The role of China for medical device companies’ growth and profitability has never been more important or more fraught with complexity than it is today. Among the most pressing challenges for the medical device industry remains figuring out how to build domestic distribution and dealer networks that are well managed.
What do we mean by that?
The simple challenge of how to efficiently manage a highly fragmented dealer and distributor market with extremely diverse and disjointed points of sale continues to be an issue across China. Ensuring that their business practices, much of which takes place out of your line of site, is consistent with your expectations and those of Chinese regulators, has never been more problematic. In the aftermath of the last 12 months where the pharmaceutical industry and its distributors in China felt the wrath of the country’s central government because of Beijing’s domestic anti-corruption drive, now would be an extremely important time to revisit how your devices are distributed in China.
In order to achieve the goal of having a scalable and sustainable medical device distribution channel and dealer network in China, it is essential to keep four ideas in mind: transparency, a trained sales force, consistent channel management practices, and realistic growth expectations.
Less than five years ago, it was customary across Asia in general, and China in particular, for medical device companies to have little visibility on what was happening within their various channels to market. Purely from a business intelligence point of view, many device companies – regardless of size – were flying blind in China. In many cases, the entire value chain in China was managed by their distributor, including the entire dealer network, with the channel feeding very little information beyond aggregate orders back to the device company itself.
This lack of transparency meant device companies have traditionally lacked the ability to see down through their channel into what is actually being sold at which hospital, by which dealer, through which distributor partner. They could see overall market growth based on total units being sold into the China market, and yes, because of where China’s under-developed device market was coming from, these have been compelling growth numbers.
Nonetheless device makers could not clearly see or anticipate problems, whether those were logistics, proper use of the products in question, or simple measurements around stock control. This inability to see down a distribution channel and through a dealer network is of concern, especially in China where a lack of transparency inevitably creates risk.
Proper Salesforce Training
But transparency is only the first step. The second step is to ensure the sales’ force in your dealer network is properly trained. Having high expectations of your own sales force is challenging enough when it comes to product knowledge, selling strategies versus competitors’ products and ethical behavior. Ensuring these same expectations are met with independent distributors and dealers on the other side of the world remains a big challenge.
Many pharmaceutical and device companies fear a mismatch between the standards they hold internal employees to versus those they hold external partners to. In a changing market such as China, where a company’s compliance risk also includes its distribution partners, paying more attention to partners’ training and the standards cannot be overemphasized.
Consistent Channel Management Practices
The question of enforcing standards outside your own company is tricky in any market – emerging or developed - but especially in China. Most device company product managers and front-line executives understand this reality all-too-well. Relationships are key, and the activities that build, foster and sustain relationships in China are especially important.
But these same activities also can create gray areas where risk abounds. Companies need to understand that one of the keys to managing this risk is to have a sound channel management strategy to address logistics, medical education and demand generation. These practices should include robust reporting practices from distributors in general, and from dealer networks in particular. In order to reinforce this reporting process, companies should require detailed transaction, pricing, end-customer sales and inventory data. These items are typically internally managed but in a dealer-dependent market like China, foreign multinationals should demand a broader understanding and transparency of that data. Having higher expectations of your distribution and dealer network’s reporting and analysis quality will go a long way to facilitating sustainable growth.
Have Realistic Growth Expectations
The last issue is also perhaps the hardest to address. Put simply, medical device companies need to be realistic about growth expectations from China. There is still room for significant growth in China, but not the 30-40% year-over-year growth that too many companies have come to rely on. When headquarters in the US and Europe transfers too much of its revenue growth and profitability expectations to its China operations, the pressure to cut corners inevitably follows.
The fact that the days of 60-70% annual growth in China’s medical device market are gone is perhaps a good thing. Many of the behaviors that evolved during those heydays pose structural problems today to Chinese hospitals, doctors, and device companies in general. Today, viable and well-managed distribution channels and dealer networks offering differentiated products that are supported with smart promotional activities, product training and other strong medical education remain the only way forward in China.
-- By: Juan Jimenez, General Manager China, Medical Device & Diagnostics, DKSH, which is a market expansion services company; and Benjamin Shobert, Founder & Managing Director, Rubicon Strategy Group that helps healthcare companies find new markets in Asia.