China’s Two Invoices System: What Medical Equipment Manufacturers Need To Know
China’s Two Invoices System – a policy that limits the number of invoices between medical devices manufacturers and hospitals to a maximum of two – has entered its next round of implementation. The system has been launched in 11 pilot provinces: 4 in 2014 and 7 in 2016.
As its reach expands, it becomes increasingly important for pharmaceutical and medical equipment manufacturers to understand its implications and prepare for change.
What is the purpose of the reform?
The distribution network of China’s healthcare supplies has been typically characterised by multiple, small scale and highly localised sub-distributors. This highly fragmented structure results in higher prices and makes room for corruption.
The Two Invoices System sets out to tackle these problems by pushing small and less competitive distributors out of the market, thus shortening and consolidating supply chains. In Fujian, for example, the number of Pharma distribution companies has already been almost halved: from 176 before the launch of the reform, to only 91 now.
How will this affect foreign manufacturers?
Fiducia expects the reform to have net gains in the middle term for international manufacturers who adapt successfully. It will increase transparency and improve logistics capabilities, as competition between distributors will get fiercer and only Tier 1 distributors – the larger-scale, more efficient ones – will survive.
Nonetheless, being closer to the local market will pose a series of challenges to manufacturers, who will have to get involved in business activities that were otherwise passed down in the supply chain.
Some of the reform’s specific impacts include:
- A closer relationship with end customers, and a more direct involvement in tenders and negotiations.
- The need to adopt new strategies to manage a flat distribution network.
- A focus on technology and quality-based competition, thanks to reduced supply chain distortions.
How can manufacturers adapt successfully to the new landscape?
Foreign suppliers will need a more nuanced understanding of the market and all relevant stakeholders. Becoming familiar with local regulations and pricing structures, as well as identifying the right decision makers and access channels, will be crucial.
With only one middleman, manufacturers will also have to develop strong risk assessment, compliance and negotiation capabilities. A more direct interaction with hospitals, clinics and Tier 1 distributors will additionally require a scaling up of manufacturers’ sales efforts.
There are also specific business models that manufacturers can implement to adapt to the new setup, such as leveraging on logistics distributors to deliver to end customers and then paying service fees to current local distributors.
To further discuss the reform’s implications for your business, please contact our experts at contact@fiducia-china.com.
