China’s hospital builders would do well to check out the Sino-German Friendship Hospital, currently under construction in Shanghai’s Nanhui district. The US$190 million project, built as a joint venture, will showcase a wealth of German medical equipment and how it can help Chinese doctors and patients.
As new hospitals in China become more specialized, they require sophisticated medical equipment and drugs. German companies have no shortage of expertise in this field and they are eager to benefit from rising spending on private and public healthcare in China.
According to the Ministry of Health, there are 13,120 general hospitals in China and 3,022 institutions that specialize in treating diseases such as cancer, as well as offering treatments like bone marrow transplants for leukemia patients.
“[Hospitals] will be smaller but more high-end in the future,” said Franc Kaiser, head of the healthcare department at Shanghai-based InterChina Consulting, which advises several German firms in China’s medical devices market.
Low base, strong rise
Munich-based Siemens is the top player by revenue in China’s medical equipment market, but dozens of other German companies supply equipment here.
Europe remains these companies’ primary customer worldwide, with the US accounting for 30% of global orders and China less than 10%. However, Jens Dreier, chief executive of Beijing-based consultancy EuroHealth, says that China’s local market for medical equipment specifically is growing by 20% a year. The devices market was worth US$4.4 billion in 2007, according to InterChina research.
Headquartered in Shanghai, Siemens Healthcare China promotes itself as a one-stop shop for medical devices. Imaging, X-ray and radiation therapy products are among the firm’s biggest sellers in China. Siemens claims to be the market leader in imaging and X-ray device sales in China, but declined to comment on specific sales figures.
Ziehm, one of Siemens’s competitors in this particular market segment, says it has sold 100 units in China. The firm’s range of computerized tomography (CT) imaging devices – more sophisticated versions of traditional X-ray machines – cost between US$111,000 and US$238,000.
While 30% of China’s large-scale hospitals have CT machines, only 10% are equipped with larger-scale equipment such as magnetic resonance imaging (MRI) machines, which can cost up to US$2.4 million.
Volker Böttcher, head of Ziehm’s China office, is optimistic that German firms like his will grab a slice of China’s extra spending on healthcare. Böttcher singled out People’s Liberation Army (PLA) hospitals – which treat army personnel and their families – as institutions with the financial resources to buy high-end German machines.
[China’s private clinics] will have to match global standards or the local rich will go abroad for treatment,” he added.
Top of the market
Higher standards remain an advantage of German medical device producers over their domestic counterparts. Local market leaders like Shandong Zibo tend to concentrate on fast-selling, mass-use products like IV drips and syringes.
“There is a price war going on, and quality is being sacrificed,” said Qu Guobing, international sales manager at Jingwei Kangda, a Beijing-based company that imports equipment for Chinese hospitals to diagnose diabetes.
But besides selling the devices themselves, German firms are selling the know-how behind the machines, which gives them another edge over domestic players. Keen to promote specialist equipment that can draw fee-paying patients, Chinese hospitals are only too willing to pay consultancy fees to the likes of Siemens and Ziehm.
“The German brand name is recognized and trusted among Chinese doctors and patients,” said Kaiser.
Germany has an even bigger footprint in China when it comes to pharmaceuticals, with both Bayer and Boeringer Ingeheim among the top five for drug sales.
Bayer Healthcare saw its sales grow by 40% in 2007, eclipsing local drug market-leader Yangtze Jiang, which slipped to fourth place. Bayer accounts for 80% of China’s hospital drug sales, according to Liam Condon, the firm’s chief executive in China.
Bayer’s China portfolio is expanding fast, with four new products planned for launch each year over the next five years. Brands such as Gluckobay and Adalat, which treat diabetes and hypertension respectively, have been the company’s bestsellers in the country. It’s worth noting that China suffers the second-highest incidence of diabetes worldwide.
Bayer’s M&A activity is another reason for its dominance in China. The company was ranked number eight in drug sales in 2006, but its merger with Schering, the fifth-largest drug seller in China, created a combined entity that leads the market so far this year.
Through further consolidation, Bayer hopes to hold on to the top spot. It has just spent US$158 million on domestic peer Topson, which is known for its iconic Bai Jia Hei cough medicine. The acquisition bolsters Bayer in a product segment where it’s weak in China, Condon said.
Yet Bayer isn’t the only one enjoying good times. The China subsidiary of Boehringer Ingelheim saw revenues rise 46% year-on-year to reach US$102 million in 2007. The firm expects this figure to hit US$337 million in 2012.
Boehringer has a distribution deal with state-owned pharmaceutical giant Sinopharm for its heart disease, hypertension and arthritis drugs – which are manufactured in Shanghai – and the firm is keen to bring its over-the-counter medicines such as Bisolvon, a cough syrup, to China as well.
China may not yet rival Japan as a market for drugs in terms of sales volume, but the local market is growing faster than anywhere else in Asia, including India. According to a 2008 report by McKinsey & Co, pharmaceutical sales are growing by 20% per year, which puts China on course to become the world’s largest market for prescription drugs by 2050.
Multinationals like Bayer invested early so they could position themselves to track this growth and plan on securing their market positions through smart marketing and innovation. Chinese pharmaceutical companies, which rely on cheap generic drugs for revenue, struggle to compete with foreign offers of free training for local doctors and lots of glossy literature intended to help patients understand their ailments.
Too rich for their blood
For pharmaceutical firms and medical equipment manufacturers alike, the challenge lies in brand-building in rural areas. German firms’ higher quality, and corresponding higher price, put products beyond the means of most people.
A rural dweller would be more interested in generic primary care products such as anti-infection treatments than in the high-end secondary fare offered by the likes of Bayer. A rural hospital, meanwhile, is unlikely to fork out US$146,000 for a Siemens X-ray machine when a locally made alternative can be obtained for one-tenth the price.
Bayer has decided to play the long game, working with the Ministry of Health to train doctors in small clinics in western China. The company can’t make any money in the region now but it might further down the line – and, in the meantime, such activities are useful in terms of building up government goodwill.
Ziehm, however, is content to leave equipping hospitals in second- and third-tier cities to the lower cost domestic medical device manufacturers, as well as market entrants from India and Korea.
It remains to be seen whether Ziehm and Siemens will ultimately be drawn into lowering their prices. GE Medical Systems has already bitten the bullet and is manufacturing equipment for the lower end of market in conjunction with two local joint-venture partners, Xinan Medical Equipment and Hangwei.
InterChina Consulting’s Kaiser sees this as a wise move, noting that the upper segment of China’s medical device market only accounts for about 5% of total sales volume. With the government keen to invest in rural clinics treating basic diseases and little chance of lower-end hospitals becoming less thrifty, he believes only foreign firms with the “right proposition” will be able to do business in the rural hinterland.
“To be really successful, firms will have to dive into the low-to-mid section of the market,” Kaiser said.