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  • GE HealthCare, Siemens Healthineers, and Philips Healthcare entered the Chinese market in the 1980s and prospered
  • The once-booming era for Western MedTechs in China has slowed and become challenging
  • Latecomers to the Chinese MedTech market face geopolitical uncertainty, changing market dynamics, domestic competition, stringent regulations, IP risks, and healthcare reforms
  • Due to these obstacles and the Chinese’s economy slowing MedTechs are seeking international growth opportunities beyond China and Asia
  • Africa is emerging as the new frontier driven by its burgeoning population, growing middleclass, economic growth, abundant natural resources, and Beijing’s investement
  • MedTech pioneers in China, such as GE HealthCare, Siemens Healthineers, and Philips Healthcare, are early entrants in the African market
  • Prudential plc, an insurance giant, has made a vast strategic bet on Africa’s growth potential
  • Given insurers are healthcare payers, should MedTechs view Africa as the new Asia?
 
Is Africa the New Asia for Western MedTechs?


Preface

In the realm of international expansion for Western MedTech companies, Asia, particularly China, has historically been a key focus due to its vast size and rapid economic growth. However, the shifting global economic and geopolitical landscape suggests a re-evaluation. Is Africa positioned to emerge as the next hub of opportunity and growth for MedTech enterprises? China's remarkable economic ascent, initiated by reforms in 1978, accelerated it to the status of the world's second-largest economy, following the US. Western MedTechs that ventured into China's market in the 1980s prospered. Yet, those who hesitated due to concerns, including intellectual property (IP) theft, now face mounting challenges, which include geopolitical uncertainties, evolving Chinese attitudes towards Western corporations, a limited understanding of the Chinese market, and China's ambition to lead global technology by 2030. The recent deceleration in China's economic growth adds to the apprehensions of Western businesses. Moreover, China's rapid economic expansion has led to an aging population, characterized by declining birth rates, and increased life expectancy. By 2040, those aged ≥60 are projected to reach ~402m, constituting ~28% of the nation’s population. This demographic shift, with a shrinking workforce and a rising number of elderly consumers, is expected to exert downward pressure on China’s GDP growth, while straining public budgets with escalating healthcare and retirement costs. Given this evolving landscape, it becomes prudent to explore whether the once-promising prospects for Western companies in China and Asia are diminishing, prompting an examination of alternative international markets. While established MedTech players in China continue to provide essential healthcare products and services, they may benefit from contemplating strategic adjustments and, in many cases, restructuring their commercial operations to adapt to the changing dynamics of the Chinese market. Notably, some companies view Africa as a promising new frontier. Early entrants into the Asian medical device market, such as GE HealthCare, Siemens Healthineers, and Philips Healthcare, have already established footholds in Africa. Could Africa be on the verge of becoming the new frontier, reminiscent of what Asia once represented?
 
In this Commentary

This Commentary is divided into two sections. In Section 1, we briefly mention the early successes of prominent MedTech companies in the Chinese market during the 1980s. The section also notes that because geopolitical tensions between Beijing and Washington have increased, and recently China's economic growth has slowed, some Western MedTechs are seeking alternative growth regions to expand their international presence and reinvigorate their stagnant market values. Section 2 challenges popular perceptions by proposing that Africa could emerge as the new frontier for the MedTech industry. Despite Africa's enduring challenges, including political instability, corruption, poverty, and limited literacy, it seems to have potential. Albeit from a low start, Africa is projected to be the world's fastest-growing region in 2023, characterized by a youthful population, abundant natural resources crucial for renewable technologies, and an emerging middleclass. Decades ago, Beijing recognized Africa's potential, and more recently, a group of MedTechs, including early entrants to China, have established a presence in the African market. The section concludes by noting the strategic entry of a giant insurance company into the continent. Given the role insurers play in healthcare expansion and the demand for medical technology this maybe a positive omen for the MedTech industry, with Africa as its new frontier.

Part 1
MedTech pioneers in China

In the 1980s, as China underwent transformative economic reforms under President Deng Xiaoping, several Western MedTechs, including GE HealthCare, Siemens Healthineers, and Philips Healthcare, entered China, and capitalized on the nation's economic growth and modernization over the ensuing decades. GE HealthCare, equipped with medical imaging devices and healthcare solutions, forged relationships with Chinese hospitals and research institutions. Siemens Healthineers, a leader in imaging and laboratory diagnostics, followed suit in the late 1980s, emphasizing local R&D and strategic partnerships with Chinese healthcare providers. Philips Healthcare, with its diverse range of patient monitoring systems and diagnostic imaging equipment, also made its mark.

These companies showed their ability to adapt and succeed by adjusting their products to fit the needs of local customers and by encouraging new ideas through partnerships. Initially, they embraced expansion-type business models with multiply marketing and sales tiers, which emphasized rapid growth over stringent financial discipline. The plan worked well because China's medical technology sector was thriving, and experienced annual growth rates of ~10 to ~15% during the first two decades of the 21st century. However, since then, things have changed. Now, the focus is on making operations smoother and more efficient, which has meant reducing the number of marketing and sales layers between enterprises and their principal customers.
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Recent Western MedTech entrants, attracted by the vast Chinese market, faced heightened scrutiny and regulatory obstacles. Their limited knowledge of local markets and different administrations hindered their growth, which was compounded by concerns about safeguarding their IP. Meanwhile, Chinese MedTech firms rapidly advanced, increasing competition for Western latecomers. As of December 2022, the number of Chinese medical device companies amounted to 32,632. The once-lucrative "gold rush" in China for Western MedTechs has faded due to shifting sentiments, regulatory hurdles, and local competition. As China pursues global technological leadership by 2030, Western firms are likely to encounter mounting challenges. To sustain international expansion, they should consider exploring alternative global markets where they can leverage their expertise and resources more effectively. This suggests a turning point, highlighting the need for strategic diversification and adaptation to evolving global dynamics in the MedTech industry.
Headwinds for MedTechs expanding in China

Here we describe some of the headwinds facing Western MedTechs attempting to increase their footprints in the Chinese market.
 

Geopolitical Uncertainty
Ongoing geopolitical tensions, such the political status of Taiwan, which Beijing claims is a province of the People's Republic of China, whereas Taiwan’s current Tsai Ing-wen administration maintains it is an independent country, and South China Sea disputes, which involve conflicting island and maritime claims by China, Taiwan, Brunei, Malaysia, the Philippines, and Vietnam. These and other geopolitical uncertainties pose risks, particularly for late entrants to the Chinese market. However, despite these tensions, US-China trade remains strong, but doing business in China has become increasingly challenging.
 

Changed Market Dynamics
China's healthcare landscape has evolved driven by the largest middleclass cohort in the world. Beijing has increased healthcare spending, which has intensified competition in the MedTech sector. Trade conflicts between the US and China add complexity to market dynamics. Relationships between the two countries deteriorated in January 2018, when American President Donald Trump began setting tariffs and other trade barriers on China. The objective was to force Beijing to make changes to what the US says are longstanding unfair trade practices and IP theft. A recent example of such tensions occurred in September 2023, during a visit to China by US Secretary of Commerce Gina Raimondo, who oversees regulating technology. The Chinese tech giant Huawei chose this time to release its new smartphone, powered by an advanced chip. This shocked American industry experts who could not understand how Huawei could have obtained such an advanced chip following efforts by the US to restrict China’s access to foreign chip technology.

Domestic Competition
Chinese MedTech companies (>32,000) have rapidly gained market share, technical sophistication, and innovation capacity. They understand local customer needs and regulations better, posing increasing competition for Western counterparts. In 2021, China’s 134 listed MedTech companies generated US$44bn in revenues, a compound annual growth rate (CAGR) of 36% since 2019, ~3X the market’s overall rate of growth. More than five Chinese MedTechs have obtained the US Food and Drug Administration’s (FDA) breakthrough designation, with innovations like the VenusP-Valve, which has already been approved in >30 countries, and in April 2022, secured EU’s CE marking under its Medical Devices Regulation (MDR). This suggests that Western corporations will not only encounter heightened domestic competition but are likely to face increasing competition from Chinese MedTechs in the global arena.
 

Regulatory challenges
Regulatory hurdles in China pose challenges for Western MedTechs. Adherence to regulations, standards, and compliance measures, often different from Western counterparts, necessitates an in-depth understanding and adaptation. Central to China's regulatory framework is the National Medical Products Administration (NMPA), which is akin to the FDA. It prioritizes safety, efficacy, and quality in evaluating medical device registrations for market entry. While global acceptance of real-world evidence (RWE) in healthcare is rising, China is in the early stages of embracing the concept. Notably, a 2020 NMPA draft guideline hinted at the potential utilization of RWE from Boao Lecheng. Situated in Hainan, an island province in the nation’s southernmost point, Boao Lecheng has become a medical innovation hub, focusing on technology, high-quality healthcare, and medical tourism. It actively promotes advanced clinical research, housing globally recognized medical institutions like the Raffles Medical Group and Brigham and Women’s Hospital (BWH). The collaboration between Western MedTechs and initiatives like Boao Lecheng holds promise in tackling China's regulatory complexities.
 

Intellectual property (IP) risks
Protecting IP is a concern for Western MedTechs in China. Enforcing IP rights can be challenging due to factors like judicial protectionism, evidence gathering obstacles, modest damage awards, and perceived foreign bias. China follows a "first-to-file" principle for IP registration, granting ownership to the first registrant. Foreign companies also face pressure from government and state-owned enterprises to transfer technology for market access, investment opportunities, or approvals. Some are compelled to license technology at below-market rates. Despite China's efforts to enhance IP protection, concerns persist. Corporations need to balance IP protection with local engagement and government cooperation to navigate China's complex IP landscape effectively.
 

Healthcare reforms
China's healthcare system has undergone a significant transformation driven by various factors, including increasing incomes, heightened health awareness among its citizens, and a rapidly aging demographic. The government has placed substantial emphasis on healthcare, as evidenced by its ambitious goals outlined in the Healthy China 2030 plan. This plan envisions the nation's healthcare market reaching a value of ~RMB16trn (~US$2.4trn) by 2030. China's dedication to enhancing healthcare is underscored by the establishment of a comprehensive health insurance system that now provides coverage to ~96% of the population, benefiting >1.36bn individuals. According to a 2023 McKinsey Report, China's MedTech sector, which was valued at ~US$70bn in 2021, is poised to potentially double in size by 2030. Such growth would elevate China's MedTech market share to ~20% of the global market. To thrive in this burgeoning market, enterprises must be agile in adapting to changes, forge strategic partnerships, and effectively navigate the evolving healthcare landscape.

Navigating China’s Diversity
Succeeding in the Chinese market hinges on effective communication and a deep understanding of Chinese culture. China's administrative divisions include 23 provinces, five autonomous regions (Inner Mongolia, Guangxi, Tibet, Ningxia, and Xinjiang), four municipalities (Beijing, Tianjin, Shanghai, and Chongqing), and two Special Administrative Regions (Hong Kong and Macao). Furthermore, China boasts 129 dialects, with Mandarin as the standard and Chaoshan as predominant in the Guangdong region. Given this diversity, Western MedTech companies often grapple with cultural and linguistic barriers. Establishing vital connections within China's intricate administrative and business landscape can prove challenging. Therefore, crafting effective market entry and expansion strategies is imperative. Chinese consumers have preferences and expectations when it comes to medical technology. Western companies must be ready to adapt their offerings to align with these preferences, a critical factor in gaining market acceptance. Failing to do so can hinder market penetration and long-term success.
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China’s rising MedTech industry and the dilemma facing Western companies
Data Privacy and Security Concerns
Data privacy and security are concerns in China. Entrants must navigate stringent data protection regulations, which may differ significantly from Western standards. Building trust with healthcare providers and patients is essential to address these concerns. Failure to do so can lead to regulatory issues, damage brand reputation, and erode customer trust.
 
Reassessing global strategies amid China's economic slowdown

China, as the world's second-largest economy, has been a pivotal market for major Western MedTech companies. However, the current economic climate calls for a strategic re-evaluation. China's economy has recently experienced a slowdown, with repercussions felt not only in neighbouring nations but also globally. South Korea, a historical driver of global growth, faces its longest factory activity decline in nearly two decades. Other major Asian exporters are also dealing with sluggish demand, and Japan's manufacturing activity has declined, with Taiwan reporting contracting output and weakened foreign demand. In September 2023, concerns grew as China experienced deflation, raising questions about currency stability, challenges in the property sector, and high local government debt. China's decision to not stimulate its economy further exacerbated the situation, impacting key financial hubs like Hong Kong and Singapore, as well as satellite economies. This economic slowdown in China is expected to persist and likely have far-reaching global consequences. Businesses worldwide, including those in the US and Europe, heavily reliant on China for growth, should explore alternative regions for sustainable value and expansion. Western MedTech companies need to carefully assess the challenges and costs associated with further expansion in China.

An alternative strategy emerges; companies should consider complementing their Asian focus and explore the growing economies of Africa. Just as early MedTech pioneers capitalized on Asia's rapid expansion, companies today should contemplate laying the groundwork for a fresh international strategy in Africa. The continent has potential, and a proactive approach could yield sustainable growth opportunities, helping to mitigate the impact of China's economic challenges and slowdown on global ambitions.


Part 2
Africa's Ascendance

 
With a few notable exceptions, Western MedTech executives tend to overlook Africa due to its challenging socio-economic conditions, which include political instability, corruption, extreme poverty affecting ~50% of the population, limited access to necessities, and a high illiteracy rate of ~40%. Notwithstanding, China has long recognized Africa's potential, which mainly revolves around Africa's abundant natural resources, which constitute ~30% of the world's mineral reserves, including critical resources for renewable and low-carbon technologies. For instance, Zambia leads in unrefined copper exports, Guinea boasts the world's largest bauxite reserves, and South Africa contributes ~90% of the world’s platinum group metal reserves. Furthermore, Africa has the world's youngest population, with substantial projected growth.
 
Asia plays a pivotal role in Africa's trade dynamics, accounting for >42% of its exports and >45% of its imports, surpassing Europe in both cases. According to a 2023, Business Insider Report, Africa is poised to become the world's fastest-growing region, with six of the ten fastest-growing economies located on the continent, albeit starting from a relatively low economic base. In addition to its mineral wealth, the continent's path to economic success is partly based on developing an export-led manufacturing economy, akin to China's transformation in the 1980s. This, already in progress, has the potential to lift >0.5bn people out of poverty, create >100m jobs, and establish a substantial and rapidly growing middleclass that will demand improved services, including healthcare.
 
Currently, Africa's manufacturing sector contributes only ~9% to the continent's gross domestic product (GDP) and ~2% to global manufacturing output. However, the African Union has placed manufacturing at the forefront of its Agenda 2063, a strategic framework supported by all 55 African countries, aimed at achieving socio-economic transformation over the next 50 years. This commitment gains significance amid escalating trade tensions between the US and China, which have global economic implications. Africa has weathered recent shocks, including weakened external demand, global inflation, higher borrowing costs, and adverse weather events, which have hindered its post-pandemic recovery. Nonetheless, in the coming decades, the "Made in Africa" label may come to symbolize quality products, solidifying the continent's position as a prominent player in global manufacturing, akin to how "Made in China" became synonymous with quality two decades ago.
 
China’s impact on African manufacturing

China has been instrumental in the economic transformation of African nations, which partly stems from the Chinese strategy to relocate its low-level manufacturing operations to Africa. As China's domestic manufacturers have advanced technically, they have systematically shifted their basic manufacturing capabilities to African countries. This provides Africa with an opportunity to mirror China's journey from standard manufacturing to advanced production processes over several decades.
 
Chinese companies have made substantial investments in labour-intensive manufacturing facilities notably in Ethiopia. This has created jobs and fueled the growth of local manufacturing sectors. For instance, the Huajian Group, a leading Chinese footwear manufacturer, established plants in Ethiopia in 2012, employing >7,000 people and producing ~5m shoes annually. The Group’s partner in this project is the China-Africa Development Fund (CADFund), a private equity facility promoting Chinese investment in the continent. Huajian also invested in Ethiopia's Jimma industrial park, contributing US$100m to build shoe and coffee processing plants and a technical education centre.
 
As Chinese enterprises expanded in Africa, they provided training to local workforces, and transferred their manufacturing expertise. This collaborative effort is helping to develop a skilled labour pool important for sustaining manufacturing growth. Notably, Ethiopia's Eastern Industrial Zone, supported by Chinese investment, evolved into a thriving manufacturing hub, attracting both domestic and foreign investors. Additionally, Beijing's Belt and Road Initiative has led to significant infrastructure developments across Africa, including roads and ports, which further stimulate the continent's manufacturing sector. China’s investment in Africa stands out due to its tangible presence, in contrast to other nations whose involvement in the continent is characterized by distant and arms-length financial engagements. With the influx of such investments, technology transfers, and ongoing skill development, some African nations are positioned to follow China's path towards a manufacturing transformation. 
 
MedTech’s early entrants to the African market

For years, support for Africa’s healthcare tended to concentrate on education and malaria nets. In recent years however, as developed-world disorders, like cancer and heart disease, grew in Africa so medical technology companies increasingly found a market in supplying devices to private healthcare operators and investing in healthcare initiatives through partnerships with governments. US President George W. Bush recognised Africa’s strategic importance, emphasising investments for development and health initiatives, including the President’s Emergency Plan for AIDS Relief (PEPFAR), which, announced in 2003, reflected a commitment to fostering stability and wellbeing on the continent. Since then, American governments have not shown much interest in Africa. However, the MedTechs that entered the Chinese market ~4 decades ago and prospered, have established footprints in the African market by adapting their products and services to local needs, building partnerships with local healthcare providers, and addressing challenges such as infrastructure limitations and affordability. Their presence caters to Africa’s large and growing middleclass and has contributed to the improvement of healthcare standards in the region.
 
Philips Healthcare has made inroads into the African market and operates in several African countries, including South Africa, Kenya, and Nigeria. One of the advantages they offer is a wide range of medical devices and equipment tailored to different healthcare settings, from high-end hospitals to remote clinics. Their focus on technology that can operate efficiently even in areas with unreliable power grids has been instrumental in their success. GE HealthCare has a presence in countries like South Africa, Nigeria, and Egypt. Their commercial advantage is in their commitment to providing innovative medical technologies across various healthcare domains, from diagnostic imaging to healthcare IT solutions. The company collaborates with local healthcare providers and governments to build sustainable healthcare infrastructures. Siemens Healthineers is active in South Africa, Kenya, and Ghana. The company’s advantage stems from their portfolio of medical equipment, laboratory diagnostics, and digital health solutions. They often tailor their offerings to meet the specific needs and budgets of healthcare providers in Africa, contributing to improved patient care and diagnostic accuracy.
 
Unveiling MedTech opportunities: the impact of insurers

Large insurance firms wield significant influence in shaping the trajectory of the medical technology industry. They play a pivotal role in extending health insurance coverage to middle-class populations worldwide, not only bolstering healthcare systems but also driving the demand for medical technology. In essence, these insurance giants act as catalysts for the MedTech industry's growth.
 
A case in point is Prudential plc., a global insurance powerhouse with >23,000 employees and 2021 annual revenues of >US$70bn. The company holds dual listings on the London and Hong Kong Stock Exchanges and is a constituent of the FTSE 100 Index. It also maintains secondary listings on the New York Stock Exchange and the Singapore Exchange. In February 2023, shortly after Anil Wadhwani assumed the role of Prudential's new CEO, he publicly declared his intent to chart a new course and focus on Africa for growth. Wadhwani highlighted that the growth drivers in Africa today closely resemble the trends previously witnessed by the company in Asia: rapidly expanding middle-class populations with a growing appetite for insurance and enhanced services, including healthcare. He emphasized that Africa would complement Prudential's expanding Asian presence. IMF's 2023 reports indicate that countries such as South Africa, Ghana, Kenya, Ethiopia, Côte d'Ivoire, and Rwanda are prime candidates for substantial future growth. It is increasingly plausible that Africa could emerge as the next frontier for MedTech companies, thanks to the leadership of individuals like Anil Wadhwani, who steer insurance giants toward new horizons.
 
Takeaways

In recent years, Western MedTechs have witnessed a significant transformation in China's healthcare landscape, driven by changing demographics and an increased emphasis on technological self-reliance. Notably, industry giants such as GE HealthCare, Siemens Healthineers, and Philips Healthcare, which established a presence in China during the 1980s, are now extending their reach into Africa with hopes of replicating their prior successes. While some may view this expansion as unconventional due to factors like political instability, corruption, and poverty, the continent has potential. Africa's attraction for MedTechs includes some of its countries with significant economic growth potential, a burgeoning youthful population, a growing middleclass, and abundant natural resources that align with the evolving demands of a rapidly expanding global green economy. Much like the historical pattern of MedTech companies venturing into Asia, a similar trend is emerging in Africa among a select group of firms. Another critical point to consider is the emerging role of insurance companies as potential guides in this new journey. These insurers are participating in the continent’s healthcare expansion and innovation, and where they lead, MedTech companies should consider following. The growing middleclass, equipped with medical insurance, will eventually exert pressure on healthcare systems in the region to enhance access to quality care. This, in turn, will expand the market for medical devices. Despite the complexities and contradictions that Africa presents, it represents an opportunity that warrants consideration. The question of whether Africa will become the new Asia suggests the need for MedTechs to embrace a new era where innovation and progress thrive on the courage to venture beyond the familiar. By doing so, corporations can discover a promising landscape for growth and innovation, tapping into Africa’s underserved opportunities and playing a role in enhancing global healthcare.
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"When you fail to reach your goals don’t adjust your goals, adjust your actions"
 
On Saturday 20th October 2022, the Chinese Communist Party (CCP) ended its twice-a-decade Congress. It amended its charter and elected Xi Jinping for a historic third 5-year term, making him China's most powerful ruler since Mao Zedong, the founding leader of the People's Republic. Given these outcomes, followers of HealthPad suggested we re-publish the Commentary, ‘Learn from the Chinese, but don’t misjudge Beijing’, which we do below. The Commentary describes the tightening of China’s regulatory and competitive environments and suggests that Western corporations, with interests in China or thinking of entering the Chinese market, should not underestimate: (i) the large and growing differences between China and the US, and (ii) the CCP’s uncompromising ambition to become economically self-reliant, a world superpower and a global high-tech leader.

Deteriorating East-West relationships
Xi Jinping used the Congress to tighten his hold over the CCP by evicting all remnants of factional opposition, placing political allies in key positions and establishing complete control over the Party and the country. Xi re-emphasized the significance of making science and technology cornerstones of China’s strategy for national economic and military “self-reliance”. He also hinted that China will further decouple its economic links with the US and Europe and increase market restrictions on Western companies trading in China. With Xi’s increased authority and China’s increased global power and influence, it seems reasonable to assume that, in the near-term, China is likely to develop a more aggressive foreign policy, and the US and its Western allies will doubtless respond with a more confrontational approach to China. This significantly raises the possibility that East-West geopolitical relationships will deteriorate further.
 

Guanxi
China and the Chinese are different to the West and Westerners. Whereas most Western nations, have a deep sense of individualism based on democracy with social and political freedoms, China and the Chinese are rooted in Confucian collectivist principles with a top-down hierarchical structure that views individuals as part of a community with ordered and friendly relationships. This is perhaps best understood by the Chinese term, ‘Guanxi’ (关系), which refers to tacit mutual commitments, reciprocity, and trust, and is central to all personal, business, and politico-economic relationships.

China’s ambition
None of China’s renewed global posturing should surprise Western corporate leaders with their fingers on the pulse of their international strategies. For decades China has been increasing its power and influence in the world. In his 2017 report to the 19th Party Congress, Xi Jinping stressed the decline of America’s  international authority and the “substantial and rapidly growing” global power and influence of China. He predicted that, by the mid-21st century, China will have become “a global leader in terms of comprehensive national power and international influence,” and will be a development model for the world.

The past 5-years
Also in 2017, Xi advocated a more aggressive and activist Chinese foreign policy, and over the ensuring 5 years, Beijing has: (i) weakened foreign enterprises trading in China and raised the bar for new entrants, (ii) strengthened Chinese domestic companies and incentivized them to trade internationally, (iii) ratcheted-up pressure on Taiwan, (iv) exerted greater control over Hong Kong, and (v) increased China’s rhetoric and tactics in defence of its interests.
 

Business-as-usual versus strategically active
Over the past 3 decades, China has strategically invested in innovation-driven development, which has helped the nation improve its core competitiveness, and significantly shape its international leadership role. During this time, many Western companies with interests in China have been strategically passive and pursued ‘business-as-usual’ policies, which often meant they: (i) continued to invest in products and services that had been overtaken by technology and were losing market share, (ii) were relatively slow to invest in emerging technologies and develop new offerings, (ii) tended to fixate on their initial success and failed to quickly recognise that something new was replacing it, and (iii) focused scarce resources on short-term performance rather than long-term value. For many corporates, such policies resulted in missed commercial opportunities and weakened global competitiveness.
 

Reducing the healthcare gap
Over the past decades while many Western companies have been strategically passive, China, by contrast, has been strategically active, aggressively developing innovative and technologically advanced solutions to narrow its healthcare gaps caused by increased healthcare demand and shrinking numbers of healthcare professionals. Witness Chinese start-ups that rapidly grew to become significant companies by leveraging data and artificial intelligence (AI) to develop digital healthcare solutions that enhanced patient outcomes and reduced costs. Examples include: WeDoctorAlibaba HealthJD Health, DXY.cn. and Ping An Good Doctor. These, and other digital innovations, provide a range of health services including, online consultations, hospital referrals and appointments, health management, medication regimens, medical insurance, and wellness and prevention programmes. Such initiatives have provided vast numbers of Chinese citizens with easier access to healthcare and enhanced patients’ therapeutic journeys while reducing vast and escalating healthcare costs and shifted many healthcare services out hospitals into peoples’ homes.

Hospital services shifting to the home
This shift is nothing new and not exclusively Chinese. Twelve years ago, Devi Shetty, a world-renowned heart surgeon, was emphasising the impact that digitalization would have on traditional hospital based services. In just 2 decades, Shetty built Narayana Health (NH), India’s 2nd largest hospital group. In 2019, Narayana was recognised by  Fortune Magazine as, “one of the world’s most innovative healthcare providers”. In 2000, Shetty, like his Chinese counterparts, was emphasising that the “next big thing in healthcare is not going to be a magic pill, or a faster scanner, or a new operation. The next big thing in healthcare is going to be IT, which will change the way a health professional will interact with the patient. Every step of patient care will be dictated by a protocol stored on a handheld device. That will make healthcare safer for the patient and shift most hospital activities to the home. The doctor and patient can interact regardless of time and place”. See video.
 
 
Two types of capitalism
The difference between Western and Chinese corporates reflects two different types of capitalist systems: liberal meritocratic capitalism in the West, and state-led authoritarian capitalism in China. In the former, the emphasise on quarterly reporting and the time, effort and costs associated with it tends to encourage short-term performance while the latter creates more opportunities for generating long-term value. There is plenty of evidence to suggest that when executives consistently invest in long-term strategic objectives their companies’ productivity increases, they generate more shareholder value, create more jobs, and contribute to higher levels of economic growth than do comparable companies that focus on the short-term performance. Data also suggest companies that implement effective environmental, social and governance (ESG) strategies, which address the interests of all stakeholders, achieve better long-term value.

Fink criticizes business executives
In 2014, Laurence Fink, chairman of Black Rock, the world’s largest asset manager, criticized Fortune 500 CEOs for their focus on short term corporate behaviour. While recognising the market pressures on company executives, Fink said, “It concerns us that many companies have shied away from investing in the future growth of their companies” and increasingly engaged in actions that “deliver immediate returns to shareholders, such as buybacks or dividend increases, while underinvesting in innovation, skilled workforces, or essential capital expenditures necessary to sustain long-term growth”.

Takeaways
Western corporate leaders are challenged to devise ethical strategies that create long-term value rather than just short-term performance. Following Fink’s suggestions policies to create long-term value might include: (i) developing a suite of strategic initiatives expected to deliver returns that exceed the cost of capital (ii) allocating resources to initiatives that create most value, (ii) focusing on generating value not only for shareholders but for all stakeholders, and (iii) resisting actions that only boost short term profits.
 
  • China is the world’s second largest economy after the US
  • Its MedTech sector is the world’s second largest after the US and accounts for 20% of the global market
  • The size of China’s market is attractive to Western MedTechs but its regulatory and competitive environments are changing, which makes it more challenging for foreign corporations to enter or grow their franchises in China
  • China’s healthcare system has similar structural challenges as those of the US and other wealthy nations: the demand for care is increasing and overwhelming health professionals, which creates care gaps
  • China is ahead of the US and other nations in attempting to reduce such gaps with patient-centric innovative digital therapeutic solutions, which is supported by a deep bench of capabilities
  • Western MedTechs have a lot to learn from Chinese digital health innovations
  • However, Beijing is engaged in an unprecedented mission to become a self-reliant, high-tech economy and a world superpower within the not-too-distant future
  • Misjudging Beijing can have significant commercial consequences
 
Learn from the Chinese, but don’t misjudge Beijing


An earlier Commentary ended by posing the question whether Western MedTechs can compete with China’s large and rapidly growing domestic medical device industry, which benefits from China being the second largest MedTech market in the world behind the US, with annual sales revenues of ~US$84bn in 2020. China now accounts for ~20% of the global medical device market, which is expected to continue an upward trajectory, supported by the nation’s quickly aging population, rising incomes, and the continued enhancement of health services.
 
With this foundation, Beijing is incentivising its domestic MedTech companies to expand internationally. Beijing’s 14th Medical Equipment 5-Year Plan (2021–25) sets a goal to have >6 Chinese MedTechs among the top 50 global industry corporations by 2025. The policy complements Made in China 2025, which is a macroeconomic strategy to reduce China’s reliance on imported foreign products including medical devices. So, while China’s domestic market is becoming more challenging for foreign MedTechs, Beijing is supporting the growth and expansion internationally of its local medical device companies to compete with their Western counterparts. For example, Mindray Medical International, China’s biggest medical device corporation by sales revenue, is the #4 ultrasound vendor in the world and over the next 5 years, expects to increase its overseas sales revenues from <50% today to ~70%.
 
Despite Beijing’s ‘for China’ policies, many Western MedTech leaders view China as a significant commercial opportunity, recall foreign corporations that have prospered in the nation over the past two decades and suggest that it is important to do business there if one of your company’s objectives is to grow its international franchise. But China has changed, and its regulatory and competitive ecosystems are tightening, which present headwinds for Western MedTechs that were not present a decade ago. Further, China has an ambition to become a self-reliant, world leading high tech nation in the not-too-distant future, which could have consequences for foreign companies participating in the Chinese market.
 
With ~400m chronic disease patients, a fast-aging society, vast and rapidly rising healthcare costs, and an economy that has slowed, China is resolute in developing a new model of digitally enabled, patient-centred integrated healthcare. This ambition is supported by significant resources and a deep-bench of capabilities positioned to enable China to achieve its goals, which include transforming its medical devices sector by supporting the development of world class, high tech, patient-centric, digital enterprises.
 
All these factors suggests a dilemma for Western MedTech leaders: China is too big to ignore, but Beijing is too powerful and unrelenting to misjudge.

 
In this Commentary

This Commentary has 3 sections. The first, entitled ‘Reducing care gaps with digital therapeutic innovations’, suggests that China, the US, and other developed nations share a common challenge of care gaps created-by a limited supply of health professionals and a large and increasing demand for care. China’s attempts to resolve these gaps differ from other nations in their scale and nature. They are nationwide innovations predicated upon digital AI strategies, which manifest themselves in digital platforms that directly address patients’ healthcare needs. We briefly describe a few examples of these and suggest that they are advantaged by China’s data policies and AI competencies. Section 2, entitled ‘Capabilities’, describes Beijing’s plans for China to become the world’s leader in AI technologies within the next decade and suggests that China has the capabilities to achieve this goal in the proposed timeframe. The final section entitled, ‘Understanding Beijing’, briefly describes the tightened regulatory and competitive environments and suggests how this impacts the business models of Western corporations seeking to enter the Chinese market or increasing their existing franchises. We posit that China and the Chinese are significantly different to Western democracies and Westerners and emphasize the Chinese Communist Party’s uncompromising ambition to become economically self-reliant, a world superpower and a global high-tech leader. Misjudging Beijing could be commercially damaging for foreign corporations.
 
 
1: Reducing care gaps with digital therapeutic innovations
 
China has similar structural healthcare challenges to the US and other developed economies, which manifest themselves in care gaps caused by a limited supply of overworked healthcare professionals and a vast and rapidly growing demand for care from aging populations. The Chinese population ≥65 years is ~140m, and this cohort is expected to grow to ~230m by 2030. By that time, the nation’s aging middle class will have grown from today’s ~0.3bn to ~0.7bn. High-risk behaviours like smoking, sedentary lifestyles, and alcohol consumption as well as environmental factors such as air pollution take a huge toll on health and increase the demand for care. According to Statista, a large portion of the Chinese population suffer from chronic lifestyle diseases, which account for >80% of the nation’s ~10m deaths each year; >0.5bn people are overweight or obese, while high blood pressure is a common illness among >0.4bn people. China’s healthcare expenditure is growing at >8% a year, and without reform, the nation’s health spending could increase to >US$2trn by 2030. Such factors, together with the nation’s economic slowdown motivate Beijing to prioritize the transformation of its healthcare system.
Significant differences in tackling care gaps

A significant difference between China and the US and other wealthy nations, whose healthcare systems are all in need of reform, is that China has been quicker to develop digital therapeutic technologies to reduce care gaps and relieve its large and rapidly growing burden on hospitals, care systems and families caring for the sick and elderly.
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Should MedTechs follow surgeons or patients?

In any healthcare system, people should be the priority, but because of a dearth of health professionals, overburdened hospitals, soaring health costs and overworked physicians, patients’ needs are often not prioritized. China has been no exception but expects to reverse this trend with the help of artificial intelligence (AI) enabled digital therapeutic solutions that put patients first. Examples include: WeDoctor, Alibaba Health, JD Health, DXY.cn. and Ping An Good Doctor. These, and other digital innovations, provide a range of health services including, online consultations, hospital referrals and appointments, health management, medication regimens, medical insurance, and wellness and prevention programmes. China’s early adoption of AI medical solutions has benefitted from Beijing’s “Healthy China 2030” policy, which, since its launch in 2016, has directed substantial funds to Chinese AI start-ups developing technological innovations to ease the burden of care gaps. According to Tracxn, one of the world’s largest tracking platforms, there are ~227 AI driven healthcare start-ups in China. Let us briefly describe three established ones: WeDoctor, DXY.cn and Ping An Good Doctor.
 
WeDoctor

Tencent-backed WeDoctor, founded in 2010 to provide people with physician appointments, is based in Hangzhou, a city of ~11m and the capital of China’s Zhejiang province. Since its inception, the company has grown into a multi-functional platform offering a range of medical services predicated upon a database of >2,000 Western treatment plans, online pharmacies, health insurance, cloud-based enterprise software for hospitals and other services. Today, WeDoctor hosts >270,000 doctors and ~222m registered patients. It has an impact on reducing care gaps and is one of the few online healthcare providers qualified to accept payments from China's public health insurance system, which covers >95% of the population. WeDoctor's services are especially valued in rural areas, where there are fewer physicians than the national average of 1.5 per 1,000 people.

In response to the COVID-19 crisis the company launched the WeDoctor Global Consultation and Prevention Center (GCPC),  which provided a free 24/7 global online health enquiry service, psychological support, prevention guidelines and real-time pandemic reports. Just before the pandemic, WeDoctor planned to float its medical and health service function on the Hong Kong stock exchange at a valuation ~US$7bn. However, it was pulled because of the Beijing-Hong Kong tensions. WeDoctor’s. other business functions, which include health insurance and health data services, were not included in its proposed flotation, and are likely to stay private to appease Chinese regulators.
 
DXY.cn
 
DXY.cn is an online healthcare community for doctors, patients, and healthcare organizations. It was founded in 2000 and is also based in Hangzhou. Over the past 2 decades it has evolved into the world’s largest community of physicians who use the platform to gain insights from colleagues, discuss new medical research, and report unusual clinical events. More recently, DXY has added a consumer-facing service that brings wellbeing advice and medical consultations to the public. DXY generates revenues from public-facing medical advertising and job recruitment for its life science clients, as well as clinics where patients can receive in-person medical care. According to TechCrunch, in 2021, DXY reached ~130m consumers, >9,000 medical organizations, and had a registered user base of ~20m.
 
Ping An Good Doctor

Ping An Insurance (Group), is one of the world’s largest financial services companies with >210m retail customers and ~560m internet users and is headquartered in Shenzhen, southeastern China. In 2014, it launched Ping An Good Doctor to provide end-to-end, AI-powered health services directly to patients. These include 24/7 online consultations, diagnoses, treatment planning, second opinions, and prescription management solutions. Today, Good Doctor has ~400m registered users and drives synergies across China’s healthcare ecosystem. The platform collaborates with >3,700 hospitals and is supported by an off-line healthcare network of >2,200 in-house medical staff and ~21,000 contracted experts to ensure quality and accuracy of its medical services. The company provides insurance coverage for both users and physicians, which helps to ease China’s healthcare payment pressures. Ping An Good Doctor’s technology also assists patients to manage their personal health records, treatment plans, and medical histories.
 
In 2019, the company launched the world's first AI-powered, un-manned healthcare service: the One-minute Clinic. This is a 3m2 booth, which patients walk into, enter their digitized medical history from their mobile phones, and add their symptoms. The clinic’s algorithms, which have been trained on data from >300m medical records, then make a diagnosis, prescribe drugs, and provide a treatment plan. Medications are purchased from an adjacent vending machine. Within a year of the start of the first clinic, Good Doctor rolled out ~1,000 units in shopping malls, airports and other public spaces throughout China providing onsite medical and pharmaceutical services 24/7. Today, the clinics provide accessible and affordable medical and health services to >3m users. Good Doctor believes that its AI-driven, un-manned clinics have a promising future helping to reduce China’s care gaps and has plans to expand its services into Southeast Asia. In December 2019, the company signed a strategic collaboration with Merck, an American pharmaceutical multinational to advance further intelligent healthcare in China.

 
Internet hospitals

Digital initiatives like those described above have led to the development and spread of internet hospitals, which are online medical platforms associated with offline access to traditional hospitals that provide a variety of services directly to patients. Today, internet hospitals are booming in China, driven jointly by government and market initiatives.
 
The first internet hospital was established in China’s Guangdong province in October 2014. It consisted of four clinics operated by doctors from the Second People's Hospital, an online platform operated by a medical technology company, and a network of medical consulting facilities based in rural villages, community health centres, and large pharmacy chain stores. Initially webcams were used for patients to communicate with physicians and share medical images of their conditions. A patient's vital signs were taken by on-site machines and uploaded onto the system. With all this information, physicians made a diagnosis and prescribed medications, which patients obtained from nearby pharmacies. According to the Lancet, two months after its launch, China’s first internet hospital “was dealing with ~200 patients and issuing ~120 prescriptions every day”. After six months, the number of patients had increased to >500 a day, ~60% of whom needed prescriptions. Soon afterwards, a network of consultation sites expanded to >1,000 facilities in 21 of Guangdong’s municipalities. In 2018, Beijing gave the legislative green light for internet hospitals, which prompted many Chinese digital health companies to start using internet-based AI solutions to meet the country’s medical and healthcare needs and contribute to the reduction of care gaps. By August 2021, >1,600 internet hospitals had been established in China. The public and physician acceptance of these and Beijing’s support for them suggests a new era in digital healthcare.

 
Internet + Healthcare” initiatives

Since 2018, a range of Internet + Healthcare” initiatives have consolidated and enhanced the position of digital healthcare innovations. The success and continual improvement of China’s digital health service platforms all benefit from Beijing’s policies to facilitate medical practice supported by digital tools. Laws and policies have been issued to support this digital transformation, including health data digitalization, data sharing, and interoperability across the whole of China’s healthcare ecosystem. After the outbreak of the COVID-19 pandemic, the government increased its “Internet + Healthcare” efforts to include telemedicine in state medical insurance coverage, and to lift barriers for prescribed drugs sold online.
 
Data advantage

Compared to the US and other Western democracies, China has significant data advantages to drive its digital healthcare initiatives. Eric Topol, a cardiologist, director of the Scripps Research Translational Institute, and author of Deep Medicine: How AI can make healthcare human again, argues that “China has a massive data advantage when it comes to medical AI research”. To put this in perspective, consider that Chinese patient healthcare data are drawn from the nation’s provinces, many of which have populations of >50m. By contrast, US AI research tends to be based on patient data often drawn from one hospital. China’s big data advantage allows machine learning algorithms to be more effectively trained to perform key functions in a range of clinical settings. Another comparative advantage of China is its large workforce of AI specialist, data scientists, and IT engineers, which can work on healthcare projects at comparatively low costs. This is partly the result of China’s emphasis over the past four decades to encourage science, technology, engineering, and mathematics (STEM subjects) in their schools and universities to fuel Beijing’s technological ambitions.

Not known for good data governance practices, but with intensions to expand internationally, China is now tightening its data protection regulations. For example, in November 2021 Beijing introduced the Personal Information Protection Law (PIPL), which is designed to prevent data hacks and other nefarious uses of sensitive personal information. Much like the EU’s General Data Protection Regulation (GDPR), the PIPL stipulates that an individual’s explicit consent must be obtained before their medical health data are collected, and it places the burden on medical AI companies to ensure that these data are secure.
 
2: Capabilities
 
Healthy China 2030

In October 2016, President Xi Jinping announced the nation’s Healthy China 2030 (HC 2030) blueprint, which put patient-centred healthcare at the core of Beijing’s healthcare plans, recognizing its ability to influence both social and economic development. The policy sets out China’s long-term approach to healthcare and shows the nation’s commitment to participate in global health governance, which Beijing recognises as necessary as it seeks to extend its international reach. By 2030, Beijing aims to reach health equity by embracing the United Nations’ Social Development Goal 3.8, which seeks to “Achieve universal health coverage, including financial risk protection, access to quality essential healthcare services and access to safe, effective, quality and affordable essential medicines and vaccines for all”. In 2019, Beijing announced an action plan to accelerate the delivery of Healthy China 2030. This puts patients first in an endeavour to build a healthy society by leveraging AI technologies to reduce the prevalence of lifestyle induced chronic disorders and subsequent care gaps. The World Health Organization (WHO) believes the policy “has the potential to reap huge benefits for the rest of the world”.
 
AI capabilities
 
As China’s economy has matured, its real GDP growth has slowed, from ~14% in 2007 to ~7% in 2018, and the International Monetary Fund (IMF) projects that growth will fall to ~5.5% by 2024. Beijing refers to the nation’s slower growth as the “new normal” and acknowledges the need to embrace a new economic model, which relies less on fixed investment and exporting, and more on private consumption, services, and innovation to drive economic growth. Such reforms are needed for China to avoid hitting what economists refer to as the “middle-income trap”. This is something many Western economies (and corporations) face: it is when countries achieve a certain economic level but then begin to experience diminishing economic growth rates because they are unable to effectively upgrade their economies with more advanced technologies. To avoid this scenario, for the past three decades, China has been investing in AI and systematically upgrading its economy.


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Leaning-in on digital and AI


 
Today, China has a significant supply of innovative AI talent to deliver a Healthy China by 2030. Some of the world’s largest technology companies are Chinese and all are developing different aspects of AI applications. For example, Alibaba’s cloud division concentrates on using AI in healthcare and Baidu, which has numerous AI research laboratories in the US, is focussed on a range of AI innovations, which include “deep learning”, and “big data”. More recently, Baidu added a Business Intelligence Lab, which develops data analytics for emerging data-intensive applications, and a Robotics and Autonomous Driving Lab, which specializes in computer vision.
In 2017 China's State Council launched a 3-step plan to become a world leader in AI technologies by 2030, with a domestic AI industry valued ~US$150bn. Beijing completed step 1 in 2020 by establishing a “new generation” of AI technologies and technocrats and developing national standards, policies, and ethics for its emerging industry. Step 2 is anticipated to be completed by 2025, by which time China expects to achieve “major breakthroughs” in AI applications that will help the completion of upgrading the nation’s industrial sector and thereby avoiding the middle-income trap. The final step is anticipated to take place between 2025 and 2030, which, among other things, will project China internationally as the world leader in AI technologies.
 
3: Understanding Beijing
 
Regulatory changes

A decade ago, foreign MedTechs operated in China with relative ease. Chinese regulations were lighter than they are today, and companies were supported by a multi-layered network of small scale and localised sub-distributors. This fragmented structure resulted in higher prices and tended to encourage corruption, but the relatively high margins obtained from foreign products allowed medical device corporations to compensate the multiple distribution levels and still make a profit. In return, domestic Chinese distributors managed the market and foreign MedTechs did not engage directly with hospitals and physicians.
 
Volume-based procurement

Recent regulatory changes have disrupted this modus operandi for foreign MedTechs. One change positioned to have a significant impact on MedTech profits is volume-based procurement (VBP). This is aimed at lowering the price of medical consumables by tendering the market volume of cities, provinces, or the country to manufacturers with the lowest price. Following a successful pilot with pharmaceuticals, VBP was extended to medical devices in 2019, and since then it has had a significant effect on certain products. For example, the price of cardio stents and hip and knee implants have been reduced by ~70% to ~90%. China’s message is clear: Medtechs are either ‘in’ with significantly lower prices, or ‘out’. This suggests that companies wishing to enter or grow their franchise in the Chinese market will have to adapt their business models by accelerating their pre-launch registrations and post-launch commercialization strategies for new products as margins on legacy offerings are expected to be substantially reduced. However, review processes for new offerings have become longer, more bureaucratic, and more expensive than they were five years ago. For example, if a Class 2 device without clinical studies took ~9 months to register five years ago, today expect ~2 years. VBP has forced foreign MedTechs to consolidate their multi-layered distribution channels to improve economies of scale. 
 
More recently Beijing has introduced a two-invoice policy for the medical devices industry: (i) MedTech to a distributor, and (ii) distributor to a hospital. This will push small and less competitive distributors out of the market and shorten and consolidate supply chains. The likely effect of this is for Chinese distributors to concentrate more on logistics to “deliver product”, rather than managing the market. To the extent that this is the case, a larger share of customer engagement will become the responsibility of MedTechs.
 
This will mean that foreign corporations trading in China will need to reassess their capabilities and adjust their business models. Further, MedTechs operating in China should expect VBP to increase the significance of “value”. This is because the policy is likely to enhance the purchasing power of hospital administrators and reduce that of physicians.  As a result, companies might expect procurement conversations to focus less on clinical outcomes and more on the overall value of products and their potential to minimize costs. Many readjustments companies will be obliged to make to their business models may be achieved by having someone local on the product management team rather than engaging high-margin agencies to resolve critical, but relatively simple domestic challenges.
 
A narrow window of opportunity for foreign MedTechs

Beijing’s “in China for China” policy makes it a condition that foreign companies entering the Chinese market must share their technology and intellectual property (IP) with a domestic “partner”. Beijing has been using this condition to acquire valuable scientific knowhow, which has helped the country to develop a large domestic medical device industry. According to a 2021 research report from Deloitte, a consulting firm, “China now boasts over 26,000 medical device manufacturers”. Beijing’s policies render China a substantially more challenging market to enter and to grow in than it was five years ago. China’s market opportunities for foreign corporations are not only getting tighter; they are getting shorter, and their orientation is changing away from surgeons towards patients. Further, Beijing is on a relentless drive towards self-reliance and tolerates the presence of Western companies in its domestic markets only for as long as they contribute offerings that are useful to the Chinese Communist Party. If China is successful in delivering on its healthcare and high-tech development plans, the window of opportunity for many foreign MedTechs could be only ~10 years.
 
China’s different

China and the Chinese are unlike the West and Westerners. When Deng Xiaoping’s started China’s reforms in 1978 and opened the nation to the world’s trading economies, he created a socialist market economy, in which private capitalists and entrepreneurs co-existed with public and collective enterprise. This formed the foundations for China’s phenomenal economic growth, prosperity, reduction of poverty, massive infrastructure investment, and development as a world-class technology innovator. As a result, many Western business leaders and politicians believed that China had abandoned ideology in a similar way that former communist regimes of Eastern Europe did in the early 1990s after the fall of the Soviet Union. However, such a transformation did not happen in China, which remains a one-party authoritarian state, tightly governed by the Chinese Communist Party (CCP), whose constitution states that China is a “people’s democratic dictatorship”. The CCP has a mission to become the world’s leading technology economy by 2030. This is backed by substantial sovereign wealth and a supply of relevant high tech human capital and an impressive history of national achievements.
 
Scale and speed of transformation

The phenomenal politico-economic progress China has made in a relatively short time is an indication of the nation’s determination, and its ability to affect change, and contextualizes Beijing’s policies to make China a self-reliant economy in the not-too-distant future. A 2022 report jointly released by China’s Development Research Center and the World Bank highlights the nation’s transformation in just four decades, from a struggling agrarian society to a global superpower. The nation’s achievements include increased health insurance coverage to >95% of its 1.4bn population, lifting ~0.8bn people out of poverty, which accounts for ~75% of global poverty reduction in the same period, a burgeoning middle class, which by 2030, will have grown from today’s ~0.3bn to ~0.7bn. In 2010, China overtook Japan to become the world's second largest economic power after the US when measured by nominal GDP. According to the World Bank, in 1960, China's GDP was ~11% of the US, and in 2019, ~67%. Not only is China the world's second-largest economy it has a permanent seat at the United Nations Security Council, modernised armed forces, and an ambitious space programme. China’s growing international clout and economic leadership positions it well to replace the US as the greatest superpower.

Such factors provide a context for Western corporation with global pretentions wishing to engage with and learn from China. At the 13th Annual National People’s Congress in March 2022, Premier Li Keqiang called for “faster breakthroughs” in key technologies, and said the government would increase the tax rebate for small and medium-sized science and technology firms from 75% to 100% and grant tax breaks for basic research to encourage innovation. Significantly, the Congress also underscored self-reliance in China’s economic priorities amid warnings of trade headwinds and geopolitical complexities.

 
Takeaways
 
China is too big a commercial opportunity to ignore. In 2021, China accounted for >18% of the global economy, rising from ~11% in 2012, its GDP was ~US$18trn, and per capita GDP reached US$12,500, which is close to the threshold for high income economies. In recent times, the contribution of China's economic growth to the world economy has been ~30%, which makes China the largest growth engine for the global economy. However, the relationship between China and the rest of the world is changing. As China becomes more self-reliant, its exposure to the world has decreased. Add to this (i) international trade disputes, (ii) increasing geopolitical tensions between the US and China, (iii) the nation’s evolving new rules to evaluate technology flows, (iv) increase of protectionism and (v) its healthcare mission to pivot towards patients, and you have significantly changed trading conditions than a decade ago. Misjudging Beijing’s rapidly evolving commercial ecosystem could be costly for Western MedTechs.
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  • China is the world’s second largest economy after the US
  • Its MedTech sector is the world’s second largest after the US and accounts for 20% of the global market
  • The size of China’s market is attractive to Western MedTechs but its regulatory and competitive environments are changing, which makes it more challenging for foreign corporations to enter or grow their franchises in China
  • China’s healthcare system has similar structural challenges as those of the US and other wealthy nations: the demand for care is increasing and overwhelming health professionals, which creates care gaps
  • China is ahead of the US and other nations in attempting to reduce such gaps with patient-centric innovative digital therapeutic solutions, which is supported by a deep bench of capabilities
  • Western MedTechs have a lot to learn from Chinese digital health innovations
  • However, Beijing is engaged in an unprecedented mission to become a self-reliant, high-tech economy and a world superpower within the not-too-distant future
  • Misjudging Beijing can have significant commercial consequences
 
Learn from the Chinese, but don’t misjudge Beijing


An earlier Commentary ended by posing the question whether Western MedTechs can compete with China’s large and rapidly growing domestic medical device industry, which benefits from China being the second largest MedTech market in the world behind the US, with annual sales revenues of ~US$84bn in 2020. China now accounts for ~20% of the global medical device market, which is expected to continue an upward trajectory, supported by the nation’s quickly aging population, rising incomes, and the continued enhancement of health services.
 
With this foundation, Beijing is incentivising its domestic MedTech companies to expand internationally. Beijing’s 14th Medical Equipment 5-Year Plan (2021–25) sets a goal to have >6 Chinese MedTechs among the top 50 global industry corporations by 2025. The policy complements Made in China 2025, which is a macroeconomic strategy to reduce China’s reliance on imported foreign products including medical devices. So, while China’s domestic market is becoming more challenging for foreign MedTechs, Beijing is supporting the growth and expansion internationally of its local medical device companies to compete with their Western counterparts. For example, Mindray Medical International, China’s biggest medical device corporation by sales revenue, is the #4 ultrasound vendor in the world and over the next 5 years, expects to increase its overseas sales revenues from <50% today to ~70%.
 
Despite Beijing’s ‘for China’ policies, many Western MedTech leaders view China as a significant commercial opportunity, recall foreign corporations that have prospered in the nation over the past two decades and suggest that it is important to do business there if one of your company’s objectives is to grow its international franchise. But China has changed, and its regulatory and competitive ecosystems are tightening, which present headwinds for Western MedTechs that were not present a decade ago. Further, China has an ambition to become a self-reliant, world leading high tech nation in the not-too-distant future, which could have consequences for foreign companies participating in the Chinese market.
 
With ~400m chronic disease patients, a fast-aging society, vast and rapidly rising healthcare costs, and an economy that has slowed, China is resolute in developing a new model of digitally enabled, patient-centred integrated healthcare. This ambition is supported by significant resources and a deep-bench of capabilities positioned to enable China to achieve its goals, which include transforming its medical devices sector by supporting the development of world class, high tech, patient-centric, digital enterprises.
 
All these factors suggests a dilemma for Western MedTech leaders: China is too big to ignore, but Beijing is too powerful and unrelenting to misjudge.

 
In this Commentary

This Commentary has 3 sections. The first, entitled ‘Reducing care gaps with digital therapeutic innovations’, suggests that China, the US, and other developed nations share a common challenge of care gaps created-by a limited supply of health professionals and a large and increasing demand for care. China’s attempts to resolve these gaps differ from other nations in their scale and nature. They are nationwide innovations predicated upon digital AI strategies, which manifest themselves in digital platforms that directly address patients’ healthcare needs. We briefly describe a few examples of these and suggest that they are advantaged by China’s data policies and AI competencies. Section 2, entitled ‘Capabilities’, describes Beijing’s plans for China to become the world’s leader in AI technologies within the next decade and suggests that China has the capabilities to achieve this goal in the proposed timeframe. The final section entitled, ‘Understanding Beijing’, briefly describes the tightened regulatory and competitive environments and suggests how this impacts the business models of Western corporations seeking to enter the Chinese market or increasing their existing franchises. We posit that China and the Chinese are significantly different to Western democracies and Westerners and emphasize the Chinese Communist Party’s uncompromising ambition to become economically self-reliant, a world superpower and a global high-tech leader. Misjudging Beijing could be commercially damaging for foreign corporations.
 
 
1: Reducing care gaps with digital therapeutic innovations
 
China has similar structural healthcare challenges to the US and other developed economies, which manifest themselves in care gaps caused by a limited supply of overworked healthcare professionals and a vast and rapidly growing demand for care from aging populations. The Chinese population ≥65 years is ~140m, and this cohort is expected to grow to ~230m by 2030. By that time, the nation’s aging middle class will have grown from today’s ~0.3bn to ~0.7bn. High-risk behaviours like smoking, sedentary lifestyles, and alcohol consumption as well as environmental factors such as air pollution take a huge toll on health and increase the demand for care. According to Statista, a large portion of the Chinese population suffer from chronic lifestyle diseases, which account for >80% of the nation’s ~10m deaths each year; >0.5bn people are overweight or obese, while high blood pressure is a common illness among >0.4bn people. China’s healthcare expenditure is growing at >8% a year, and without reform, the nation’s health spending could increase to >US$2trn by 2030. Such factors, together with the nation’s economic slowdown motivate Beijing to prioritize the transformation of its healthcare system.
Significant differences in tackling care gaps

A significant difference between China and the US and other wealthy nations, whose healthcare systems are all in need of reform, is that China has been quicker to develop digital therapeutic technologies to reduce care gaps and relieve its large and rapidly growing burden on hospitals, care systems and families caring for the sick and elderly.
You might also like: 

Should MedTechs follow surgeons or patients?

In any healthcare system, people should be the priority, but because of a dearth of health professionals, overburdened hospitals, soaring health costs and overworked physicians, patients’ needs are often not prioritized. China has been no exception but expects to reverse this trend with the help of artificial intelligence (AI) enabled digital therapeutic solutions that put patients first. Examples include: WeDoctor, Alibaba Health, JD Health, DXY.cn. and Ping An Good Doctor. These, and other digital innovations, provide a range of health services including, online consultations, hospital referrals and appointments, health management, medication regimens, medical insurance, and wellness and prevention programmes. China’s early adoption of AI medical solutions has benefitted from Beijing’s “Healthy China 2030” policy, which, since its launch in 2016, has directed substantial funds to Chinese AI start-ups developing technological innovations to ease the burden of care gaps. According to Tracxn, one of the world’s largest tracking platforms, there are ~227 AI driven healthcare start-ups in China. Let us briefly describe three established ones: WeDoctor, DXY.cn and Ping An Good Doctor.
 
WeDoctor

Tencent-backed WeDoctor, founded in 2010 to provide people with physician appointments, is based in Hangzhou, a city of ~11m and the capital of China’s Zhejiang province. Since its inception, the company has grown into a multi-functional platform offering a range of medical services predicated upon a database of >2,000 Western treatment plans, online pharmacies, health insurance, cloud-based enterprise software for hospitals and other services. Today, WeDoctor hosts >270,000 doctors and ~222m registered patients. It has an impact on reducing care gaps and is one of the few online healthcare providers qualified to accept payments from China's public health insurance system, which covers >95% of the population. WeDoctor's services are especially valued in rural areas, where there are fewer physicians than the national average of 1.5 per 1,000 people.

In response to the COVID-19 crisis the company launched the WeDoctor Global Consultation and Prevention Center (GCPC),  which provided a free 24/7 global online health enquiry service, psychological support, prevention guidelines and real-time pandemic reports. Just before the pandemic, WeDoctor planned to float its medical and health service function on the Hong Kong stock exchange at a valuation ~US$7bn. However, it was pulled because of the Beijing-Hong Kong tensions. WeDoctor’s. other business functions, which include health insurance and health data services, were not included in its proposed flotation, and are likely to stay private to appease Chinese regulators.
 
DXY.cn
 
DXY.cn is an online healthcare community for doctors, patients, and healthcare organizations. It was founded in 2000 and is also based in Hangzhou. Over the past 2 decades it has evolved into the world’s largest community of physicians who use the platform to gain insights from colleagues, discuss new medical research, and report unusual clinical events. More recently, DXY has added a consumer-facing service that brings wellbeing advice and medical consultations to the public. DXY generates revenues from public-facing medical advertising and job recruitment for its life science clients, as well as clinics where patients can receive in-person medical care. According to TechCrunch, in 2021, DXY reached ~130m consumers, >9,000 medical organizations, and had a registered user base of ~20m.
 
Ping An Good Doctor

Ping An Insurance (Group), is one of the world’s largest financial services companies with >210m retail customers and ~560m internet users and is headquartered in Shenzhen, southeastern China. In 2014, it launched Ping An Good Doctor to provide end-to-end, AI-powered health services directly to patients. These include 24/7 online consultations, diagnoses, treatment planning, second opinions, and prescription management solutions. Today, Good Doctor has ~400m registered users and drives synergies across China’s healthcare ecosystem. The platform collaborates with >3,700 hospitals and is supported by an off-line healthcare network of >2,200 in-house medical staff and ~21,000 contracted experts to ensure quality and accuracy of its medical services. The company provides insurance coverage for both users and physicians, which helps to ease China’s healthcare payment pressures. Ping An Good Doctor’s technology also assists patients to manage their personal health records, treatment plans, and medical histories.
 
In 2019, the company launched the world's first AI-powered, un-manned healthcare service: the One-minute Clinic. This is a 3m2 booth, which patients walk into, enter their digitized medical history from their mobile phones, and add their symptoms. The clinic’s algorithms, which have been trained on data from >300m medical records, then make a diagnosis, prescribe drugs, and provide a treatment plan. Medications are purchased from an adjacent vending machine. Within a year of the start of the first clinic, Good Doctor rolled out ~1,000 units in shopping malls, airports and other public spaces throughout China providing onsite medical and pharmaceutical services 24/7. Today, the clinics provide accessible and affordable medical and health services to >3m users. Good Doctor believes that its AI-driven, un-manned clinics have a promising future helping to reduce China’s care gaps and has plans to expand its services into Southeast Asia. In December 2019, the company signed a strategic collaboration with Merck, an American pharmaceutical multinational to advance further intelligent healthcare in China.

 
Internet hospitals

Digital initiatives like those described above have led to the development and spread of internet hospitals, which are online medical platforms associated with offline access to traditional hospitals that provide a variety of services directly to patients. Today, internet hospitals are booming in China, driven jointly by government and market initiatives.
 
The first internet hospital was established in China’s Guangdong province in October 2014. It consisted of four clinics operated by doctors from the Second People's Hospital, an online platform operated by a medical technology company, and a network of medical consulting facilities based in rural villages, community health centres, and large pharmacy chain stores. Initially webcams were used for patients to communicate with physicians and share medical images of their conditions. A patient's vital signs were taken by on-site machines and uploaded onto the system. With all this information, physicians made a diagnosis and prescribed medications, which patients obtained from nearby pharmacies. According to the Lancet, two months after its launch, China’s first internet hospital “was dealing with ~200 patients and issuing ~120 prescriptions every day”. After six months, the number of patients had increased to >500 a day, ~60% of whom needed prescriptions. Soon afterwards, a network of consultation sites expanded to >1,000 facilities in 21 of Guangdong’s municipalities. In 2018, Beijing gave the legislative green light for internet hospitals, which prompted many Chinese digital health companies to start using internet-based AI solutions to meet the country’s medical and healthcare needs and contribute to the reduction of care gaps. By August 2021, >1,600 internet hospitals had been established in China. The public and physician acceptance of these and Beijing’s support for them suggests a new era in digital healthcare.

 
Internet + Healthcare” initiatives

Since 2018, a range of Internet + Healthcare” initiatives have consolidated and enhanced the position of digital healthcare innovations. The success and continual improvement of China’s digital health service platforms all benefit from Beijing’s policies to facilitate medical practice supported by digital tools. Laws and policies have been issued to support this digital transformation, including health data digitalization, data sharing, and interoperability across the whole of China’s healthcare ecosystem. After the outbreak of the COVID-19 pandemic, the government increased its “Internet + Healthcare” efforts to include telemedicine in state medical insurance coverage, and to lift barriers for prescribed drugs sold online.
 
Data advantage

Compared to the US and other Western democracies, China has significant data advantages to drive its digital healthcare initiatives. Eric Topol, a cardiologist, director of the Scripps Research Translational Institute, and author of Deep Medicine: How AI can make healthcare human again, argues that “China has a massive data advantage when it comes to medical AI research”. To put this in perspective, consider that Chinese patient healthcare data are drawn from the nation’s provinces, many of which have populations of >50m. By contrast, US AI research tends to be based on patient data often drawn from one hospital. China’s big data advantage allows machine learning algorithms to be more effectively trained to perform key functions in a range of clinical settings. Another comparative advantage of China is its large workforce of AI specialist, data scientists, and IT engineers, which can work on healthcare projects at comparatively low costs. This is partly the result of China’s emphasis over the past four decades to encourage science, technology, engineering, and mathematics (STEM subjects) in their schools and universities to fuel Beijing’s technological ambitions.

Not known for good data governance practices, but with intensions to expand internationally, China is now tightening its data protection regulations. For example, in November 2021 Beijing introduced the Personal Information Protection Law (PIPL), which is designed to prevent data hacks and other nefarious uses of sensitive personal information. Much like the EU’s General Data Protection Regulation (GDPR), the PIPL stipulates that an individual’s explicit consent must be obtained before their medical health data are collected, and it places the burden on medical AI companies to ensure that these data are secure.
 
2: Capabilities
 
Healthy China 2030

In October 2016, President Xi Jinping announced the nation’s Healthy China 2030 (HC 2030) blueprint, which put patient-centred healthcare at the core of Beijing’s healthcare plans, recognizing its ability to influence both social and economic development. The policy sets out China’s long-term approach to healthcare and shows the nation’s commitment to participate in global health governance, which Beijing recognises as necessary as it seeks to extend its international reach. By 2030, Beijing aims to reach health equity by embracing the United Nations’ Social Development Goal 3.8, which seeks to “Achieve universal health coverage, including financial risk protection, access to quality essential healthcare services and access to safe, effective, quality and affordable essential medicines and vaccines for all”. In 2019, Beijing announced an action plan to accelerate the delivery of Healthy China 2030. This puts patients first in an endeavour to build a healthy society by leveraging AI technologies to reduce the prevalence of lifestyle induced chronic disorders and subsequent care gaps. The World Health Organization (WHO) believes the policy “has the potential to reap huge benefits for the rest of the world”.
 
AI capabilities
 
As China’s economy has matured, its real GDP growth has slowed, from ~14% in 2007 to ~7% in 2018, and the International Monetary Fund (IMF) projects that growth will fall to ~5.5% by 2024. Beijing refers to the nation’s slower growth as the “new normal” and acknowledges the need to embrace a new economic model, which relies less on fixed investment and exporting, and more on private consumption, services, and innovation to drive economic growth. Such reforms are needed for China to avoid hitting what economists refer to as the “middle-income trap”. This is something many Western economies (and corporations) face: it is when countries achieve a certain economic level but then begin to experience diminishing economic growth rates because they are unable to effectively upgrade their economies with more advanced technologies. To avoid this scenario, for the past three decades, China has been investing in AI and systematically upgrading its economy.


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Leaning-in on digital and AI


 
Today, China has a significant supply of innovative AI talent to deliver a Healthy China by 2030. Some of the world’s largest technology companies are Chinese and all are developing different aspects of AI applications. For example, Alibaba’s cloud division concentrates on using AI in healthcare and Baidu, which has numerous AI research laboratories in the US, is focussed on a range of AI innovations, which include “deep learning”, and “big data”. More recently, Baidu added a Business Intelligence Lab, which develops data analytics for emerging data-intensive applications, and a Robotics and Autonomous Driving Lab, which specializes in computer vision.
In 2017 China's State Council launched a 3-step plan to become a world leader in AI technologies by 2030, with a domestic AI industry valued ~US$150bn. Beijing completed step 1 in 2020 by establishing a “new generation” of AI technologies and technocrats and developing national standards, policies, and ethics for its emerging industry. Step 2 is anticipated to be completed by 2025, by which time China expects to achieve “major breakthroughs” in AI applications that will help the completion of upgrading the nation’s industrial sector and thereby avoiding the middle-income trap. The final step is anticipated to take place between 2025 and 2030, which, among other things, will project China internationally as the world leader in AI technologies.
 
3: Understanding Beijing
 
Regulatory changes

A decade ago, foreign MedTechs operated in China with relative ease. Chinese regulations were lighter than they are today, and companies were supported by a multi-layered network of small scale and localised sub-distributors. This fragmented structure resulted in higher prices and tended to encourage corruption, but the relatively high margins obtained from foreign products allowed medical device corporations to compensate the multiple distribution levels and still make a profit. In return, domestic Chinese distributors managed the market and foreign MedTechs did not engage directly with hospitals and physicians.
 
Volume-based procurement

Recent regulatory changes have disrupted this modus operandi for foreign MedTechs. One change positioned to have a significant impact on MedTech profits is volume-based procurement (VBP). This is aimed at lowering the price of medical consumables by tendering the market volume of cities, provinces, or the country to manufacturers with the lowest price. Following a successful pilot with pharmaceuticals, VBP was extended to medical devices in 2019, and since then it has had a significant effect on certain products. For example, the price of cardio stents and hip and knee implants have been reduced by ~70% to ~90%. China’s message is clear: Medtechs are either ‘in’ with significantly lower prices, or ‘out’. This suggests that companies wishing to enter or grow their franchise in the Chinese market will have to adapt their business models by accelerating their pre-launch registrations and post-launch commercialization strategies for new products as margins on legacy offerings are expected to be substantially reduced. However, review processes for new offerings have become longer, more bureaucratic, and more expensive than they were five years ago. For example, if a Class 2 device without clinical studies took ~9 months to register five years ago, today expect ~2 years. VBP has forced foreign MedTechs to consolidate their multi-layered distribution channels to improve economies of scale. 
 
More recently Beijing has introduced a two-invoice policy for the medical devices industry: (i) MedTech to a distributor, and (ii) distributor to a hospital. This will push small and less competitive distributors out of the market and shorten and consolidate supply chains. The likely effect of this is for Chinese distributors to concentrate more on logistics to “deliver product”, rather than managing the market. To the extent that this is the case, a larger share of customer engagement will become the responsibility of MedTechs.
 
This will mean that foreign corporations trading in China will need to reassess their capabilities and adjust their business models. Further, MedTechs operating in China should expect VBP to increase the significance of “value”. This is because the policy is likely to enhance the purchasing power of hospital administrators and reduce that of physicians.  As a result, companies might expect procurement conversations to focus less on clinical outcomes and more on the overall value of products and their potential to minimize costs. Many readjustments companies will be obliged to make to their business models may be achieved by having someone local on the product management team rather than engaging high-margin agencies to resolve critical, but relatively simple domestic challenges.
 
A narrow window of opportunity for foreign MedTechs

Beijing’s “in China for China” policy makes it a condition that foreign companies entering the Chinese market must share their technology and intellectual property (IP) with a domestic “partner”. Beijing has been using this condition to acquire valuable scientific knowhow, which has helped the country to develop a large domestic medical device industry. According to a 2021 research report from Deloitte, a consulting firm, “China now boasts over 26,000 medical device manufacturers”. Beijing’s policies render China a substantially more challenging market to enter and to grow in than it was five years ago. China’s market opportunities for foreign corporations are not only getting tighter; they are getting shorter, and their orientation is changing away from surgeons towards patients. Further, Beijing is on a relentless drive towards self-reliance and tolerates the presence of Western companies in its domestic markets only for as long as they contribute offerings that are useful to the Chinese Communist Party. If China is successful in delivering on its healthcare and high-tech development plans, the window of opportunity for many foreign MedTechs could be only ~10 years.
 
China’s different

China and the Chinese are unlike the West and Westerners. When Deng Xiaoping’s started China’s reforms in 1978 and opened the nation to the world’s trading economies, he created a socialist market economy, in which private capitalists and entrepreneurs co-existed with public and collective enterprise. This formed the foundations for China’s phenomenal economic growth, prosperity, reduction of poverty, massive infrastructure investment, and development as a world-class technology innovator. As a result, many Western business leaders and politicians believed that China had abandoned ideology in a similar way that former communist regimes of Eastern Europe did in the early 1990s after the fall of the Soviet Union. However, such a transformation did not happen in China, which remains a one-party authoritarian state, tightly governed by the Chinese Communist Party (CCP), whose constitution states that China is a “people’s democratic dictatorship”. The CCP has a mission to become the world’s leading technology economy by 2030. This is backed by substantial sovereign wealth and a supply of relevant high tech human capital and an impressive history of national achievements.
 
Scale and speed of transformation

The phenomenal politico-economic progress China has made in a relatively short time is an indication of the nation’s determination, and its ability to affect change, and contextualizes Beijing’s policies to make China a self-reliant economy in the not-too-distant future. A 2022 report jointly released by China’s Development Research Center and the World Bank highlights the nation’s transformation in just four decades, from a struggling agrarian society to a global superpower. The nation’s achievements include increased health insurance coverage to >95% of its 1.4bn population, lifting ~0.8bn people out of poverty, which accounts for ~75% of global poverty reduction in the same period, a burgeoning middle class, which by 2030, will have grown from today’s ~0.3bn to ~0.7bn. In 2010, China overtook Japan to become the world's second largest economic power after the US when measured by nominal GDP. According to the World Bank, in 1960, China's GDP was ~11% of the US, and in 2019, ~67%. Not only is China the world's second-largest economy it has a permanent seat at the United Nations Security Council, modernised armed forces, and an ambitious space programme. China’s growing international clout and economic leadership positions it well to replace the US as the greatest superpower.

Such factors provide a context for Western corporation with global pretentions wishing to engage with and learn from China. At the 13th Annual National People’s Congress in March 2022, Premier Li Keqiang called for “faster breakthroughs” in key technologies, and said the government would increase the tax rebate for small and medium-sized science and technology firms from 75% to 100% and grant tax breaks for basic research to encourage innovation. Significantly, the Congress also underscored self-reliance in China’s economic priorities amid warnings of trade headwinds and geopolitical complexities.

 
Takeaways
 
China is too big a commercial opportunity to ignore. In 2021, China accounted for >18% of the global economy, rising from ~11% in 2012, its GDP was ~US$18trn, and per capita GDP reached US$12,500, which is close to the threshold for high income economies. In recent times, the contribution of China's economic growth to the world economy has been ~30%, which makes China the largest growth engine for the global economy. However, the relationship between China and the rest of the world is changing. As China becomes more self-reliant, its exposure to the world has decreased. Add to this (i) international trade disputes, (ii) increasing geopolitical tensions between the US and China, (iii) the nation’s evolving new rules to evaluate technology flows, (iv) increase of protectionism and (v) its healthcare mission to pivot towards patients, and you have significantly changed trading conditions than a decade ago. Misjudging Beijing’s rapidly evolving commercial ecosystem could be costly for Western MedTechs.
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Will China become a world leader in health life sciences and usurp the US?
 
After World War II, the US captured the global lead from Europe in life sciences thanks to the large American domestic market, its strong network of university research laboratories, competent regulation, effective pricing regimens and generous federal R&D funding.
 
America’s leadership in life sciences is slipping
 
Over the past two decades, as China has systematically upgraded its economy from low-grade to high-grade production, it has come to realize the significance of the health life sciences and Beijing has become determined to win a larger share of the industry’s activity. During this time America’s leadership position in the life sciences industry has slipped.
 
  • Will China usurp the US and become a world leader in health life sciences?
  • What could the erosion of the life sciences industry mean for the US economy?
  • What can American life sciences corporations do to reduce or slow their market slippage?
 
Health life sciences
 
Health life sciences refers to the application of biology and technology to improve healthcare. It includes biopharmaceuticals, medical technology, genomics, diagnostics and digital health and is one of the future growth industries positioned to radically change the delivery of healthcare, substantially reduce the morbidity and mortality of a range of chronic and incurable diseases and save healthcare systems billions. The life sciences industry plays a key role in supporting the economies of the US and China as well as other nations and helps them to compete internationally. The sector requires a complex ecosystem, which integrates high-tech research, large, long-term investments of capital in the face of significant technological, market and regulatory risks, skilled labour, specific manufacturing skills, intellectual property (IP) protection and policy support. According to a 2019 Deloitte’s report on health life sciences the global market size of the industry is projected to grow from US$7.7trn in 2017 to US$10trn by 2022.
 
Reason’s for America’s slippage
 
America’s slippage in its life sciences industry is due to:
  • Increased fair competition from a number of nations, including the UK, and increased unfair competition from China who aggressively steals US IP to piggyback on American life-sciences innovations in order to benefit from enhanced therapies without having to pay their fair share for the costly R&D. China then uses its government’s monopsony power as a purchaser of life sciences offerings to limit the prices of US and other international firms
  • Recent US Administrations’ lukewarm support for the industry. Federal biomedical research funding has been cut in real terms. Reimbursement policies are changing to a value-based approach and pricing policies have tightened. Such policies create uncertainty regarding the government’s willingness to pay for future treatments and the research necessary to discover and bring them to market. The US is also falling behind in providing innovative tax incentives for the industry
  • American life sciences corporations’ reluctance and inability to adapt their strategies and business models to changing international markets.
 
Permanent economic damage
 
The Chinese competitive threat is real and significant. It is important for the US to maintain a competitive life-sciences sector since it generates high-skilled, high-paying jobs and its product offerings are sold throughout the world and the industry is a key component of the US traded economy. A weaker American competitive position in the life sciences could mean a lower value for the dollar, a larger trade deficit, plant closures and job losses. China and other nations, which are gaining global market share at the expense of the US, could cause significant damage to the American life-sciences industry.
 
Creating a health life sciences industry is challenging enough, recreating one after it has lost significant market share is even more challenging, if not impossible. We suggest that to reduce to possibility of this happening US life sciences corporations might consider changing the mindsets of their leaders and demonstrate a greater willingness to learn from and engage with Chinese start-ups, especially those in adjacent industries with AI and machine learning capabilities and experience. The cost of doing this will be to give up some IP, which might be worth doing given the potential financial benefits from such a strategy.

 
A “bullish” American perspective
 
The generally accepted Western perspective is that the US excels at visionary research and moon-shot projects and will always be the incubator for big ideas. The reasons for this include: (i) American education is open, encourages individuality and rewards curiosity and its universities have consistently produced vast numbers of innovative discoveries in the life sciences, (ii) American scientists have been awarded the majority of Nobel prizes in physiology/medicine, physics and chemistry, and (iii)  America is the richest nation in the world. This suggests that there are no apparent reasons why the US should not continue as a world leader in health life sciences.

By contrast, China has stolen and copied America’s intellectual property (IP) for years and is a smaller economy fraught with politico-economic challenges. Although China’s economic growth has lifted hundreds of millions of people out of poverty, China remains a developing country with significant numbers of people still living below the nation’s official poverty level. Beijing has challenges balancing population growth with the country’s natural resources, growing income inequality and a substantial rise in pollution throughout the country. Further, China’s educational system is conformists and not geared to producing scientists known for making breakthrough discoveries. This is borne-out by the fact that China only has been awarded two Nobel prizes for the sciences: one for physiology and medicine in 2015 and another for physics in 2009.

 
Copiers rather than inventors
 
Over the past four decades Chinese scientists, with the tacit support of Beijing, have aggressively and unethically stolen Western technologies and scientific knowhow. According to findings of a 2017 research report from the US Intellectual Property (IP) Commission entitled The Theft of American Intellectual Propertythe magnitude of "Chinese theft of American IP currently costs between US$225bn and US$600bn annually."

America’s response to China’s IP theft has been to adopt the moral high-ground, dismiss China as an unscrupulous nation not worthy of investment and focus on commercialising its discoveries with “single bullet” product offerings and marketing them in wealthy regions of the world, predominantly North America, Europe and Japan. Over the past decade, this strategy has been supported by a US Bull market in equities, which started in 2009, outpaced economic growth in most developed nations and led to a significant degree of satisfaction among C-suites and boards of directors of US life sciences corporations, which did not perceive any need to adjust their strategies and business models despite some market slippage and changing market conditions.

 
Confucian values support conformism rather than discovery
 
Although China has benefitted economically from the theft of American IP, the American view tends to be that China is unlikely to become a world leader in the life sciences because the nation has not produced a cadre of innovative scientists and its education system is unlikely to do so in the near to medium term. Chinese education encourages students to follow rather than to question. Indeed, Confucian values remain a significant influence on Chinese education and play an important role in forming the Chinese character, behaviour and way of living. Confucianism aims to create harmony through adherence to three core values: (i) filial piety and respect for your parents and elders, (ii)  humaneness, the care and concern for other human beings, and (iii) respect for ritual. According to Confucian principles, “a good scholar will make an official”. Thus, some of China’s best scientists leave their laboratories for administrative positions.
 
Further, Chinese universities tend to bind students to their professors who expect unquestioning loyalty. Scepticism towards generally accepted scientific theories is discouraged, especially when they are held by senior academics. Also, China unlike the US, does not tolerate “failure”, and this incentivises Chinese scientists to conduct “safe” research that yields quick and “achievable” outcomes. All these factors conspire to discourage high risk creative scientific activity and encourages safer, “copycat” research endeavours.
 
The strength of the US$ and the US economy
 
America’s global leadership in the life sciences is supported by the fact that the US is the world’s richest and most powerful nation. In nominal terms (i.e., without adjustment for local purchasing power) the US and China have GDPs of US$19trn and US$12trn respectively and  populations of 326m and 1.4bn. Further, the US has an “unrivalled” global trading position: the US dollar is the strongest currency in the world and dominates the overwhelming percentage of all international trade settlements: 70% of all world trade transactions are in US$, 20% in €’s and the rest in Asian currencies, particularly the Japanese ¥ and increasingly the Chinese ¥. Also, US dollar holdings make up the largest share of foreign exchange reserves and the effect of this is to maintain the high value of the US$ compared with other currencies and provide US corporations with significant profits, US citizens with cheap imports and the US government with the ability to refinance its debts at low interest rates.
 
An Asian context
 
We suggest that it is increasingly important for American health life science professionals to get a better understanding of China and Asia. The Asian perspective described here is drawn from three recent books: The New Silk Roads: The Present and Future of the World by Peter Frankopan, The Future is Asian by Parag Khanna and AI Super-Powers: China, Silicon Valley and the New World Order published in late 2018 by Kai-Fu Lee.  

Crudely put: the 19th century was British, the 20th century American and the 21st century is expected to be Asian. The era of breakthrough scientific discoveries and stealing American IP is over, and we have entered an “age of implementation”, which favours tenacious market driven Chinese firms. “Asians will determine their own future; and as they collectively assert their interests around the world, they will determine ours as well”, says Khanna. This is starkly different to American prognosticators who assume that the world will be made in the American image, sharing American values and economics.
Asian view of the US$

Some observers suggest that there are chips appearing in the giant US edifice of international trade described above. The current US Administration’s policies have triggered and intensified discussions in Europe and Asia about America’s dominant global economic position and suggest that the US$ might be starting to weaken against a basket of currencies as China, Russia, Iran, Turkey and other nations, choose to use local currencies for some international trade transactions, which they then convert into gold. Further, central banks are tightening their monetary policies and adjusting their bond purchasing strategies. A common US view is that such trading activities are so small relative to global US$ transactions they will neither weaken the US$ nor dent America’s pre-eminent global trading position.
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Can Western companies engage with and benefit from China?
Notwithstanding, replacing the US$ with the Chinese ¥ seems to be part of Beijing’s long-term strategy, as Beijing encourages its trading partners to accept the ¥ as payment for Chinese exports. China’s recent trading agreements with Canada and Qatar for instance have been based upon local currencies rather than the US$. China, which is the biggest importer of oil, is preparing to launch a crude oil futures contract denominated in Chinese ¥ and convertible into gold. European, Asian and Middle Eastern countries have embarked on domestic programs to exclude the US$ from international trade transactions. Also, oil exporting countries are increasingly able to choose which currencies they wish to trade in. At the same time, oil-producing countries no longer seem so interested in turning their revenues into “petrodollars. For the past decade, President Putin of Russia has been calling for the international community to re-evaluate the US$ as the international reserve currency. All this and more suggests that increasingly, emerging economies may transition from their undivided dependence on the US$ for international trade settlement to a multipolar monetary arrangement. Whilst small relative to the full extent of global trade, it is instructive to view these changes within a broader Asian context.
 
The US has had little exposure to China and Asia
 
One outcome of America’s pre-eminent global economic position and the financial success of American life sciences companies is that corporate leaders and health professionals tend to have little or no in-depth exposure to Chinese and Asian culture and markets. For example, few Fortune 500 senior executives have worked in China; few American life sciences corporations have sought in-depth briefings of Asian markets and few US students and scientists have studied or carried out research in China. Instead, American life science corporate leaders tend to be US-centric; they condemn China for its IP theft and recommend not to invest in China because a condition of doing so is that you are obliged to part with some of your IP.
 
Asia a potential economic powerhouse
 
This distancing has resulted in life science professionals “misdiagnosing” China in a number of ways, which we will discuss. One misdiagnosis is to conflate China with Asia. Asia is comprised of 48 countries. East Asia includes China, Japan and North and South Korea. South Asia includes India, Pakistan and Bangladesh. South East Asia includes Indonesia, Malaysia, Philippines, Singapore and Thailand. These three sub-regions link 5bn people through trade, finance, infrastructure and diplomatic networks, which together represent 40% of the world’s GDP. China has taken a lead in building new infrastructure across Asia - the new Silk Roads - but will not necessarily lead this vast region alone. Rather, as Khanna reminds us, “Asia is rapidly returning to the centuries-old patterns of commercial and cultural exchanges, which thrived long before European colonialism and American dominance”.
 
The difference between IP theft and imitating ‘what works

Market driven Chinese start-ups, supported by the government, are expected to transform China into a world leader in health life sciences by 2030. The thing to understand about China is that it is not just a few start-ups that steal and copy American IP but thousands, which then aggressively compete. This entails cutting prices, improving and adapting their product offerings, developing leaner operations and aligning their strategies and business models to the demands of different markets. The vast scale of this activity has led to a unique cadre of über agile Chinese entrepreneurs, who imitate successful business models and then engage in value added culture-specific product development processes. This has led to Chinese companies becoming exemplary “market driven” implementors. By contrast American companies tend to be “mission driven” and operate a “single bullet” business model and are either slow or reluctant to adapt to the demands of different markets. This results in US discoveries being exploited in Asia by Chinese rather than American companies. We suggest that there are significant benefits to be derived from American life sciences companies developing joint ventures with market driven Chinese start-ups even if it means surrendering some IP.
 
As a postscript, it is worth pointing out that the first Chinese patent was only granted in 1985 and recently, after decades of widespread theft, IP protection in China has improved at lightning speed. As Chinese companies issue more patents, the keener they are to protect them. According to the World Intellectual Property Organization in 2017 China accounted for 44% of the world’s patent filings, twice as many as America.

 
US inventions exploited in Asia by Chinese start-ups
 
An illustration of a disruptive life science technology invented in the US but exploited faster and more extensively in China is CRISPR-Cas9 (an acronym for Clustered Regularly Interspaced Short Palindromic Repeats), which is generally considered to be the most important invention in the history of biology.  The initial discovery was made in 2012 by a collaboration between Jennifer Doudna, at the University of California, Berkeley, USA and French scientist Emmanuelle Charpentier. Applications of CRISPR technology are essentially as infinite as the forms of life itself. Since its discovery, modified versions of the technology by Chinese scientists have found a widespread use to engineer genomes and to activate or to repress the expression of genes and launch numerous clinical studies to test CRISPR-Cas9 in humans.
 
Virtuous circle
 
Notwithstanding, transforming CRISPR genomic editing technologies into medical therapies requires mountains of data and advanced AI capabilities. China has both. The more genomic data you have the more efficacious clinical outcomes are likely to be. The better your clinical outcomes the more data you can collect. The more data you collect the more talent you attract. The more talent you attract the better the clinical outcomes. China is better positioned than America to benefit from this virtuous circle. China’s less than stringent regulation with regards to privacy and storing personal data gives it a distinct competitive advantage over American and Western life sciences companies. China also has more efficient means than any Western nation for collecting and processing vast amounts of personal data.
 
Collecting personal data

Any casual visitor to China will tell you that one of the striking differences with Western nations is that the Chinese economy is cashless and card-less. Citizens pay for everything and indeed organise their entire lives with a mobile app called WeChat, a multi-purpose messaging, social media and mobile payment app developed by TencentWeChat was first released in 2011 and by 2018 it was one of the world's largest standalone mobile apps, with nearly 1bn daily users who every day send about 38bn messages. Not only is WeChat China's biggest social network it is also where people turn to book a taxi, hotel or a flight, order food, make a doctor’s appointment, file police reports, do their banking or find a date and has become an integral part of the daily life of every Chinese citizen. State-run media and government agencies also have official WeChat accounts, where they can directly communicate with users. Further, an initiative is underway to integrate WeChat with China’s electronic ID system. It may be hard for people outside of China to grasp just how influential WeChat has become. There is nothing in any other country that is comparable to WeChat, which captures an unprecedented amount of data on citizens that no other company elsewhere in the world can match. This represents a significant competitive advantage. Applying AI and machine learning technologies to such vast data sets provide better and deeper insights and patterns. These vast and escalating data sets, and advanced AI capabilities for manipulating  them, give China a significant competitive advantage in the high growth life sciences industry, which  increasingly has become digital.
 
 Processing personal data
 
AI is another example of  a technology invented in the West and implemented much faster in China. The “watershed” moment for China was in 2017, when AlphaGo became the first computer program to defeat a world champion at the ancient Chinese game of Go. Since then, China has been gripped by “AI fever”.

Until recently AI machines were not much better than trained professionals at spotting anomalies and mutations in assays and data. This changed in early-2,000 with the ubiquitous spread of mobile telephony and the confluence of vast data sets and the development of neural networks, which made the onerous task of “teaching” a computer rules redundant. Neural networks allow computers to approximate the activities of the human brain. So, instead of teaching a computer rules, you simply feed it with vast amounts of data and neural networking and deep learning technologies identify anomalies and mutations in seconds with exquisite accuracy.

The Beijing Genetics Institute

An illustration of the scale and seriousness of China’s intent to become a world-leader in life sciences and to eclipse similar initiatives by the US is the 2016 launch of a US$9bn-15-year national initiative to develop technologies for interpreting genomic and healthcare data. This national endeavour followed the launch in 1999 of the Beijing Genomics Institute (BGI), which today is a recognised global leader in next generation genetic sequencing. In 2010, BGI received US$1.5bn from the China Development Bank, recruited 4,000 scientists and established branches in the US and Europe. In 2016 BGI created the China National GeneBank (CNGB) on a 47,500sq.m site in Shenzhen, which benefits from BGI’s high-throughput sequencing and bio-informatics capacities. CNGB officially opened in July 2018 and is the largest gene bank of its kind in the world. Dozens of refrigerators can store samples at temperatures as low as minus 200 degrees Celsius, while researchers have access to 150 domestically developed desktop gene sequencing machines and a US$20m Revolocity machine, known as a “super­sequencer”. The Gene Bank enables the development of novel healthcare therapies that address large, fast growing and underserved global markets and to further our understanding of genomic mechanisms of life. Not only has CNGB amassed millions of bio-samples it has storage capacity for 20 petabytes (20m gigabytes) of data, which are expected to increase to 500 petabytes in the near future. The CNGB represents the new generation of a genetic resource repository, bioinformatics database, knowledge database and a tool library, “to systematically store, read, understand, write, and apply genetic data,” says Mei Yonghong, its Director.

US life sciences benefit by engaging with Chinese companies

Lee, in his book about AI, suggests that it is not so much Beijing’s policies that keep American firms out of the Chinese markets, but American corporate mindsets, which misdiagnose Chinese markets, do not adapt to local conditions and fail to understand the commercial potential of Chinese start-ups and consequently get squeezed out of the Chinese market.

This is what happened as Google failed to Baidu, Uber failed to DiDi, Twitter failed to Weibo, eBay failed to TaoBao, and Groupon failed to Meituan-Dianping. We briefly describe the demise of Groupon and point to lessons, which can be learned from it.
 
Lessons from Groupon’s failure in China

Groupon failed to adapt its core offering when group discounts in China faded in popularity and as a consequence it rapidly lost market share. Meituan, founded in 2010 as a Chinese copy of Groupon, quickly adapted to changing market conditions by extending its offerings to include cinema tickets, domestic tourism and more importantly, “online-to-offline” (O2O) services such as food and grocery delivery, which were growing rapidly.
 
In October 2015, Meituan merged with Dianping, another Chinese copy of Groupon, to become Meituan-Dianping the world's largest online and on-demand booking and delivery platform. The company has become what is known as a transactional super app, which amalgamates lifestyle services that connect hundreds of millions of customers to local businesses. It has over 180m monthly active users and 600m registered users and services up to 10m daily orders and deliveries. In the first half of 2018 Meituan-Dianping facilitated 27.7bn transactions (worth US$33.8bn) for more than 350m people in 2,800 cities. That is 1,783 enabled services every second of every day, with each customer using the company’s services an average of three times a week. Meituan-Dianping IPO’d in 2018 on the Hong Kong stock exchange and raised US$4.2bn with a market cap of US$43bn.
 
Efficiency also drives innovation. Meituan-Dianping’s Smart Dispatch System, introduced in 2015, schedules which of its 600,000 motorbike riders will deliver the millions of food orders it fulfils daily. It now calculates 2.9bn route plans every hour to optimize a rider’s ability to pick up and drop off up to 10 orders at once in the shortest time and distance. Since Smart Dispatch launched, it has reduced average delivery time by more than 30% and riders complete 30 orders a day, up from 20, increasing their income. In 2019, the American business magazine Fast Company ranked Meituan-Dianping as the most innovative company in the world.
 
Takeaways
 
Although Meituan-Dianping and other companies we mention may not be well known in the West and are not in the health life sciences industry, they are engaged in highly complex digital operations disguised as simple transactions, which enhance the real-world experiences of hundreds of millions of consumers and millions of merchants. To achieve this the companies have amassed vast amounts of data and have perfected AI and machine learning technologies, which make millions of exquisitely accurate  decisions every hour, 24-7, 365 days a year. Such AI competences are central to the advancement of health life sciences. American life science professionals might muse on the adage: “make your greatest enemy your best friend” and consider trading some of their IP to joint venture with fast growing agile Chinese data companies in a strategy to restore and enhance their market positions.
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  • China will not challenge the economic supremacy of the US in the near to medium term
  • But with a GDP of US$14trn growing at 6.9% a year China is a substantial economy and a significant trading partner of the US
  • China is replacing imported high-tech products with domestic ones and incentivizing Chinese companies to dominate high value global industries
  • China’s large and increasing supply of appropriately qualified human capital gives it a competitive edge
  • Beijing’s US$8trn-30-year Belt and Road (B&R) strategy aims to make China the centre of a new world order in which knowledge-based Chinese companies dominate high-value global markets
  • China is challenged by substantial debt and significant credit it has extended to economically weak nations
  • Notwithstanding, Western companies seeking growth outside their current wealthy markets need to develop constructive trading relationships with China
  • Lack of understanding and cultural differences are barriers to productive West-East trading relations
 
Can Western companies engage with and benefit from China?
 
Previously we described how Beijing had offered Western companies a ‘poisoned challis’: either localize your value chain and help China achieve its goals to dominate key industries globally or be progressively squeezed out of markets. Washington responded by levying punitive tariffs on products manufactured in China and marketed in the US in an attempt to force Beijing to change. China hit back, cross fire ensued, more US tariffs were levied, markets became nervous and a ‘flight for liquidity’ seems a possibility. This is when equity players become nervous about uncertainties in markets and move their investments into more liquid securities in order to increase their ability to sell their positions at a moment’s notice. To some observers the current trade conflict between the world’s two largest trading nations must seem like Stanley Kramer’s 1952 epic ‘High Noon” movie. The difference being the 2018 showdown could affect the lives of billions and threaten the global economy. The fact that the world can be brought to such a position in such a short time is partly due to a profound lack of understanding and cultural differences between Washington and Beijing and vice versa. The differences manifest themselves as: (i) competition versus harmony, (ii) short-termism versus long-termism, (iii) tactics versus strategy and (iv) nationalism versus globalism. These differences pervade organizations, institutions and mindsets in the respective regions.
 
In this Commentary

This Commentary is divided it into 3 parts.
  • Part 1: China’s penetration of emerging markets discusses the implications of China’s stated aim to become a major global high-end, knowledge-based economy and describes how, for the past three decades, the nation has been preparing for this by systematically upgrading its human capital. From a perceived position of strength Beijing suggested to Western companies seeking or increasing their franchises in China that unless they are prepared to localize their value chains, not only will they be squeezed out of the China market, but they will also encounter challenges in other large emerging markets as China’s presence and influence in these markets increase. This is significant because the world’s emerging economies are the growth frontiers of many high-tech industries. 
  • Part 2: China’s economic rise and its strategic objectives briefly describes China’s phenomenal transformation from a centrally managed economy to the world’s second largest economic power and a significant commercial partner of the US. We provide glimpses of some aspects of China’s recent history in order to convey the scale of its industrial reforms and its well-resourced, central government-backed long-term strategies to establish China as a world leader in knowledge-based high-value industries. We describe China’s planned slowdown of its economy and how Beijing is systematically upgrading its human capital. Indicative of China’s increasing trading prowess are its new technology companies. We describe three, which are likely to have a significant global impact in the next 5 years. We conclude part 2 with a description of the Pearl River Delta, China’s high tech production hub, in order to provide further insights into China’s achievements, the nature and scale of its projects to upgrade its economy and the thinking that drives China’s economic transformation. 
  • Part 3: China’s ‘Belts and Road’ (B&R) initiative. B&R is a bold neo colonialistinitiative to build a 21st century ‘Silk Road’ of infrastructure and trade-links between China and Eurasia. This is expected to stimulate trade, economic growth and domestic employment in some of the least developed regions of the world, which have suffered from post-colonial decline and are neglected by the West. Beijing expects that the B&R project will position China at the centre of a newly formed global trading network. We review some of the concerns raised by the R&D initiative including China's increasing exposure as a principal creditor to economically weak nations. This, together with China's mounting debt, presents Western companies with a dilemma: China is too big to be ignored but its structural weaknesses could be damaging.   

 

Part 1
 
 China’s penetration of emerging markets
 
 
Made in China 2025 (MIC25) incentivizes Chinese enterprises to develop their competences and capacities in order to respond to the pivotal needs of global customers to reduce costs while maintaining value by providing affordable quality product offerings.  It also encourages Chinese companies to become ‘global champions’ and help China establish itself as a dominant international force in knowledge-based technologies of the future. As a result, Chinese companies are successfully taking share of key segments in emerging markets. So, Beijing’s industrial strategies not only increase the challenges for Western companies in China, but also provide potential barriers for them to penetrate and increase their franchises in other large emerging markets such India and Brazil, which are the future growth frontiers.
 
China’s investment in human capital

Beijing’s well-resourced strategies to transition China from a manufacturing-based economy to a high-end, innovation-driven, knowledge-based economy could not be achieved without a significant supply of relevant human capital. It is instructive that for the past three decades China has been systematically upgrading its human capital, while Western nations have not been doing so at a similar pace.
 
According to the World Economic ForumChina has committed massive resources to education and training. In 2016 China was building the equivalent of one university a week and graduated 4.7m citizens, while in the US 568,000 students graduated. In 2017, there were 2,914 colleges and universities in China with over 20m students. The US had 4,140 with over 17m students enrolled. Significantly, between 2002 and 2014 the number of students graduating in science and engineering in China quadrupled. In 2013, 40% of all Chinese graduates completed a degree in science, technology, engineering or mathematics (STEM), whilst in the US only 20% of its graduates did so. In addition to China producing more STEM graduates than either the US or Europe, which are vital for high-tech knowledge-based industries of the future, the gap between the top Chinese and US and European graduates is widening. Projections suggest that by 2030 the number of 25 to 34-year-old graduates in China will increase by a further 300%, compared with an expected rise of around 30% in the US and Europe. This represents a substantial shift in the world's population of graduates, which was once dominated by the US, and gives China a potential competitive edge in high-tech growth industries of the future.
 
Further, US students struggle to afford university fees. Many American colleges and universities are struggling financially and as a consequence actively recruiting foreign students. In recent years, the number of Chinese students admitted to US universities has increased significantly. In 2017 for instance, some 350,000 Chinese students were recruited. Most graduates return to China with quality degrees. European countries have put a brake on expanding their universities by either not making public investments in them or restricting universities to raise money themselves.
 
Shanghai students are world’s best in maths, reading and science

Supporting this competitive edge is China’s world-beating performance of its 15 and 16-year-olds. According to an internationally recognised test, Shanghai school children are the best in the world at mathematics, reading and science. Every three years 0.5m students aged 15 and 16 from 72 countries representing 80% of the global economy sit a 2-hour examination to assess their comparative abilities in these three subjects. The examination, called the Program for International Student Assessment (PISA), is administered and published triennially by the Organisation for Economic Co-operation and Development (OECD). When the 2009 and 2012 PISA  scores were released they created a sensation, suggesting that students in Shanghai have significantly better mathematics, reading and science capabilities than comparable students in any other country.  Although these scores have been contested, and the most recent test scores suggest Shanghai students have slipped down the rankings, in the 2012 tests Shanghai students performed so well in mathematics that the report compared their scores to the equivalent of nearly three years of schooling above most countries.
 

Human capital strategies challenged by aging populations
Human capital strategies in China, the US and Western Europe are all challenged by aging populations. According to the United Nations, China’s population is ageing more rapidly than any country in recent history. America’s 65-and-over population is projected to nearly double over the next three decades, rising from 48m to 88m by 2050. The UK’s population also is getting older with 18% aged 65-and-over and 2.4% aged 85-and-over. In 2014, 20% of Western Europeans were 65 years or older and by 2030 25% will be that age demographic.
 
Taking share of high-value MedTech markets
 
Many Western MedTech companies are late-bloomers in emerging markets. This can partly be explained by the two decades of economic growth the industry experienced from developed markets and the continued buoyancy of the US stock market.  Thus, Western MedTech companies have felt little pressure to adjust their strategies and business models and venture into territories committed to “affordable (low priced) medical devices”. Beijing seems determined to take advantage of this and Chinese companies are increasing their share of large fast growing and underserved emerging markets by: (i) increasing their innovative go-to-market strategies and (ii) making sure they “localize” their product offerings. We briefly describe these two strategies.
 
Innovative go-to-market approaches

According to OEDC data, between 2000 and 2016 China doubled its R&D investment to 2% of GDP, which is more than the EU but less than America. In 2016, the US spent 2.7% of its GDP on R&D, which is more than any country. Individual Chinese domestic companies are also increasing their investments in R&D as part of their growth strategies. For instance, over the past decade, Mindray, China’s largest MedTech company has spent more than 10% of its annual revenues - currently US$1.7bn - on R&D. The company has a large R&D team of over 1,400 located in 2 centres: 1 in Mahwah, China and another in Seattle, USA. BGI, China’s largest manufacturer of next-generation gene-sequencing equipment, devotes more than 33% of its revenues to R&D, double that of its US competitor Illumina. In aggregate, however, Chinese companies are a long way behind their Western counterparts when it comes to R&D spending.
 

Supercomputers
High-tech companies require supercomputers to assist with their R&D and innovative strategies. These are powerful and sophisticated machines with enormous processing power, which can support medical and scientific R&D. According to an internationally recognised ranking, which has been conducted biannually by leading scientists since 1993, China leads the world with its installed-base of supercomputers. China has 206 and  America has 124. In 2000 China had none. The most recent rankings show that the US has regained the top performance position from China with an IBM-system-backed supercomputer now running at the US Department of Energy’s Oak Ridge National Laboratory. 
 

Increasing number of Chinese patents
Although the US maintains a lead in scientific breakthroughs and their industrial applications, innovation is increasing in China. The number of invention patent applications received by China in 2016 was 1.3m, which was more than the combined total from the US (605,571), Japan (318,381), South Korea (208,830), and the EU (159,358). Patents from these five countries accounted for 84% of the world total in 2016. 
 

Increasing share of high-tech markets
Emboldened by enhanced processing power, increased patents, greater R&D capacity and improved capabilities, Chinese MedTech companies are increasingly represented across a broad spectrum of high-end medical technologies and have made significant inroads into emerging markets. Some manufacture Class III product offerings such as orthopaedic implants and are beginning to compete in medium-level technology markets in Brazil, India, Japan and the UK. For instance, SHINVA markets its linear accelerators globally. Sinocare is #6 in the global market for blood glucose monitoring devices. In 2008 Mindray paid US$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. Also, Mindray has increased its share of the ultrasound imaging market to 10%, behind GE and Phillips. MicroPort broke onto the world stage in early 2014 when it acquired Wright Medical’s orthopaedic implant business for US$290m. In 2015 China overtook Germany to become Japan’s second largest supplier of MRI devices, behind the US, and Biosensors International is among the largest suppliers of drug-eluting stents in France, Germany, Italy, Spain and the UK.
 
Localized product offerings in India
 
Mindray, which positions itself as a world-class MedTech solutions company, has established a significant presence in India where it has built local operations, tailored its line of affordable high-quality patient monitoring, ultrasound and in vitro diagnostic devices to address India’s unmet needs, hired local engineers and operators and built a local marketing and sales team, which provides a 24-7 customer service. Mindray has understood that many of the factors, which drive China’s MedTech market growth are mirrored in India and other rapidly growing emerging markets that share a similarly high disease burden, aging demographics and a desire to reduce healthcare costs.
 
Mindray was one of China’s earliest MedTech companies to list in New York in 2006. However, the company felt its shares were undervalued and privatized in 2016 in a deal, which valued the company at US$3.3bn. A funding round shortly after its delisting valued Mindray at US$8.5bn. The company employs over 8,000 and its 2017 revenues were US$1.7bn.
 
India’s MedTech market
 
The attraction of India to MedTech companies is easy to understand. India’s MedTech market is the 5th largest in the world and could rival that of Japan and Germany in size by 2022 if it continues its 17% annual growth. Although India mainly has been an out-of-pocket healthcare market this is changing. In September 2018, the Indian government launched one of the world’s largest publicly funded health insurance schemes, which will provide some 0.5bn poor people with health cover of US$7,000 per year (a sizable sum in India) for free treatment of serious ailments. India’s medical device markets, like those of China’s, will benefit from this, but also from the country’s large and growing middle class with relatively high disposable incomes in an economy growing at around 7 to 7.5% annually.
 
In 2016 India’s middle class was estimated to be 267m - 83% of the total population of the US - and projected to increase to 547m by 2025. Further, India has a large and growing incidence of lifetime chronic diseases, which expands the need for medical devices. Between 2009 and 2016, China emerged as India’s 3rd largest supplier of medical devices (behind the US and Germany) and is currently India’s leading provider of CT scanners, representing 50% of the US$69m that India spent on imports of these high-tech devices during 2016. India’s orthopaedic devices market is estimated to be around US$375m and is projected to grow at about 20% each year for the next decade to reach US$2.5bn by 2030. In contrast the global orthopaedics industry is estimated to grow at 5% annually.

China is positioned to increase its share of MedTech markets in India and other emerging countries. This suggests that unless Western companies are prepared to transform their strategies and change their business models similar to what Medtronic and GE Healthcare have done, they will not only be squeezed out of the China market but shall encounter challenges to penetrate and increase their franchises in other large emerging MedTech markets. This is significant because the world’s emerging economies are the growth frontiers of the MedTech industry.



Part 2

China’s economic rise and strategic objectives: background

 
How long can China sustain its rise?”. We broach this question in the next two parts of this Commentary. Here in Part 2, we describe some relevant aspects of China’s recent commercial history, its success in producing high tech global companies and we also provide a glimpse of its urban communities for creating and developing companies of the future.

It was not until the early 1980s, after the death of Mao Zedong in 1976, that China started to dismantle its centrally planned economy and began implementing its free market reforms and opened its economy to foreign trade and investment. Shortly afterwards China: (i) became the world’s fastest growing market-based economy with real annual GDP growth averaging 9.5% through 2017, (ii) lifted 800m citizens out of poverty and (iii) overtook Japan to become the world's second largest economy. By 2010 China had become a significant commercial partner of the US and is now America’s largest merchandise trading partner, its biggest source of imports and America’s third largest export market. Also, China holds US$1.7trn of US Treasury securities, which help fund the federal debt and keep US interest rates low. It is worth noting that China has a long history dating back more than 2,000 years BC. In more recent times, Adam Smith the father of modern capitalism, described China in The Wealth of Nations (1776) as a country which is, “one of the most fertile, best cultivated, most industrious, most prosperous and most urbanized countries in the world”.

 
Avoiding a middle-income trap
 
Over the past decade China’s economy has matured and Beijing has managed a planned slowdown of its growth rate to what it calls the “new-normal”. In 2017 China’s GDP was 6.9% and is projected to fall to 5.6% by 2022. The orchestrated slowdown is less based on fixed investment and exports and more on private consumption of China’s large and growing middle class, enhanced services and innovation. A previous Commentary described Beijing’s Made in China 2025 (MIC25) initiative and other policies, which prioritised innovation and the systematic upgrading of its domestic industries whilst decreasing its reliance on foreign technology. This is essential for China to avoid a ‘middle income trap’, which happens when nations achieve a certain level of economic growth, but then begin to experience diminishing returns because they are unable to restructure their economies to embrace new sources of growth.
 
Baidu, Alibaba and Tencent: BAT

An example of China’s ability to upgrade its economy and avoid a middle-income trap is its new technology companies, which are positioned to have significant global roles in the next five years. We briefly describe three: Baidu, Alibaba and Tencent: collectively referred to as BAT. Baidu, is a Chinese language Internet search provider incorporated in 2000, which has grown to  become the world’s 8th largest internet company by revenue. It has a market cap of US$80bn, annual revenues US$13bn and has the world’s largest Internet user population of about 800m. Alibaba, was founded in 2000 as a business-to-business (B2B) portal connecting Chinese manufacturers to overseas buyers. Today, the company is a multinational conglomerate with a market cap in excess of US$500bn and annual revenues of US$13bn. It is the world’s largest e-commerce company in terms of gross merchandise volume (GMV). For the fiscal year ended March 31, 2017, Alibaba had a GMV of US$0.43trn and 454m annual active buyers on its marketplaces. Alibaba’s long-term vision is to become a global company providing solutions to real world problems and using e-commerce to help globalization by making trade more inclusive. The company expects GMV to reach US$1trn by 2020, and to serve 2bn consumers(one-third of the world’s total population)and to support the profitable operation of 10m businesses on its platforms by 2036. Alibaba is sometimes referred to as the "Amazon of China," but the company’s founder Jack Ma suggests there are differences. "Amazon is more like an empire: everything they control themselves. Our philosophy is be an ecosystem”, says Ma. Tencentfounded in 1998, has become a multinational investment holding corporation with a market cap of US$556bn, annual revenues of US$22bn and specializes in various internet-related services, entertainment, AI and technology.  
 
The Pearl River Delta
 
Tencent has its HQs in Shenzhen, a megacity in the Pearl River Delta, which is China’s hub for high tech production. We briefly describe the delta to further show the progress China has made in transforming its economy. In the early 1980s the Pearl River Delta was primarily an agricultural area and Shenzhen was an unassuming town of about 30,000 (now 13m). The delta witnessed the most rapid urban expansion in human history to become the world’s largest urban area in both size and population by 2015, with more inhabitants than Argentina, Australia or Canada. Today the Pearl River Delta has a population of 120m and a GDP of US$1.5trn - growing at 12% per year - which is greater than that of Indonesia and equal to 9.1% of China’s output.
 
Land, sea and air infrastructure serving the delta is state of the art. For example, the delta has six airports; three of which are international air hubs. In 2016, the passenger traffic of Baiyun Airport in Guangzhou (population 15m) surpassed 60m and the volume of freight it handled was over 2m tonnes. In the same year passenger traffic at Shenzhen (population 13m) airport was in excess of 42m and the volume of freight it handled was over 1m tonnes.  This compares favourably with JFK and Newark Liberty airports. In 2017 both airports set records with more than 59m and 43m passengers respectively
.

Part of the delta’s infrastructure is the new Hong Kong-Zhuhai-Macau Bridge, which spans 34 miles (55klm), crosses the waters of the Pearl River and connects Hong Kong with Macao. It is the longest sea-crossing bridge ever built and has a section that runs for seven kilometres in a submarine tunnel that passes four artificial islands. Its construction cost US$16bn, which is part of a US$30bn plan announced in 2009 to develop an infrastructure network to connect the nine cities in the delta so that collectively they would become the largest contiguous urban region in the world, which was achieved in 2015.  One of the infrastructure goals is to reduce travel time between the nine cities and Hong Kong and Macao to one hour from any which way.
 
The Pearl River Delta is the most southern of three major Chinese coastal growth areas. In the middle is the Yangtze River Delta region, which includes Shanghai with a population of 130m and a GDP of US$2trn. To the north is the Beijing-Tianjin-Bohai corridor, covering 10 cities and has a population of 100m and a GDP of US$1.3trn. These three urban clusters account for 21% of China’s population and about 40% of its GDP.



Part 3

 China’s Belt and Road initiative

 
It is not only important to understand the changes in China within the context of its recent history, MIC25 and Beijing’s restructuring of its healthcare sector, but also against the backdrop of China’s ambitious Belt and Road” (B&R) initiative. Unveiled by President Xi Jinping in September 2013, it has become the centre of Beijing’s ambitions for a new world order predicated upon a modern-day Silk Road connecting China by land and sea to Southeast Asia, Central Asia, the Middle East, Europe and Africa. It is a bold model of economic development, which Xi has called, “the project of the century”. The initiative is supported by the new Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund. Some estimates suggest that Beijing has already invested US$900bn in the project. Overall, it is expected to cost US$8trn and take three decades to complete. At its core are 6 economic corridors, which connect 65 countries, about 65% of the world’s population, involve some 40% of global trade and 33% of global GDP.
 
Belt and Road’s 6 economic corridors
  1. The Eurasia-Land-Bridge economic corridor is developing rail transportation between China and Europe through Kazakhstan, Russia and Belarus
  2. The China-Mongolia-Russia economic corridor aims to develop trade between China and Mongolia by modernizing transport, telecommunication and energy networks to make Mongolia a hub between China and Russia
  3. The China-Central Asia-West Asia economic corridor connects the Chinese province of Xinjiang to the Mediterranean Sea, through Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Turkmenistan, Iran and Turkey 
  4. The China-Indochina-Peninsula economic corridor aims to strengthen cooperation among states of the Greater Mekong sub-region and support trade between China and the 10 nations of the Association of Southeast Asian Nations (ASEAN) that are already bound by a free trade agreement since 2010 to facilitate economic growth
  5. The China-Pakistan economic corridor connects Kashgar in the Chinese province of Xinjiang to the port of Gwadar in Pakistan and includes the construction of railways, highways, optical fibre networks, and the creation of an international airport in Gwadar as well as the establishment of special economic zones
  6. The Bangladesh-China-India-Myanmar economic corridor links Kunming to Kolkata (Calcutta) via Mandalay and Dhaka to strengthen connections between China and various economic centres of the Gulf of Bengal in order to increase interregional trade by reducing non-tariff barriers.
China’s neo-colonial strategy
 
China’s B&R initiative is based upon an interpretation of colonialism, which is significantly different to Western  interpretations. While Western nations struggle with a sense of guilt associated with their past colonial rule and feel responsible for the abject economic failure, widespread poverty and erosion of governance in post-colonial independent states, Beijing believes that there are lessons to be learned from colonialism, which are relevant today and necessary prerequisites to stimulate trade, economic growth and domestic employment. Beijing’s B&R initiative is best understood as a neo colonial strategy to strengthen China’s slowing economy, enhance its industrial capabilities and improve its geopolitical standing by driving economic growth in some of the least developed regions of the world, which are neglected by the West.
 
The lessons of Singapore
 
China’s neo-colonialist policies are influenced by Singapore, an island city-state located in Southeast Asia off southern Malaysia. The country gained independence from Malaysia in 1965 and has become a global financial centre with a multicultural population and a multi-party parliamentary representative democracy with a President as head of state and a Prime Minister as the head of government. Although China is 14,000-times bigger than Singapore, has 1bn more citizens and its GDP is US$14trn compared to Singapore’s US$300bn; China views Singapore as an object lesson of political stability and prosperity predicated upon aspects of its colonial legacy, which Beijing believes can be replicated in under-developed regions of the world. These include basic infrastructure, improved administration, widened employment opportunities, female rights, expanded education, improved public healthcare, taxation, access to capital, independent judiciary, and national identity. Such factors China views as benefits of colonialism and necessary prerequisites for trade, economic growth and prosperity. Singapore has a colonial history, but today is a rich country with a GDP per capita of US$55,235, (higher than that of the US: US$53,128) and where Asian culture is intact and Western knowhow is harnessed for economic growth and prosperity for its citizens and is where China would like to be in the future.
 
The AIIB comparable to other development banks
 
In 2013, when Xi Jinping first proposed creating the Asian Infrastructure Investment Bank (AIIB), Washington was against it and campaigned rigorously to persuade potential donor countries not to participate. The US expressed concerns that the AIIB would undermine the World Bank, and the Asian Development Bank (ADB), which operate in Asia and lend to China. Washington also believed that the AIIB would unfairly benefit Chinese companies and argued that China would not adhere to international banking standards of transparency and accountability. Today, the AIIB is up and running as a medium-sized regional development bank with capital of US$100bn and lending at around US$4bn. It is broadly comparable with other development banks and Washington’s concerns appear unfounded.
 
Systematically migrating low-tech manufacturing to low-cost locations
 
An important role of the AIIB is to assist the B&R initiative to open up and create new markets for Chinese goods and services, to stimulate exports and to provide low-wage locations, to which China can migrate its light manufacturing industries. Beijing no longer sees its country’s economy as competitive on the basis of low wages. China’s labour costs are rising faster than gains in productivity and cost estimates of outsourcing production to China will soon be equal to the cost of manufacturing in the US and Western Europe. China is adjusting to rising real wages in its domestic markets by systematically migrating its low-tech industries to less-common low-wage production operations in new locations in Africa such as Ethiopia.

A rationale for this strategy is provided in a 2017 paper from the Center for Global Development, which suggests that “Ethiopia could become the new China” as, “the cost of Ethiopian industrial labour is about 25% that of China today”. This suggests that migrating Chinese low-tech manufacturers might leap-frog middle and lower-middle income developing countries in favour of the poorest countries such as Ethiopia, which is included in China’s B&R initiative. African countries view B&R as a platform to promote global cooperation based on win-win strategies. Speaking at a conference in June 2018 in Addis Ababa, Tan Jian, the Chinese ambassador to Ethiopia said, "We are working closely with Ethiopia in advancing the Belt and Road Initiative. Ethiopia is a very important partner in this regard. We have been doing a lot of projects here in Ethiopia: infrastructure, policy dialogue, trade, financing and people-to-people exchanges.” At the same conference Afework Kassu, Ethiopia's Minister of Foreign Affairs, said, “the Belt and Road initiative is an advantage for African countries for infrastructure development and for economic growth”.
 
Concerns about China’s neo colonialism and debt management
 
Despite these good words, China's B&R initiative is not free of criticism mostly from Western nations and international institutions, which suggest Beijing’s motivation is a retrograde strategy that employs globalization to service its domestic economy, and many of the concerns are about China’s potential economic predominance.
 
A March 2018 Center for Global Development (CGD) paper suggests that because China’s record of international debt financing is not good, and the B&R initiative follows China’s past practices for infrastructure financing, which entail lending to sovereign borrowers, then the initiative runs the risk of creating debt distress in some borrower nations. The paper identifies 8 of the 68 B&R borrower countries as “particularly at risk of debt distress”. Pakistan is the largest country at high risk with the development of its Gwadar deep-sea port, which is part of the B&R China-Pakistan Economic Corridor. China is financing about 80% of this endeavour, which is estimated to cost US$62bn.  Other countries mentioned in the CGD paper to be at high-risk of debt distress from the R&D initiative include Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan. The concern is that these at-risk nations could be left with significant debt ‘overhangs’, which could impede their ability to make essential future public investments and thereby challenge their economic growth more generally. Recently, public concerns from within China have been raised over the costs of the initiative. There is also concern that debt problems will create “an unfavourable degree of dependency” on China as a creditor. Several US Senators have expressed similar concerns and suggest that potential defaults could have a deleterious economic impact more generally. In addition to B&R loans, which have been questioned, it has been rumoured that Beijing has lent Venezuela US$60bn and also extended significant credit to Argentina. Venezuela is in economic meltdown and Argentina has applied to the IMF for a bailout
 
China’s mounting debt
 
China’s increasing exposure as a significant creditor to economically weak developing nations is compounded by its mounting debt and triggers concerns about China’s future stability. A popular Washington view, endorsed by President Trump’s chief economic adviser Larry Kudlow, is that China’s mounting debt and slowing growth mean that its “economy is going south”, and the recent imposition of tariffs on Chinese exports to the US will accelerate the nation’s demise. However, there is a view that Washington’s imposition of punitive tariffs is an over-reaction because the Chinese economy is nowhere as strong as that of the US economy. Notwithstanding, China is an important trading partner for the US and American companies should find a way to engage with China.
 
Since the 2008 financial crisis, China’s debt has been a concern in Beijing because it was a driver of the country’s economic growth. In 2016, Vice-Premier Liu He, President Xi’s top economic adviser, conscious of the potential national security risks of China’s mounting debt, took steps to de-risk the country’s financial sector. More recently, Liu has accelerated infrastructure investment and taken steps to avoid a banking crisis by ensuring that the renminbi does not fall too rapidly against the US dollar. Over the past 5 months the renminbi has weakened about 10% against the US$ and could weaken further if the currency becomes politicized. Despite Liu’s efforts to reign-in and control China’s debt, which some estimates put at about  260% of GDP, it is not altogether clear how successful these efforts will be especially if China’s debt challenges are considered in conjunction with its loose credit conditions.
 
Changing world economic order

Putting aside these concerns, it is instructive to note that a 2017 study by Price Waterhouse Coopers (PwC), suggests, ceteris paribus, that within the next decade China’s economy will be bigger than America’s and within the next three decades India’s economy will overtake that of the US. The study argues that the US will rank 3rd in the world and in 4th place could be Indonesia. The study suggests that China will have an economy of US$59trn, while India’s will be around US$44trn and America’s will total $34trn. Significantly, Japan (US$6.7trn), Germany (US$6.1trn), the UK ($5.3trn) and France (US$4.7trn), key markets for Western MedTech companies, are expected to fall respectively to 8th, 9th, 10th and 12th in the list. They are expected to be replaced by Indonesia (US$10.5trn), Brazil (US$7.5trn), Russia (US$7.1trn), and Mexico (US$6.8trn), which climb to 4th, 5th 6th and 7th positions respectively. This signals some significant economic shifts likely to take place over the next two to three decades and underlines the importance of emerging economies in the medium-term strategic plans of Western companies.
 
Takeaways
 
The world is on the cusp of some significant  economic changes and the two nations most likely to affect those changes are the US and China. Beijing’s policies and global aspirations are helping China to step into a leadership void created by Washington’s current rejection of multilateralism. However, it is still not altogether clear whether China will be able to sustain this new position, and the uncertainty this causes presents a significant strategic dilemma for Western companies seeking growth outside their current markets in the developed world. China is too big to be ignored by Western companies, but China’s conditions for engagement are onerous and its long-term stability remains in doubt.
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  • China is seen as a significant growth frontier for MedTech
  • Over the past 2 decades Western companies have derived billions from China
  • But today companies seeking or extending their franchises in China will encounter significant barriers
  • China is successfully decreasing its dependence on Western medical devices and other high-tech products and replacing them with domestic offerings
  • The choice facing Western companies expecting to derive revenues from China is: either localize your value chain and help China achieve its goals to dominate key industries globally or be progressively squeezed out of markets
  • Some Western companies have localized and manufacture their offerings in China
  • Some MedTech companies concerned about China’s weak intellectual property (IP) protection and buoyed by 2 decades of growth and the current performance of the US stock market are turning away from China
  • Could adherence to history dent their futures?
  
China’s rising MedTech industry and the dilemma facing Western companies

 
This is the first of two Commentaries on China.
 
Increased cost pressures, maturing home markets, resource constraints, growing regulatory pressures and rapidly changing healthcare ecosystems are driving Western MedTech companies to seek or expand their franchises in large fast-growing emerging economies. For many, the country of choice is China. AdvaMed, the American MedTech trade association says, “China presents the most significant growth market for the medical device industry today and for the foreseeable future.”

Despite only accounting for 3% of the global MedTech market share, China’s attraction is a US$14trn economy growing at some 7% per annum, a population of 1.42bn with a large, ageing middleclass with disposable incomes, rising healthcare consumption and Beijing’s commitment to increase healthcare expenditure to provide care for all its citizens from “cradle-to-grave”. All these factors drive China’s MedTech market and the certainty of its increasing demand.

Despite this positive scenario, there are an increasing number of non-tariff barriers facing Western MedTech companies in China. This is because Beijing has launched extensive and aggressive initiatives to decrease China's dependence on Western medical devices and replace them with domestic offerings. Opportunities in China for Western players are shrinking and becoming tougher as Beijing’s new healthcare reforms kick-in and Chinese MedTech companies strengthen, increase their capacity, move up the value chain and take a bigger share of the domestic markets. To compete effectively in China, Western companies need to enhance their understanding of Beijing’s extensive healthcare reforms, increase their understanding of the complexities of China’s new procurement processes and be prepared to localize their value chains.
 
In this Commentary

This Commentary is divided it into 2 parts.
  • Part 1: China an ‘el Dorado’ for Western MedTech companies describes the significant commercial benefits derived by some Western companies who, for the past two decades, have supplied high-end medical devices to the Chinese market and benefitted from: (i) Beijing’s commitment to extend healthcare to all citizens, (ii) the country’s vast, rapidly growing and underserved middleclass and (iii) China’s large and aging population with escalating chronic lifetime diseases. These market drivers have profited Western companies because domestic Chinese MedTech enterprises had neither the capacity nor the knowhow to produce high-end medical devices. This gave rise to a bifurcated MedTech market with domestic Chinese companies producing low-end offerings and Western companies supplying high-end products.
  • Part 2: China the end of the ‘el Dorado’ for Western MedTech Companies suggests that commercial opportunities in China for Western MedTech companies have shrunk significantly and become much tougher as domestic manufacturers, incentivized by Beijing, move up the value chain and capture a bigger share of the domestic market. We describe Made in China 2025 (MIC2025), which is a well-resourced government initiative aimed at decreasing China’s dependence on Western MedTech suppliers by enhancing the capacity and scale of Chinese companies. This, together with China’s current 5-year economic plan aimed at a “healthier China” and its 2009 healthcare reforms are already significantly effecting some segments of MedTech markets previously dominated by Western companies.


PART 1
 
 China an el Dorado for Western MedTech companies
 
China’s healthcare market and the MedTech sector
The attraction of China’s healthcare market to Western investors over the past decade is easy to comprehend. In 2013 China surpassed Japan to become the world’s second-largest healthcare market outside the US and the fastest growing of all large emerging markets. Healthcare spending is projected to grow from US$854bn in 2016 to US$1trn in 2020. In 2016, China’s healthcare expenditure as a proportion of its GDP was 6.32%, up from 4.4% in 2006, and this is expected to rise to between 6.5 and 7% by 2020. Although this is a lower percentage than that of the US with 17%, Germany with 11%, Canada, Japan and the UK with about 10%; it suggests that China’s healthcare market has a substantial upside potential; especially as the country’s middleclass grows and becomes economically stronger and Beijing’s healthcare reforms kick-in.
 
The attraction of China’s MedTech market to Western investors also is easy to understand. It is one of the fastest growing market sectors, which has maintained double-digit growth for over a decade. In 2016 China’s MedTech market was valued at US$54bn, an increase of 20% compared to 2015; 72% of which was fuelled by hospital procurements. In 2017 China imported more than US$20bn worth of high-end medical devices the overwhelming majority of which was supplied by Western companies.
 
Drivers of China’s MedTech markets
 
Three China market variables making for highly valued Western MedTech businesses include: (i) the country’s vast, rapidly growing and underserved middleclass, (ii) China’s large and aging population with escalating chronic lifetime diseases and (iii) Beijing’s commitment to extend healthcare to all of its citizens.

 
  1. Rapidly growing and underserved middleclass
China’s past rapid economic growth lifted hundreds of millions of its citizens out of poverty and into the middleclass. As China’s middleclass has grown, its healthcare market has expanded and the opportunities for Western MedTech companies have increased. This partly offsets slower demand experienced by Western MedTech companies after 2009 when middleclass consumers in developed countries were challenged by the shocks to their living standards caused by the 2008 recession and subsequent lower global economic growth.
 
Since 2015, Chinese middleclass consumers have become a significant driver of the country’s economic activity and are projected to remain so through at least 2025. Since 2000, annual real GDP growth per capita has averaged 8.9% while real personal disposable income on average has risen 9.2%. According to Credit Suisse’s Global Wealth Report, in 2015 China overtook the US as the country with the biggest middleclass, which is comprised of some 109m adults compared with 92m in the US. Today, the Chinese middleclass is facing more lifestyle related diseases, whilst expecting more and better healthcare. By 2025, China’s middleclass is projected to reach 600m and have an annual disposable income between US$10,000 and US$35,000. Further, compared to the US and the UK, China’s middleclass has a low level of household debt. China’s household debt-to-GDP ratio is 40% compared with 87% for that of the US and UK. This suggests that consumer led growth in China still has a significant upside. However, there are cultural obstacles to Chinese citizens assuming more personal debt.

 
  1. Large aging population with escalating chronic lifetime diseases
China has a population of 1.42bn and each year Chinese citizens give birth to some 20m. In January 2016 China lifted its 40-year-old one-child policy, which is expected to increase the country’s birth rate and increase the demand for in-vitro fertilization among older parents. Notwithstanding, partly because of the country’s falling fertility rates and partly the increasing life expectancy of the elderly share of the country’s population (In 2017 total life expectancy was 76.5), the number of elderly Chinese citizens has been increasing. According to China’s Office of the National Working Commission on Aging, in 2017 the number of its citizens aged 60 or above had reached 241m, accounting for some 17% of the total population and this is expected to peak at 487m, or 35%, around 2050, when it is projected that China will have 100m citizens over 80.

This is significant because elderly people have a higher incidence of disease, demand more frequent, longer and more complicated treatment regimens and use medical services more often than their younger counterparts. For example, China’s ageing population is fuelling the rise in demand for orthopaedic devices. Projections suggest that over the next decade China could become the world’s largest orthopaedic device market. As the Chinese population continues to age, demand for healthcare services and medical devices are expected to increase substantially. Notwithstanding, a ‘dependent’ large growing and aging population has a significant economic downside.
 
Further, the 600m Chinese citizens of prime earning age tend to live in large urban centres. China has some 662 cities; 6 of which are mega cities with populations of about 10m. 160 Chinese cities have populations in excess of 1m. Increased urbanization, changing diets and lifestyles and increased air pollution and other environmental hazards are causing a substantial rise in the prevalence of chronic lifetime diseases. It is estimated that 330m Chinese citizens currently have chronic diseases. According to a 2018 study almost 100m adults (8.6%) have chronic obstructive pulmonary disease (COPD), about 110m have diabetes and more than 80m Chinese citizens are handicapped. Altogether this creates a vast and growing demand for various high-end medical devices.

 
  1. Beijing’s commitment to extend healthcare to all citizens
A 3rd driver of China’s expanding healthcare sector is Beijing’s healthcare reforms launched in 2009 and its current 5-year economic plan, which prioritizes a "Healthy China". According to a 2016 World Bank report, ”Since the launch of the 2009 health reforms, China has substantially increased investment to expand health infrastructure; strengthened the primary-care system; achieved near-universal health insurance coverage in a relatively short period; reduced the share of out-of-pocket expenses - a major cause of disease-induced poverty - in total health spending; continued to promote equal access to basic public health services; deepened public hospital reform; and improved the availability, equity and affordability of health services. It has also greatly reduced child and maternal mortality and rates of infectious diseases and improved the health and life expectancy of the Chinese people.”
 
The share of healthcare expenses covered by the government is expected to increase from 30% in 2010 to 40% in 2020, but current regional differences in access to and quality of healthcare are expected to remain in the near term. China’s current economic plan, which was approved in 2015 and adopted in 2016 is responsible for a number of well-funded and aggressive healthcare reform programs, and increased investment in healthcare infrastructure. The plan also encourages private capital investment to improve service quality and meet the public’s diverse, complex and escalating healthcare needs.
 
Bifurcated MedTech market

These three healthcare drivers have significantly benefitted Western MedTech companies who leveraged their pre-existing products and business models and served China’s fast growing and underserved high-end MedTech markets with sophisticated medical devices. Chinese domestic MedTech companies, which today are comprised of about 16,000 small-to-medium sized light manufacturing enterprises on China’s east coast, participated in the low end of the global value chain and mostly produced Class I and II cheap disposable medical devices, which required simple forms of manufacturing or assembly, but created large numbers of jobs and made a significant contribution to poverty reduction. This mutual dependence gave rise to a bifurcated market and reflected the type of foreign direct investment that China attracted at the time and the relative lack of capacity of the domestic labour force.
 
The foreign sourced market segment has been served historically by large, well-resourced Western MedTech companies such as Medtronic, General Electric (GE), PhilipsSiemens, Zimmer Biomet  and DePuy Synthes. Before 2009, such companies enjoyed a near monopoly supplying their pre-existing high-end medical devices to large Chinese hospitals (see below). US MedTech companies were the #1 foreign supplier of such offerings, followed by Germany and Japan. These 3 countries represented the overwhelming majority share of China’s imports of medical devices.


PART 2

China the end of the el Dorado for Western MedTech companies
 
Between 2003 and 2009 foreign direct investment in China’s MedTech sector was concentrated in low-value-added activities. This pattern reversed during 2010-2018 and enabled Chinese MedTech companies to move up the value chain and develop more sophisticated manufacturing processes, increase their R&D capacity, enhance their post-market services and begin to penetrate more segments of the higher-value-added Class lll MedTech markets. As this happened so the predominance of Western MedTech companies providing high-end product offerings was reduced. This shift suggests that late entrants to the China market may struggle.
 
A 2017 survey conducted by China’s New Center for Structural Economics, covering 640 Chinese export-oriented labour-intensive companies across four sectors between 2005 and 2015 suggests that upgrading low-tech industries is pervasive throughout China. “’Technology upgrading’ was the firms’ most common response to their challenges: 31% of firms ranking it top and 54% in their top three responses. Tighter cost control over inputs and in production was next (top for 27% of firms) and changing product lines or expanding markets was third most common (24%)”, says the report.
 
Taking share from Western companies

To-date domestic Chinese MedTech companies have captured about 10% of the technologically intensive segments of endoscopy and minimally invasive surgery as measured by value, and 50% of the market in patient monitoring devices and orthopaedic implants. Only 5 years ago Western companies such as Zimmer Biomet  and DePuy Synthes controlled 80% of the Chinese high-end orthopaedic market segments. Further, about 80% of China’s market of drug-eluting stents, (medical devices placed into narrowed, diseased peripheral or coronary arteries, which slowly release a drug to block cell proliferation), which is another relatively high-end therapeutic device segment, is controlled by Biosensors InternationalLepu Medical, and MicroPort. These three Chinese companies market drug-eluting stents, on average, for about 40% less than their Western counterparts. Just over a decade ago 90% of this market was controlled by Western MedTech companies. Similarly, Chinese companies have increased their domestic market share of digital X-ray technologies to 50%. In 2004 they had zero share of this market.
 
Made in China 2025
 
In May 2015, Beijing launched “Made in China 2025” (MIC2025), which is a national strategy to enhance China’s competitive advantage in manufacturing. Increasing competition from developing nations with similarly competitive costs, coupled with technology-driven efficiency gains in developed countries, means that China’s abundance of cheap labour and the competitive advantage of its infrastructure will soon be insufficient to drive sustainable economic growth. MIC25 is expected to redress this by comprehensively upgrading, consolidating and rebalancing China’s manufacturing industry, and turning China into a global manufacturing power able to influence global standards, supply chains and drive global innovation.
 
The strategy names 10 sectors, including medical devices, which qualify for special attention to help boost the country’s goal of accelerating innovation and improving the quality of products and services. The initiative incentivizes domestic Chinese companies, including SMEs, to increase their usage of artificial intelligence and digital technologies to move up the value chain and capture a greater market share from their Western counterparts. MIC2025 is explicit about China reducing its reliance on Western imports and includes subsidies, loans and bonds to support and encourage domestic companies to: (i) continue increasing their capacity, (ii) devise lean business models that emphasize “affordability”, (iii) increase their R&D, (iv) expand their franchises overseas, and (v) acquire foreign enterprises with cutting-edge technologies. The initiative  also addresses issues of quality, consistency of output, safety and environmental protection, which are all considered strategic challenges to China’s development.
 
Beijing expects MIC2025 to increase the market share of Chinese-produced medical devices in the country’s hospitals to 50% by 2020 and 70% by 2025, enable Chinese companies to compete with Western MedTech giants by 2035 and make China a world MedTech leader by “New China’s” 100th birthday in 2049. The initiative is expected to quickly spread beyond China’s borders as its leading manufacturers seek to develop global supply chains and to access new markets. MIC25 is important for the next stage of China’s emergence as an economic superpower and its ambition to design and make the products of the future required not only by the Chinese consumer, but consumers around the world.
 
US attempts to halt MIC25

While many Western countries are debating how to respond to MIC25 Washington sees the initiative as a well-defined, well-orchestrated strategy, which is “unfair and coercive” because it includes government subsidies and the “forced transfer” of technology and IP to enable the Chinese to “catch-up and surpass” American technological leadership in advanced industries.  An August 2018 US Council for Foreign Relations response says, “MIC25 relies on discriminatory treatment of foreign investment, forced technology transfers, intellectual property theft, and cyber espionage”. In June 2018 Washington sought to halt the policy by levying punitive tariffs on Chinese imports into the US and blocking Chinese-backed acquisitions of American technology companies.
 
The commercial effects of increased tariffs are unclear

It is not altogether clear how successful Washington’s punitive tariffs will be because they could unsettle the US medical supply industry given that a growing number of product offerings marketed in the US are made in China. MRIs, pacemakers, sonograms and other medical devices manufactured in China and imported into the US are all included in the list of items subject to the increased US tariffs. Some estimates suggest that the tariffs will cost the American medical device industry more than US$138m in 2018, and about US$1.5bn every year there after. According to AdvaMed, the US enjoys a trade surplus with China for medical products and rather than grow US productivity, the tariffs could result in less trade and a smaller surplus in medical devices. Whilst protectionist, the MIC25 initiative is permitted under World Trade Organization rules as China is not a signatory to the Agreement on Government Procurement, which covers state run hospitals. Further, historically healthcare products have been excluded from tariffs on humanitarian grounds and because they are seen as an asset to public health.
 
Western companies ‘encouraged’ to localize their value chains
 
Although Beijing is seeking to reduce its dependence on imported medical devices, it has not shut-out Western companies who are expected to continue to be significant high-tech market players in the short to medium term. This is because such international trade is crucial to facilitate China’s access to global knowhow and technology. But Beijing has amended its procurement and reimbursement policies to incentivise hospitals to purchase domestically manufactured medical devices and introduced tough conditions on companies seeking to do business in China. To qualify for inclusion in China’s new hospital procurement arrangements Western companies are obliged to localize their value chains and partner with domestic enterprises. Some companies have done so, while others have been reluctant to localize their value chains because of China’s weak record of IP protection. Beijing is aware of this and is streamlining and strengthening its IP prosecution system (see below).
 
Western importers seriously handicapped
 
Importers who choose not to localize their value chains face a number of significant non-tariff barriers. Unlike other Asian countries such as Japan, China has no national standard for tendering and bidding and there are significant differences between its 34 provincial administrations and 5 automatous regions. Further, China has a dearth of large ‘general’ distributors. Western MedTech companies importing product offerings into China are obliged to engage small-scale distributors dedicated to one sector, one imported brand and one type of product. Such distributors are ill-equipped to effectively navigate China’s vast hospital sector (see below) and its complex, rapidly changing and disaggregated procurement and reimbursement processes. A clash of sales cultures is a further disadvantage for Western MedTech companies’ whose marketing mindset is product-centric territory driven, while winning sales strategies in China and in other emerging markets are customer-centric key-account driven.
 
China’s vast hospital sector
 
One dimension of the challenges faced by Western MedTech companies who are obliged to engage small-scale distributors is the enormity of China’s hospital sector. China has about 30,000 hospitals, which have increased from about 18,700 in 2005, serving a population four and a half times that of the US across a similar land mass. By comparison, the US has some 15,500 hospitals and England 168 NHS hospitals. About 26,000 hospitals in China are public and some 4,000 are private. Although public hospitals in China provide the overwhelming majority of healthcare services, this is changing.  Recently, Beijing has loosened its regulations and private sector healthcare has witnessed an influx of private capital. Over the next decade, China’s private healthcare sector is expected to see new hospital chains, expansion of existing hospitals and improvements in a range of private healthcare services. Currently, Western participation in the Chinese private healthcare market is nascent but expected to grow over the next decade.
 
China’s hospitals provide about 5.3m beds, compared with about 890,000 in the US and 142,000 NHS beds in the UK. Chinese public hospitals, which are the biggest consumers of Western medical devices, are categorized into 3 tiers according to their size and capabilities. The largest are tier-3 hospitals of which there are about 7,000. These are 500-bed-plus national, provincial or big city hospitals, which provide comprehensive healthcare services for multiple regions as well as being centres of excellence for medical education and research. There are about 1,500 tier-2 hospitals, which are medium size city, county or district hospitals. Together teir-2 and 3 hospitals represent about 3.5m acute beds. Tier-1 hospitals are township-based and do not provide acute services. There is a range of specialist hospitals, which are also significant users of imported high-end medical devices. Further, Beijing is beginning to develop primary care facilities, which are normal in North America and Europe, but underdeveloped in China.
 
Mega private hospitals
 
Healthcare in China has traditionally been the monopoly of the central government. However, Beijing’s recent relaxation of the rules on private investment referred to above has triggered an explosion in the number of private healthcare facilities and the development of mega hospitals on a scale not seen elsewhere in the world. For example, Zhengzhou Hospital, which is nearly 700km south of Beijing and can be reached by bullet train in under 3 hours at a cost of about US$45, was officially opened in 2016 and was dubbed the “largest hospital in the universe”. Zhengzhou is a mega-city with a population of 10m and is the capital of east-central China's Henan province. The hospital has some 10,000 beds, facilities are spread across several buildings and over 28 floors and it has its own fire department and police station. In 2015, the hospital admitted some 350,000 inpatients and treated 4.8m people. In one day in February 2015 the hospital received 20,000 out-patients. 
Centralizing procurement
 
Most noticeable among the changes taking place in China’s procurement processes for domestically produced medical devices is the development of centralized e-commerce facilities, which are expected to increase efficiency and reduce spiralling hospital costs. The initiative is a partnership, announced in 2018, between IDS Medical Systems and Tencent’s digital healthcare subsidiary WeDoctor, to establish China’s first smart medical supply chain solutions and procurement company, which in the near term, is expected to dominate the Chinese market by becoming the “Amazon of healthcare”. Tencent is the world’s 6th largest social media and investment company and IDS Medical Systems is a Hong Kong based medical supply company with an extensive Asia-Pacific distribution network, which represents over 200 global medical brands in medical devices and consumables. 
 
WeDoctor, was founded in 2010 to provide online physician appointment bookings, which is an issue in China and patients often stand in-line for hours from 2 and 3 in the morning outside hospitals to get brief appointments with physicians. From this modest beginning WeDoctor has rapidly evolved into a US$5.5bn company, which employs big data, artificial intelligence and other digital tools to deliver cutting-edge healthcare solutions and support services to over 2,700 Chinese hospitals, 240,000 doctors, 15,000 pharmacies and 160m platform users; and these numbers are expected to increase significantly in the next few years.
 
Underpinning WeDoctor’s business model and differentiating it from Western endeavours such as Google’s DeepMind, is the freedom in China to collect and use patient data on a scale unparalleled in the West. WeDoctor is designed to leverage Tencent’s significant complementary strengths, innovative resources and networks in order to centralize device procurement by connecting domestic MedTech companies with China’s vast hospital network. WeDoctor’s ability to manage petabytes of patient data, its knowledge of and favoured position in China’s hospital procurement processes, its rapid and sophisticated distribution capacity and central government support, positions WeDoctor to have a significant impact on the procurement of medical devices in China and beyond in the next five years, and this is expected to provide domestic companies with a further competitive edge.
 
Localizing the value chain in China

Manufacturing in China has been an option only for larger Western MedTech companies with the necessary management knowhow, business networks and finance to bear the costs. Companies which have localized their value chains and support the MIC25 initiative include Medtronic and GE Healthcare.
 
Medtronic
Medtronic, the world’s largest MedTech company, has had a presence in China for the past 2 decades and has established local R&D facilities to design products specifically for the needs of the Chinese market and crafted partnerships with provincial governments to help educate patients about under-served therapeutic areas. In 2012 Medtronic acquired Kanghui Medical, for US$816m. In December 2017 the Chinese government approved sales of a new pacemaker, which is the product of a strategic partnership between Medtronic and Lifetech Scientific Corporation. In January 2012 Medtronic paid US$46.6m for a 19% stake in Lifetech and a further US$19.6m for a convertible loan note. The agreement called for LifeTech to develop a line of pacemakers and leads using its manufacturing plant in Shenzhen, (population 13m). Medtronic supplied “technology, training and support” and LifeTech provided local market expertise, brand recognition and growth potential within China. The alliance has made Lifetech the first Chinese domestic manufacturer with an implantable cardiac pacing system with world-class technology and features. In 2015 Medtronic entered into a partnership with the Chengdu’s (population 14.4m) municipal government in the south west of China to enable people with diabetes in Chengdu and the broader Sichuan province (population 87m) to access a new, locally produced next generation sensor augmented pump system with Medtronic’s SmartGuard technology and software displayed in the Chinese language. Medtronic’s 2017 revenues from its China operations amounted to US$1.6bn, 5% of total revenues, and US$3.4bn from other Asia-Pacific countries, 12% of total revenues.
 
GE Healthcare
GE Healthcare is the largest medical device manufacturer in China and China is a key manufacturing base for GE. GE started conducting business in China in 1906 and today has over 20,000 employees across 40 cities in the country. One third of GE's ultrasound probes, half of its MRIs and two thirds of its CT scanners, which are marketed globally are manufactured in the Chinese cities of Wuxi, Tianjin and Beijing respectively. These devices and others are now subject to a punitive US tariff levied in June 2018. “We remain concerned that these tariffs could make it harder for US manufacturers to compete in the global economy, and will shrink rather than expand US exports,” says Kelly Sousa, a GE Healthcare spokesperson.
 
Rachel Duan, president and CEO of GE China explains that, “GE China has been investing in people, processes and technologies throughout the value chain so that it can design, manufacture and service products closer to customers. This goes beyond market and sales localization, to product R&D, manufacturing and product services." GE has pinpointed localization, partnership, and digitization as the three key initiatives to drive its future development in China. In May 2017 GE opened an Advanced Manufacturing Technology Center in Tianjin, its first outside the US, and has partnered with over 30 Chinese engineering, procurement and construction (EPC) companies. "With a global footprint and depth of localized capabilities in China, we are partnering with customers and helping them win both in China and worldwide by connecting machines, software, and data analytics to unlock industrial productivity," says Duan. 

 
Changing IP environment
 
Medtronic and GE Healthcare provide object lessons of how best Western MedTech companies might leverage commercial opportunities in China. But many remain reluctant to manufacture in China because historically the country’s legal system has been weak in prosecuting IP infringements and more recently they have been further handicapped by Washington’s response to MIC25. For many years, when dealing with China, Western companies have faced a combination of IP challenges, which included litigation with low level damages, an inability to effectively enforce judgments, an inability to patent certain subject matter and a lack of transparency on legal issues. This amounts to substantial disincentives for Western companies to localize their value chain in China. However, the country’s IP environment is changing. In 2017 Beijing spent some US$29bn for the rights to use foreign technology, with the amount paid to US companies increased by 14% year-on-year. China’s IP legal system is maturing and has improved in the scope of allowable patent subject matter to enhancements of litigation options. However, Western reluctance to localize production in China is not only influenced by the country’s weak IP protection and recent trade tensions with the US, but also by ethical concerns and the perceived need for more predictable rules and institutions about environmental and regulatory issues.
 
All this, together with two decades of growth in developed nations and the continued performance of the US stock market might be enough for some MedTech companies to turn-away from China, but could such a reaction dent their futures?

 
Takeaways

This Commentary describes some of the near-term challenges facing Western MedTech companies looking to offset increasing challenges in their home markets by extending their franchises in China. We have suggested why operationalizing this strategy in the short term will be tougher than 5 years ago, especially if Western MedTech companies are reluctant to innovate and transform their strategies and business models. China presents a challenging dilemma for Western companies: either they manufacture in China and support that nation’s endeavours to become a world class manufacturing platform or they progressively get squeezed out of markets. Whatever Western companies decide, we can be sure that their near to medium term futures will be shaped by maturing developed world markets, encumbered by short termism and aging infrastructures and a rising Chinese economic power with state-of-the-art infrastructures and significantly enhanced capacities and capabilities. But how long can China sustain its rise?
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