Medical device makers to taste bitter pill of consolidation

PUBLISHED : Tuesday, 29 March, 2005, 12:00am
UPDATED : Tuesday, 29 March, 2005, 12:00am

China's fast-growing medical equipment market is about to undergo a period of consolidation which is likely to see a host of manufacturers going out of business, according to a KPMG report.

'A lot of Chinese medical device companies will not be around in a few years because they will have either gone under or merged with other firms,' said Thomas Stanley, a director of KPMG.

The prediction comes following last year's introduction of Good Manufacturing Practices (GMP) - a set of safety and quality requirements - which will be the industry standard by next year.

The medical equipment sector was likely to meet the same fate as the country's pharmaceutical industry where GMP had been implemented over the past five years, Mr Stanley said. During that period, a third of the country's drug firms failed to meet the new standards and ceased production.

'We may see a similar number exit the medical device market,' he said.

China has 9,000 medical equipment manufacturers, most of them operating at the low-end of the market and supplying basic devices such as biochemistry analysers. Foreign manufacturers dominate the high end.

From 2001 to 2003, China became the world's biggest importer of medical equipment as the value of imports almost doubled to US$2.2 billion, accounting for 25 per cent of the mainland market.

Sales of medical equipment are forecast to reach US$17 billion in 2008 up from US$9 billion in 2003, at an annual growth rate of 13.6 per cent, according to KPMG. One key driver is the country's ageing population - the number of people aged over 65 is expected to reach nearly 200 million by 2025 and the demand for equipment such as pacemakers is forecast to soar.

'China's medical equipment market is growing much faster than developed economies, due to a number of factors such as its ageing population and rising incomes,' Mr Stanley said.

However, China accounts for only 2 per cent of the world medical equipment market, compared with 41 per cent for the United States, Europe's 27 per cent and Japan's 14 per cent.

The mainland has 67,000 hospitals, of vastly differing quality. At the top end are Class III hospitals which import the most advanced equipment, such as CAT and MRI scanners. A Class III hospital in Shanghai imported US$6 million of equipment in 2003 while the budget for a small rural hospital would be US$25,000, according to the KPMG report.

However, the portion of Class III hospitals is small, presenting limited opportunities for the high-end market.

The mid-range sector offered the most opportunities, with relatively advanced equipment being sold at competitive prices, including products such as emergency care ventilators, Mr Stanley said.

'The mid-range sector is going to be the battleground. The high-end has been lucrative but is not the bulk of the market. In the mid-range market, we'll see both foreign and local firms active, with foreign firms tailoring their products to be more competitively priced, while Chinese companies will acquire technology to shift to the higher end.'

The mid-range market had a shortfall of suitable suppliers, as many foreign firms offered products that were too expensive while most local firms lacked technology, Mr Stanley said.

He predicted that only a 'small number' of mainland companies would succeed as there was a 'shortage of quality Chinese companies worthy of being acquired by foreign firms seeking to expand'.

'Foreign firms may need to rethink product design and pricing to make sure they are competitive in the Chinese market,' he said.

US giant General Electric plans to lower costs and product prices by making China its global production centre for medical devices, having established a US$26 million medical systems industrial park in the country in 2003.

Chinese firms such as Shandong Weigao Group Medical Polymer Products are trying to move up from the low-end to the mid-range market.

'We plan to upgrade our products to grab China's high-end market. Our competition is mainly with foreign firms. We compete on price. Our injection syringes are cheaper [than foreign ones] by 20 to 40 per cent,' vice-chairman Zhang Huawei said.

'Our competitive advantage is we understand local conditions, including Chinese health laws and polices.'

Hong Kong-listed Weigao, a mainland producer of single-use medical appliances is looking at foreign partnerships to acquire technology.

'We are too small compared with the biggest US firms and cannot surpass them,' Mr Zhang said.

'The concern over infectious diseases such as Sars, bird flu and AIDs is an opportunity for us, as it creates greater awareness of the need for our products.'

Equipped to cope

China has more than 67,000 hospitals

1,000 Class III hospitals - 200 to 500 beds, well equipped with advanced imported medical devices

5,500 Class II hospitals - more than 100 beds, equipped with imported medical devices

Most of the remainder are non-graded hospitals in rural areas, with fewer than 20 beds and typically poorly equipped