Multinationals lose ground in China’s medical devices

The world’s biggest medical device makers have been increasing sales at double-digit rates in China, the world’s most lucrative healthcare market after the US. But a drive by Beijing to boost domestic companies is cutting their market share in the country, a trend analysts say will accelerate. China’s market for medical devices is worth Rmb462bn ($74bn), and growing at 20 per cent a year, according to Citic Bank, propelled by an increasingly wealthy, but rapidly ageing population, combined with greater government spending on healthcare. China imported more than $20bn of high-end medical devices last year, with sales of higher technology devices dominated by foreign groups such as Johnson & Johnson, which says its China medical device sales rose double digit rates last year, Philips, Siemens and General Electric. But Beijing is explicit about its intention to change that. According to its “made in China 2025” initiative, Beijing wants to increase the use of domestically produced devices in hospitals to 50 per cent by 2020, and 70 per cent by 2025, as it seeks to create “national champions” that can conquer export markets.

The drive has added to trade tensions between China and developed countries, with both US and European officials saying it threatens their advantage in advanced manufacturing. Several government notices seen by the FT show that the plan is being aggressively implemented. In Sichuan province, officials said in September that hospitals must use only China-made devices in 15 categories from respirators to PET-CT scanners. While protectionist, the moves are permitted under World Trade Organization rules as China is not a signatory to the Agreement on Government Procurement, which covers state-run hospitals. As Chinese devices are generally cheaper, the drive is partly about cost-cutting, with officials using state-insurance funds, which cover an increasing portion of medical costs, as leverage. That has caused a rapid transition in the market for devices such as stents used in heart surgery, where local companies now dominate the market. “Imported stents cannot be reimbursed for medical insurance. So we use domestically made ones,” said Li Qiang, a doctor in Sichuan. Multinationals’ share of orthopaedic implants in China has fallen from 80 per cent to less than 50 per cent in the past five years, according to Ying Luo, partner at Boston Consulting. “As Chinese companies are becoming stronger in R&D and commercial capabilities, they have been gaining share in more medical device sectors,” she added. Medical devices remain “a market where many multinational companies are growing double digits . . . the locals are growing faster”, said Florian Then, a partner at McKinsey. But he argued that as China was seeking to increase the use of domestic products, multinationals could be included in government procurement if they were made locally. “Its clear that the government encourages local production. Its encouraging multinationals to evolve their business model to localise the value chain in China. If you want to align you should seriously consider a localisation strategy,” he said. Johnson & Johnson, for example, has two manufacturing sites in China and is adding a third. Those Chinese companies that are benefiting include Shenzhen-based Mindray, founded in 1991. It generated net revenues of $327m in the third quarter of 2015, before it delisted from Nasdaq to seek a higher valuation on a domestic bourse. It said it had invested about 10 per cent of its revenues in R&D over the past decade, and in 2008 paid $200m to acquire the patient monitoring business of US company Datascope, making it the third-largest player by sales in the global market for such devices.

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Mindray, a fast-growing med-tech enterprise from China during the Medica exhibition in Düsseldorf, Germany.