WEB EXCLUSIVE
China’s economy was hit hard by the 2008 financial crisis, and the medical device industry was not spared. Data collected by the China Association for Medical Devices Industry (CAMDI) and several global market consulting firms show that China’s medical device exports have dropped, and exports to America, Europe and other markets have slowed down significantly. Companies involved in OEM processing of low-end medical devices and consumables have suffered the most.
Although the med-tech industry has not been affected as much as the electronics, automotive, or computer sectors, many small and medium-sized medical device companies continue to struggle for survival. I know of one company—a major manufacturer of disposable syringes and infusion products—whose production and sales figures rank among the highest in the country, but whose profit margin has fallen to nearly zero. Many export-oriented companies that are reliant on OEM orders are in a similar situation. Some are even facing bankruptcy.
Under the influence of historical factors and the current economic environment, China’s medical device industry is facing the following problems and systemic weaknesses.
Lack of large globally competitive companies
Compared to China’s pharmaceuticals industry, the medical device industry is fundamentally weak, consisting primarily of SMEs serving the domestic market. China has more than 10,000 medical device companies, but only a few dozen have annual sales exceeding RMB 100 million. None can compete with leading global firms like Medtronic, Stryker, Boston Scientific or Baxter. Most of China’s medical device companies are located in the Yangtze Delta and Pearl River Delta, which is one of the reasons why industry has remained small and weak, lacking the foundation for sustainable long-term growth. These SMEs are easily affected by changes in the external environment, as seen during the recent financial crisis.
Lack of innovative products and intellectual property rights
Most devices produced by China’s med-tech industry are “me-too” products, and some are clearly in violation of international patents. China has had its own patent law for years, but relatively few patents have been awarded for medical devices. Many companies claim to have domestic patents, but they tend not to reach the level of internationally recognized ones but are so-called “practical utility patents,” which have little value as intangible assets. Some companies have achieved enviable success in the domestic market, but their products clearly infringe on intellectual property (IP) rights and have no chance of entering the global market. In the interventional cardiovascular device market, for example, several Chinese companies have received State Food and Drug Administration (SFDA) permission to market drug-eluting stents (DES) on the domestic market. These companies’ sales reach into the hundreds of millions of RMB, and are outperforming international companies like Johnson & Johnson and Boston Scientific in terms of domestic market share. Because their products potentially are in violation of patents, however, they have little chance of entering the European or North American markets. This problem will not be easy to solve in the short term.
Weak brand awareness
Many Chinese SMEs were founded to satisfy manufacturing and trade requirements for foreign brands, and they are content with the quick profits that the OEM model provides. This, in turn, has kept them from developing their own brands. These companies are unable to leverage a product’s added value and marginal profit, and they are susceptible to environmental changes. As soon as OEM orders dry up, the companies struggle to survive. As China’s economy has grown and industries have taken shape over the past 30 years, Chinese products—from the toys and clothing of the early period to today’s home electronics, cars and communication equipment—have met with international approval. It will be difficult at first for Chinese brands to compete with leading global medical device manufacturers, but their competitive advantages are gradually becoming apparent. My own small interventional medical device brand is competing successfully against French, German and American brands and has won bids in European healthcare markets. Chinese medical device companies must start developing brand awareness and brand value early on if they hope to succeed.
Lack of expertise using outsourcing and global supply chains Because of cultural factors, Chinese companies like to be “big and comprehensive” and are reluctant to take advantage of outsourcing or partnership opportunities. This leads to massive waste. And despite the abundance of expensive high-tech equipment in the medical device industry such as MRI and CT machines, domestic companies continue to reinvest in the same products and projects. For example, there is a glut of expensive laser cutting machines to make stents, but new companies continue importing them so they can achieve self-sufficiency. As globalisation continues, Chinese companies are getting better at making use of outsourcing to create their own brands at the lowest possible cost and claim a share of the market. European companies are also creating and selling “kit packs” as a way to increase market share.
But just as every dialectical process has two sides, the financial crisis has brought with it rare opportunities. Here are a few strategic approaches to take advantage of these opportunities.
Improve industry positioning to focus on mid- and high-end products
There are 13,000 medical device manufacturers in China, but most of them are SMEs producing low-end or consumable products. Data from 2008 show that there are only 60 companies with more than 100 million RMB in sales per year. Almost half of these companies have foreign investment. The Chinese medical device industry must reposition itself, improve its product structure, focus on mid to high-end products and increase its core competitiveness as soon as possible. To take two “leading” domestic manufacturers of disposable syringes and needles as an example, both have an annual production valued at several hundred million RMB yet see less than 3% in profits. The per capita production value is very low. Compare this with a manufacturer of interventional cardiac catheters and stents with profit margins of more than 200% and 300 times per capita production value. In comparison with the pharmaceutical industry, medical device manufacturers are less likely to require large investments in machinery, making it much easier to adjust product structure. Companies with enough innovative technology and production know-how can make these changes very quickly. Potential new product areas include biologically active materials, orthopaedic devices and consumables, interventional medical devices and consumables, high-end clinical test equipment and consumables, and IVD rapid testing kits.
Locate areas of “foreign demand,” and expand into foreign markets
The government’s 4 trillion RMB stimulus package and policies to boost domestic demand have helped most Chinese companies, but the medical device industry has benefitted less than other industries. Because most SMEs manufacture only for the domestic market and medical device demand is determined by domestic institutions, recent medical reforms have not done a great deal to stimulate demand. Some export-oriented companies rely on OEM services and do not benefit from the expansion of domestic demand. If companies can think outside the box and try to expand foreign demand for their products, this might be a way to achieve quick economic gains. The financial crisis has decreased demand for traditional exports, but the decrease in purchasing power of foreign healthcare systems has also decreased the competitiveness of many foreign medical device SMEs. This gives Chinese companies a good opportunity to take advantage of their low manufacturing costs to get a foothold in foreign markets.
For years, companies have been succeeding in the domestic market but have not tried to expand overseas. This can be attributed, in part, to language and cultural barriers and to unfamiliarity with foreign market regulations. In the European Union, Chinese medical device companies only need to obtain CE certification to be eligible to directly enter more than 20 member states. CE certification is much less stringent than SFDA certification. Some small pharmaceutical companies have obtained CE certification while waiting for SFDA certification and marketed their products overseas right away. I suspect such strategies will become more and more popular.
Use human resources to accelerate the pace of product commercialisation
Medical device development in China lacks the support of national research institutions, which are often out of sync with practical needs. This leaves technology and product development in the hands of medical device companies. Unfortunately most medical device companies use their limited investment funds to expand production and sales rather than to develop new products or technologies. China’s so-called new products are often imitations of foreign products, which limit the impact they might have on foreign markets.
Medical devices, especially small products, can be developed and manufactured in a relatively short timeframe, and human resources can be harnessed to drive innovation. Over the past 30 years of opening and reform, a significant portion of the 200,000+ Chinese students who have studied abroad have gone to work for major medical device manufactures. Domestic companies should find ways to put these intangible assets and technological assets to use.
Strengthen internal and external industry links
Most of China’s 10,000+ medical device manufacturers are SMEs. Each one is independent, each one wants to be “big and comprehensive” and do everything from raw materials processing and manufacturing to product sterilisation. There are two problems with this scenario: the medical device industry has no structure and certain key service and component areas are underrepresented. In the interventional cardiac catheter and stent market, for example, no Chinese companies have the technical capabilities to manufacture the internal catheter tubing, which must be imported. Polymer extrusion technology is all that is required to manufacture the tubing, and there are more than 100 companies in the Pearl River Delta alone that have that capability. But none of them are capable of precision extrusion, and thus a 100 million RMB market opportunity is missed. In the increasingly global economy, industry supply chains are an important way to decrease costs and increase efficiency. Chinese companies would be well advised to stop trying to be “big and comprehensive” and start being “small and specialised.”
China’s medical device industry also suffers from a lack of distinction between upstream, midstream and downstream companies. In other countries, component manufacturers and makers of finished products are clearly defined. Some manufacturers of finished products in China do not even participate in international conferences of their related filed and have minimal or no exposure in overseas markets. If Chinese companies pay more attention to their roles within industry, highlight their advantages, work around their weaknesses, and avoid destructive price competition, they will have bright prospects for growth.
Take advantage of financing channels, and develop new projects
The difficulty of obtaining venture capital, loans and other financing during the global financial crisis has provided a good opportunity for China’s med-tech sector. Growth may slow in China’s medical device industry but it will not reverse. For investors, this makes the medical device industry less risky than other industries, and makes risk management easier.
Of the 4 trillion RMB stimulus package, 160 billion RMB was spent on healthcare projects. Consequently, provincial and municipal healthcare industrial parks are springing up everywhere. For companies with a good business plan, sound IP, innovative products and a clear market, financing is not hard to find. Banks are desperate to find solid projects to invest in, and the medical device industry is capable of becoming a top choice. New product investment is not limited to domestic products but extends to foreign products, as well, at a level that should be acceptable to domestic investors. Just as a stock market crash provides investors with new opportunities, the global financial crisis has brought new opportunities to China’s medical device industry.
Conclusion
Compared with other industries, the medical device sector has not been hit as heavily by the financial crisis or by changes in the domestic economic environment. As a “sunrise industry,” China’s medical device industry has plenty of room for growth. Most healthcare institutions in China use relatively old equipment, and there is great potential for growth in the healthcare market. China’s medical device industry benefits from the country’s importance in international manufacturing, and medical device exports will certainly continue to grow. If Chinese companies can use their vision and insight, formulate mid- and long-term strategies, develop innovative new technologies and products and claim and protect IP rights, and if the industry can adjust its product structure, make use of global supply chains and increase its core competitiveness, then Chinese medical devices will compete successfully with imported products in the domestic market and begin to play an important role in foreign markets.
Eric Chien, MD, PhD, has practised as a clinical cardiologist and held key management positions at healthcare companies in China and elsewhere. He is the founder and CEO of SynexMed, a med-tech OEM manufacturer headquartered in Hong Kong with a manufacturing base in mainland China, and is a member of the editorial advisory board of sister publication China Medical Device Manufacturer. He can be reached at echien@synexmed.com.
