Medical Device Market: Demand Growth and Medical Reform Impact on Competitive Strategy

In order to solve many problems in the current medical system, the Chinese government is implementing a large-scale medical system reform. In April 2009, the State Council introduced a new medical system reform plan and promised to invest 850 billion yuan ($123 billion) in the three years from 2009 to 2011 to promote reform. The program plans to establish a universal health insurance system that will cover 90% of the Chinese population by 2010, while focusing on improving the construction of rural areas and community health service centers.

The government will build and renovate 3,700 urban community health service centers and 11,000 community health service stations within three years; and build 2,400 urban community health service centers in difficult areas. The purpose of these initiatives is to divert patients from large urban hospitals to more convenient small clinics, alleviating the overcrowding and over-beding of large hospitals, while developing medical infrastructure to meet the needs of China's aging population.

The central government will focus on improving the medical services of China's 800 million rural poor, who are difficult or unable to access many basic medical services and medical insurance. The new Rural Cooperative Medical Compensation Plan requires that by 2011, clinics must be established in various villages and towns in China, and hospitals must be established in each county. If the program objectives are met, at least 2,000 new county-level hospitals and 29,000 village and town clinics will be established in rural areas across the country within three years.

One of the potential beneficiaries of these reforms is China's medical device industry. According to the analysis report of medical equipment research company Episcom, by 2014, the total value of China's medical equipment market is expected to reach 28 billion US dollars, more than twice that of 2006. The industry believes that the main reason for continued growth is the rise in the purchasing power of high-end medical devices or home medical devices, and the government's emphasis on the development of medical facilities in rural areas.

Impact of new regulations

In this reform, the central government stressed that while increasing the health care level of small clinics and first- and second-tier hospitals (less than 500 beds), the corresponding costs should also be reduced.

The Ministry of Health has tightened controls on the purchase of high-priced "Class A" medical devices, which cost more than $5 million (about $710,000). The Ministry of Health pointed out that such equipment may cause a significant increase in medical expenses. However, the government still encourages medical spending and will allocate 8.3 billion yuan ($1.2 billion) between 2008 and 2010 for X-ray machines, patient monitoring equipment and ultrasound testing equipment in rural areas. The government will also provide medical equipment subsidies, and stipulate that medical institutions that use financial funds to purchase relevant equipment must give priority to purchasing domestically qualified products.

In addition to the regulations related to the purchase of medical devices, the central government has also injected funds into research and development. Through the recent stimulus package, the central government plans to invest 62.8 billion yuan (US$9.2 billion) in technology research and development in the medical industry. For a long time, Chinese companies have competed in the low-end market, while foreign companies have occupied the high-end market. However, the government's strong support for research and development, as well as the ambition of many Chinese companies to develop into global manufacturers, is changing the industry's situation.

New medical facilities need to be equipped with equipment, and existing hospitals need to update medical equipment, because 60-70% of the hardware equipment is currently left in the 1970s and 1980s.

Domestic companies are investing

The domestic medical device market is still a highly fragmented market. At present, there are about 3,000 medical device manufacturers in China, but most of them are small in scale, with limited market power and only a small number of fist products. A total of 62 companies in the Chinese pharmaceutical industry are listed overseas, of which only four are medical device companies: Jinwei Medical Technology Co., Ltd. listed in Hong Kong and Shandong Weigao Group Medical Polymer Co., Ltd., and listed on NASDAQ. Mindray Medical International Ltd. and China Medical Technology Corporation.

However, domestic manufacturing companies are investing heavily to gain market share. Beijing Wandong Medical Equipment Co., Ltd. is one of the largest medical equipment manufacturers in China, specializing in the production of diagnostic imaging equipment and even oral treatment equipment. The marketing manager of the company said, “The market still has a lot of room for development, despite the financial crisis. , but we are still very optimistic about the market outlook."

At the same time, they are working on the development of quality equipment, which may cost 30% less than foreign competitors. Mindray Medical International Co., Ltd. is the largest medical device manufacturer in China. The company's revenue in 2008 was nearly 550 million US dollars, an increase of 36% over the previous year. Mr. Xu, Marketing Manager of Mindray, believes that there are still many opportunities for expansion: “Our company has established a solid foundation in the domestic market and is currently looking to the international market. Recently, we have done research and development and sales. A lot of investment in order to be able to grasp future business opportunities."

The reform measures adopted by the government and the rise of domestic companies such as Mindray have all created pressure on foreign companies to promptly respond to their position in the Chinese market, but multinational medical device manufacturers still have huge development opportunities in China. Because they currently have technical advantages, hospitals and consumers are also more inclined to use foreign products.

High-end demand continues to grow

In recent years, the demand for China's healthcare system has shown an upward trend. Continued economic prosperity and changes in eating habits mean that more and more Chinese people are facing the same health problems as those in developed countries. In China, the top three deadly diseases are cancer and malignancy (28.53%), cerebrovascular disease (18.04%) and cardiovascular disease (16.29%).

More and more patients are looking for advanced medical technology to treat these diseases, and still rely heavily on Western medical technology. “The most demanding foreign products are those that use state-of-the-art technology. Many tertiary hospitals specialize in importing medical products to serve wealthy patients who are willing to pay for the best equipment for treatment,” Yao Hong Quan, manager of the medical device department of Meikang Shanghai International Trade Co., Ltd., said. This company is one of the largest import and export trading companies in China for pharmaceuticals and medical equipment.

For some patients suffering from serious illness, price is not the most important issue. For example, in complex cardiac surgery, the demand for high-grade cardiovascular medical devices has been high. Interventional therapy is a non-surgical method for the treatment of cardiovascular disease, and this method is being accepted by more and more people in China. The cost of this treatment ranged from 10,000 yuan ($1232) to $90,000 ($11,084). The high cost of treatment made the treatment popular, but the demand is still increasing. The demand for vascular prosthetics and arterial stents, especially drug-eluting stents, is growing rapidly, and several domestic companies are struggling to seize the market. In China, the number of heart patients increases by 20-30% annually. On the other hand, the market growth rate of arterial stents has reached 40%.

Due to the lack of a comprehensive health care system, most patients are unable to afford the high cost of arterial stenting. In 2003, only 5.8% of patients who came to treat cardiovascular disease used stenting. However, the recent introduction of special medical system reforms and medical device regulations will provide patients with better medical reimbursement systems, which will greatly increase the demand for advanced treatment methods such as arterial stents.

Foreign companies, especially large medical device manufacturers in Japan, Germany and the United States, still enjoy technological superiority and control 90% of the high-end medical device market. Although the government is providing high-cost medical equipment for rural projects, the major hospitals in China's big cities still need the best foreign equipment. In addition, Chinese consumers are still cautious about “Made in China” and require the use of foreign-branded products when treating diseases.

China Market Research Group is a Shanghai-based market strategy research company. In a recent survey, most Chinese consumers trust Western medical device brands rather than domestic brands, and prefer to pay 20% more. Money because they think foreign brands are more reliable and less prone to failure.

Owen Tang, an analyst at InMedica, a medical device industry research organization, summarized the phenomenon. “The demand for low-end X-ray machines will continue to stabilize over the next few years, such as simulating ordinary X-ray imaging equipment, as the Chinese government will continue to invest in rural health care. These areas often lack basic medical equipment. However, for high-end The demand for X-ray equipment is considerable... In fact, from 2007 to 2012, the number of imports of digital X-ray imaging systems in China is expected to triple."

Domestic production companies must strive to establish a trustworthy image and eliminate the negative image of “Made in China” at home. At the same time, foreign medical device manufacturers have the opportunity to use their brand value to build market share.

One problem facing foreign companies is that China's relevant regulations mean that they will have difficulty entering the rural market. Domestic companies will receive strong government support and win opportunities in these markets. In order to counter this trend and continue to develop in China, many foreign brands have chosen a joint venture or cooperation with domestic companies in order to enter the developing market, improve sales channels, and benefit from government medical funds.

Create a joint venture

In order to maintain a competitive edge in both the high-end and mid-end markets, many foreign companies choose to establish joint ventures with local Chinese manufacturers. In addition to reducing costs, joint ventures can take advantage of strong local dealer networks and relationships with hospitals or affiliates to eliminate barriers to sales.

Promoting products with the help of domestic companies also enables foreign companies to benefit from the newly introduced policy that fiscal funds must prioritize the purchase of domestic products. This decree may have little impact on the high-end medical device market, as domestic companies still lack the technical capabilities to provide such products. Mr. Yao of Meikang Shanghai said, “Reputable hospitals will continue to buy high-end equipment from foreign suppliers because most of the medical devices produced in China still fail to meet the requirements.” The situation in the low-end market is very different. In order for foreign manufacturers to accelerate development, they must take creative measures. For example, after working with domestic companies, foreign companies can produce and sell cheaper products and use the funds provided by the government to build a rural health care system.

Recently, Medtronic Inc., a US-based medical device company, and Shandong Weigao Group Co., Ltd. established a joint venture to promote Medtronic's spine treatment products and Weigao's orthopedic instruments. Weigao's distribution network covers 100 cities in China, which will help bring the products of Medtronic to the market. At the same time, due to the complementary characteristics of the products of the two companies, it will help to establish a more efficient marketing system.

Similarly, other multinational giants have also acquired or cooperated with the local market. In April 2008, Philips Healthcare acquired the company's second largest patient monitoring equipment manufacturer, Shenzhen Jinkewei Industrial Co., Ltd., which enabled Philips to strengthen its position in the high-end and low-end markets.

General Electric (GE) recently launched a low-cost product development program that specifically targets rural hospitals in China. GE's main strategy is to establish a local base in China that uses Chinese resources and technology to produce low-cost medical devices at a 15% lower price than imported products. In order to achieve this goal, the company and Xinhua Medical Equipment Co., Ltd. jointly established Xinhua General Electric Medical System Co., Ltd. According to the cooperation plan, the company will introduce 50 low-cost products to the market; mainly for the supply of X-ray machines and supporting equipment for rural hospitals. At the same time, General Electric continues to invest in its R&D capabilities in the United States.

The emergence of the bipolar market requires foreign suppliers to make corresponding strategic adjustments. On the one hand, the use of high-end products, such as high-end products in implantable medical devices and cardiovascular devices, is expanding, because some large and medium-sized cities have more and more wealthy people, such as Beijing, Shanghai, Shenzhen, Guangzhou, and A fast-growing second-tier city. Once the new medical system is in place, this market will expand further.

At the same time, the rural market, which accounts for 80% of China's population, will be the focus of the new health care system reform. For rural poor areas, manufacturers must develop low- to mid-range diagnostic and imaging equipment and simple household diagnostic equipment for local hospitals.

One of the challenges faced by multinational companies is how to maintain a good brand image while catering to the needs of the low-end market. Ben Cavender, a senior analyst at China Market Research Group (CMR), points out that companies can “sell different brands to sell low-end and high-end products to avoid negative impacts on high-end products while creating price-sensitive Type of sales."

China's promotion of the development of rural medical systems has created huge business opportunities for the industry, but regulations on how to buy products in hospitals and clinics, as well as rising domestic medical device manufacturers, mean that multinational companies must respond quickly to consolidate Their market position.