China’s Mid-End Medical Devices
China is rapidly developing into the biggest medical devices market in the world. While international companies have historically entered the market with highly advanced products targeted at the top-tier segment, new opportunities are emerging in the middle range. But local players are competing for access to this same segment, moving up from the low-end and gaining more specialised know-how.
China Focus interviews Mr. Jürgen Lauterbach, former CFO of Fresenius Kabi Greater China, with over 17 years’ experience in the medical device and pharmaceutical industry, on current trends and opportunities in China’s medical technology market and how foreign companies can adjust their strategies to be part of this growth story.
What opportunities does China hold for international medical devices manufacturers?
My general impression is that the market will continue to grow significantly, albeit not as fast as before. The Chinese government has been very successful in implementing a thorough health care policy, which has created enormous growth momentum. In the past, the highest potential for growth and opportunity for foreign companies was in the high-end segment, but this has been changing. Today, many big hospitals are already well equipped with high quality devices.
With increasing competition from domestic players, what can foreign companies do to defend their market share?
Local competitors are continuously moving into this mid-range space. While the top tier is dominated by international suppliers with limited local players, and vice-versa holds true for the low-end, both multinationals and local companies are now in fierce competition for the middle segment.
My advice is to focus on a well-defined, good quality, up-to-date product range with clearly defined features that address this mid-end market. If a company can offer a portfolio with a suitable technology for a competitive price and a design geared towards the medium segment, it will be able to participate successfully in this opportunity.
What changes have you witnessed in the last years?
Today, it is increasingly common for hospitals to implement the so-called Pay-Per-Use, or “Commodato” model, in which the hospital and the supplier enter into a long term contract with a supplier placing a device and the hospital purchasing the corresponding disposables for a fixed period of time. This kind of model is beneficial to both parties for several reasons:
- hospitals with limited or no investment funds can still gain access to the newest technology
- instead of using generic disposables that could compromise the effectiveness of the device, hospitals will use the products offered by the supplier and
- there is an ongoing purchase flow for the supplier.
How does the medical technology market in China compare to the rest of the Asia Pacific region?
I wouldn’t use the term “Asia Pacific” because, in reality, the region is highly diverse. There are a few clusters, for example the developed markets such as Korea, Taiwan, Singapore, and Australia, or the smaller ones in South East Asia. India is in its own category with a large number of local players and MNCs. Japan is another very important but very different opportunity.
The best chances for growth are in countries with a well-defined agenda to improve the health care infrastructure, such as China, Malaysia, Thailand and increasingly Indonesia. Out of these, China is by far the biggest in the region. The big developed markets like Japan and Australia, are primarily focus on replacement and offer substantial potential for innovative products.
Do you see a level playing field for foreign vs. domestic companies?
Yes, increasingly so. China has made substantial progress in levelling the playing field. There is more transparency overall and the registration procedures and time lines are by and large the same. However, there are still differences between imported vs. domestically produced products, which is one of the reasons why many companies decide to manufacture in China for China.
Is Intellectual Property a problem?
It is certainly still a big concern. Local players are very active in copying foreign know-how both in medical devices and disposables. Nonetheless, this should not be a reason for foreign companies to avoid the Chinese market! If the supply chain requires it and the demand is there, it absolutely makes sense to manufacture in China. It is more important to be present with the latest product generation, to be fast, and to have sales and marketing capabilities on the ground.
Speaking of which, do you need a local presence?
In today’s competitive environment it is the only way. When the Chinese market first opened up, it was common practise to work with distributors because it was an easy way to gain access. But now it is not only feasible but also absolutely advisable to build up your own team if the business size and the growth potential allow it. Having your own sales and after-sales presence is essential if you want to gain a solid foothold in China. Distributors usually work with a variety of companies and therefore can only offer limited support in these areas.
What practical advice will you give to fresh entrants to the Chinese market?
Entering the medical devices market in China is challenging because it still is very fragmented. You need to identify competent local distribution partners if you do not establish your own sales organisation. There is a number of local distributors which may look good on paper but tend to be rather opportunistic in their business approach. Here it absolutely pays off to hire an advisor like Fiducia to conduct a distributor search according to your selection criteria.
Market analysis is critical: How do you intend to positiopn your product? In which regions and channels should you be selling? What is the demand in the different segments? What are your competitors doing? Since medical devices are so intricate and the market is very fragmented, I would highly recommend to have a thorough understanding of the dynamics before you make a move.
If you are building a team, I would also recommend to go via an executive search company with a sizeable network and knowledge of this industry. There is certainly enough talent with relevant know-how available, but they are difficult to find.
In summary, it is essential to develop a customised strategy for China. Foreign companies need to build up a product portfolio that serve the country’s specific needs. As added benefit of this approach you will be able to offer a suitable portfolio as well in other emerging markets with similar characteristics.
Mr. Jürgen Lauterbach started at Fresenius Group in 1998. From 1999 to 2006 he held various management positions within Asia Pacific. After 4 years in the corporate headquarters in Germany, he returned to Hong Kong in 2010 as CFO APAC and most recently held the position of CFO Greater China Region and Executive Vice President Taiwan & Hong Kong.