|Chinese Manufacturing: Scandals and Opportunities|
BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT
The People's Republic of China has become the foremost manufacturing center in the world today. Chinese manufacturing output increased from 4% of the global total in 1995 to 10% in 2006. Over the past 15 years, gross domestic product has grown at about 9% per year.1 With Western companies continuing to flock to China to source or manufacture products, the country is permanently altering the world's economic landscape.
In 2007, however, the darker side of unconstrained high-speed growth has revealed itself in problems with Chinese imports. In March, a pattern of dying pets was traced back to adulterated pet food. A plastic additive, melamine, had been added to wheat gluten by Chinese food makers to increase its tested protein content. In August, Mattel and other major toy manufacturers implemented large-scale recalls of toys made with lead paint. It was found that their supplier, a well-respected Chinese company, had bought lead paint from a supplier of its own with fake product certificates.
Quality issues extend to medical products as well. Dozens of Panamanians are confirmed dead from cough medicine in which diethylene glycol was substituted for the more expensive glycerol. The same substance has been found in American toothpaste. This has raised fears as to what other fraudulently labeled active pharmaceutical ingredients may be coming from China.
The dangerous lack of strict oversight in medical industries caused a domestic furor in China even before the current Western focus emerged this year. During 2006, multiple deaths from substandard medicines caused public outrage after wide coverage in the Chinese media. The defects included improperly sterilized antibiotics and the use of mislabeled ingredients.
Quality problems and recalls are not confined to discount products from small companies. In an environment where toys with lead paint made it through the supply chains of large companies like Mattel, vulnerability is widespread. The potential damage to Western medical companies extends far beyond the expense and inconvenience of recalls: patients can get sick or die, exposing manufacturers to lawsuits and damaging their reputations. It is also possible that all Chinese products will be stigmatized by the recent publicity.
Some of the Chinese government's response to recent quality problems has been symbolic. In late May 2007, Zheng Xiaoyu, former chief of China's State Food and Drug Administration (SFDA), was sentenced to death for taking bribes. He was executed without delay on July 10.
New trade frictions are also growing between China and other countries. As U.S. officials demand action, some Chinese officials have criticized the West for inferior products of its own. They have also accused regional trade partners of setting quality standards artificially high in order to protect domestic industries.
But beyond the rhetoric, China's central government recognizes that the country's economic future may depend on its efforts to improve matters. China is working hard to address its oversight problems. In theory, the medical device industry in China is currently regulated. But in practice, enforcement of regulationsespecially quality-related regulationsis highly variable. Mandatory quality standards in place as of 2006 included the following.
Since the scandals of 2006 and 2007, the Chinese government has been pressured at home and abroad to improve its product quality efforts. A number of new regulations and decisions issued since March 2007 affect both the regulatory structure and the enforcement situation for medical devices. They include the following.
Chinese GMP-compliant standards have not yet been put into effect for medical devices. However, they are scheduled to be implemented gradually, beginning this year. Currently, SFDA plans to make Chinese GMP mandatory for all sterile and implantable medical devices over the 20072008 period. The practices will extend to more medical device categories in future years and cover all categories by 2012. The Chinese GMP regulation is based on the medical device quality systems standard compiled by the International Organization for Standardization (ISO 13485).8
In summary, government oversight in China is increasing quickly, and the more-rigorous standards being put in place should help Western medical device manufacturers and importers ensure product quality.
Preventing Further Problems
In the short term, however, the medical device industry cannot rely purely on new regulatory standards to solve its problems. Medical device executives' most important precaution for doing business in China should be finding the right suppliers or partners. Some Chinese companies are experienced in and happy to implement quality requirements. But unscrupulous companies can be ingenious in deceiving their Western customers. Thus, it is important to fully vet suppliers during due diligence. Further information related to this and other precautions for medical device manufacturers is outlined in the following sections.
Vetting Suppliers. It is crucial that foreign device companies check potential suppliers' and partners' references, examine every phase of production, learn about companies' local reputations, and confirm that their regulatory documents, as well as product registration, factory registration, and compliance with ISO 9001 or 13485, are properly authorized and up to date. Foreign companies should also investigate the entity that owns a potential supplier. It may be an individual owner, or it may be a variety of investors. Ultimately, a company must know what party or parties should be held accountable if anything turns sour.
Price within Reason. Another consideration in preserving quality is to be reasonable about pricing. Obviously, huge price savings are available in China compared with other manufacturing locations. But if foreign device companies demand prices that are too low, it can tempt Chinese suppliers to neglect quality control or to use inferior materials. Executives should recognize that, in some cases, price increases will genuinely reflect rising wages or raw material costs.
A Trusted Representative. In preserving medical device quality standards, a vital step is for a manufacturer to assign its own full-time quality control representative to the supplying factory. However, there is a severe shortage of qualified staff who speak Chinese, understand Western quality standards, and can implement them effectively. Many of these individuals are employed by large Western medtech companies with a presence in China, such as Medtronic, GE Healthcare, or Johnson & Johnson. High demand for their skills is quickly driving their salaries up. Moreover, after working for large Westernized companies, they may not be interested in switching to more-traditional Chinese workplaceseven for more pay.
Foreign device companies will find it is often necessary to train Chinese quality engineers and regulatory personnel extensively to do this kind of work. The key then is to retain these qualified employees. Although retention in China challenges even the best of managers, key strategies for holding on to such key employees include keeping salary and benefits competitive, accommodating Chinese employees' interest in training and promotion prospects, and being sensitive to local cultural issues.
Contract Considerations. Contracts with Chinese suppliers should clearly state quality requirements. Basic Chinese contracts often simply say that product specifications will be "in accordance with the customer's requirements," which is risky. Also, the contract should stipulate that the buyer can periodically conduct unannounced audits of quality and performance.
Moreover, medical device companies should also determine whether their contracts with Chinese suppliers are enforceable. Chinese courts are unlikely to enforce foreign judgments. Therefore, contracts should provide for litigation in China, not the manufacturer's home country. The current Chinese judicial system, especially in major cities like Shanghai, is more accessible to foreign litigants and less discriminatory against them than it has been in the past. The local system still has its flaws, but it is the best bet for getting a contract enforced in China (see sidebar).
Increase Scrutiny, React Appropriately. Often, quality is viewed more lightly by Chinese business heads than in the West. In China, many people have bought equipment, hired employees, and made a great deal of money quickly. Based on this experience, many of them have become accustomed to skimping on quality in order to make more money. Now, however, most industry players are realizing that better quality is vital to doing business with the West. Some factories now have excellent modern quality systems, including some with independent ISO 13485 certification. However, less-Westernized Chinese companies may choose to deceive their customers in regard to quality in order to keep profits rolling in. Medical device manufacturers' vendor certification practices must be designed in a way that will weed out such unsavory partners.
Increased scrutiny of Chinese-made products is making Western medical device businesses more cautious in their China dealings. They are demanding more testing of products by suppliers and doing more testing on received products. They are sending more of their own quality control people to Chinese suppliers' factories to confirm quality practices, and hiring more quality assurance and regulatory consultants on the ground. Also, business contracts are becoming more strictly defined, clearly detailing quality standards and responsibilities.
In addition, in order to maintain long-term relationships with suppliers, the appropriate reaction to a quality problem may not be to end the relationship with the supplier immediately. Despite the great numbers of Chinese manufacturers, it can be difficult to find a responsive supplier that can produce a complex product to detailed specifications. Of course, companies acting in bad faith should be dropped. However, some suppliers may face deception by their own suppliers, as in Mattel's case. In some such cases, a thorough overhaul of the supplier's quality system and supply chain may be the better option.
Despite deficiencies, the growth of medical device manufacturing in China does not appear to be significantly slowing. The potential cost advantages are still a powerful driving force for Western industry. In addition, China's factories are continuing to increase in sophistication, making more and more complex products. While products like gauze, surgical tape, and gowns are commonplace, Chinese manufacturers are now making Western-quality cardiology, orthopedic, and respiratory products.
The public airing of China's quality problems worldwide is generating significant pressure to fix those problems. In hindsight, the current focus on Chinese product recalls may have favorable consequences. As Western industry uncovers hidden quality problems, it will increase its oversight. At the same time, Chinese industry will further integrate quality control into its corporate culture, enabling it to make more-reliable medical products. The boom in Chinese manufacturing for medical devices should continue as Western companies continue to enter and increase their presence in the market.
1. "World Economic Outlook" [online database] (Washington, DC: International Monetary Fund, 2007); available from Internet: www.imf.org/external/pubs/ft/weo/2007/01/data/index.aspx.
2. "Implementing Extension on GB9706.1-1995 Standards Relating to Medical Device Product Registration" (Beijing: State Food and Drug Administration of the People's Republic of China [SFDA], 2006); available from Internet: www.sfda.gov.cn/cmsweb/webportal/W6249/A64013780.html.
3. "China's CCC Mark" (Washington, DC: Market Access and Compliance, International Trade Administration, U.S. Department of Commerce, 2002 [cited 8 October 2007]); available from Internet: www.mac.doc.gov/china/cccguide.htm.
4. Provisions for Implementation of the Special Regulations of the State Council on Intensifying Safety Control of Food and Other Products [draft released for comment 8 August 2007] (Beijing: SFDA, 2007); available from Internet: www.sfda.gov.cn/cmsweb/webportal/W134/A64022743.html.
5. Requirements on the Compilation and Revision of Medical Device Industrial Standards (interim) (Beijing: SFDA, 2007); available from Internet: www.sfda.gov.cn/cmsweb/webportal/W4245/A64020447.html.
6. Eight Prohibitive Rules for Personnel Involved in Food and Drug Supervision (Beijing: SFDA, 2007); available from Internet: www.sfda.gov.cn/cmsweb/webportal/W45325/A64019191.html.
7. Provisions on National Sampling and Testing of Medical Device Quality (interim) (Beijing: SFDA, 2007); available from Internet: www.sfda.gov.cn/cmsweb/webportal/W4245/A64014459.html.
8. Cheng Wang, "GMP and QA for Medical Devices in China" [Webcast] (Bethesda, MD: Pacific Bridge Medical, 2006); available from Internet: www.pacificbridgemedical.com/Webcasts/10_2006.htm.
Ames Gross is president and founder of Pacific Bridge Medical (Bethesda, MD), a consulting firm dedicated to assisting medical companies in Asia. John Minot is an associate at Pacific Bridge Medical.