Chinese equipment market is a rapid growing market with extreme potentials. Now China has 5% world market share in medical equipment compared to 30% in mobile phone. Medical equipment is only 1/10 of entire medical market in China compared to ½ in developed countries. And, Chinese GDP is growing at a speed of 10%+ per year..

This is really a dream land. Every medical equipment company could not wait a second to dive in it. But it’s proved thousands of times that simply copy and paste western marketing strategy onto Chinese medical equipment market will inevitably fail.

Why? Because the locks of Chinese market have a different structure, and specific keys are needed.

 

State-owned hospitals occupy >90% of China medical market. The reason is simple: before 1978, all hospitals in China are state-owned. These hospitals accumulated brand, human resource, technique advantages within more than 30 years of monopoly. Though private hospitals are permitted after economical reform, people still prefer state-owned hospitals.

            This feature leads to all the following features and keys to medical equipment business in China.

 

In state-owned hospitals, CEO is the key responsible person. So they are also the key decision-maker of the decision-making team in medical equipment purchase, instead of the expert who use the equipment as key person in western hospitals.

 

Because most of the medical expenses are reimbursed by government medical insurance, China government keeps strongly control equipment purchase and charge level.

For purchase of medical equipments valued more than 1 million RMB, hospitals must get a purchase license . Because licenses are much less than purchase demand, so it really constrains the market need.

Charge of clinical use determines the payback time of a equipment, so the charge level directly influences the market price and market size of medical equipments.

Another important point is the reimbursement list of medical insurance. If a treatment/exam is not in the list, the demand will sharply drop.

 

 

 

Because there is a relationship, so rent-seeking is much safer compared to without relationship. And ,because relationship long-term exists , and there will be business again and again, so the pay back of rent doesn't need to be fully and immediately after a business, it’s also long-term, and not only in a monetary way.

More important ,”everybody should get benefit” is “communistic”, it’s totally different from western way of rent-seeking. The privilege for rent-seeking comes from the position, and the man who sits on the position is supported by many other people, or to say by his strong “Guanxi” network. Then he is in duty of sharing his benefit got from this position with his “Guanxi” network. So, behind “Guanxi”, there’s a benefit(or rent)-sharing network which is wide-spread.

So, “Guanxi” is a Chinese commercial culture, don’t doubt it, the only possibility is you lower estimate it.

Because CEO of state-owned hospitals doesn't have any share of the hospital, nor get any incentive from hospital’s profit, so he’s not restrained from rent-seeking. Though Chinese law is against rent-seeking ,but because rent-seeking is usually not immediate and not monetary, so most of the instances rent-seeking in purchasing is safe, and should say it’s “default” in medical equipment business in state-owned hospitals. CEO will buy from a person with “Guanxi”, and get some benefit not only for himself, but also to share with his “Guanxi” network.

A hospital buys thousands of equipments per year. So a CEO doesn't have enough time to control every purchase, he has to make some authorization. The decision-making power usually goes to vice CEOs, equipment director or directors of demand department. This authorization is also a  “Guanxi”, and need pay back on the long run.

When the power of decision-making goes to another person, the game-rule keeps the same--he will buy from a person with “Guanxi” and get some benefit.

 

Choice1, he build up a “Guanxi” start from scratch, that need a lot of time and  money, and finally , the company still need to pay the kickback to win the business. Compared to distribution sales model, the cost of building up a “Guanxi” is much higher than renting a “Guanxi”.

Choice2, he finds somebody who has “Guanxi” with the hospital, and deal with him. Compared to distribution sales model, the company pays more sales salary and sales expenses.

 

 

            This looks similar to western market, but actually they are difference. In western market, dealer can get maximal profit by high volume through a relatively low margin. But in China, the volume a dealer can sell is limited, he will only pursue for highest margin.        

            “Face” in quotation marks refers to a specific meaning: one try to look good in front of others in every aspect. This is not a special phenomenon in China, but a common human psychological need.

            When buying a product, a customer not only cares about the function and price-performance ratio, but also the “level” of product. For example, people prefer to buy a low-performance “BMW” rather than a high performance “TOYOTA”, that’s the need from “face”.

            As a business entity in the market, a hospital must improve its “face” in front of the patients. A hospital’s “face” includes good environment, experienced doctors, and advanced equipments. In China, advanced equipments not only attracts more patients, but also creates more income. So, every hospital tries it’s best  to buy equipments of “high level”.

In China medical equipment market, high level means high price, and high customer preference. This is a square gain.

As mentioned in 0.2, hospital CEO is the decision-maker for equipment purchase, he’s not an expert in the field, so in China, there’s no reasoning like “because our product is really good, so the customer will accept it as high level”. We have to do a lot of work before the market accepts our product as high-level.

European companies often make mistake on this, they just copy there global product selling points to China, and invest very small money on product marketing. While American companies are much smarter, they follow the opinions from local China team, set China-specific selling points, make localized strategies, invest a lot of money on product marketing. As a result,  American companies position there products to a higher level than European products of the same quality, thus their products have much higher dealer margin which is the Key A, then they achieved high market share together with high profit.

 

If the end-user price drops, then either we keep dealer price stable and lose market share, or we drop dealer price accordingly, and lose profit, both means we lose a lot. And in addition, low price means low level, we’ll lose more customers and face more fierce price pressure.