As the government makes improvements through a stimulus bill, Chinese consumer preferences show a real opportunity for foreign medical device makers
Lawmakers in Washington continue to struggle over President Obama's proposed reforms of America's health-care system. On the other side of the world another country has gone much farther, much faster, in addressing the need for change to its health-care system. As part of its $586 billion stimulus package, China has unveiled an aggressive plan to revamp its health-care coverage, providing a counterpoint to America's struggle with reforms.
China's reforms are designed to address needed improvements to health-care infrastructure and coverage for an aging population and 800 million rural residents as well as to spur domestic consumption to offset the effect of dwindling exports. While younger Chinese are still spending (as I wrote in BusinessWeek in March), savings rates among older folks are running as high as 50% as they worry about skyrocketing health-care costs.
In March, China's State Council announced an allocation of $123 billion toward health-care reform. Under the plan, by next year 90% of China's citizens will be covered by a universal health-care system and health-care facilities will be upgraded, including construction of 30,000 hospitals, clinics, and care centers across the country. Instead of focusing on large magnet hospitals (where queues to see rock-star-like doctors regularly top eight hours) the government plans to build local clinics to treat smaller problems and act as hubs directing traffic to bigger hospitals.
New facilities need equipment and new patients mean more demand for implants, monitoring devices, and diagnostic machines. For foreign medical device companies, China's reforms could prove to be a boon by offsetting lagging demand in developed markets. While the U.S. medical device market has been hit by the financial crisis, China's is estimated to almost double in size between 2006 and 2014 to $28 billion a year, making it a potential growth driver for foreign firms.
A Preference for Foreign Medical Devices
As China's population becomes wealthier, patients are demanding better quality care. With fattier diets and problems with smoking and pollution, Chinese are increasingly afflicted by the same diseases that are prevalent in the developed world: cancer, cerebrovascular disease, and cardiovascular disease. The number of cardiac patients in China is growing at a 20-30% annual rate, with the market for cardiovascular stents increasing by 40% annually. Patients are often able to pay for expensive treatments, despite a fledgling insurance system.
My firm, the China Market Research Group, recently conducted what we believe is the most extensive research into China's health-care sector by interviewing hundreds of doctors, hospital staff, and consumers. We found that there is a clear preference for foreign medical devices. Patients want foreign products, even if they are more expensive, because they trust the quality over local ones. The majority of respondents also said that they were willing to pay 20% or more for Western device brands because they believed them to be more reliable.
The "Made in China" brand perception is hurting local producers even if they are technically getting better. This leaves room for foreign companies like Medtronic (MDT), Philips (PHG), or Siemens (SI) to shape the market for higher-end products like stents and MRIs.
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.