China healthcare tech insight: trends, risks, and opportunitiesChina healthcare tech insight: trends, risks, and opportunities

A closer look at the top 10 Chinese medtech companies shows a strong compound annual growth rate (CAGR) of 28 per cent between 2019 and 2021— far above their international counterparts.

Medtech is also creating a wave in the Chinese stock market. In 2021, the number of Chinese medtech initial public offerings (IPOs) broke the record. This momentum has continued into 2022— on August 22, 2022, United Imaging, a Shanghai-based medical imaging device vendor only in its 12th year, raised $1.6bn on the day of its stock market debut, ranking top five in global IPOs in August 2022.

The growth of Chinese Medtech is conspicuous.

Factors driving the fast growth of Chinese medtech

There are several factors driving the fast growth of Chinese medical device companies, including strong domestic demand, technology proliferation, and government support, as well as the boost generated by the COVID-19 pandemic.

Strong demand for medical devices in the domestic market

Chinese medical device companies rise against the backdrop of the country’s fast-growing medical device market. Between 2016 and 2020, China’s medical device market, globally the second largest, growing at a CAGR of 13.6 per cent. According to Omdia’s projection, the growth momentum is expected to continue into 2025 at a CAGR of more than 10 per cent. The demand for medical devices is strongly driven by the ageing population and increasing medical expenditure.

Sped-up learning curve via technology proliferation

The Chinese market’s high potential attracts international medtech companies to invest in China, including building production facilities, R&D centers, and sales organizations. The technology has proliferated through the localized practice of international medtech companies. For example, to better access and serve the local market, Philips Healthcare established a joint venture with its Chinese partner, Neusoft, in 2004 to produce and develop medical imaging devices; the 10-year joint venture helped Neusoft grow as a key medical vendor. For over a decade, Neusoft was the top Chinese vendor for CT equipment before it was overtaken by United Imaging in 2018.

The “made-in-China” condition, which is required for participation in government procurements, fosters the localisation strategy of international medtech companies, further propelling the proliferation of technology among local companies through the flow of talent. It is very common to see senior executives in the Chinese medtech industry with previous working backgrounds from international medtech companies.

Support to Chinese medtech from the Chinese government

China’s 14th Five-Year Plan (for the period of 2021–25) set a goal of having at least six Chinese companies in the top 50 global medical device companies. To achieve this, the government has supported Chinese medical device companies in various forms, including leading and funding innovation projects, favourable taxation, streamlined administrative procedures, and subsidies to Chinese companies.

The Chinese government spends a massive amount of money on subsidies to favored companies whose industries or technologies are deemed strategically important. The amount of subsidies is sometimes substantial to a company—for example, Neusoft’s government subsidy accounts for 50 per cent of its profit in 2021. The subsidies reduce the costs of the recipient companies, creating a competitive advantage in both domestic and international markets.

COVID-19 boosted the growth of Chinese medtech companies

Soaring demand from overseas markets for COVID-19-related medical devices—such as ventilators, respiratory care devices, and life monitoring devices—gave a boost to Chinese vendors. For example, Yuwell and Mindray reported 45 per cent and 27 per cent revenue growth, respectively, in 2020. The growth was largely contributed by COVID-19-related demand from overseas markets.

In China, CT scanning is the gold standard for COVID-19 diagnosis. The demand for CT equipment for COVID-19 management focuses on the low-end segment. Hence, Chinese CT vendors benefited more from the soaring demand for the Chinese CT equipment market compared to their international counterparts, whose product portfolios focus on the mid- and high-end segments. The top four Chinese CT vendors experienced strong revenue growth of 107 per cent in 2020 and 29 per cent in 2021.

A new phase of expansion and upgrading

After decades of learning and catching up, Chinese medical device companies are grabbing significant market shares in many medical device industries, particularly in the low- and mid-end segments of the China market. Take diagnostic ultrasound equipment as an example —Chinese vendors’ market share in China grew from around 20 per cent in 2011 to nearly 35 per cent in 2021. The ambition of Chinese companies is growing. They are shifting their focus from the low-end segment to the high-end segment, from the domestic market to the international market, and from standard products to ones with original features.

Investing in R&D is one way to further strengthen the competitiveness of Chinese medtech companies. Producing low-end segments of medical devices is usually where Chinese companies start off. To upgrade their product portfolio, Chinese medtech companies invest heavily in R&D to tackle technological bottlenecks. Take the top two Chinese medtech companies as an example — United Imaging and Mindray grew their R&D spending by 23 per cent and 30 per cent, respectively, in 2021. United Imaging’s and Mindray’s R&D expenses accounted for 14 per cent and 11 per cent of their total revenues, respectively, in 2021—far above the R&D-to-revenue ratio of their international counterparts.

The R&D investments resulted in technology breakthroughs. Unlike its Chinese peers, United Imaging started producing key components, including X-ray tubes and high-voltage generators, instead of fully relying on suppliers. With the enhanced technology, the company steadily penetrates the high-end market.

Some Chinese medtech companies are working on leapfrogging their international competitors in technological development. For example, MicroPort MedBot, a startup founded in 2015, produces a wide range of surgical robots. Toumai, its endoscopic surgical robot, is the first robot from a Chinese company to conduct complex laproscopic surgery and is registered for clinical trials. According to MicroPort MedBot, Toumai has demonstrated non-inferiority to the da Vinci Surgical System, the world’s leader in surgical robots.

Mergers and acquisitions also accelerate the growth of Chinese companies. Mindray, China’s biggest medical device manufacturer by sales revenue, is now the fourth ultrasound vendor in the world. Mindray has grown partly through a series of acquisitions of overseas medical technology companies.

Insights from Omdia

Backed up by the fast-growing Chinese medical device market and the support of the Chinese government, Omdia expects Chinese medtech companies to continue having a high rate of growth in the coming 10 years. But they also have challenges to address.

Low profitability is a common issue among Chinese vendors, compared with their international counterparts. The high purchase costs of key components, low-end product mix, and high distribution costs have squeezed profits. The withdrawal of government subsidies would challenge the vendors’ market viability. The low-profit rate, in turn, can restrain R&D investment, which can negatively affect technological innovation.

Lack of talent restrains technological innovation. China’s zero-COVID policy has a big impact on its stock of talent. The quarantines, lockdowns, and unknown roadmap are anxiety-inducing. In the wake of stringent lockdowns, the outflow of talents from Chinese tech companies to other countries soared.

High revenue growth by expanding in overseas markets is a good approach to address the low-profit rate of Chinese medtech companies. However, they face high entry barriers, including regulatory clearance, brand recognition, and customer loyalty. In the case of the US, the world’s biggest medical device market, the volatile US-China relationship also means unpredictability to market entry. Other geopolitical factors also affect the growth of Chinese medtech companies.

Chinese medtech companies are also running against the rise of Indian competitors. India’s low production costs and huge market potential are attractive to international medtech companies. For example, in April 2022, Wipro GE Healthcare (a joint venture between GE Healthcare and its Indian partner Wipro) launched the “Made in India” CT system to strengthen accessibility in India. In July 2022, GE Healthcare opened a 5G innovation lab in India, aiming to bring cutting-edge technology to rural and suburban regions.

Chinese medtech companies face both growth opportunities and challenges. Therefore, the next 10 years will be crucial for Chinese medtech companies to transform and upgrade to a new phase.

Sally Ye is the Senior Analyst, Healthcare Technology at Omdia

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