China has become the largest medical equipment market in Asia, and this being a technologically advanced business, foreign-made products and know-how are in particularly strong demand. Imports account for about half of the market.
Recent reforms in the healthcare business have added extra impetus. Government health spending cutbacks precipitated reforms which have enabled hospitals to make their own independent purchasing decisions. Diagnostic imaging equipment has been one of the most buoyant sectors since 1990. The initial spending priority of leading hospitals in developing countries tends to be on products which help identify what is wrong with a patient.
Another stimulus came in 1994 when, under pressure. from the US, China permitted high-end diagnostic equipment to be imported without import licences.
"China is already pretty important," says Ms Terri Zavada, director of global strategy at America's Health Industry Management Association (HIMA). "The big three ? the US, the EU and Japan ? together account for about 85 per cent of the market. China has now surpassed the US$1bn sales mark, making it the number one emerging country market. In a couple of years, it could become the fourth or fifth largest market in the world." HIMA members have experienced recent annual growth rates of 30 per cent.
Indeed, the prospects for manufacturers could hardly be brighter: a population of 1.2 billion people with an average age set to soar because of the one-child policy. They can expect to live longer, earn more and take greater interest in health matters than previous generations.
European, Japanese and American companies have been quick to seize the opportunities. Medtronic of the US has been in China for 15 years, mostly distributing pacemakers and heart valves. "We have been enjoying a growth rate of over 30 per cent a year and we expect the growth rate to accelerate in the near future and then to level at 20-25 per cent," says Mr Daniel Luthringshauser, Medtronic's Vice-president of Far East and International Development.
"China is so high profile at the moment," says Ms Roberta Lipson, president of US-China Industrial Exchange, a sales and marketing company for foreign manufacturers of medical equipment. "The level of interest shown by US medical equipment manufacturers is more proportionate to its future potential than to the current position."
There are the familiar qualifications. Medical equipment suppliers need to deal with various government ministries at both central and local level. The complexity of breaking into the market and securing financing require a deep understanding of China's healthcare system.
"Multi-layered bureaucracy can be frustrating and expensive to deal with and profits are small," warns a report by HIMA. "Few firms expect to make money in the short term and most will tell you their business in China is an investment in the future."
There are over 600 enterprises in China which make medical devices, a little over 10 per cent of which are joint ventures. Domestic output is rising at 50 per cent a year. Import growth has averaged 20 per cent, says HIMA, but the pattern has been spasmodic. Sales are susceptible to changing government policy, which strongly influences what products can be imported and in what quantity.
The major purchasers are the 60,000 hospitals in China. They get reimbursed by the state or through insurance schemes by carrying out tests, consultations or issuing medications.
However, as far as foreign equipment manufacturers are concerned, the market is much smaller. Traditional Chinese hospitals and general clinics buy little in the way of high-tech equipment, except for some diagnostic devices. Then there is the classification system whereby hospitals are broadly defined as being in levels I, II or III. Classification depends on the number of beds, and the provision of healthcare, training and research. The highest ranked hospitals receive the largest state reimbursements and they are therefore able to recoup their investments fastest. Simply by investing in the latest equipment, a hospital can improve its classification.
It is hardly surprising that they are the prime target of sales representatives. "The top-rated hospitals are an important part of the sales effort," says Ms Aileen Fan of Hewlett-Packard's medical products division in China. "However, there are also a lot of level II and III hospitals which are expanding their healthcare services." About three-quarters of hospitals are rated as level III.
Most of the top-rated hospitals are in the prosperous coastal cities and their superior purchasing power has led to a highly unequal distribution of equipment across the country. The different rates of investment return which pertain to types of equipment has also led to strong bias towards certain types of devices. For example, China has the world's highest proportion of gamma knives per head of population.
These inequalities prompted the Ministry of Public Health (MOPH) to take the decision to approve all large equipment purchases on a 'certificate of need' basis.
Monitoring regulations is a priority area for Western manufacturers as they are prone to substantial change at short notice. The MOPH is responsible for health care policy, including financing. It is not responsible for regulating medical devices, but its influence over financing matters may determine what products can and cannot be sold.
All medical products sold in China must be registered with the State Pharmaceutical Administration. Those not registered are prohibited from being distributed, advertised or displayed. Companies which fail to comply face fines of up to Yn30,000 (US$3,600).
The structure of China's healthcare system is both wasteful and inequitable. Western manufacturers of drugs and medical equipment are selling to chronically underpaid doctors and pharmacists, and paid for, ultimately, by the Chinese government. "The economics were out of check," says Zavada. "Doctors and nurses were paid nothing, but for new technology, money was made available."
The scope for corruption could hardly be greater and the state is aware of this. China Daily has blamed soaring costs on the abuse of power exercised by hospitals' pharmaceutical dispensaries. The newspaper said doctors prescribe unnecessary quantities of medicine in order maximise the difference between the wholesale and retail prices of pharmaceuticals.
The system of funding is also in dire need of reform. For many years, Chinese ministers have been anxious to reduce the amount spent on health by the central government. Direct funding and reimbursement are to be replaced by a greater reliance on insurance and direct payment by patients.
The structure of the system developed under the communist government was designed to provide cover for workers and their families in a centrally-controlled economy. The economic reforms which began in 1978 have left a large number of Chinese without state welfare support or insurance coverage. Funding is still provided under the rural cooperative healthcare system but the proportion of state funding has slipped dramatically. Government workers and students are covered by the government healthcare system which costs about US$1bn a year. The labour healthcare system, which covers employees of state-owned enterprises, costs around US$5bn a year. But this protection is starting to crumble with so many loss-making state enterprises facing bankruptcy or being forced to cut back on welfare.
The government's long-term goal is to establish a health insurance system for the entire nation. Trial schemes, introduced three years ago, are now being introduced in many cities, but change is expected to be slow.
Nevertheless, there is a direct and immediate impact on suppliers. "All the healthcare reforms in China will affect hospitals' revenue and will affect part of our business," says HP's Fan. "The MOPH and some provincial and municipal governments have regulations to control high-tech. equipment. This has had an impact on our business ? for example, the restriction on the ownership of ultrasound equipment. Some hospitals have the money but they are not able to buy the equipment."
Scarcity of financing is perhaps the biggest single barrier to import growth of medical equipment. It is not just a case of a shortage of money; there is no independent data on a hospital's creditworthiness to help manufacturers. "Not many companies have the stomach to help hospitals address the problem of a scarcity of financing," says Lipson.
Some have been willing to offer deferred payment and other financing techniques. "Financing is a major problem for hospitals which want to buy equipment," says Fan. "Hewlett-Packard puts a lot of resources into facilitating hospitals to solve their funding problem."
The best solution for a company is to receive export financing from its government. European countries, including Germany and Finland, have been aggressive in this area, whereas Washington has limited funds and does not initiate concessional loans to commercially viable projects. This has blunted the American sales performance. "You just need to look at the statistics," says Lipson. "The US is losing market share to European countries which offer government-guaranteed loans."
America is starting to wake up to the threat. Lipson says medical equipment imports have been growing for the past three years because of China being at the start of a five-year cycle and because of some success in the area of preferential financing. "We were able to secure an US$8.5m financing package from the US Ex-Imbank in 1996," she says, adding that she hopes more money will become available in future.
With so many foreign companies investing in sales, distribution and even manufacturing capacity in China, competition is becoming intense. "The pressure on price is so great in China that it creates a situation where, in order to win a contract, you have to come in with the lowest price," says Zavada. "This means you tend to get short shrift in terms of after-sales service." She says there is still not enough sophistication at the purchase point to evaluate the after-sales component within the contract price.
Lipson disagrees, saying practitioners are becoming more sophisticated. "Chinese hospitals are getting wary of buying the lowest-priced offering," she says. However, all agree that if the equipment is not up to scratch or not used in the right way, the hospital is going to lose out. "Training is an important aspect of the equipment offering," adds Lipson. "If you don't provide sufficient training… in the end everybody suffers."
More foreign companies are setting up operations in China, producing mostly low technology products. For example, HP has a joint venture in Qingdao, producing lower level products such as cardiographs, over half of which is exported.
The other trend is to produce a simpler version of a successful product. Three years ago, Medtronic decided to set up a wholly-owned factory in the Pudong district of Shanghai to make pacemakers specifically designed for China and other emerging markets. Production should start this autumn and prices will be about half of the equivalent, yet more sophisticated, products it markets in the West.
Lipson argues that the incentives for local manufacture are limited. The basic duty on medical equipment is 12 per cent and this can be avoided if it can be shown that the equipment is used for scientific or educational purposes. "For most high-end equipment, there is a very small labour component," she says. "And, if most of the parts need to be imported, you don't really save on the tariffs. So it's hard for me to understand what the great benefit is."
The benefit may have something to do with the usual reason for investing in China ? getting a foothold in a major market of the future. "The government makes it quite clear that local manufactures will be treated more favourably," says Zavada. The drawbacks are the absence of a guarantee of favourable treatment, the high investment costs and uncertainty regarding the implementation of healthcare reforms leading to greater expenditure on equipment. "The concern is that the reforms will maintain costs but not grow the market," says Zavada.
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