Medical Devices Market to Maintain 20% Growth Rate

In the past few years, several multinational medical equipment companies have expanded their market share in China via mergers and acquisitions with Chinese companies; cases include Stryter’s acquisition of orthopaedic products manufacturer Trauson Holdings, Medtronic’s acquisition of Kanghui Holdings, and Biosensors’ acquisition of JW Medical and Zimmer of Beijing Montagne. In these M & A cases, executives of the companies often list penetration of China’s ‘economical’ market as one of the most significant motives and aims.

Emergence of An ‘Economical’ Market

China’s medical equipment market is expanding on a sustained basis. In the past 5 years, the market’s average compound annual growth reached 23%, increasing from $4.9 billion in 2007 to $14 billion in 2012. It is now the fourth largest market following those of America, Japan and Germany.It is projected that China’s medical devices market will maintain a growth rate of approximately 20% in the next 5 years, reaching a market size of $35 billion in 2017.

Government policies significantly influence the development of the market of imported high-value medical equipment. This can be seen in the following aspects: (1) Firstly, because China’s medical policy is inclined towards ‘low level and broad coverage’, most of the country’s medical spending are channeled towards developing basic medical and fulfilling basic needs. Thus, multinational firms ought to strategize to gain access to more resources against this backdrop. (2) Next, once the National Development and Reform Commission’s (NDRC) guideline of marking up prices of high-value invasive devices is implemented, profitability of imported products will be directly impacted. Medical devices firms are actively responding to this situation. For example, the Advanced Medical Technology Association (AdvaMed) in the US is negotiating with NDRC to establish a more efficient and sound pricing policy. (3) Furthermore, the Ministry of Health’s measures on provincial centralized procurement not only put pressure on the prices of high-value products, but also increased firms’ workload. (4) Finally, Independent Innovation is a core issue in China’s Twelfth Five Year Plan. The government has been encouraging domestic firms to engage in research and development, increased competitiveness, and guides multinational companies in building the capacity for R&D and production. Undoubtedly, reforms in payment methods of the medical security system such as the implementation of ‘Single Disease Payment’ and ‘Diagnosis Related Groups System’, which are now under active piloting and discussion, will also impact doctors and patients’ decisions profoundly.

Currently, almost all multinational medical equipment companies have their products and strategies focused on the market of tertiary hospitals in first- or second-tier cities, and are less involved in other hospitals such as those in second- or third- tier cities or secondary hospitals.In such an environment, multinational medical equipment companies that are traditionally active in big cities and hospitals need to set eyes on a broader Chinese market, so as to maintain the rapid growth of their revenues. Relative to the former which we label as "high-end", the latter would be called "economical" market.

High-end Market vs. Economical Market

Multinational companies currently concentrate mostly on competition in the ‘high-end’ market, namely in tertiary hospitals in first- or second-tier cities, and only a fraction of their products is able to penetrate the ‘economical’ market, namely the secondary hospitals and various hospitals in third-tier cities. Hence, a central theme of multinational medical equipment companies’ stratagem planning for Chinese market is how companies may penetrate the ‘economical’ market at the same time as they lead in the ‘high-end’ one.
There is one characteristic of the ‘economical’ market that should not be ignored: a vast number of hospitals belong to this category, but their average sizes tend to be small. Data show that there are only about 150 tertiary hospitals in first-tier cities, but the annual number of impatient surgeries in these hospitals exceeds 50,000 cases. Even in tertiary hospitals in third-tier cities (of which there are fewer than 1,000), average annual impatient surgeries can amount to 10,000 cases. In contrast, in most secondary hospitals of first-tier cities, this figure may only reach 7,000 to 8,000 cases, and in those of second- to third-tier cities, 2,000 to 3,000 cases, even though there are almost eight thousand secondary hospitals and county hospitals in total.

Thus the sheer number of hospitals is not an accurate indicator of the size of the market. At the same time, the consumers of this ‘economical’ market are rather dispersed. Consequently, the input required to achieve the same level of output as that of the high-end market can be quite different. There are many important differences between the ‘high-end’ market and the ‘economical’ market other than in the numbers and sizes of hospitals. Companies’ modes of operation (such as sales models, products, pricing) in an ‘economical’ market will diverge very much from those in a ‘high-end’ market. Thus, success strategies in the ‘high-end’ market cannot be simply duplicated and used in the ‘economical’ market.

Strategies in "economical" market

Based on the aforesaid, while they have an excellent market outlook for "economical" market, multinationals will also face considerable challenges. The latter include: Large number f hospitals albeit of small individual scale; geographical dispersal of hospitals; reduced efficiency in relation to team visits; mixed standards in medical team; low per capita expenditure for patients; overall market being smaller than that of "high-end" market and intense competition among local low-end products etc.

Simplify existing products: Development of "simplified" version of products through simplification of product function or use of cheaper raw materials. Unlike research and development from the ground up, simplification of existing product will mean quicker market launch, without affecting the brand's positioning.

Localized research, development and production: Manufacturers customize their products for the Chinese market in order to better meet the market's demand while also preventing conflict with existing products. The disadvantages are that product research take long period of time and requirement for clinical test in order to meet registration requirements. In addition companies would need to consider using a new brand in order to avoid confusion with existing brands.

Differentiated marketing and competition: Use of differentiated market means to highlight advantages other than price (e.g. services and training etc.), while also actively increasing doctors' knowledge and technical standard.

Close working relationship with distributors: Companies must maintain close cooperation with distributors in order to penetrate the market. Each multinational is deliberating and exploring different cooperation models with its distributors. There is room for cooperation between distributors and manufacturers with regard to market promotion, investment, tender and bids and after-sales services. Some multinationals may be better at handling certain aspects on their own while others may rely more on their distributors. Each model has its advantages and disadvantages. As such multinationals should choose wisely and select only those that are suitable to them. In relation to the existing market, there is considerable difficulty in achieving complete direct marketing. As such close cooperation between manufacturers and distributors in every aspect is essential.

An important task to improve the supply chain: Supply chain is a crucial aspect for any company that sells physical products in any maturing market. Some companies will outsource their collection of sales data to third-party companies, while others enhance the transparency of their channels and inventories by using inventory warning systems. All these are means to improve the supply chain.