Getting a Good Night’s Sleep While Distributing Medical Devices in China

Somewhere in China right now, a domestic Chinese medical device distributor for an American company is invoicing one of their dealers for a product they sold to a public hospital. This is a good thing. The dealer has built and maintained key relationships with the hospital. This is also a good thing. Both the dealer and distributor likely are covered by some sort of exclusive distributor agreement between them and the manufacturer, which is always a good idea in China. But, unbeknownst to you, when the dealer encounters a situation where your product is too expensive, or would be too complex of a sale for your dealer, they will assume a new identity and, under this assumed identity, sell a competitor’s product. The assumed identity represents another option for the dealer, another way to protect their risk in a market where selling on something more than price is many times an uncomfortable position for an unsophisticated distributor or dealer.

It is almost impossible to describe the fragmented and dynamically evolving nature of medical device points of sale across China. Even harder is to be able to put yourself in the shoes of a small dealer—to really understand why they so easily are able to deviate from what, according to western standards, would be a clearly un-ethical response to competitive pressures. However, while taking this position might be morally satisfying in the short term, it does not help device manufacturers understand how to evaluate and manage China’s scattered distributor and dealer networks.

Populated by small dealers and distributors, the country’s medical device market relies on many small operators to get products placed in hospitals. This part of the market is extremely fluid, with dealers willing to go to great lengths in order to stay in business themselves first, and sell your products a distant second. During the foreseeable future, this fight for survival is unlikely to change, and the risks to device companies that do not have clear dealer management plans in place will continue to grow.

In order to reach China’s 1.3 billion-person market, companies have to develop distribution and dealer strategies to sell into China’s 21,000 hospitals (a number that is rapidly growing as part of the country’s massive infrastructure spending on new hospital and clinic capacity), taking advantage of the more than 13,000 device distributors spread across the country, not to mention the tens of thousands of small independent dealers that populate China, an often overlooked but essential part of the distribution channel for medical devices as they make their way into China’s hospitals.

Distribution strategies for device companies working in China tend to be ad-hoc, a reality born of years of torrential rates of growth and the constant shifting sands that have been China’s public hospital reforms and, specifically, ongoing changes to the tendering processes for devices. This means that too many device companies lack visibility down the entire distribution channel, down to and including the hospital and user. Companies too many times lose the ability to track products once they leave their distributor (best case); being able to track between the distributor and dealer, or the dealer and the hospital itself, is all but a pipe dream today.
Consequently, medical device companies struggle to achieve the sort of transparency in their value chain that would be expected in more developed markets, and as can be easily surmised, encounter unnecessary compliance risks because of this lack of transparency and down-channel visibility.

Beyond these issues, China’s highly fragmented distributor and dealer network complicates the sort of strategic selling approach and midterm investments that device companies need their partners to be making. Specifically, many device companies in China find it difficult to identify and build scalable relationships with dealers who are willing and able to sell on something other than price. Too few domestic dealers and distributors believe they need to be investing in information technology (IT) tracking systems or inventory optimization programs for their Chinese hospital customers.

This means that device companies many times have to either live with the inadequacies of their distributor partners, or augment their capabilities directly, which adds further cost and complication to the device company’s plans, and has caused more than one to consider whether they should simply have their own distribution company in China.

Assuming that most device companies do not want to set up their own distribution operation in China, what are they left to do?
First, device companies need to identify a partner in China that has something close to what would be understood in the United States or European Union as a national service platform. This would be more than a measurement of geographic reach. Rather, a distributor with a national service platform would have an IT backbone that provides transparency through the distribution channel, all the way down to the dealer and hospital. They also will have an IT capability that makes inventory management easier, and provides the foundation for the device company to specify key performance indicators critical to the success of everyone from the manufacturer down to the hospital. Compliance standards, already a tricky area for device companies in China, do not go away with a competent distribution partner, but they are mitigated if you can find someone who understands the commercial, political and social reasons to maintain high standards in these areas. In addition, a distribution partner capable of taking over some of the sales and marketing management activities targeted at the dealers themselves—something that as our earlier scenario about an “exclusive” dealer re-naming itself in pursuit of a lower priced sale made clear happens all the time in China—is an ideal partner.

Over the next decade, absent a massive economic downturn that shifts the central government’s resources away from spending on healthcare, China will continue to expand its public health insurance program, and increase reimbursement for drugs, diagnostic procedures and interventions that use a medical device. More doctors will look for higher technology and more effective treatment options. However, the China device market will continue to struggle with a geographically diverse and highly fragmented set of dealers whose motives may not always align with those of a competent international medical device company. This makes the selection of a strong distribution partner who can take responsibility for much of the distribution channel and dealer management issues a key priority, so you and your fellow executives can rest easy while pursing the China market. Sleep tight. 

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Benjamin Shobert is founder and managing director of Rubicon Strategy Group LLC, a Seattle, Wash.-based consulting and project management services firm that helps healthcare companies access markets in China and South East Asia. Juan Jimenez is China general manager, medical devices and diagnostics, for DKSH, a Zurich, Switzerland-based market expansion services company.