How to successfully develop the Chinese medical device market
A practical guide on finding and managing distribution partners in China to help you achieve your sales targets.
The Chinese healthcare market and its opportunities at a glance
As the 2nd largest global economy and with a huge and aging 1.4 billion population, of which 95% is covered by one of the Basic Medical Insurance (BMI) programs, China is very attractive to and offers good opportunities for medical device manufacturers. Healthcare expenditures as a % to GDP have increased considerably over the last 15 years to over 5% in 2019 which is relatively high to e.g. India but still gives room for double digit growth if compared to e.g. Japan and South-Korea. If we look at the healthcare spending per capita it more than doubled between 2010 and 2020.
Both US and EU medical devices are very well accepted and comprise a significant portion of the high-end, high-risk market (whereby roughly three quarters of China’s total medical devices market consists of imports) since Chinese customers have a high demand for quality products. Hence, they look for foreign brands and distributors importing products from abroad. In general, Chinese customers value foreign brands more than their own when it comes to quality, which offers opportunities for foreign manufacturers and their China distributors to become successful.
Cultural characteristics influencing business relations: the importance of guanxi
Many SMEs feel that the market is very challenging and difficult to develop though. In a way it’s quite sophisticated and very different than many western markets and it requires careful navigation and perseverance. It’s key that you start understanding the local market and its players and, even more important, build trust and a long-term personal relationship with your partners. Without that relationship, it’s very difficult to have success on the long term.
Guanxi is the relationship that people in China form in order to get things done. It’s not just about who you know, but also about the favors and obligations that people owe each other. In a society where there is great emphasis on hierarchy and status, guanxi, personal trust, is incredibly important for moving ahead, especially in the business environment.
The key to having successful guanxi is to first be able to identify who the right people, decision makers are for your business, and then to develop a relationship of trust with them. This can take time, but once it’s established, the possibilities for what can be accomplished are endless. So, if you want to find a good China distributor for years, you need to form proper guanxi with them, so that mutual trust is achieved. And at the end it’s all about effective communication (like in any other market)!
Route map: market entry strategy, distributor search and distributor management
Foreign market development is both challenging and comprehensive as many things are correlated. Besides the regulatory requirements, it does include gaining market intelligence and creating a go-to-market strategy. Next to that, it includes the search for the right China medical device distributor and effective distributor management. So, a distributor search is just one part of market development; distributors need to be managed and guided based on your and their understanding of the Chinese market.
Building a market entry strategy on local market intelligence
A successful market entry strategy should at least look at the following aspects:
Product offering: which products offer good opportunity in the market given the existing competition, procedures, and price levels?
Regional strategy: China is so large, but where to start? Our advice is to grow from regional to national coverage. For example, start in Shanghai to radiate into other eastern regions like Jiangsu, Zhejiang and Anhui;
Pricing strategy: create a list price or just a bottom price (whereby the distributor can sell at whatever price they want);
Channel strategy: is direct sales an option or better to approach the market through (sub-) dealers? If working with dealers, what is the preferred channel strategy to cover most of China and to conform to local policy such as the “Two-Invoice System”? Do you give exclusivity to a single distributor, or do you work with several distributors to cover the market? (the Two-Invoice System is the trend towards a market dominated by larger, medium sized distributors, whereby the manufacturer sells to the customer directly through the distributor, eliminating the use of additional sub-distribution layers which will increase market efficiency and reduce customer pricing);
Organization and support: how are you internally going to support the Chinese operations? And how do you plan to overcome language barriers (if any)?
Without addressing the above aspects, it will be difficult to find, manage and guide local distributors to successfully develop the Chinese market. Our local consultants can help you define (based on market intelligence) and present the appropriate sales concept and support in negotiating business terms with partners more effectively in order to keep things moving smoothly.
Finding qualified Chinese distributors
Finding qualified China medical equipment distributors is a challenge. Understanding the product and service offering from just looking at the distributor website is difficult. Assessing the network capabilities and resources of the distributor is a daunting task given existing cultural and language barriers. Going to tradeshows like CMEF is a costly exercise, including international traveling and accommodation, exhibition fees and possible COVID restrictions. Not to mention literally thousands of exhibitors and many distributors visiting (all promising to do the job better than anyone else…). How to find the right one?
We combine desk research, our knowledge of the market and our existing network to start the search and list potential partners. Thorough communication and close cooperation with the manufacturer is key. This requires a focal point at the manufacturer side to communicate with the local market, including distributors and consultants, as well as to coordinate among different departments internally. This to deliver the right message and quick response, including the creation of the right distributor profile. This is what we call a partnership approach, whereby we make optimal use of mutual resources.
Please note that before approaching distributors, good preparation is important:
Business terms: to win trust from your partner, it is important to set reasonable targets for annual growth, be transparent on pricing, give clarity on support given by the manufacturer and clearly define mutual expectations;
One assumption usually made by many manufacturers is that the sales concept and business terms, that work in the US, Europe or other regions, may apply to China as well. This is not necessarily true and need to be adapted if necessary.
Having identified potential distributors doesn’t mean they are also qualified. Intensive communication is required to better understand their local market qualifications. What additional products do they carry, have they got the marketing capabilities to grow your brand, what is their distribution coverage, and can they support you from a regulatory and quality perspective are all vital questions that need to be answered.
Assure you have full understanding of the market situation and have done a thorough due diligence before you make the selection for a partner and engage in contract negotiations. Once a partnership has been established, it is advised to further work out the local go-to-market strategy together. This strategy would be more reliable and better adapted to the specific local market situation if input is given by key staff of the local distributor. Local distributors will be more committed to carry out the China strategy if they are involved in formulating it from the very beginning, and it is also a good opportunity to build trust and establish a relationship with them. Next to that, it is also a good and natural process to further evaluate the distributor’s capabilities and commitment.
Finding the right China distributor (-s) is the key to success in the Chinese market. When assessing potential partners, be sure to check the following aspects carefully: their level of experience and expertise in your industry, their existing distribution channels and reach within China, their resources and financial stability to grow the market and finally, whether you both share the same values. With proper due diligence, you can find a qualified China distributor that will help your business grow and thrive in this complex but lucrative market.
Our service provides a structured and cost-efficient approach to finding and qualifying professional and reputable distributors. Our consultants can help you make the distributor selection, support in the due diligence, present the appropriate sales strategies to local distributors and negotiate business terms with them more effectively. Any distributor search or project we do combines the market intelligence of the principal and our network and knowledge of the local market. Working together in a partnership and sharing available resources gives the best outcome at the end.
China distributor management
After identifying and selecting a China medical device distributor (or distributors), managing the local partner is the next challenge. Make sure you continue to invest and stay engaged in the relationship with the Chinese partner. Create a win-win working relationship where there is a real incentive for the distributor to deliver on targets set (e.g. new product launches, distribution coverage, launching marketing plans).
Some learnings from managing distributors in China:
Set clear goals, agreed by both parties. At the same time, don't feel bad about replacing a distributor with subpar performance. Outline clear goals on an annual basis; if not reached without good reason, don’t hesitate to replace the distributor when there are better options at hand;
Clearly divide the territories between the distributors. Don't let them sell in each other’s territory. If you do, it could be the downfall of your business. Cross-border sales must be avoided;
Establish proper reporting systems. And have the distributor share relevant market data based on which decisions can be made;
Have regular contact to get informed on market developments and educate and train on products (functionality and features, competitive offering) and branding. This will add to a transparent relationship and improve mutual understanding;
China is large but information travels fast. If you sell to one distributor with a cheaper price everyone in the industry will know about it and will demand the same price. So, a list price and performance discounts should be in place;
China is huge and no one can promise you access to the entire country. Start from small and give exclusivity only by province, at most by region, not the whole of China
Given existing differences in culture, language and business ethics, it doesn’t mean the distributor will do exactly what has been discussed and what the manufacturer asks them to do. Many reasons will be given and it’s sometimes difficult for a manufacturer to tell whether these are true or just an excuse.
Large multinational companies can establish a local office with local employees to manage the above. SMEs don’t want to invest huge resources, but they do need local support especially in the early stages. Our local consultants can help you to better manage your Chinese business in a cost-efficient way. We present you a clear picture and road map how to navigate through the very specific and sophisticated Chinese market without having to invest in local resources. And we support you in assessing a distributor’s performance, communicating with your partners to assure their continued performance, managing mutual expectations and helping you make the right decisions.
As mentioned before, foreign market development is both challenging and comprehensive. It is a companywide effort from a manufacturer, with local consultants helping to effectively communicate with local distributors, supporting the manufacturer to make right decisions.