Comparing and Assessing the Medical Devices Industry in India and China

July 5, 2016

Medical devices are a dynamic segment of both the Indian and Chinese economies. With the growth rate of the industry in both countries now surpassing the global average, each market has been experiencing an uptick in interest from foreign investors in recent years. However, the way in which medical devices investment is structured in India and China differs significantly, with vastly different regulatory frameworks and market entry vehicles for foreign companies to navigate. Understanding how each functions is therefore essential prior to making the decision of where to invest.

Overview of India’s medical devices industry: a massive growth market

A recent report by Deloitte forecast that India’s domestic medical devices industry would grow organically by 15 percent a year. This is significantly higher than the global average of just 4-6 percent per year. If these estimates prove correct, India will have a medical devices industry worth US$ 8.6 billion by 2020.

The Indian government has recognized the latent potential of the country’s medical devices market and has accordingly attempted to boost the industry’s development through various plans. The most relevant among these is the amendment to the foreign direct investment (FDI) rules for medical devices. In 2015, the central government passed a law to permit 100 percent FDI in the industry through the automatic route, removing the need for companies to seek government approval prior to making their investment. This drove a substantial increase in FDI into the industry, with shares in Indian medical device manufacturers such as Opto Circuits (India) Ltd and Siemens India rising by 16 and 2.2 percent, respectively.

Favorable market conditions and government policies have made the Indian medical devices industry highly competitive. The past two years has seen a number of medical device startups mushrooming across the country. For instance, Remedio, an eye-care technology startup, has launched two products and installed machines in around 300 hospitals and health centers in the past two years. Similar startups have helped diversify India’s medical devices market, while several established companies, such as Hindustan Syringes & Medical Devices, Opto Circuits (India), Wipro GE Healthcare, have continued to expand.

Overview of China’s medical devices industry: somewhat opaque but hugely profitable

China is currently the world’s second largest medical devices market. A report commissioned by the China Association of Medical Device Industry (CAMDI) states that the industry is expected to grow at a rate of seven percent per year until 2019, again higher than the global growth rate of the industry. Despite China’s recent economic slowdown, the country’s medical devices market is expected to be worth US$ 50 billion by 2017, underlining the industry’s huge potential.

The Chinese policy framework related to medical devices is slightly more complex than that of India.  Unlike India, China does not classify how foreign investment is structured in medical devices as an entire industry. Rather, it separates the industry into individual categories, which can be classified as being encouraged (foreign companies can form wholly foreign owned enterprises), restricted (a Chinese partner is required), or prohibited. As of 2015, the vast majority of categories relating to medical devices are classified as encouraged, but this is subject to change.

China’s medical devices industry also has an opaque registration process and classification system that differs significantly from other countries. For example, a medical device considered Class II in the U.S. or Class II-a/II-b in the EU may be considered Class III in China, meaning its registration process will be longer and more costly. However, there are targets contained in China’s 13th Five Year Plan (FYP 2016-2020) that, if realized, will assist the development of the medical devices industry. Programs such as “Healthy China” aim to prioritize healthcare innovation, which will likely have a knock-on effect on the classification of medical devices.

 

The medical devices industry in China is distinctly divided into two parts: domestic manufacturers that supply low- to mid-range products, and international medical device giants such as GE, Philips, and Siemens that supply higher-end products. Both have done well in the market in recent years. They maintain their performance mostly through market consolidation strategies – as of 2014, there were 17,800 domestic medical device manufacturers and 180,000 distributing companies. Interestingly, non-traditional players have recently been looking to enter the industry. Alibaba, for instance, is looking at an online-to-offline (O2O) platform for an e-pharmacy. Such developments are expected to catalyze the development of the industry.

 

India Outlook: Economic growth and favorable investment policies will continue to spur growth

India’s medical devices industry is projected to grow exponentially in the next five years. Several factors will contribute to this growth. The country has both a growing middle class and, importantly, a growing working population. India’s appetite for high-class medical goods and services is expected to grow in conjunction with these increases, and is seen as a key demand driver that will contribute significantly to the industry’s growth.

The demand for medical services in India has also spurred the creation of several new hospitals and medical centers. Such centers often sell their services at extremely high profit margins, which in turn has incentivized more players to enter the market. In addition, the large profit margins in the Indian medical sector and the liberal FDI policies attached to it are driving up the quality of medical services.

China Outlook: Preference for foreign brands continues to drive high profit margins, but local competition is rising

According to the China Medical Pharmaceutical Material Association, imported medical devices tend to sell in China at prices 50-100 percent higher than in the countries where they are produced, making China an attractive market for foreign producers of medical devices. Foreign manufacturers also benefit from a general perception among Chinese consumers that foreign products are of better quality and worth paying a premium for. Additionally, imported devices typically enjoy higher brand recognition, with even public hospitals often deciding to purchase them despite the higher costs.

 

This trend led the China National Health and Family Planning Commission to announce the launch of a policy favoring local producers of medical devices as a means of bringing down rising health care costs. The policy includes a list of locally produced medical devices that are specifically recommended by the

Commission and are to be given preferential treatment by public hospitals.

 

The new policy is especially focused on getting the larger “Tier-3” hospitals to strengthen their procurement of locally produced products. Notably, these larger hospitals also frequently handle purchasing for smaller hospitals. In this light, the latest trends in Chinese state policy for the medical devices industry may dissuade foreign investors from a purely distribution-based approach to the Chinese market.

 

Observations

Eric Skuse, Research Manager at Emerging Strategy, comments: “The medical devices industry in both India and China has strong growth potential. However, while each can be characterized by strong domestic demand and dynamic growth potential, foreign companies need to recognize that the investment landscape of the industry in both countries is nuanced. Companies that want to access either market will need to address the various regulatory and market differences that exist. Equipped with a comprehensive due diligence report and an understanding of the idiosyncratic nature of each market, foreign players will be able to make informed decisions that will ensure a faster return on their investment.”

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