Originally Published IVD Technology September 2003

IN PERSON

Ripe for the picking

IVD manufacturers have the opportunity to enter the Chinese market on the ground floor.

Wing S. Pang is vice president of platform development in the Diagnostics Division of Beckman Coulter Inc. (Brea, CA). He can be contacted at wspang@beckman.com.

A nascent market that is wildly promising, and growing quickly, is a rare find these days. Yet, in China, many manufacturers have been able to take advantage of such an uncommon opportunity. Although the steep cost of market entry, great differences in business style, and embryonic stage of both the market and IVD regulatory system can all pose quite a challenge to foreign companies, when approached with caution and forethought, the Chinese IVD market can offer a bountiful return on an early investment.

To gain insight on the keys to success for IVD companies that want to bring their business to China, IVD Technology editor Richard Park spoke with Wing S. Pang, vice president of platform development in the Diagnostics Division of Beckman Coulter Inc. (Brea, CA). In this interview, Pang discusses the business practices that are unique to the Chinese market and how to avoid pitfalls when bringing IVDs to China.

IVD Technology: How does the market for IVDs in China differ from the market elsewhere?

Wing Pang: This question requires a complex answer. In 2001, there were close to 16,000 hospitals in China, with an average of 250 beds each. In China, there are many different types of hospitals, and quite a few are highly specialized. For example, one may be strictly focused on infectious disease, and another dedicated to oncology. In addition, they are run by different entities including the public health department, the military, private companies, or, and this is unique to communist governments, they are owned by the community.

The hospitals are generally inspected, rated, and certified by the government health agencies. The agencies offer triple-A, double-A, and A ratings, though some smaller hospitals will not have been rated at all. The sophistication of the hospitals varies according to their location. In the big cities, about 10–20% of hospitals will have triple-A ratings, whereas in some rural areas, most of the hospitals have not been rated, because the rating process has not been implemented nationwide yet. As a result, there is a huge spectrum in terms of the level of sophistication, specialty, and the services that are available in the hospitals.

In very wealthy provinces, in the coastline area, or the inland cities where the services are more technologically advanced, hospitals buy the same equipment we would sell to any other hospital in the United States. However, in China, only the top 15–20% of the hospitals can afford to buy it and have the infrastructure to use it. However, this number of hospitals is growing at a rate of 20–25% a year.

Apart from the use of IVDs in a hospital setting, are IVDs used in separate laboratories, doctor’s offices, or in homes?

There are very few private laboratories in China. In the United States, we have huge reference labs that physicians send samples to. In China this laboratory system doesn’t exist. Testing takes place in the hospitals. In the larger cities in China, some of the hospitals are so large that they may have 2000 beds and 5000 outpatients. The hospitals there are more centralized.

The more advanced cities like Shanghai and Beijing are forming a healthcare network that will have multiple hospitals. At the moment they have maybe five hospitals that are linked together. They may have some major hospitals in the center of the city and then several smaller hospitals in smaller surrounding cities that are associated with the larger hospitals, but there’s no central laboratory. As far as the doctor’s office, there they do standard simple testing such as pregnancy testing, but nothing automated at all.

You estimated that the IVD market in China is growing at rate of 20 to 25%, which is just phenomenal. What is the source of that growing demand?

The more advanced cities that can afford sophisticated technology want better and newer equipment. As the average income increases in China, the citizens expect better medical care. When they have the money to purchase good care, and then they pay for it, then the hospital has money to buy more equipment. It’s a domino effect.

The laboratory functions as a profit center for the hospital, and its fees are not fully regulated. In some major cities, standard fees have been set, but the standardization is not widespread. Hospitals are able to charge what they deem to be a reasonable amount of money for their testing, and most of the hospitals generate revenue from their laboratories. This profit funds new equipment. Thus, as more and more people are able to afford testing, the demand for new technology and the industry overall rapidly expand.

How would you describe the state of diagnostic technology in China?

If a hospital imports its equipment, it will surpass the technology produced domestically. The vast majority of advanced instrumentation has been imported from the well-established diagnostic companies outside of China. For example, Beckman Coulter sells the same equipment to China that it sells to the rest of the world. Yet, when they use home-brew reagents in China, the test will not be as advanced as it should be. As far as getting state-of-the-art equipment, a triple-A hospital in China will be equipped with what you see in a U.S. hospital, but there are very few hospitals that have this sort of instrumentation.

Industry Focus

How would you characterize the domestic IVD industry in China?

In China, the IVD companies are primarily reagent companies, and a few of them are quite good. Most of them are lacking in their quality control (QC) processes.

For example, in the United States, the lot-to-lot differences are very slight and there are tight regulatory requirements for reagents. In China, they don’t have a set of prescribed rules for QC processes and they don’t have a regulated manufacturing process. When selecting antibodies in China, there is a great variation in performance from one batch to another.

The few companies that are reasonably good are primarily interested in general chemistry.

In the field of instrumentation, I have not seen any meaningful automated instrument companies in China, even today. It’s just because the expertise required from the fields of engineering, software, and chemistry combination is not available. In addition, many necessary hardware components are not readily available. The components that are available are often not good quality.

People are not investing money into this field yet because there are so many other opportunities in China to invest in. But there are people talking about it, trying to form joint ventures with foreign companies, and trying to import their technologies.

Do these reagent companies make their products for the domestic market or for export?

Most Chinese companies manufacture reagents for domestic consumption. When reagents are manufactured for export, then QC becomes an important issue and most companies are not ready to maintain a strong QC system. A few companies in China send their products throughout the nation, but mostly they are sold locally.

Do Chinese hospitals import reagents?

They often do. Many foreign companies that serve the Chinese market sell a total-solution product, as ours does. The product sells because we guarantee the quality.

We can’t compete on pricing. In China, they can sell reagents at one-fifth the cost. When offering reagents as part of a product, however, we can supply quality up to their highest specifications. That is our strength and our competitive advantage.

In China, the Minister of Health is trying to set a required level of quality that somewhat mimics the standards set in the U.S. Clinical Laboratory Improvement Amendment. The government is trying to make sure the hospitals are in compliance and raise the quality step-by-step.

Regulation and Quality Control

Are the Chinese companies looking for ways to improve their QC processes and eventually export their products?

In terms of improving their QC process, yes. More than simply an internal company initiative, the government and the Minister of Health have begun to put pressure on the clinical laboratories. The government is working to convince hospital personnel and suppliers of the importance of a QC process.

They have begun to point to other countries that rely upon governmental standards and an approval process, and have told the consumers in China that these are the standards they should hold the Chinese companies to. The use of regulations elsewhere will eventually drive manufacturers in China toward a process that will call for greater QC.

Is governmental pressure causing IVD companies to implement greater QC?

Yes, the companies are starting to add more QC elements into the manufacturing processes. They’re also under pressure to become compliant to ISO 9000, receive the CE mark, and follow other international trends. When a product receives the CE mark, it means that the company has met the world standard. There is definite movement in this direction among manufacturers. Within China, many consumers have begun to screen out companies that haven’t become compliant with these international standards.

In addition, the Minister of Health is trying to raise the level of quality in the clinical laboratories by conducting surveys in the big cities, similar to the surveys sent by the College of Pathologists in the United States. Through this survey, they are able to assess the quality of the results coming from the various laboratories. They’re not quite up to setting firm regulatory requirements yet, but the government and major hospitals are very willing and eager to participate.

Breaking into the Market

How have U.S. and European IVD companies been faring in their business activities in China?

All the major players are there. The smaller companies have a more difficult time broaching the market because of the cost of infrastructure. Companies that have been able to establish themselves have been very successful over the last two years.

Last year, when I spoke at the annual conference for the American Association for Clinical Chemistry (Washington, DC), many smaller companies expressed their interest in getting into the IVD market in China. However, before entering the market there are many factors to consider.
The entrance cost is fairly high. Because China is a huge country, companies really need to know how the economy functions. For example, it is not difficult to do business in China, it is not difficult to sell things, but it’s very difficult to make money. It’s very difficult to collect money if you don’t have an infrastructure set up.

The key for smaller companies is to find a good partner in China. In China, you must work through a third party and cannot sell directly to the consumer.

Our company has been in China for over 25 years, so we have a solid infrastructure and established third-party vendors, or foreign trade companies. We have no problem doing business, but for a new company the entrance costs are pretty high.

What are the keys to success for IVD companies when doing business in China?

First of all, the company must go through the Minister of Health, Department of Medical Devices, and also the National Center of Clinical Laboratory to get its product approved.

Companies will want to start selling to a few provinces first, rather than covering all of China at one time because they will stretch their supply chain too thin.

As I mentioned, companies cannot sell directly in China, and must work through a third party, unless they have a registered place of business in China and are manufacturing their products in China. All products that are made outside of China must be sold through a third party that has a registered place of business in China. To accomplish this, the foreign company should establish a representative office.

It’s easier to sell reagents than instruments in China because companies don’t have to worry about supplying spare parts. If a company is selling an instrument, it will have to have a spare parts warehouse, and it will have to establish a relationship with a local dealer.

Several points must be considered when selecting a dealer. Will the company work through one dealer exclusively? Will it use a national dealer or a local dealer? These are difficult decisions to make before a company has had any experience in China, which is why it’s easier from a learning-curve standpoint for a company to go into partnership for a couple of years with another company that is already established in China.

This will give them the opportunity to really study the market, and learn how business is done in China. In the United States, when companies have a new product, they just begin to sell it, but in China they must go through each province individually. They each do business a little bit differently. A company that is new to China needs to understand that.

A new company can’t just go in blind-sided. It will not work. In the inland provinces in particular, companies will need to work through local guys because they speak different dialects. Also, in business transactions in China, a lot of things are settled on a handshake, and a lot of deals are made based on reputation and relationships, more so than in the United States or in Europe. For instance, a new company may offer a product that is lower in cost, but in China, the customer may buy a higher-cost product from another company if the customer knows the people representing the company, knows the dealer well, and has had a relationship in the past.

In addition to obtaining a reputable dealer, providing postsale support is a great challenge. Companies will have to both provide service and spare parts and train the service people. Again, there is a very high cost involved, particularly for smaller companies.

If a small IVD company has a simple assay that it would like to sell and distribute in China, how much money would it have to invest to get started?

The first thing to consider is what type of assay the company would be selling. If it is a “me too” assay that is priced similarly and performs similarly to an assay that is already on the market, it would be very, very difficult to get started at all.

If the company has a unique assay, its cost for entrance may be not that much because the key is to identify a partner from the local Chinese pharmaceutical companies. If the foreign company has a unique assay and a Chinese pharmaceutical company is interested in selling it, the entry cost is minimal because they will do all of the work, and you will only have to sell them the product.

If the product is unique and there is a need for it, then the best bet for a smaller company is to go to a reputable dealer in one of the big cities on the coastline. The cost will not be that much, probably in the range of six figures.

Instrumentation will cost a bit more because the company will have to provide demo units, and most customers will buy equipment on credit. The company must consider whether it is willing to work with the credit system because in China it’s not difficult to do business, it’s difficult to collect money.

All of the major companies conduct business by using a letter of credit (LC). We make sure all deals are made in U.S. dollars. Our customer will go to the bank and obtain a $50,000 or even $200,000 LC. Once we receive this LC, then we ship goods. If you’re not willing to work that way, you expose yourself to a huge accounts receivable issue.

What recommendations can you make for smaller companies that are considering getting involved in the Chinese market?

Smaller companies should start with a modest plant. If you start right in with a huge plant, you’ll get your nose bloody very fast. They should hire some Chinese staff that can understand the business and how it works in China. The company should spend half a year observing how things are working before sinking a lot of money into it. That step is critical because a lot of companies just go open their offices, and hire all these people, and then finally they can sell, but they cannot collect money.

Basically, they have not taken the time necessary to understand the business practice. The business is always there, and the market is there. The challenge is understanding the market, understanding the culture, and understanding how business is conducted. Once a company becomes familiar with these differences and finds the right employees and the right partner, then it has a good start. The market is there and it’s rapidly expanding.

Overcoming Obstacles

It seems like a challenge to find a reputable partner.

Yes. But companies can begin by going to a consulting company inside China, or even to a government agency, and they will be referred to a partner company that is reputable.

You’ve spoken of how difficult it is to collect money in China. What recommendations can you offer in this regard?

If you sell to a smaller company in China that does only a few hundred-thousand dollars in business per year, then you should start to worry. But if you go to a national company, and they do multimillion dollar business, then your risk of collecting money is much lower. That’s why, for a smaller company entering China, entering into a partnership is the most crucial step. Established partners will have a sense of which companies are reputable.
If a hospital or a smaller company fails, or even a small dealer fails, they often just pack up and go. They disappear. You will not be able to find them and collect. Even if you can find them and sue them, it won’t do you any good because you cannot enforce the judgment.

If you enter a partnership with a reputable company that has been doing business for 20 years or that is a multi-million dollar company, then the risk of not being able to collect is much lower.

The key is not to take another company’s word regarding its success rate and growth rate. Companies should ask for bank statements, income statements, and tax returns to demonstrate that the partner is a legitimate business and is making a profit. You have to evaluate the risk involved because if the partner company disappears, you have little chance of tracking it down.

Is an LC easily enforceable?

Usually when you have an LC from a reputable bank, and from the dealer, there will be minimal problems collecting money.

China is notorious for piracy. If an IVD company starts doing business in China, how serious is the risk that its products will be pirated?

This is another reason why I said that if a company goes to China with a “me too” product, it will have an uphill battle. If its product requires specialized technology, there is very little risk of piracy. We never worry about people copying Beckman’s instruments, because they cannot get the parts. General reagents are more risky. Thus, the more advanced the technology, the lower the risk.

In China, they don’t even have the equipment to copy advanced products. They would have to invest millions to copy sophisticated automated instruments.

For immunochemistry, specific antibodies are very difficult to copy, and companies manufacturing these products will never have problems with piracy.

China is also known for its cheap labor. Does the reduced cost of labor offer opportunities for IVD companies?

For IVD companies, cheap labor is not a big part of the equation. There is a high cost involved in training the workers. Companies invest a lot of money to train them. They come, learn for a couple of years, learn how to work for a foreign company, and then they jump ship and get a much better offer either in the same industry or outside the industry. That’s much more of a headache for us than if we started out with trained personnel that were committed to staying with the company for a while, even if they cost a bit more.

The Next Step

Does China provide a good entryway to business opportunities in other parts of Asia?

The answer is both yes and no. For example, our business with China is growing faster than anywhere else, and it is going to be the fastest-growing market in Asia in years to come. But if you do business in China and you do business in Japan, there will be almost no relationship. You will be working with a totally different culture and different way of doing business.

When you go from China to Southeast Asian countries such as Thailand and Singapore, again, the culture is totally different. However if a company forms a separate branch for, say, Asia Pacific, then it can leverage that infrastructure for all of Asia Pacific.

For operational concerns like storage and shipping throughout Asia, it can be advantageous to have some infrastructure in China, but the business tactics are different in every country. Hong Kong and Singapore are very similar. Taiwan is a little bit different, but they’re all quite different from China.

When considering all of the challenges, costs, risks, and cultural barriers to doing business in China, what are the unique advantages to doing business in China?

It’s the only market in the world that is growing at a double-digit rate. Other markets, including Japan, Asia, the United States, and Europe, are larger but they are mature and are growing at rates of around 2%. China is growing at 20%, and we can’t yet see when it’s going to stop.
The opportunity will continue into the future as well. I have many contacts with government officials in China, and they are working as fast and as hard as they can to raise the standard of the industry for the well-being of the people. The whole IVD industry has a very bright future in China that should last for at least the next 5 to 10 years.

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