in Congress are trying to push health-care reform in the U.S., but it is unclear how broad those reforms will be or if they will provide any kind of tangible benefit to medical device makers. Change is already coming to China and foreign medical device makers have the opportunity to capture growth in both high-end and developing segments provided they make the right choices on distribution, branding, and strategy.

Shaun Rein is the Founder and Managing Director of the China Market Research Group, a leading strategic market intelligence firm focused on China. He can be reached at shaunrein@researchcmr.com.

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