It’s Time of Medical Device Companies Can Enter and Expand Their Business in China
Overview
The future is bright for many foreign medical device products in the China marketplace. Such optimism is based on the
following factors---(a) a growing economy, (b) a rising middle class with growing per capita incomes and (c) an increased
awareness of the benefits of better health care. Over the last three years, the number of medical device companies exporting
their products or setting up their operations in China has greatly increased. This report will discuss some of the business
strategies available to medical device companies in China. Finally, China’s entry into the WTO will also help foreign medical
device companies to penetrate the marketplace.
During 1978-1998, real GDP grew on average by about 9% per year, contributing to a near quadrupling of per capita income
over the same period. The number of people below the poverty line was reduced from more than 200 million in 1981 to about
70 million in 1995. The rise in the income levels of both rural and urban employees have considerably improved the standard
of living in China, and, at the same time, have brought about a rise in personal saving. The amount of savings of urban and
rural residents has increased from 21.06 billion RMB ($2.63 billion) in 1978 to 1,520.35 billion RMB ($183 billion) in 1993, 71.4
times the 1978. Within the last 20 years, the number of health care institutions has nearly doubled (Figure 1).
Today, the overall size of China’s medical device market is about $1.4 billion. While this market size is considerably smaller
than the U.S., Japanese and some major European countries, the market potential is significant as China’s health care market
improves and grows. In 1998, the U.S. medical device exports to China totaled about $240 million, which at about 35%, was the
largest share. Japan, Germany, France and Israel are the strongest competitors. While quality is an important factor in
purchasing these devices, affordability is oftentimes more important.
Figure 1: China Statistics, 1978 - 2010
Sources: CIA World Factbook; U.S. Department of Commerce; International Monetary Fund; Wen Hui Bao Daily (Chinese
Newspaper in China)
Market Entry
A foreign medical device company must choose an appropriate market entry strategy for China, depending on a number of
factors. These include: 1) how the Chinese “view” the foreign medical device company’s product entering their market, 2) the
demand for its product, 3) the future growth of demand for that product, 4) the foreign medical device company’s resources
and commitment to entering the market and 5) the time frame to enter.
Foreign medical device companies selling in China and interested in covering the majority of the country should rely on a
combination of distribution channels to reach end-users. This is true for both foreign companies exporting as well as those
distributing locally made goods. Foreign companies that want to export their products generally choose among state-owned
distributors, private domestic distributors and foreign distributors. Foreign companies that have a physical presence in China
can have direct distribution channels via their joint ventures and/or Wholly Foreign Owned Enterprises (WFOEs). Whichever
strategy is chosen, targeted marketing and promotion to the Chinese medical community is crucial.
Distribution Options for Medical Device Companies Wanting to Export to China
Medical device companies that do not have the intent or resources to set up staff in China to establish and monitor their
distribution networks usually opt to utilize the resources of a Chinese distributor(s). As a result, they may designate someone
in their corporate or Asian headquarters to meet with periodically and review the performance of their Chinese distributor(s).
Below are the three main distributor options in China.
First, there are large China state-owned distribution companies. There are two types of state-owned distribution companies.
Foreign Trading Companies (FTCs) are authorized, experienced groups that have an established infrastructure to deal with
foreign trade. FTCs normally have a broad reach and can sell to multiple provinces in China. Unfortunately, these firms tend to
rely on their existing network, rather than developing new business. In addition, they generally do not specialize in marketing
(or promotion), but, rather, end up functioning in many cases as “order takers.” Industrial Trading Companies (ITCs) are newer
and smaller than FTCs and are administered by the respective industrial ministries and bureaus. ITCs have a better
understanding of the specific products they are trading than FTCs, but they are generally limited in their geographic focus.
Second, there are privately owned trading companies. These companies have emerged in the last 3-5 years and are often
good alternatives to the state enterprises. They are, in general, more motivated, entrepreneurial and market oriented than
state-owned enterprises. Despite these advantages, each private distributor group should be analyzed separately and
carefully. Since privately owned trading companies usually do not have large cash balances to inventory medical products,
there is a risk that if one major client leaves the distributor, the entire trading company could collapse. These companies are
generally also limited geographically and sometimes are not authorized to engage in foreign trade.
Third, a Chinese-American owned distributor will be familiar with both Western, as well as Chinese, business practices and can
oftentimes identify appropriate end-users, import/export corporations and local distributors in China. Some Chinese-American
owned distributors have good experience and knowledge about China business and since they normally know at least
Mandarin, their communication can be effective.
Foreign medical device companies that want to stay “close” to their China distributors or have a local presence can do so via a
representative office. A representative office can perform “liaison” activities in China, but is not supposed to engage in such
profit-making commercial activities as importing and selling goods or issuing invoices. While the representative office staff in
China will target and work with customers, the local distributor eventually finalizes the sale. Of course, enforcement of a
representative office’s activities is often neglected.
Figure 2: Recent Distribution Agreements
Sources: Business Wire and PR Newswire
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