The Changing China Medical Landscape: High, Medium and Low End Markets

For the past 20 years, the Chinese medical market has enjoyed healthy growth of 14% to 15% annually. Advanced technology and products flowed into China to meet the high demands of better healthcare.

In keeping with these trends, Chinese hospitals needed to upgrade their treatment capabilities with advanced equipment. Backed by high patient volumes and various financing alternatives, they looked for foreign products that offered more sophisticated technology and better quality, performance and reliability. According to industry reports, 70% of the Chinese medical equipment market has been occupied by international suppliers. For example, GE, Siemens and Philips are the three top brands that dominate the high-end, high-value markets of computed tomography, magnetic resonance imaging and cardiac catheterization, respectively.

Domestic Chinese companies, meanwhile, mostly were competing in the medium- and lower-end markets—which encompass city and county hospitals or lower-level healthcare facilities—by employing strategies of lower-margin, high-volume and broad distribution networks. Their lack of competitiveness in the high-end market is due to the fact that Chinese companies often are small in scale and have only a few product lines that weather through the market fluctuations.

China only has about 10,000 medical device companies, 80% of which are medium- and small-size companies. Their technology traditionally has lagged behind the international markets. In the past, low technical capabilities and a long new product development cycle has put Chinese companies at a disadvantage in meeting the demand of the growing market.

For years, foreign companies and domestic suppliers lived peacefully within their respective market segments. But this peaceful world is going to change with the new government policies. Soon, both sides are going to meet face to face in the medium- and lower-tier markets.

New Initiatives Aid the Low-End Market

To improve the capabilities of lower-end healthcare facilities, the central government has committed to increase investment to healthcare systems and facilities in remote provinces and poor areas.

In 2004, the central government invested one billion RMB (US $129.5 million) to rural healthcare systems to experiment with collective healthcare insurance programs in rural villages. The following year, the expense for this experiment grew to three billion RMB (US $388.4 million) in an effort to expand this program. In the next five years, the central government is going to invest 20 billion RMB (about US $2.8 billion) to equip fundamental healthcare facilities in rural and suburban areas.

Some experts estimated that to bring rural health conditions on par with those achieved in urban areas, the central government may need to invest 100 to 200 billion RMB each year over the next 10 years. This would strengthen the purchasing power of lower-end hospitals, which were largely ignored by international companies in the past. According to market reports, 75% of the entire Chinese medical market is occupied by low-end medical products—this is much higher than the 45% average globally. Investment by the Chinese government for medical equipment purchases is expected to grow 13% each year, making the low-end market a very attractive place to be.   

Slowing Down the High-End Market

After two decades of healthy growth, the high-end market now is facing slower expansion due to pricing adjustments (downward adjustment of reimbursement rates for many procedures) and purchasing approval requirements for large-ticket items.

As a result, more companies are modifying their strategies to enter the medium- and low-end marketplaces. The face-to-face battles between foreign and domestic companies are intensifying.

The Medium- and Low-End Markets

International and domestic producers have tried to expand their reach in the medium market. This segment consists of hospitals in cities as well as those at the county level. The lowest segment of the healthcare market ironically is the largest in number and has the most locations, and these facilities are the frontline healthcare providers to average citizens.

International companies, due to high product prices, high technology content, focused application and limited distribution, had marginal success in selling to the medium segment—especially hospitals in the provincial capitols, as these facilities have investment influx and patient volumes to warrant such purchases. To improve their competitive advantages, international companies have made significant investments in China by establishing local manufacturing facilities and using local suppliers for components to help reduce production costs.

For example, GE Healthcare has three plants in China that manufacture computed tomography scanners, ultrasound equipment and X-ray systems. Siemens Medical bought out its Chinese joint venture partner to form a new, wholly owned subsidiary in Shanghai. And Philips purchased a part of Neusoft Medical in 2004 to establish Neusoft Philips, which manufactures low-end computed tomography scanners. These companies are well positioned to enter the new era of the Chinese market. As the market shifts, other international companies also will reposition their sales focus and strategy to meet the demand.

Domestic Chinese companies have had better success over the years in the medium section of the market. Despite their shortcomings, Chinese domestic suppliers worked hard to improve their competitiveness by implementing various strategies to upgrade their technology, broaden product lines and shorten the new development cycle for new products. Some of them have grown enough to become strong competitors to their international counterparts—and some even became the market leaders in certain specialties.

For example, Wandong Medical Equipment Co. Ltd. (Beijing) became a strong competitor in the cardiac catheterization market. In addition, Shenzhen Mindray is the market leader in patient monitoring and other electronic products. Finally, MicroPort Medical (Shanghai) Co. Ltd. sustained its market shares by offering stent catheter products at up to 50% off its competitors of Johnson & Johnson and Boston Scientific. These companies used their local advantages to establish broad distribution networks. With aggressive marketing, faster new product releases and connections with the government and decision makers, Chinese companies have established a strong foothold in the medium-tier market.

Challenges Ahead

International businesses won’t find it easy to get such a foothold in the medium- and low-volume market segments for several reasons.

First, hospitals in these segments are less focused on long-term disease management and treatment. They usually need to treat acute problems that require the use of multi-function or general function systems—for example, general purpose radiographic imaging systems are more popular than dedicated cardiac catheterization systems. Because the healthcare providers in these facilities may have limited education, application training will be critical after installation of any new equipment.

In addition, shipping may present a challenge in terms of delivery time and cost at facilities located in remote places. A distribution network may need to be reinvented to establish local connections.

Finally, companies need to pay close attention to policies made by central government and local governments, as they will impact the purchasing scheme and procedures.

In summary, there is no doubt that Chinese and international companies will have to face intense battles in the medium- and low-volume market segments in the coming years. Companies need to understand the landscape of the new battlefields, their competitors and the demands so they can formulate a strategy that fits the new market demands.

Chang-Hong Whitney is president of Whitney Consulting Ltd. in Massachusetts. With an MBA from Babson College (Wellesley, MA) and undergraduate degrees in electronic engineering and international business, she has been consulting for western companies on doing business in China since 1994, focusing on the medical device market. Her services include China regulatory affairs, market research, sourcing and logistics programs and China business strategies. She can be reached at [email protected].