China Aims to Smooth the Way for International Investors
BY LAUREN UZDIENSKI, JUNE 23, 2008
Last week's In3 Medical Device Industry Summit featured a talk on opportunities for device manufacturers in China, and we came away with a sense for the country's efforts to step up regulatory and legal practices to better reflect U.S. and other international standards.
Companies looking to invest in China are seeing a number of positive administrative and legal changes. In recent years, restrictions surrounding foreign companies operating in China have become more relaxed. The SFDA is becoming more transparent, and the FDA is opening their own offices there to monitor products being imported to the U.S. IP laws are being strengthened. Across the country, there is broad healthcare reform as well as general population migration. People are moving closer to cities (and thus closer to healthcare services), and some estimates suggest that half of China's population will live in urban areas by 2011.
Despite this progress, foreign companies face a number of challenges.
China has a complex distribution network, and it is difficult for a U.S. company to distribute their products on their own. Local Chinese contacts are essential.
Foreign and domestic products are priced differently, and pricing varies by region.
Despite amendments to IP law, the laws are not consistently enforced, and the country lacks the legal structure to handle the complaints. However, the panel speaking at the event noted that there are more patent disputes ongoing in China than the U.S. right now. This shows that the Chinese understand that IP is valuable and should be protected, which bodes well for a more rigorous IP enforcement policy.
From a sales and marketing perspective, it is difficult to interact with Chinese doctors. Salespeople are only allowed to meet with physicians in an educational setting and never in the hospital.
There are general business concerns with investing in China. Currently, due to all the attention on Chinese opportunities, valuations are high and exits are uncertain. As far as local staff, Chinese managers typically have engineering backgrounds and may not have business expertise. This is one of the ways the U.S. can add value, bringing liquidity experience and general business acumen to Chinese companies.
Finally, most people don't have insurance coverage. In urban areas, only about half of patients have insurance.
Despite these concerns, Chinese law is changing, becoming more transparent and favorable to Western investment. Innovation is driven by major research institutions in Beijing and Shanghai, and the country continues to represent operational cost savings and a vast, largely untapped market. Orthopedics may even be spared some of the quality concerns associated with Chinese manufacturing; the panel pointed out that quality concerns are more likely to emerge in products with razor-thin margins. Higher-margin products, such as orthopedic devices, are therefore less at risk. The key for U.S. investors looking to China for growth is finding the right opportunity in a trendy, competitive market. As it was described by the panel, there are a lot of good companies in China; you just have to find them.
