A New Wrinkle For China’s Medical Device Market (Forbes)
This week, China’s National Health and Planning Commission (NHPC) threw foreign medical device manufacturers a wrinkle: going forward, the Chinese government would pursue policies explicitly designed to favor domestic manufacturers over foreign manufacturers. The NHPC’s announcement was clear: “We want to strongly advocate health ministry organizations to use domestically-made medical devices, especially pushing top level class III hospitals to use domestically-made products.”
Justifying this policy, the government noted such measures were necessary for it to “effectively control unreasonable increases in the cost of medical care and reduce the burden on patients.” While some wiggle room does exist in this language (foreign companies are free to argue for the unique value of their particular products, and some latitude for Chinese hospitals to make purchasing decisions on the basis of these advantages), the tone and direction of the NHPC’s announcement should be cause for concern to foreign owned device companies.
If successfully implemented, the NHPC’s policy adds several layers of complexity to foreign medical device companies operating in China. The first is whether this bias by China’s hospitals towards domestic manufactured goods complies with the country’s WTO obligations. For now, the answer to this would appear to be that yes, China can discriminate in this way by arguing that the purchases made by its public hospitals fit within the exclusions offered by the WTO’s Government Procurement Authority (GPA).
One way to think of the GPA is as a corner of the WTO’s current rules that accommodates a certain amount of discrimination by governments for goods they require to be purchased domestically, usually by locally owned companies. This is known as the “Buy China” policy, and has provoked a lot of anger towards Chinese trade policies by other industries that have been subjected to domestic purchase limits set by the country’s central government. If the GPA exclusion does in fact provide coverage for China to discriminate against foreign device manufacturers, this will add further fuel to the fire for China to revise its GPA rules, a negotiation that has been going on since 2007, with much too little fruit to show for their efforts, as China’s critics have pointed out.
Beyond questions of trade protocols, the NHPC’s move accelerates the current trend of foreign multinational medical device manufacturers acquiring or joint venturing with Chinese medical device companies, as well as moving additional medical device manufacturing capacity from their home countries to China. If successful, these strategies should allow foreign companies to continue to participate in the public tendering processes within China’s hospitals, simply by illustrating that they qualify as a domestically produced product and as such, cannot be discriminated against by the NHPC. With an eye on the domestic Chinese market, almost every major multinational medical device company has expanded their domestic Chinese production capabilities over the last decade. Currently, market share in China strongly favors foreign companies: Novotek Therapeutics estimates that approximately 74% of China’s medical device market comes from foreign owned entities (whether produced in China or abroad).
On this point, one comment in the NHPC’s statement is worth emphasizing: “especially pushing top level class III hospitals to use domestically-made products.” This point is important, because China’s public tendering process – led first by pharmaceuticals and now devices as well – are moving to a “top-to-bottom” and “left-to-right” approach. The “top-to-bottom” public tendering means China’s biggest hospitals (the “top level Class III hospitals” referenced in the earlier quote), will be increasingly speaking for, and negotiating on behalf of, China’s smaller hospitals. In the future, a win in one big Class III hospital matters not just because of the volume in that hospital, but now also the other smaller hospitals who will be forced to follow the larger hospital’s lead. The “left-to-right” component of how China’s hospital tendering process is evolving speaks to the province-by-province influence of these policies. In other words, if the Zhejiang province adopts a particular device for procedures the government reimburses, then the neighboring Anhui and Jiangxi provinces would also likely follow the same approach. This obviously increases the stakes for medical device manufacturers, by consolidating the market into an increasingly important point of sale in a handful of China’s public hospitals.
In 2009, as the US slipped into a deeper economic recession, critics of China’s trade policies found new ammunition as Beijing put increasing emphasis on what it calls China’s “Indigenous Innovation” policy. While this had been a thorn in the side of US-China trade negotiations since 2006, the 2008 financial crisis resulted in American industry becoming more assertive about those parts of the Chinese economy where they were prohibited from selling (these were the “Buy China” sections). Now, as pharmaceutical and medical device companies see their margins come under pressure in more developed economies, due to the combined pressures of aging populations and government austerity programs, the China market is increasingly important.
This means medical device companies in particular will need to pay attention to how changes like those the NHPC set in motion this week impact the industry’s ability to successfully sell into China. The combined effect of favoritism towards domestic-manufactured goods and the consolidating pressures set in motion as public hospital tenders grow broader in scope, will require foreign device companies to develop their China manufacturing and sales capabilities much faster than many have expected. To the extent ongoing uncertainties about China’s overall hospitality towards foreign multinationals in particular also continues to be a concern, device companies now have another layer of complexity to navigate.