Originally Published June 2000
MARKET ANALYSIS
The Asian Marketplace for In Vitro Diagnostics
Widely differing markets offer something for everyone, with success attending the company that is well informed.
Michael Farmer
For medical product manufacturers, the next great market expansion is likely to come in Asia, where a number of national economies have long been on the verge of booming growth. Now emerging from the currency crisis of the late 1990s, these economies are once again showing signs of the vitality that is the essential precursor to the creation of improved healthcare systems and heightened demand for advanced medical products.
Even so, not every market in Asia is everything it's cracked up to be—or as bad as it appears. For companies preparing to sell into Asian markets, knowing the key healthcare-related differences among the various national economies can help to reduce the chances of a marketing misstep that could doom the company's efforts. In this regard, the experience of companies in the in vitro diagnostics (IVD) market can be especially instructive. In both price and technical sophistication, IVD products include a broad spectrum that is a fair representation of the entire universe of medical products—from manual reagent kits to fully automated clinical laboratory instruments. Factors that influence the various Asian national markets for IVDs are also likely to be important for manufacturers in other sectors of the medical products industry.
In 2000, the total Asian market for IVD products will exceed $4 billion—nearly 20% of the $21-billion worldwide IVD market. Almost $3 billion will be spent in Japan, the largest of the Asian economies. Nearly 90% of the remaining $1 billion in IVD sales expected this year will be in the next five biggest markets—China, Australia, South Korea, India, and Taiwan.
The top 15 Asian markets can be sorted into four distinguishable types. Type One includes the rich and mature markets of Japan, Australia, South Korea, Taiwan, New Zealand, Singapore, and Hong Kong. China and India constitute the Type Two category. These countries are in many ways the least-mature Asian markets. Type Three markets are those of Thailand, Indonesia, the Philippines, and Malaysia, which fall somewhere between the Type One and Type Two markets in overall level of development. The least-developed Asian countries are the Type Four markets, of which Vietnam and Pakistan are the largest.
This article discusses the distinctive characteristics of Type One, Type Two, and Type Three Asian markets. Few international companies are now likely to look seriously at the so far unrewarding Type Four nations, which cannot yet be described as "emerging." Table I charts the salient facts about the population and IVD industry in each of the 15 most significant national markets of the East.
Type One Markets
In Asian nations of the elite category, the vast majority of the population is well educated and well insured. Nearly everyone can afford imported diagnostic products, and well-established reimbursement systems govern IVD commerce. Virtually every laboratory in the Type One countries has automated instrumentation, because both employees and laboratory space are expensive. These markets are very competitive, largely because most of them are home to world-class exporting IVD manufacturers. The forces of industry consolidation that have tightened markets in North America and Western Europe are also affecting these markets, some of which are growing slowly and others not at all. Consequently, breaking into Type One Eastern markets is difficult for new players.
Japan. Japan could reasonably be viewed as representing a category of its own. It has much in common with the other Type One markets, especially South Korea and Taiwan, but on a much grander scale. The most striking figures in Table I are Japan's IVD market size of $2.9 billion and its per capita annual spending of nearly $23 on diagnostics. Japan is the second-largest market in the world, after the United States, for nearly every type of IVD product.
Despite the fact that Japanese laboratories pay some of the highest prices in the world for their instruments and reagents, margins in Japan are thin. This is because a huge proportion of the country's outlay for IVDs is taken up by distribution costs. Nearly 90% of the cost of building a new road in Japan is the cost of acquiring the land. Japanese laboratories sit on some of the most expensive real estate in the world, and Japanese laboratory technicians are comparably expensive and scarce. Wholesalers, most of whom barely know the difference between a cholesterol test and a complete blood count, buy from local subsidiaries of multinational manufacturers. The big manufacturers are perfectly capable of servicing their end-users directly, but they all sell through wholesalers because they are unwilling to set up their own distribution infrastructure. Nor do they want to extend credit to cash-strapped hospitals.
Immunoassays aside, Japan is very much committed to the open-system philosophy of laboratory testing. Reagent rental-instrument placements are more the exception than the rule. Laboratories like to pay cash for big, expensive open instrumentation from Hitachi, Toshiba, Shimadzu, Olympus, and Sysmex, and then squeeze their reagent suppliers. Because Japan has well over 100 indigenous reagent suppliers, taking open-system reagent business away from the local firms is nearly impossible for an outsider. Importers command about half of the immunoassay market, but the share of all other IVD product categories represented by imports is very modest.
South Korea and Taiwan. These Type One markets resemble Japan in their open-system instrumentation preferences. South Korean and Taiwanese laboratories are also willing to write big checks for instrumentation so that they can write small checks for reagents. While Japanese laboratories can choose from more than 100 local reagent producers, South Korea and Taiwan are each home to between 5 and 10 competent reagent producers, most of which are somewhat successful exporters as well. The reimbursement systems in these countries are not nearly as comprehensive or generous as Japan's, but the vast majority of people in both South Korea and Taiwan have some form of health insurance. South Korea has more than twice the population of Taiwan, but offers IVD markets only about 50% larger. Per capita IVD spending in South Korea is $3.19 annually, whereas in Taiwan it is $4.77. The South Korean IVD market is worth about $150 million per year, as compared with Taiwan at about $105 million.
Australia and New Zealand. The southerly Type One markets have always been different from the northeastern markets just described. Australia and New Zealand have generous and universal public health insurance. They both spend in the neighborhood of $10 per capita on IVD products. The Australian IVD market is worth $210 million annually, while much smaller New Zealand consumes $39 million worth of IVDs per year. Both countries want reagent rental options, and both are open-minded about closed systems. Australia has about a dozen producers of various types of reagents and a handful of instrumentation companies, several of which export successfully and challenge the multinational reagent companies at home.
Another very important difference between the two Down Under markets and the three northeastern markets is that distribution channels are much leaner in Australia and New Zealand. The importer—whether the local subsidiary of a multinational or a locally owned distributor—generally sells directly to end-users, without an intervening layer of wholesalers or subdealers as is common in Japan, South Korea, and Taiwan.
Hong Kong and Singapore. The smallest of the Type One markets are Hong Kong and Singapore. Like Australia and New Zealand, both of these prosperous city-states want reagent rental options, and both are also open-minded about closed systems. Per capita IVD spending in these markets is in the $5–$7 range. Because many multinational IVD companies have set up regional headquarters in one or both of these places, the local laboratories get very good service directly from these subsidiary offices. In this environment—small domestic markets overrun with subsidiary offices of large IVD companies—it is difficult to find good locally owned dealers that are not already overcommitted. Consequently, smaller IVD companies tend to stay out of Hong Kong and Singapore, leaving these affluent markets to the big multinationals.
Type Two Markets
Laboratory consolidation trends have bypassed China and India, because their populations are still underserved. These are highly stratified societies, in IVD consumption as in everything else. Only a small minority of people can afford imported kits and instrumentation. Still, because the combined population of these giants is well over 2 billion, that means that nearly 200 million people in China and India enjoy a standard of living that enables them to patronize laboratories that can afford imported diagnostic products. Neither China nor India has the kind of reimbursement system that international exporters can live with, so much of the business is done outside of recognizable reimbursement systems at an elite minority of automated laboratories. Labor is cheap in these countries, so labor-saving technology is a hard sell. These markets are very competitive, just like the Type One Asian markets, but the indigenous IVD producers are mostly companies that can compete only in their coddling home environments. Very few local Chinese or Indian manufacturers have exportable product.
China. Over the past three years, China has grown to become the world's third-largest instrumentation market, surpassing Germany, Italy, and France. Its $300-million market for diagnostics makes China number eight worldwide in that category. While China is one of the best places in the world to sell instrumentation, it may be the worst place to sell reagents. Dozens of local reagent producers sell virtually every type of reagent at prices that would cause American or European sales managers to lose their jobs. Other than the warranty-period reagents that are imported with new systems, a negligible share of the reagent business goes to imported brands. Like the Japanese, South Koreans, and Taiwanese, the Chinese are open-system oriented, though they are beginning to give a modest share of immunoassay business to closed systems. China is also like those markets in that distribution in that country is multilayered and expensive.
The clinical laboratory business in China, as mentioned, is highly stratified. Of more than 13,000 clinical laboratories in China, only 3000 can charitably be considered automated. These 3000 run nearly two-thirds of China's lab work. This market's per capita IVD spending of 24 cents is a deceptive statistic. Several hundred million Chinese people may never see a doctor in their lives, while at the other end of the spectrum, an elite population of 100–125 million spends whatever it must at the country's elite hospitals.
China has no private commercial laboratory or private hospital business because its doctors have not yet been liberated by government decree to participate in the private sector. It is foreseen that within the next one to three years doctors will be told that they can open private practices once some set of public health obligations is satisfied. When that happens, those affluent 100 to 125 million will quit the government healthcare systems en masse, and commercial laboratories and private hospitals will sprout like weeds. Only at that point will a substantial imported reagent market begin to emerge.
India. India has just become the world's second billion-person country. But because India's per capita IVD spending is barely half that of China, the entire Indian market amounts to just $125 million. As in China, hundreds of millions of people will never see a doctor. India's society is also stratified, even more than China's. Only some 60 million Indians patronize laboratories that can afford imported IVD products. Distribution channels are multilayered because the country is large and people want to buy from a dealer who speaks their dialect (of which India has many). As in China, plenty of seemingly suicidal local manufacturers are happy to sell reagents at prices that are lower than production costs in the United States.
The stratification of Indian laboratories is not nearly as top-heavy as in China. Only about 300 laboratories have automated chemistry and hematology systems; these handle perhaps 20% of the national work load. A second tier of about 3000 semiautomated laboratories runs an estimated 40% of the nation's lab work. The remaining 40% is performed by 17,000 manual laboratories.
The biggest difference between China and India is that India has always had a lively private sector. The vast majority of the 17,000 manual clinical laboratories are mom-and-pop commercial enterprises running tests for fewer than 20 patients a day. More than half of India's automated laboratories are private hospitals and commercial establishments that serve the carriage trade. While the Indian market is much smaller than the Chinese, it provides a much more friendly environment for selling imported reagents. This is because competitive laboratories at the top end of the market want to take business away from each other. They distinguish themselves in part by using better reagents and instrumentation.
In both China and India, abundant skilled small and midsize local distributors stand eager to sell imported products. A difficult aspect of establishing a distribution system in both countries is finding distributors that can effectively cover a wide territory. Another challenge for the importer is to hook up with a distributor that is not also offering competing product lines.
Type Three Markets
Thailand, Indonesia, Malaysia, and the Philippines represent the middle ground between the Type One and Type Two markets. These countries are much easier to work with than the others. Each of them contains an abundance of competent local distributors who can be relied upon to cover most of their markets without taking on any conflicting product lines. All of the laboratories like to have reagent rental options, and they are far more tolerant of closed systems than the laboratories in Japan, Korea, Taiwan, China, or India.
The markets in Type Three Asian countries are somewhat less competitive than those in the first two groups because there are very few indigenous producers to take business away from the international brands. No strong local reagent producers exist. Virtually the entire IVD market in these countries—most reagents and all instrumentation—is imported. Each country has an elite group of 200 to 250 automated laboratories that handle most of the clinical work load, but, as in the Type Two countries, there are plenty of semiautomated and manual laboratories that manage to stay in business.
The private sector in each of these markets has filled a void left by inadequate health insurance and reimbursement systems. Private hospitals and laboratories maintain standards different from those of government hospitals and laboratories. Because they compete for patients, the best of them distinguish themselves in part by the instruments and reagents they choose.
Thailand is the biggest of the Type Three markets at about $50 million. Indonesia is second at $32 million. The Philippine and Malaysian IVD markets are about the same size, roughly $25 million each. Malaysia is the richest of these markets by far on a per capita basis, at $1.09 per year in IVD spending. Thailand is gaining fast and is now at 79 cents per person per year. The Philippines and Indonesia offer much less affluent markets. They are nearly as stratified as India and China, with 15–20% of the population consuming well over half of all IVD products.
Type Four Markets
Representing the least-developed markets in Asia, this category includes Pakistan, Vietnam, and the other Asian countries not belonging to the first three groups. Type Four markets are comparable to China and India in that they are very immature and feature highly stratified societies. None has a sizable-enough upper class to attract many international IVD companies. Neither have any of them spawned indigenous producers of quality; thus, as with the Type Three markets, nearly all IVD products are imported. In addition, these countries have few competent dealers, another reason they tend to be neglected by most IVD companies. Commerce within this group is much less competitive than in any of the other markets, but not much business is done, either.
Pakistan, with $15 million in IVD spending per year, and Vietnam, at $10 million annually, are the biggest markets, and the only ones where per capita IVD spending meets or exceeds 10 cents per year. Among the other Type Four markets are Bangladesh, Myanmar, Sri Lanka, Nepal, Laos, and Cambodia.
Conclusion
A large Asian population represents an excellent market opportunity for IVD manufacturers looking to sell their products abroad. But before success can come, would-be exporters of IVDs to Eastern markets need to know what they are getting into. Different market conditions for IVDs prevail in the various countries. Which countries' markets are the most promising to enter will depend on the importer's goals, size, and level of sophistication.
Michael Farmer is a partner in Asiatic Research Inc. (San Francisco), a market research firm that specializes in clinical diagnostics.
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