Outsourcing Hazards in China’s Medical Device Market

Despite slower growth predictions for 2013, China’s economy is still performing at a rapid clip. In 2012, it posted a gross domestic product (GDP) of $8.28 trillion, second only to the United States. In 2013, analysts predict an economic growth rate as high as 7.8 percent. If growth continues at current rates, the Chinese economy should overtake the U.S. economy in terms of total size by 2030.

China’s medical device market also is expanding rapidly. As per capita GDP goes up, middle class Chinese citizens are willing to spend more of their disposable income on healthcare, including medical devices. The result has been a recent year-on-year growth rate of 17 percent in China’s medical device market. At this pace, the Chinese medical device market will be worth $32 billion by 2022.

As the market expands, so has the range of Chinese suppliers and medical device manufacturers.
In the past, China was associated with low-tech components and consumable medical devices. However, in the last five years, medical device manufacturers in China have made significant improvements in medical technology and product quality. It is now possible to source some high-end products such as implantable devices and diagnostic imaging technology from China. Many Chinese factories are ISO 13485- and China GMP-certified, and they have benefitted from their experience doing business with Western firms.

However, quality still can be a problem. Despite ISO 13485 and China GMP certifications, some Chinese companies cut corners when it comes to regulatory compliance. Quality assurance documentation, raw material sourcing, production processes and even record keeping all can pose substantial problems during an audit.

“The Requirements Are Not Appropriate”
My company recently did a mock audit of an optical instrument components manufacturer in Wuhan. For years, this company had done business with a major Western medical device company. The company’s components had been approved for sale both in China and overseas.

When it came to recordkeeping, however, their system was a mess. Our mock auditor arrived at the factory, and immediately discovered that both the batch records and the quality manual was out of date. No executable written procedures, including the instructions for batch testing, existed at the plant.
This was a serious problem. Even a seasoned auditor could not have anticipated a violation on this scale. So she spent the next week working with the factory’s quality assurance (QA) people, process engineers and technical staff to put together a quality manual that would allow them to improve operations.

In the meantime, the auditor had a face-to-face discussion with the factory manager. He agreed that continuous quality training was important. He would make sure that her improvements to the batch testing process would be enforced. But he didn’t think their old way of operating was a problem. He claimed that the factory was losing time and money to accommodate the auditor’s QA requirements, which was a strain on their other operations. The new requirements, he said, were simply “not appropriate.”

In the end—despite the assurances of the factory manager—the auditor felt the optical instruments components company was not 100 percent committed to implementing the changes she had recommended. Instead of solving problems with the appropriate solutions, the factory manager often would look for “second best” alternatives or excuses to avoid facing the problems. His attitude, she said, did not bode well for the future prospects of the company.

Problems Persist
Although the example with the Wuhan components manufacturer is just one incident, it highlights some serious systemic problems that plague the medical device outsourcing industry in China. Chinese manufacturing facilities—even reputable ones—do not always follow the proper procedures when it comes to Western quality standards.

As Chinese suppliers and medical device manufacturers become more sophisticated, keep in mind that many cut corners, especially in quality, to keep existing profit margins.

Foreign medical device companies should be prepared to check and double check the factory conditions of their outsourcing partners in China. Extensive due diligence is always required.