COVID-19 lockdowns significantly disrupted the usual operations of the medical system in China. However, government initiatives to reform the medical system continue to move forward. Some initiatives are as follows:
- The Chinese government continues to invest in public hospitals as a crucial part of its medical system reform. In 2020, 2021, and 2022, total budgets allocated to public hospital investment accumulated to 30 billion yuan (US$4.3 billion).
- Volume-based procurement further expands from drugs to medical devices, including coronary stents, and orthopaedic products like artificial joints. Vendors that successfully secure tenders will see big shipment increases, but heavily squeezed profits. Containing costs to defend profitability becomes crucial for any medical device manufacturer participating in volume-based procurements.
- Despite the official paper issued in October 2021 by China’s Ministry of Finance to ensure foreign suppliers’ fair participation in government procurements, made-in-China is still a common precondition to participating in government procurements.
These initiatives further raise the importance of public hospitals in the Chinese medical device market and pose challenges to international players on market access and profitability. Many multinational MedTech companies have responded with China-specific go-to-market strategies to enable them to play in the high-growing Chinese medical device market.
Accelerated localisation strategy of multinational MedTech giants in China
Localisation has been a buzzword among multinational MedTech giants in China over the past few years. Omdia has recently observed an acceleration of localisation strategies among multinational MedTech giants. Some examples are as follows:
- On June 9, Siemens Healthineers announced its latest localisation strategy, aiming to better contribute to the Healthy China initiative. This strategy includes striving to manufacture all products in China, furthering innovation based on Chinese market needs, and optimising the business practice in China.
- China has the world's largest production base of Siemens Healthineers, with a total construction area of about 180,000 square metres, producing more than 80 products including devices like CT, magnetic resonance imaging, X-ray, ultrasound, as well as other components. Furthermore, the laboratory diagnostics plant in Shanghai, in which Siemens Healthineers invested 3 billion yuan (US$434 million) in 2018, is projected to officially open in 2023. This plant will become Siemens Healthineers’ first in-vitro diagnostic reagent production base in Asia Pacific.
- Echoing Siemens Healthineers’ domestic Chinese production strategy, on July 13, Philips (China) launched its latest made-in-China magnetic resonance product. The launch event was themed “In China for China”. As per a senior executive from Philips, the company aims to localise the manufacturing of all precision medicine diagnostic products in China by the end of 2022. In another one to three years, the company targets to achieve a 100 per cent made-in-China goal for its ultrasound products including the premium segment.
- On June 30, Medtronic signed a strategic partnership agreement with Changzhou National High-tech Industrial Development Zone, located in Jiangsu province. The high-profile signing ceremony was attended by top government officials from Jiangsu province and senior executives from Medtronic headquarters. Medtronic’s Changzhou Science and Technology Park will serve the functions of manufacturing, R&D, and an innovation incubator as well as a customer experience centre for its orthopaedic surgery products.
- In March this year, the president of Boston Scientific’s Great China remarked that in the future the company would further its localised practice in areas of R&D, production, technological transformation, and talent development. In July, Boston Scientific announced that its intravenous ultrasound imaging product made in Shanghai would be launched this September, selling to the global market. This product launch is a highlight of the company’s 25th anniversary in China with a vision of “In China for Global.”
No matter “In China for China” or “In China for Global,” these localisation initiatives demonstrate the rising importance of China to multinational MedTech.
Factors underpinning the localisation strategy
The size and growth rate of the Chinese medical device market is one of the major reasons for multinational MedTech giants’ continuous investment. China is already the world’s second-largest medical device market with an estimated revenue compound annual growth rate (CAGR) of 10-15 per cent through 2025, more than double the projected pace of growth of the global medical device market.
- China is seen as a key growth driver for many multinational MedTech companies. For example, China contributed between 13 per cent and 15 per cent of total revenue for Siemens Healthineers, Philips and GE Healthcare in 2021. China is the second largest regional market for all three companies.
- Made-in-China gives multinational MedTech companies a big advantage in accessing the Chinese market. Firstly, a product made in China better qualifies for consideration in government procurement. Secondly, it takes much less time for a made-in-China product to be approved by the local FDA. Thirdly, this created product is usually lower in cost. The growing competitiveness of local brands in all product segments also propels multinational MedTech vendors to expand production in the high-end segment.
- As the world’s factory, despite the growing labour costs, China is still an ideal manufacturing site for many capital-intensive products. The strong business ecosystem, a complete supply chain, government investments, and capacity for high output mean that China’s manufacturing capability is unparalleled.
- Take Siemens Healthineers for example, the company has built a supply chain network with more than 200 vendors across China. Based on this network, Siemens Healthineers’ production facility in Shanghai can source more than 80 per cent of components (for all equipment produced) in China. About 70 per cent of its products made in China are shipped overseas for the global market.
- Better addressing specific needs of the Chinese healthcare system is another reason for equipment vendor localisation strategies. For example, a doctor in the outpatient department of a typical Chinese public hospital receives about 100 patients per day. This high workload demands medical equipment to be highly efficient, easy to use, and robust. The workflows in Chinese hospitals and medical system infrastructure all demand product features tailored to the Chinese market.
Multinational MedTech companies are stepping up both the depth and breadth of their practices in China. As per a senior executive from Philips (China): ‘Philips is striving for localisation in China, building an ‘end-to-end’ value chain encompassing R&D, manufacturing, market access, sales, service, and other workflow links, to better serve the Chinese market’.
The localisation strategy reflects the long-termism that multinational MedTech companies hold toward the Chinese market. Many localisation initiatives were launched during covid lockdowns in China.
While the impact of the Covid pandemic and associated restrictions in China begin to ease, under the pressure of economic deterioration, the Chinese government (at all levels) is taking measures to appease foreign investors by provocatively initiating meetings with foreign companies and offering better business conditions.
The love-hate relationship between multinational MedTech and domestic Chinese vendors will continue for the foreseeable future.
Sally Ye is a health care technology analyst at the Healthcare Technology division of Omdia, a sister research brand of Omnia Health. Located in the US, Europe and China, Omdia’s health care team produces a wide range of syndicated and customised reports, including a monthly China Healthcare Market Update, the Healthcare IT Topical Report, and the Healthcare Equipment Database, as well as in-depth reports and analysis on the medical imaging industry.