With a population of 1.4 billion, China is a market that most medtech companies can't afford to ignore. However, differences in population types (urban versus rural), the government's role in healthcare expansion and a multi-tiered distribution system that is undergoing reform make navigating the Chinese market a challenge.
Brian Chapman, a principal in ZS's Zurich office who leads ZS's medical products and services team, spoke with Tim Lee, a manager in ZS's Shanghai office who focuses on medical devices for the Chinese market, to discuss how multinational medtech companies can address these challenges and be more successful in China.
Brian Chapman: How much of the Chinese population represents a market opportunity, and how should medtech companies take advantage of that opportunity?
Tim Lee: China's population is definitely huge, but while it's one country, it's not one market. Each province and city has a different level of economic development, and the national government sets the national policy, but provinces interpret and implement policies differently, so the opportunity will differ based on the province or city you're in. For Shanghai and Beijing, GDP per capita is equivalent to a country in the E.U., and the rural areas are very much like other developing markets. We see our clients developing more robust and geographic government and market access teams to be able to manage these local stakeholders. Having a regional organization to support the decision making, having a team to engage the local hospital stakeholders and having the evidence to support your communication in the process with local medical affairs is also becoming more important.
BC: Since certain product categories may be expanding more rapidly, while others are more concentrated in the urban centers, do you recommend segmenting your portfolio and having different strategies for different areas?
TL: We do see a lot of clients that are segmenting the market that way, in terms of a core market, an emerging market and a broad market. We're increasingly seeing portfolio-based selling, where they’re trying to combine the different product lines, versus looking at separate views, to take advantage of synergies and reduce the travel requirements to cover those markets, and also to provide a total portfolio to some of the county hospitals.
BC: Do you often see that companies will have different strategies for different parts of the market?
TL: Yes. From a product perspective, we see different portfolio strategies in different segments of the market from companies that have a broader portfolio. Many of these companies will focus their more clinically-advanced products on the premium side of the market, while they’ll push their proven, bread and butter, larger volume products lower down in the market, often to compete against emerging local copycats in the market.
BC: And you also mentioned that the stakeholders are different. Does that also change the way a company would go to market? Would they have different go to market approaches in different parts of the country?
TL: Definitely. For the lower-tier markets, there is a growing need to come in with a portfolio of products to better engage the president and the head of equipment in a hospital, and instead of talking about individual products, they’ll talk about what a manufacturer as a whole can provide. With the larger hospitals, the specialty departments still have a very large sway from the clinical side on individual products. However, we predict that moving forward, even in the large hospitals, the conversations are increasingly shifting towards hospital management as well.
BC: How has the Chinese government encouraged the expansion of healthcare outside of the biggest, most prestigious centers in the country?
TL: Chinese patients have historically visited the largest centers for even basic treatment, and there's just not enough capacity to treat patients there, so being able to divert patient flows is a top priority for the government, and they've significantly increased investment in building new hospitals and building brand new centers in the counties. Also there's province-wide procurement, where they have planks to procure diagnostic instruments. The government also is offering reimbursement incentives for patients to visit the community health centers and county hospitals. That means higher reimbursement in the lower-tier centers, which will reduce patients’ out-of-pocket costs, which will encourage them to visit these centers further. We see the growth in community health centers and smaller hospitals contributing significantly to the overall growth.
BC: Can you talk about Made in China 2025? Should multinational companies be nervous about it?
TL: Made in China 2025 is an overall Chinese macroeconomic strategy, and the goal is to reduce reliance on all imported products, not just medical devices. For many years, a lot of the larger multinationals have been developing products in China through local R&D and local manufacturing, to support being seen as a partner locally that's serving needs in China, rather than as a completely foreign company. Also, the conversation isn't always about imported versus exported, which is often related to low cost versus high cost, but it's important for a client to develop the capability to shift that conversation to not only talk about cost, but also talk about the value that you deliver with your superior products. Lastly, to further advance their agenda of improving care, the government cannot rely on Chinese champions alone. The government is encouraging innovative products to enter the market – sometimes they’re launching at the same time or even earlier than in the U.S. and the E.U.
I wouldn't necessarily say that clients should be worried, but they should be prepared for more generic or locally-made commoditization, and share loss in these categories that are more commoditized. You've already seen that in areas such as stents and syringes, which used to be dominated by multinational companies, but have been taken over by local companies. It's more important for clients to be prepared for increased competition on the lower end, introduce some of their more innovative products into the market and be able to deliver on value propositions more, because hospitals are not only looking to lowering the price tag of products, but also lowering the burden of healthcare and increasing efficiency.
BC: One major difference in China is the distribution model and the need for so many small partners. Why are these so critical to succeeding in China?
TL: Different stakeholders are existing in different provinces, so it's very hard to have one national distributor to cover all the parts of the market. You need a local distributor to manage some of the local relationships within the hospitals, or a national distributor that in return manages different local distributors, or different regional distributors that also work with smaller partners that cover individual hospitals.
BC: What are some of the most successful strategies you have seen in expanding the reach of healthcare in China? Do you see companies focusing on improving capabilities for patient care, expanding diagnosis, driving referrals, or educating top physicians?
TL: Companies that have early success are the ones that have educated the market and have led the market. For instance, BD launched an “in China, for China” catheter that was designed in China for the techniques that clinicians in China use, and they also taught the nurses how to use it, which helped them become the leader of the market for many years, and they still are, and inspired many copycats in the process. Having education is not just important for more primary and general care products such as infusion and general testing panels, but it’s also important in specialty surgery to address gaps in the patient journey and encourage better presentation, diagnosis and referrals in areas where there is patient leakage.
BC: What are some of the most important trends in China for the future?
TL: We talked about the distribution channels being multi-tiered in China, but we have seen this changing with the implementation of the two-invoice policy, which is basically the government mandating only two layers of distributors in the market. So the manufacturer to a distributor is one invoice, and then a distributor to the hospital is another invoice. While implementation of the two invoice policy is slowing down in some areas, the trend of the government trying to further contain costs, as well as increase transparency into the channels, will undoubtedly continue. This will also inevitably reduce the ability that multinationals can rely on distributors to drive the market. In the past, many multinationals relied on ceding a large portion of their margins to local distributors and relied on a selling model where they ‘pushed’ distributors to buy more of their products. As margins and their compliance become scrutinized, multinationals can no longer rely on their distributors to do all the work. Instead, they need to build a ‘pull’ model to engage and educate clinical users to generate demand for the distributor channels.
BC: With all of the demographics and regulatory and market access, and even some of the current headlines around trade tensions, overall, how do you feel about China, in terms of the return it would bring to multinational companies? Is China still a good place to invest?
TL: Yes. Sometimes the outlook may be uncertain for China, but China isn't going anywhere. First of all, the population is still there, and second of all, the government is doubling down and investing heavily in healthcare, so healthcare expenditure is going to continue to rise. There are going to be some headwinds, especially in the lower end of the market, with local competitors, but as long as multinationals continue to focus on innovating in their respective areas to provide better care, as they've done in the U.S. and the E.U., and introduce those products to China, with a population that's large, still growing and becoming wealthier, China is, for our clients, definitely still one of the top markets to focus on.
Brian Chapman is a principal in ZS’s Zurich office who leads the medical products and services team. Having spent 15 years at ZS, Brian has deep expertise with global issues such as portfolio strategy, new product and launch strategy, value proposition development, organizational design and sales force effectiveness.
Tim Lee is a Manager in ZS’ Shanghai Office. Tim leads ZS’ Medical Products and Services practice in China, supporting clients on a wide range of go-to-market topics that include opportunity assessment, market access, distribution strategy, sales force effectiveness and market development.