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China Medical Device Industry Report 2021 From Deloitte Consulting

The following is the China Medical Device Industry Report 2021 From Deloitte Consulting recommended by And this article belongs to the classification: Medical health, Deloitte Consulting , research report.

The market scale of China’s medical device industry is large and continues to grow. In 2019, the scale of China’s medical device market is 629 billion yuan, double the 308 billion yuan in 2015. In 2020, due to the epidemic situation, the demand for a series of medical devices such as medical masks, nucleic acid detection kits and extracorporeal membrane oxygenation (ECMO) machines will increase rapidly. Therefore, in 2020, the income of the medical device industry is expected to jump to more than 800 billion yuan. Since 2015, the average annual growth rate of the industry has been maintained at about 20%, and the growth rate in recent years has exceeded that of GDP.

At present, there are more than 26000 medical device manufacturers in China, and the number of small-scale manufacturers has increased sharply. In 2019, medical equipment dominated the medical device market, accounting for nearly 57% of the market share, followed by high value medical consumables (20%), low value medical consumables (12%) and in vitro diagnostic medical devices (IVD) (11%).

In terms of geographical distribution, China’s medical device industry is mainly concentrated in four regions: Beijing Tianjin Bohai Bay region, Yangtze River Delta (including Shanghai), Pearl River Delta and central China (including Wuhan, Chengdu and Chongqing). In order to support the development of medical device industrial parks, local governments usually give preferential policies to enterprises settled in the parks, such as rent reduction, settlement bonus or product registration bonus. In terms of the number of enterprises, the largest of these industrial parks is Taizhou China Pharmaceutical city in Jiangsu Province, with more than 110 medical device enterprises.

At present, China’s medical device market accounts for nearly 20% of the global medical device market, and it is still growing. It is expected that the growth trend will continue to be driven by the following key driving factors in the future:

1. The aging population leads to the increasing number of chronic patients;

2. Income growth drives the growth of per capita medical consumption expenditure;

3. The number of medical clinics and hospitals increased rapidly;

4. Low drug price policy (meaning that industry participants are looking for other sources of income).

With the continuous development of China’s economy, the focus of medical and health patients will shift from treatment to prevention.

Market participants

Domestic medical device enterprises are mainly small and medium-sized enterprises, mainly focusing on low value-added devices such as low value medical consumables. These small domestic enterprises dominate the low-end market. In terms of high-end equipment, the industry is still highly dependent on imports, and this market segment is dominated by a few foreign brands. However, in the past 10 years, the share of domestic brands in the high-value medical consumables market segment has increased from about 20% to about 30%. China is also becoming an increasingly important player in the global medical device market. From 2015 to 2019, China’s foreign trade of medical devices will grow at an annual rate of nearly 10% (more than the global growth rate), which makes China’s proportion in the international medical device trade market more and more large. In 2019, China’s total import and export of medical devices will reach US $29 billion and US $27 billion respectively. Most of the exported medical devices are disposable medical consumables, medical dressings and low-end medical equipment, while nearly 70% of the imported medical devices are diagnosis and treatment equipment (most of them are high-end products).

Influenced by COVID-19, 2020 was a disruptive year in the industry. However, China’s exports grew overall in the first half of 2020, up 22% from the first half of last year. Among them, the category with the highest export growth was medical consumables (such as masks), with an increase of 43%. At the same time, the total import volume decreased by 18%, and all product categories except medical dressings decreased. This means that compared with the past, all product categories of Chinese medical devices are net exports. Therefore, China is increasingly becoming a big market that foreign enterprises can not ignore. However, like the markets of all countries, China’s medical device market has its own unique regulatory and competitive environment. Enterprises need to consider how to find their best position in the market.

Regulatory policies are changing and affecting foreign brands

In China, medical devices can be divided into three categories according to the degree of risk: the first category (minimum risk), the second category and the third category (maximum risk). The production of medical devices needs to obtain the production license, the products need to be registered, and the operation needs to obtain the corresponding business license. In recent years, foreign manufacturers have been subject to increasingly strict regulation. In 2018, the State Council explicitly requested to strengthen the overseas inspection of medical devices. Therefore, in 2019, the number of drug inspections carried out by the State Drug Administration will increase significantly. In the future, this trend is likely to continue (except for disruptions caused by COVID-19). But at the same time, some provinces are also carrying out pilot projects to speed up the registration and approval process for innovative products with urgent needs.

In fact, the policies issued by the Chinese government tend to support domestic manufacturing in various ways. The goal of “made in China 2025” is to increase the proportion of domestic medium and high-end medical devices to 50% by 2020, 70% by 2025 and 95% by 2030. The registration fee of domestic products is low, and it can obtain a variety of support in product development, market access approval and downstream procurement.

Manufacturers have noticed that central and local governments have pressed hospitals to buy domestic products. For example, the national medical insurance may refuse to pay for some imported devices. Six provinces have released the catalogue of medical devices that are allowed to be imported. In the absence of medical or technical comparable domestic products, it is recommended that domestic operators only import the products listed in the catalogue. Although these provinces do not strictly prohibit hospitals from importing products beyond the catalog, it is suggested that hospitals should consider carefully before importing them.

However, it is not realistic for China’s medical device market to be completely localized, especially import plays an important role in the innovation and technology dissemination of the industry. Therefore, for foreign enterprises, there are still market opportunities.

How to enter the Chinese market

If foreign manufacturers decide to develop the Chinese market, they need to establish the method of market access. There are three ways to enter the Chinese market

1. Totally rely on import channels,

2. Direct investment in the establishment of local operation institutions, or

3. Cooperate with OEM.

Imports help to enter the market faster (which is very important when the market is about to be saturated), require relatively low capital investment, and also help to prevent the risk of intellectual property theft. However, if there is no local operation organization, it will be difficult to manage the brand image, and Chinese hospitals may also face relatively high procurement regulatory barriers. Therefore, entering the market through import is most suitable for enterprises with small scale, low brand awareness and lack of capital and management ability to set up local offices in China.

In contrast, enterprises operating products with high brand awareness in high growth market segments can choose to set up local operation agencies. However, in the long run, manufacturers can reduce production costs and develop localized after-sales service capabilities. Foreign enterprises can set up local entities through joint ventures, mergers and acquisitions or green space investment. In recent years, cross-border M & A and joint venture transactions in China’s medical device industry have surpassed those in other medical fields because local enterprises expect to take advantage of the comparative advantages of foreign enterprises in high-end technology.

In addition, enterprises can consider cooperating with local original equipment manufacturers (OEM). Through local OEM partners, enterprises can meet the local production requirements, thus reducing the regulatory barriers to enter the market. Compared with direct investment, cooperation with local OEM requires less capital investment and helps to enter the market faster. However, this way will lead to a greater risk of IP / technology leakage. Foreign enterprises should also strive to find reliable and qualified local OEM partners and continuously monitor product quality. Therefore, this method is more suitable for general basic products or products whose IP can be properly protected in the manufacturing process. No matter which market entry mode is adopted, foreign enterprises may need to rely on distributors to promote sales to hospitals and clinics.

New market entrants choose suitable distributors

If you want to flourish in the Chinese market, the importance of choosing the right distributor cannot be underestimated. A good distributor can promote the manufacturer’s products, influence the views of key opinion leaders, including the local government, and help identify important customers and markets. They can use their extensive network of hospitals and clinics to expand a wide range of customers and help alleviate the cash flow pressure of manufacturers, because the payment cycle of hospitals themselves is often longer (more than one year). Suitable distributors have highly skilled sales personnel who can provide key support services such as operation tutorial, operation guidance, customer question answering and complaint relief. However, for new enterprises, top and mature distributors are not necessarily the best choice. These distributors will have a higher standard in selecting the foreign medical device manufacturers they represent. Given that they have already represented a mature set of products, they may be reluctant to accept new products that compete with their existing products. More importantly, compared with smaller distributors, their agency conditions may require a higher proportion of profit sharing.

In the past, China’s traditional distribution model made it possible for manufacturers and hospitals to have multiple intermediaries. The manufacturer signs a contract with a large distributor, and then the distributor sub contracts the distribution services to a smaller distributor to contact with the hospitals.

This model leads to multiple rounds of price increases in distribution prices and encourages hospitals to make purchasing decisions based on commissions or rebates. In order to control the cost of supply chain, the Chinese government has introduced the “two invoice system”, which allows only one distributor to issue an invoice twice in the process of product circulation: the local manufacturer will issue an invoice to the distributor and the distributor will issue an invoice to the hospital again.

This system first appeared in the pharmaceutical industry and became a reference for the later reform of the medical device industry. The pharmaceutical industry has gradually turned to the single ticket system, effectively eliminating all middlemen, and the medical device industry is likely to develop in this direction in the future.

When foreign enterprises enter the Chinese market, their main considerations are shifting from traditional labor costs and infrastructure to tax incentives, financial subsidies and industry compliance support provided by local governments.

Price pressure

As mentioned above, the rapid growth in the number of new manufacturers has brought competitive pressure to foreign brands, and this situation will continue: “according to the State Drug Administration, in response to the new epidemic that raged in the first few months of this year, the relevant departments of China have accelerated the approval speed of medical devices.”.

The government’s reform to reduce the cost of medical services makes hospitals more and more sensitive to the price. In 2012, Sanming City of Fujian Province began to carry out a comprehensive reform of the medical system to reduce medical costs. The reform measures include cracking down on price increase, adjusting the salary level of medical staff to reduce the incentive of drug rebate, centralized procurement and increasing the use of generic drugs. Through these measures, Sanming City has achieved positive results in reducing the cost of medical services. Therefore, the central government announced to implement similar reforms nationwide based on Sanming City, including stipulating that all localities should carry out price adjustment assessment every year.

In May 2019, the eighth meeting of the Central Committee for comprehensively deepening reform was held, and the reform plan on the management of high value medical consumables was deliberated and approved. As a part of the program, the government will explore the classified and centralized procurement of high-value medical consumables.

Therefore, the Chinese government began to adopt the method of centralized procurement to reduce the price of specific devices. In 2020, China has introduced the bidding system of centralized procurement of cardiac stents. The purchased stents are enough to meet the estimated demand of more than 70% of hospitals. A total of eight enterprises (six domestic enterprises and two foreign enterprises) have won the bidding. The system has led to a sharp drop in stent prices, with the Chinese government reporting an average reduction of more than 90% compared with the previous year. After the completion of the first batch of centralized purchasing, the government said it was collecting the list data of the first batch of medical consumables from various provinces to prepare for the next round of national centralized purchasing of consumables. The second batch of medical consumables list mainly includes artificial hip joint, artificial knee joint, defibrillator, occluder, orthopedic materials and stapler.

With the encouragement of the central government, local governments turn to centralized procurement with quantity. In the whole country, 26 provinces purchase intraocular lens with quantity. In December 2020, Jiangsu Province completed the fourth round of procurement of medical consumables alliance of public medical institutions. After the procurement of stent, artificial hip joint and artificial knee joint, the target varieties were dry film and stapler, and the price decreased by 50% to 96%. In the same way, Guizhou, Chongqing, Yunnan and Henan Province Alliance launched the centralized procurement of stapler, patch and film, with an average price drop of more than 60%. Hubei Province has carried out a similar reform, and the price has also decreased to the same extent.

Under the pressure of cost reduction, hospitals turned to local manufacturers with lower prices. As a result, local manufacturers gradually occupy more market share, especially in the image and in vitro diagnosis (IVD) market segments. At present, four of the top ten IVD enterprises in China are local enterprises. For a long time, foreign brands have occupied a dominant position in the market of high value medical devices with low price sensitivity.

However, as mentioned above, the market share of foreign brands has declined from about 80% to 70% in the past 10 years, and is expected to continue to decline. However, due to the overall growth trend of the industry market, even if the market share of foreign enterprises declines, they are still expected to gain revenue growth in the future. If foreign enterprises can find their own market positioning, it should be a good situation for them.

How to develop in the market with fierce price competition?

This kind of medical reform not only helps hospitals control costs, but also reduces the profits of medical device manufacturers. So, how can medical device suppliers continue to flourish in such a market?

One way is to focus on sales rather than profit margins. The huge scale of China’s market means that even if the profit margin of a single product is not high, the overall profit that enterprises can obtain in the market is still considerable. Boston Scientific, for example, has won the right to supply two kinds of stents in the latest round of centralized procurement, which has won it a greater source of revenue than supplying to a single hospital or clinic. However, this source of income is obtained by reducing the unit price of products.

However, this mode of “sales volume is more important than profit margin” needs the support of large-scale economy. Therefore, the development of the market in the direction of large-scale centralized procurement, as time goes on, is likely to drive the concentration and commercialization of the medical device industry.

Most medical device manufacturers don’t want to see their products become pure commodities and their profits are squeezed. If suppliers can develop a high value, technical niche market, local suppliers can not easily lower prices. These niche products are also unlikely to be the target of a centralized procurement program. Medical device manufacturers also began to think more about how to add services to their products, because the “product + service” model is not easy to commercialize. China does not have the ability to develop or produce all the medical devices it needs, so there is still a large market space for high-end foreign brands.

The use of medical Internet of things (iomt) can not only avoid profit squeeze, but also create added value. With the integration of data and intelligent medical devices, medical Internet of things (IOT) emerges as the times require. It is “an Internet infrastructure composed of medical devices, software applications, medical and health systems and services”. The medical Internet of things is changing the role of medical device manufacturers in the global health system. If medical device manufacturers in the medical Internet of things can show the value and benefits of interconnected medical devices to hospitals and patients, they will be able to achieve rapid value growth. But in China, when it comes to collecting or accessing a wide range of data needed to maximize the value of medical Internet of things technology, multinational companies are obviously at a disadvantage compared with local technology companies. If foreign manufacturers want to compete in this field, they may need to consider cooperating with local enterprises.

Multinational medical device companies need to re-examine their current business model and supply chain structure in China in order to reduce the pressure of price and cost in the short term and seize the future market growth point in China. In the process of optimizing the business model, tax assessment and planning should be carefully considered. At the same time, it is suggested that manufacturers should make full use of local preferential policies to build a tax optimized Global trade and supply chain model. In particular, the transfer pricing policy and price of imported materials and market supply should take into account market changes. For example, if medical device companies take more responsibility in China, their profits in China may increase. In addition, if they adopt the strategy of large quantity and low profit, their import price may need to be reduced, which will affect the transfer pricing and customs valuation. The comprehensive impact of these changes on tax revenue is usually ignored, but of great significance.

China’s localization strategy

Localization of operation

With the aggravation of geopolitical tensions between China and the west, many foreign enterprises in China are turning to the “in China, for China” strategy, that is, the purpose of making productive investment in China is to sell products to the Chinese market, not to export from China. This strategy reflects the growing scale and importance of the Chinese market. By moving production closer to the end market, manufacturers with branches in China are able to respond more quickly to customers’ needs and generally reduce costs. Localization of supply chain in China not only means copying foreign supply chain model, but also is more economical.

Manufacturers should see it as an opportunity to invest in innovation in the Chinese market. Since the mid-2000s, the Chinese government has been encouraging greater innovation, such as tax policies conducive to R & D investment. This has transformed China’s economy from imitation oriented economy to one with infrastructure and resources to encourage enterprise innovation. Therefore, China’s economic development has formed an ecosystem focusing on accelerating innovation.

In China, for example, the state has been playing a leading role in the development and deployment of 5g technology. By the end of 2020, China will account for nearly 80% of global users. At present, more than 10% of China’s mobile users are using 5g. This technology will play an important role in the field of medical devices, especially in the development of medical Internet of things, intelligent hospital and wireless body sensor network. The development of this network will promote the improvement of disease diagnosis, monitoring and postoperative feedback. At the peak of COVID-19, 5G technology assisted remote diagnosis in Wuhan. China has become the third largest global intelligent medical market after the United States and Japan.

Enterprises should not ignore the financial incentives brought about by localization, such as reducing corporate income tax rate by 15% and reducing or exempting value-added tax. These and other financial incentives are the key financial factors to optimize the business model of medical device manufacturers, and will be affected by their strategic choices.

So, how can foreign medical device manufacturers be more localized? Joint ventures (JVs) are a common way for foreign medical device manufacturers to enter the Chinese market. In cooperation with local enterprises, foreign investment companies can take advantage of the local technological know-how of local enterprises, which is particularly important in the highly regulated industries such as health care. Appropriate partners can help foreign medical device manufacturers connect to the local supplier, customer and government relationship ecosystem of partners, so as to help enterprises take root in the Chinese market more deeply.

As part of the capital cost of joint ventures will be borne by local partners, joint ventures are also a relatively simple way to indirectly utilize China’s capital market.

On the other hand, many local medical device manufacturers are seeking cooperation with foreign manufacturers to shorten the marketing cycle of new products. With the development of Chinese enterprises, they increasingly regard this kind of Sino foreign cooperation as a means to expand overseas markets.

Success factors of joint venture

Like all forms of investment, joint ventures have their advantages and disadvantages. According to Deloitte’s experience, there are some key factors to ensure the success of joint ventures in China.

One is to ensure the importance of the transaction, that is, to ensure that the transaction is important enough for both sides of the transaction, so that the management of both sides are willing to invest key resources to facilitate the success of the transaction, including top talents.

The second is to find suitable partners. Many joint ventures are struggling because of the inconsistency of their basic strategic objectives in promoting the development of the enterprises. For example, one party may pursue fast profits, while the other party may be willing to sacrifice short-term profits to occupy more market share. A suitable partner should have the following conditions:

Have a consistent vision and goals

Have key capabilities (e.g. be able to obtain government approval, recruit competitive talents, provide supply channels, etc.)

They are culturally compatible, transparent and credible

Third, foreign investors who want to establish joint ventures need to spend time to understand the specific situation of the Chinese market and its regulatory framework. If foreign enterprises entering the Chinese market want to maintain the same operation mode as those in the west, they will bring a lot of difficulties to their future development. For example, the governance structure of Chinese enterprises is unique. In practice, even if one party controls the board of directors, if the key management positions are ignored, the decision-making can not be effectively made and implemented in the enterprise.

Figure 6 below shows the development trend of domestic and cross-border M & A transactions (including joint venture transactions) in the field of medical devices in China. It can be seen that in terms of transaction scale, the volatility of cross-border M & A transactions is relatively large, because cross-border M & A transactions are more likely to have super large M & A cases. As high-end devices are heavily dependent on imports, domestic enterprises hope to acquire new technologies or products through mergers and acquisitions. Although the global Chinese market, like all markets, is unique. Localization means that it needs a certain degree of autonomy to accept the Chinese branch. In the successful cases of foreign enterprises in China, a common factor is to empower local entities to make effective decisions according to the local actual situation. In China, the economic situation is grim, and the number of cross-border transactions has declined. However, M & A transactions in the medical device industry remain relatively stable in 2020, reflecting the importance of the industry during the epidemic period. One of the industry’s biggest deals of the year is Dirui medical, a Chinese medical device manufacturer specializing in disease detection equipment, including nucleic acid detection.

China’s growing foreign enterprises do not regard the management of China branch as the spokesperson of the headquarters, but regard China as an independent market and formulate strategies on this basis. This does not mean lax management or lack of supervision.

Localization of capital market

The development of medical devices needs more capital, and the R & D cycle is longer. Therefore, access to capital is an important consideration for manufacturers. The scale of China’s capital market is huge, but it is lack of balance. Some types of enterprises have benefited from easy access to capital for many years with the support of government policies.

Overview of China’s capital market

Traditionally, China’s capital market is relatively inclined to the debt capital market, and large state-owned banks are more inclined to provide loans to state-owned enterprises. This bias is likely due to the fact that the lending institutions believe that there is absolute support from the government behind the state-owned enterprises. This has led to the expansion of shadow banking in the past, with state-owned enterprises transferring loans to other enterprises. In recent years, regulators have cracked down on such practices. As Chinese banks formulate more perfect risk management strategies, they are more and more willing to provide loans directly to SMEs.

China’s bond market is large in scale, but mainly interbank lending, with a small proportion of exchanges regulated by China Securities Regulatory Commission. Since 2014, the default rate in the market has risen steadily. The Chinese government has shown more and more tolerance to the default of state-owned affiliated enterprises, which makes the lending institutions question the assumption that state-owned enterprises have government support.

Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) are the two largest stock exchanges in mainland China. State owned enterprises account for a large proportion in China’s stock market. The trading volume of institutional investors is low, while that of retail investors is high. Although the amount of foreign shares is relatively low due to the restrictions on access to foreign capital for many years, recently, the Chinese government has relaxed the access threshold for foreign financial institutions to enter China’s stock market. Despite the large scale of China’s stock market, equity financing accounts for a relatively low proportion. Generally speaking, Chinese enterprises are more likely to finance through debt than international enterprises.

How can foreign medical device manufacturers enter China’s capital market? Foreign companies may be able to get access by setting up branches in China. Joint venture is a common way for foreign enterprises to enter the broader Chinese capital market through the investment of local partners. In fact, according to Deloitte’s experience, capital acquisition is the core driving force for foreign enterprises to seek joint ventures in China.

Seize the opportunity

China’s medical device market is full of opportunities, large and growing. However, medical device manufacturers must seriously consider their own market positioning, whether they have the ability to win by volume? Or focus on developing high value-added products that are not easy to be commercialized? If the strategy is appropriate, it will win the broad opportunities of China’s medical device market.

When entering the Chinese market, enterprises should consider how to obtain government support. Industries in line with national strategic objectives are more likely to receive support from the Chinese government. In addition, Chinese local governments often compete with each other. Therefore, if enterprises can settle in the expected medical device Industrial Park, local governments will be more willing to provide help to enterprises, such as settlement bonus, preferential loans, etc. With the increasing trend of China’s aging population, the demand for long-term medical services will surge. At the same time, with the growth of income and the expansion of medical clinics and hospitals, China will play an increasingly important role in the global medical device market. Manufacturers should consider how to take a share in this growth trend.

Innovation in the local market continued to accelerate. Therefore, in order to stay ahead and stand out, manufacturers need to provide the latest technology and product solutions for the Chinese market.

Large global multinational companies will need to review their governance and operation mode, manage their business according to market changes, and adopt flexible strategies to form a rapid decision-making mechanism with “Chinese characteristics”.

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