The views expressed in any article published in this blog are the author's own and do not necessarily reflect the views of Joseph Foster or Bob Lupoli.

Friday, March 11, 2011

China & Medical Device Sales - article & comments

Joe:  I receive a regular newsletter from MDDI Magazine http://www.mddionline.com/ it is for the medical device industry. I though you would be interested to see how this business community thinks about doing business in China. Please see below. -Bob


Published: March 8, 2011
Medical device sales are lagging overseas. Can China reverse this trend?
By: John Jarowski
U.S. Secretary of Commerce Gary Locke and U.S. Trade Representative Ron Kirk visited Memphis, TN in October 2010 to promote President Obama’s National Export Initiative (NEI), a program designed to increase jobs by boosting exported goods.1 The plan is aimed at doubling U.S. exports over the next five years to Asia, Africa, Europe, South America, and Central America. According to NEI Director Courtney Gregoire, the initiative is “targeting high-growth, high-potential sectors like medical devices.”2 One of the reasons the pair visited Memphis was because the medical device industry has been struggling to meet this initiative.
The medical device trade surplus was reduced from $6 billion in 2005 to $3 billion in 2010, according to Joe DeVivo, president of Memphis-based Smith & Nephew Orthopedics. DeVivo projects that 50% of his company’s products will be sold overseas. He notes, however, that this will not be enough to pick up the slack in lagging international sales.1
Officials in the Minnesota state government resound this alarm. A hub of medical device manufacturing (it is the home of medical device giant, Medtronic) the state reported that while exports rose 18% to $4.3 billion from 2009 to 2010, exports of medical products decreased to $723 million, roughly 10%.3 Data demonstrates that this is the only area of Minnesota’s economy to decrease in exports.
These developments should ring alarm bells for medical device manufacturers and the Obama administration. Industry giant, Medtronic  is headquartered in Minnesota and was considered a beacon of hope for NEI.  A decline in this industry’s export profitability is an ominous sign for the success of the NEI, especially in light of the rosy predictions made earlier last year. For example, 41% of Medtronic’s revenue ($15.8 billion) is generated by international sales. Trends suggested at the time that this percentage would rise 53% by 2015. Former Medtronic CEO,
William Hawkins noted this in 2010 with considerable optimism saying that exports are one of the company’s major focuses and that significant changes had taken place within the company in order to increase international sales.2
A number of explanations for the shortcomings of the medical device industry have been proffered. Chief among them is that exports to Ireland dropped by 51% in 2009 to $109 million. However, reports suggest that the problem runs deeper as Medtronic cut its sales forecast for 2011 because of a decrease in price and use of medical devices in the international market.
Nevertheless, there is hope. This hope is known as China.
The China Profile
Gradual transition into a free-market economy, accession to the World Trade Organization (WTO), and liberal trade policies in China are fueling rapid expansion of international trade. Being the second largest recipient of foreign direct investment (FDI) and the sixth largest foreign trade country, China is poised to grow in the healthcare industry.
China’s medical device market relies largely on imports, with the United States being a major supplier. The reduction of the tariff rate on medical devices to 3.9 % has made importing low-cost and convenient.
In addition to these facts, it is important to shed light on some other general truths. China is the world’s second largest economy and is growing at the second fastest rate. Healthcare reform is the top priority of the Chinese government. Despite pessimism about the U.S. market, there is reason to be positive about selling medical device products in China. In July 2010, it was reported that China’s GDP grew at a rate of 10%.4, 5 As China’s economy grows, so does its need for imported goods. When we think of China, we think of it as a major exporter. However, China is fast becoming one of the leading importers in the world.
When President Obama met with Prime Minister Hu Jintao agreements were made to increase US exports to China by 45$ billion. Commerce Secretary Locke, speaking at the U.S.-China Economic and Trade Cooperation Forum, in January, remarked that exports to China will exceed $100 billion in 2011. All of these factors indicate the increasing importance of China to US industries.
Opportunities and ObstaclesPerhaps the most hopeful development for medical device manufacturers, however, is that China has dedicated $123 billion over the next four years toward healthcare reform. Additionally, the demand for Western medical devices has increased.6,7 The medical device industry in the United States currently exports $1.23 billion per year to China. The market for medical devices in China is at $14 billion and is projected to double by 2014. Chinese medical professionals prefer Western products because of their high quality and technology.8
 
There is no question of China’s ability to rescue this industry. Even U.S. Treasury Secretary, Timothy Geithner acknowledged China’s potential at a G8 Summit in 2010 when he called on its officials to step up local consumption.9 So what is holding us up?
There are several reasons the medical device industry has not been as successful in China as one would expect. The challenges to doing business are multiple, complex, and often intertwined. They range from cultural misunderstandings and language barriers to more technical problems such as meeting regulatory standards and acquiring legal and intellectual property protection. The difficulties of doing business in China are not limited to medical device manufacturers.
Across all industries, companies have encountered several problems associated with entering the Chinese market. Even Internet giants like Yahoo and Google, and medical device companies such as Boston Scientific, have all faced their fair share of obstacles in China.10
The culture of the marketplace in China is one challenge to doing business. An article by Dexter Roberts in Bloomberg’s Business Week magazine titled, “The Higher Costs of Bribery,” paints a grim portrait of top medical device manufacturers being investigated in China under the charges of bribery and corruption.11,12
In just four years, the U.S. Justice Department has tripled the number of investigations into American companies accused of bribery in China. The World Bank estimates that more than $1 trillion is paid in bribes worldwide each year, with China ranking third on the list of where bribes are most common.
Companies are now scrambling to find ways to avoid such charges, as they become “one of the highest priorities of the Department of Justice,” Attorney General Eric Holder, is quoted as saying. In June 2010, more than 150 executives from Siemens met in Germany to discuss plans to maintain compliance with US and Chinese anticorruption laws.
During the same month, Johnson and Johnson’s medical device unit went under investigation for bribing a top SFDA official in China. In 2005, US based, Diagnostic Products, was charged with paying $4.8 million in bribes and paid $2 million in fines as part of a compromise.10 There have been no developments reported since on this case.

A culture of bribery has developed in China due to the way in which the sales process is approached. As one sales agent said on the matter, “[The] market does not wait for products. Compared to the huge profit the company could earn by jumping the queue, the bribes [are] just a small cake.”13 This was said in reference to the recent Johnson and Johnson scandal in China. The company stands accused of bribing SFDA officials to gain quicker approval for their products. The idea that even large, well known companies are bribing public officials in China reveals two important facts.
First, doing business in China holds lucrative allure, and second, selling to China is so difficult that even firms with high profitability, reputability, and recognition have tried to cut corners. Another looming concern for medical device makers that want to enter the Chinese marketplace is intellectual property (IP) protection. Although there has been a rise in the number of companies in China dedicated to protecting IP, this has been a longstanding hot-button issue for American companies operating in China. It reached the point that IP violations in China were so bad that in 2007, the office of the U.S. trade representative put China on a priority watch list for violations of copyrights, trademarks, and patents. China is one of the world’s leading offenders in IP violations.14
U.S. Ambassador Jon Huntsman Jr., speaking at a conference in Shenzhen in June 2009, noted progress in China’s enforcement of IP protection. The city of Shenzhen is serving as an example for the rest of the country in terms of taking IP seriously. In response to such developments, David Buxbaum, an American attorney who handled the first IP case in 1972 with Microsoft, had some measured words, saying, “The city is an amazing success but its intellectual property protection and its institutions in the legal field and the administrative field lack a great deal.”15
In spite of huge potential, American companies are falling short of meeting expectations and conducting ethical business in China. In addition, the lack of IP protection is concern enough to drive away businesses that wish to operate in China. Clearly, innovative techniques in penetrating the market are required.
What to Do
So the director of international sales at a medical device company faced with the opportunity of expanding its company’s market in China. However, she is nervous about whether to make an attempt. A few tips and reminders about doing business in China might help.
Know Your Audience. It is important that you know whom you’re selling to. This process is typically referred to as localization. Localization is tailoring a product to fit the needs and language of a particular culture.
Even though it’s not a medical device company, the example of Yahoo’s disappointing foray in China is a useful one in illustrating the importance of localizing a product. Yahoo entered the Chinese market with high hopes. The search engine giant knew there were hundreds of millions of users. Yahoo also had a lucrative budget to handle marketing costs and brand promotion. It was already a household name throughout the world. But Yahoo failed.
Yahoo failed because it did not consider its audience. Chinese culture does not embrace the concept of e-mailing the same way that Westerners do. The Chinese prefer live communication to leaving messages. Yahoo was slow to realize this and its competitor, BAIDU, was already offering a service of live messaging that was more attractive to the Chinese user.10
So, the lesson is to know the audience, or at least outsource the work to people who do. This practice enables accurate transmission of a message and ensures that information about a company, its products, services, and technology are conveyed accurately, thereby attracting more clients in China.
Look for a Good Partner. Looking to a foreign market that is unknown territory and holds high competition can be intimidating to a small- or medium-sized company.
The rule of thumb is that when you don’t know much about something, you should to find someone who does. The best way to doing business in China with a limited budget is by contracting an all-inclusive service company. By this, I mean, a firm that will assist a company every step of the way so as to ensure the product sells successfully in China.
Such contractors can be more affordable than you might think. Most of these companies offer discounts on additional services once they are contracted. These firms offer their knowledge of the region and have the required connections. These companies should have years of experience in performing the tasks required in addition to tools such as market research, legal support, localization, product development, and after sales support.
Penetrating the Chinese market is a complicated and intimidating task. It no longer has to be. Having a company at your disposal that knows the market, is affordable, and handles every aspect of your product’s entrance into China is a benefit on its own because its simplicity avoids needless frustration.
Get Legal Assistance. One way of attaining regulatory compliance is by contracting local legal firms to carry the workload. The problem typically associated with this is how to gain contact with them. American firms often have partnerships with Chinese legal representatives. These companies can guide a company through each step of the process so that a product is licensed, certified, and copyrighted.
Conclusion
 
China’s potential value to the medical device industry is alluring, but the obstacles related to entering the Chinese marketplace are considerable and the cause of much consternation. Nevertheless, there are tested methods available for medical device companies that want to enter this market that are affordable, efficient, and effective.
China should not be taken off the radar for international sales projections. Rather, it should be approached with care and great anticipation of the opportunities presented by expanding markets there.
References1. Toby Sells, “Top Obama Administration Officials Visit Memphis to Push Exports,” The Commercial Appeal (October, 2010); available from Internet: www.commercialappeal.com/news/2010/oct/13/top-obama-administration-offic....
2. Thomas Lee, “How to fix the US economy: Buy Less of their Stuff, Sell more of Ours,” Med City News ( June, 2010); available from Internet: www.medcitynews.com/2010/06/how-to-fixthe-u-s-economy-buy-less-of-their-....
3. Thomas Lee, “Medical Exports from Minnesota Register Sharp Drop.” Minneapolis Post (September, 2009); available from Internet: www.minnpost.com/medcitynews/ 2010/09/23/21712/medical_exports_from_minnesota_register_sharp_drop.
4. “Minnesota Exports Continue Rebound in the Third Quarter,” Minnesota Department of Employment and Economic Development (November 2010); available from Internet: www.positivelyminnesota.com/Data_Publications/Data/Export_Statistics/201...
5. CNN Moneystaff, “China’s Economic Growth Eases to 10.3%,” CNNMoney.com (July 2010); available from Internet: www.cnn.com/2010/BUSINESS/07/14/china.gdp/index.html.
6. Bloomberg Data, “Eastern Exposure.” Bloomberg BusinessWeek ( July 7, 2010); p. 18.
7. Crystal Global Info Tech (CGIT), “Global Medical Instrumentation,” CGIT (Quincy, MA ); available from Internet www.cgitus.com/newcgitus/home.html.
8. An Analysis of Medical Device Industry in China With Reference to The Chinese Healthcare Reform,” MedicExchange.com (September, 2009); available from Internet: www.medicexchange.com/Healthcare-Reform/an-analysis-of-medical-device-in....
9. Timothy Geithner, Speech to the G8 Summit ( June, 2010); available from Internet www.america.gov/st/texttrans-english/2010/June/20100627160708SBlebahC0.6....
10. David Babroza and Brad Stone, “China, Where US Internet Companies Often Fail.” New York Times (January, 2010); available from Internet www.nytimes.com/2010/01/16/technology/16failure.html.
11. Dexter Roberts, “The Higher Costs of Bribery in China,” Bloomberg Businessweek ( July, 2010); available from Internet: http://www.
businessweek.com/magazine/content/10_29/b4187011931530.htm
12. Dexter Roberts, “Bribery is losing its Charm in China,“ Bloomberg BusinessWeek (July 12–18, 2010).
13. “Bribe Case Casts Shadow on Foreign Firms.” Global Times ( July, 2010); available from Internet: http://english.sina.com/business/p/2010/0706/327990.html.
14. “China, Russia top U.S. Piracy List” Reuters (April, 2007); available from Internet: www.reuters.com/article/idUSN3041927620070430.
15. Steve Toloken, “US Ambassador to China says Intellectual Property Issues are Evolving.” Plastic News ( June, 2010); available from
Internet:
http://plasticsnews.com/headlines2.html?id=18986.
John Jarowski is an independent marketing consultant and policy analyst, based in Boston, MA.  

Submitted by TimGee on March 11, 2011 - 1:02pm.
China represents a tempting target, until one considers the corruption, lack of protection for intellectual property, and the fact the country is a totalitarian state (and the potential for lawlessness that represents). Yet due to its size, ignoring the Chinese market is not an option for many companies.  This story outlines some good basics about entering the Chinese market, but China will not "save medical device sales" for US manufacturers. The miasma plaguing the US medical device market is the result of too many barriers to entry and insufficient innovation. Most US medical devices are too expensive for countries like China, except for the small percentage of the population who are members of the Communist Party (or similar elites in other developing markets). Many US medical devices are getting too expensive for the US. Where are the disruptive innovations among medical devices, that we've seen in IT, telecommunications, consumer electronics and other industries? Big manufacturers like GE and Philips, when faced with innovation from developing countries, have taken the strategic direction of moving into HIT rather than disrupt the rich cash flows of their mature medical device businesses. This strategy of shifting resources into new markets, rather than innovate in existing markets is legitimate and well considered - the problem centers on the barriers to entry for new entrants who will shake up sclerotic medical device markets with something besides lower labor and manufacturing costs. A new dawning of medical device innovation will come, and it should be a lot of fun.

Submitted by Dr.Dr. on March 11, 2011 - 12:43pm.
Yep, they'll buy one of each of your devices and start manufacturing cheap knockoffs. Deal with China and they will steal all of your ideas.
Submitted by torch46 on March 11, 2011 - 12:24pm.
I agree with ajpalmer on most points. Despite the fact that many medical devices are somewhat more difficult to reverse engineer than consumer and commercial electronics, often the tactic in parts of the world where IP protection is weak is simply to get the example devices to study and then make something similar that is "good enough." This frequently results in the rapid adoption of the product when the price is right and licensing standards are weak or non-existent. The revenue from "good enough" then generates sufficient profit to further the effort necessary to perfect the device or process. But from here I differ with ajpalmer. The real problem comes years later, when the basic IP expires in the US. Then the original product is not only not sold in the international market, but the foreign product is sold in the US at lower prices, and sometimes with better design than the original. So I think the export sales slow down in a few years, but later the domestic sales shrink too. I have personally witnessed this in the industry that I consult in regularly.

Submitted by TimGee on March 11, 2011 - 1:07pm.
tourch46, you reinforce my argument that the fundamental issue plaguing the medical device industry is a lack of innovation, and not markets.
That a US manufacturer could be faced with a superior product from a knock-off manufacturer from a developing market is a travesty. Such companies deserve to lose in the market, although I agree that they should lose in a legal and ethical way.

Submitted by ajpalmer on March 11, 2011 - 10:37am.
The idea of China saving US medical device sales brings out the skeptic in me. Why? For the simple reason that China is notorious for 'buying' our products, then reverse engineering those products so they can produce and sell them in the same markets at lower prices. Sure, sales to China would work in the short term, and I mean the very short term, because ultimately their goal is to make money. I have seen this happen over and over again in the last 20 yrs and it isn't just medical devices. We don't sell to China and we won't sell to China, so we will remain a very small company. But, neither are we going to give them our technology. Other medical device companies would be well advised to be a bit stingy in this respect as well. Remember the quote, 'beware of China, she is a sleeping giant' and she is more awake now than ever. We have seen our production and jobs go overseas to the Asian continent for many years and if we don't shore up our US economy with jobs and producing new and proprietary products here in the USA, then we will lose what little we still maintain in our medical device business. China does not respect patents. We cannot be so naive to believe they will honor any currently in place for any medical devices or medical technology developed here. By all means increase sales with a market in China, but remember when it goes away in 2 or 3 yrs that it was simply a means to an end and they will gain market share for what was a US product.

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