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China's New Market for Medical Devices

A growing economy and government reforms are opening up opportunities for medical device manufacturers.

MARKET ANALYSIS

China's rapidly growing middle class and its potential spending power have been well documented with respect to their implications for sales of consumer products and luxury goods. More quietly, sales of medical devices are also burgeoning in China, and the growing demand for clinical and consumer-use healthcare products has created abundant opportunities for medical device manufacturers.

However, capitalizing on such demand is not an easy task; medical device manufacturers must pay close attention to regulations and cultural differences if they want their products to become part of the healthcare system in China. In addition, device costs and other economic factors weigh heavily on hospitals' and consumers' healthcare decisions. This article evaluates the current economic and cultural climate surrounding the administration of healthcare in China and its market for medical devices.

A Growing Need for New Devices

(click to enlarge)
Figure 1. Production of, sales of, and profits from device sales in China, 2005–2007.3

In 2003, sales of medical devices in China represented only 3% of the world's total, whereas combined sales in the United States and Europe represented 73% of the market.1 From 2003 to 2006, however, China saw a jump in medical device sales. During that period, device sales in China grew at a rate of 14–15% each year (see Figure 1).2

Between 2003 and 2007, the Chinese government spent 3.56% of its total public expenditures on healthcare, compared with 20.5% in the United States.4 However, as average incomes in China continue to grow and the government's healthcare programs take shape, greater healthcare spending by both groups is likely.

Currently, few hospitals and clinics in China—especially in rural areas—are equipped with up-to-date devices for treating patients. About 15% of the devices in use were produced in the 1970s; about 60% of them were produced before the mid-1980s.5 Growing awareness of the need to replace these aging devices is ex­pected to fuel the market's continued growth.

Current Market Dynamics

At present, multinationals hold about 70% of the market for medical devices in China.5 Foreign manufacturers dominate the market for high-end devices and also compete with local manufacturers of midrange and low-end products. For example, GE Healthcare (Chalfont St. Giles, UK) dominates the market for computed tomography (CT) systems in China, and Siemens Healthcare (Erlangen, Germany) has a strong hold on the country's magnetic resonance imaging (MRI) market.5 In 2005, the most-imported devices in China included x-ray equipment and ultrasound diagnostic instruments with color displays (see Table I).6

Segment
2005
(π billions)
Foreign Manufacturer
Market Share (%)
Computed tomography
1.67
808
Ultrasound
2.07
908
Magnetic resonance imaging
1.27
908
Cardiac pacemakers
0.079
998
Table I. Total sales and foreign manufacturer market share in China of select medtech segments during 2005.

Some multinationals have successfully penetrated the device market in China by forging partnerships with established Chinese companies. In June 2004, Royal Philips Electronics (Amsterdam) and Neusoft (Shenyang, China) launched an R&D and man­ufacturing joint venture focused on providing CTmachines, x-ray machines, and ultrasound diagnostic instruments to both the Chinese and worldwide markets. By joining forces with a local industry leader, Philips was able to quickly deploy its strategy for the market in China and gain a direct link to a skilled workforce and R&D talent.10 In addition to facili­tating the sharing of resources and technology, joint ventures can help multinationals navigate the complex bureaucratic process of establishing a business in China.

At present, Chinese device manufacturers compete mainly on price, which severely limits their profits. Thus, only about 1% of the revenue from device sales is spent on innovation for new devices.5 Because Chinese companies have limited R&D and design budgets, imitations of foreign medical devices are common, but they occur mostly in product categories in which technology is easily obtained, such as biochemical analysis instruments.11 To address this widespread problem, in 2006 the State Intellec­tual Property Office of the People's Republic of China initiated an intellectual property protection action plan that will identify new goals and initiatives each year. Protection for the medical device industry was addressed in the first action plan.12 Since the Chinese government has established increased protections for intellectual property, imitation has begun to decrease, opening the door wider for foreign device manufacturers to enter the Chinese market.

The Role of Hospitals

In China, hospitals are the largest purchasers of medical devices. With the exception of several large multinational corporations that have sales channels directly to hospitals, most foreign medical device manufacturers sell their products through agents, and a device usually goes through several agents before it reaches the hospital. Although the device purchasing process usually includes a bidding element, manufacturers can also leverage personal networks and relationships to help close a deal.

Overall, most Chinese hospital administrators prefer imported medical devices because they perceive their quality as being superior to products manufactured locally. Hospitals are ultimately responsible for the results of medical treatment; therefore, they tend to choose high-quality, higher-priced devices over lower-quality, lower-priced devices. Many patients also believe that foreign brands are superior to local ones, and they may choose to pay a premium for treatment using imported medical devices.

In the past, Chinese hospitals earned most of their profits by selling pharmaceuticals to patients, and their reliance on this profit center drove up the cost of medication. In an effort to make pharmaceuticals more affordable, the government has ordered widespread price reductions. Between 2003 and 2007, the National Development and Reform Commission of China adjusted pharmaceutical prices nine times, affecting 1400 drugs with a total price reduction of about 40 billion yuan. The government has also limited price markups on pharmaceuticals to 15% over the hospital's cost.13 By doing so, the government is forcing the hospitals to reduce their reliance on pharmaceutical revenue and encouraging them to increase their focus on services as a source of revenue. Consequently many urban hospitals are buying advanced, high-end medical devices that enable them to provide higher-quality services—and thus bring in higher revenues.

In China, hospitals are becoming increasingly information-rich environments, thereby opening increased sales opportunities for digital devices—which are more precise than analog devices and can also store data—and Internet-capable data transmission devices. Thus, despite their higher price points, advanced IT-enabled devices are now receiving a warmer reception among Chinese hospitals—particularly in urban settings—than they have in the past.

As in many aspects of life in China, great disparity exists between the levels of medical care available in urban versus rural areas. Urban hospitals typically have greater access to foreign brands and advanced devices, whereas clinics in smaller municipalities are more likely to use outdated Chinese-manufactured medical devices. The majority of the roughly 40,000 clinics throughout rural China are equipped to perform only basic medical examinations and services.14 Their capabilities enable them to diagnose and provide treatment for common problems such as the flu, headaches, and cuts, but patients with more-serious illnesses or injuries are referred to higher-level hospitals.15

Chinese officials have stated that they intend to improve medical services in rural areas over the next five years. The government plans to invest about 20 billion yuan (approximately $2.7 billion) on such an initiative, and about 30% of the investment will be spent on medical devices.16 Easy-to-use, low-cost devices are in greatest demand, and those with multiple basic functions are given preference over advanced, single-function technologies. For example, Carestream Health Inc. (Rochester, NY) markets the Kodak Point-of-Care CR system, a computed radiography unit that combines a laser scanner, image management software, and a digital imaging workstation.17 Such a solution is well-positioned to meet the need for digital image capture and management solutions in China's rural areas.

Medical Devices in the Home

Increased use of medical devices in the home is a significant trend in the United States and Europe, but such a trend has not emerged in China. Most large medical device manufacturers operating in China, including multinationals, are still focusing on clinical devices and currently show little interest in the home-use market. Indeed, due to the in­creased focus on service as a source of revenue, hospitals often opt to keep patients longer, limiting demand for home-use devices. Furthermore, the majority of Chinese people are not ready—in terms of finances, attitude, and education—to use medical devices at home.

In 2006, combined insurance funding and patient out-of-pocket payments for healthcare in urban areas was an average of 1145.1 yuan per person. In rural areas, average expenditures per person were less than half that at 442.4 yuan per person.14 At present, a low-end imported wrist-worn blood pressure meter costs around 230 yuan (90 yuan for a unit manufactured in China).18 Thus, such a purchase would constitute about one-fifth of the average annual health expenditure in urban areas and one-half the average expenditure in rural areas. As such, most Chinese families consider many common home-use medical devices to be priced out of their range (see Table II).

Location
Income Per Capita
(π)19
Health Expenditures
Per Capita (π)14
Urban
11,759 (disposable)
1145.1
Rural
3,587 (net)
442.4
Table II. Average per capita income in urban and rural China in 2006 compared with average annual health expenditures per person in the same year.

A lack of awareness regarding self-healthcare options is also contributing to a limited market for home-use devices. In Chinese culture, doctors are regarded with great respect. When people become ill, their first instinct is to seek help from a physician. Because people have little education regarding self-healthcare, the benefits of medical devices are not widely known, and, especially in rural areas, many people are not educated as to how to properly use medical devices themselves. Therefore, Chinese patients consult their doctors on most health matters even though they are becoming more knowledgeable about their diseases and better educated overall.

As incomes and awareness have increased, some home-use devices—including digital thermometers, blood pressure meters, and blood glucose meters—have started to gain popularity among health-conscious Chinese consumers. However, many people still place a greater level of trust in hospital tests than they do in self-administered ones. Even if they initially invest in home-administered diagnostics, they will often go to a hospital to confirm their results, especially if they believe they have made an error.

In order to develop the market for home-use medical devices, manufacturers have started to develop product designs and marketing campaigns directed at younger people, who are the likely purchasers of home-use devices for older family members. For example, a home-use incontinence protection system for the elderly (Xinxiangshi Baite Yiyongpin LLC; Henan Province, China) is branded as Da Xiao Zi, meaning "very filial son." The implication is that young people who purchase the product for their parents are showing great respect.18 Likewise, many consumer-oriented home-use devices such as blood pressure meters and therapeutic massagers are purchased as gifts during holidays such as Mother's Day and Chinese New Year.

In terms of cultural perceptions that are influencing China's medical device market, it's important to note that many Chinese consumers make little distinction between medical devices and products promoting a healthy lifestyle. Therefore, products such as massage chairs may be perceived to be medical devices. Such a perception has its roots in the philosophy of traditional Chinese medicine, which teaches that some physical symptoms can be cured, eased, or prevented by massage. Therefore, massage is not only a luxury for relaxation but also part of maintaining one's health. Traditional Chinese medicine and the desire to lead a holistic, healthy lifestyle are influential in modern Chinese culture and affect people's choices in home-use devices and medical treatment.

Paying for Medical Care in China

As part of its effort to improve national healthcare, the Chinese government is developing medical insurance programs for both urban and rural residents. However, enrollment in such programs is still limited. As of 2003, about 70% of all healthcare coverage was managed through self-payment. In urban areas, such self-payment represented about 45% of coverage, with that figure rising to nearly 80% among rural residents.20 In 2006, 65.7% of Chinese people still did not have any kind of health insurance.21

In urban areas, basic insurance is the minimum coverage provided by the government. The program allows employees and employers to contribute a percentage of the employee's salary toward health insurance. Usually, 30% of the contributed money goes to the employees' personal insurance accounts and the rest goes to public funds.21 Funds are disbursed once a patient's medical expenses exceed a minimum amount and stop once the expenses exceed a specified maximum amount. Usually, the minimum is about 10% of the average local salary, and the maximum is about four times the average local salary.22

Cooperative insurance is the basic form of health insurance provided in rural areas. Rural residents may join the health insurance plan voluntarily by paying about 10 yuan ($1.45) per year. The government pays 20 yuan ($3) for each rural participant. The contributions are consolidated and deposited in a special account supervised by the government.23 The point at which cooperative insurance takes effect depends on the type of hospital at which treatment is provided. Treatment at rural clinics generally has a lower starting point than treatment at urban hospitals, which encourages rural residents to seek care at local clinics rather than city hospitals.

Commercial insurance can also be purchased to supplement government health insurance. The government also provides funds for extremely poor people who cannot afford to buy insurance plans.

Conclusion

China is undergoing many economic and cultural changes, and amid such change, healthcare and quality of life are top concerns among the public. Today's medical device manufacturers have an opportunity to improve the lives of millions of people—many of whom have not had access to quality devices in the past.

Manufacturers must take into account many considerations when launching or designing a medical device for the Chinese market. A crucial but often overlooked factor is an understanding of the culture and how people view medicine and healthcare. To achieve market success in China's complex healthcare landscape, medtech manufacturers need to have a deep understanding of the cultural, social, and economic implications of a given device.


References
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Jean Zelt is a principal researcher for Insight Product Development who lives in Shanghai and manages client projects and cultural studies at the Insight Asia office. Matthew Jordan is director of research and interface at Insight Product Development (Chicago).

Copyright ©2008 MX
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