Returning from a recent trip to China, I cannot overstate Chinese medtech companies’ desire to overtake the Western medical device business. Ten years ago, China made Class I and II commodity devices for export to the West. Many Western hospitals, clinics and nursing homes have become reliant on buying these disposable devices and other medtech products from China. Even outside of the medical device business, China’s economic growth has given the country a lot of money to invest in many industries and sectors. China is a huge investor in the United States, Australia, the European Union, Southeast Asia, South Americas, Africa and Pakistan.

Today, China can also make sophisticated Class III medical devices. For example, in the orthopedic implant devices sector, Western companies such as Zimmer or DePuy Synthes sell their products in Brazil, and Chinese orthopedic implant devices already have a market presence and pose as competitors there.

While the Chinese orthopedic implant products may only be 80% of the quality of Western orthopedic implant products, they sell at about 70% of the prices of Western products. Many people in Brazil and other developing countries are willing to accept lesser quality because the 30% price difference is much more affordable. Some Western device companies have even begun buying Class III products from China, and then performing clinical studies on such products in the West to add China-made products into their sales teams’ bag of tricks. Of course, in these cases extreme due diligence at the China factory is required.

The Chinese government also provides large incentives to local Chinese medical device companies and disincentives to foreign device companies. For example, registration for foreign device companies in China today is very difficult and often requires expensive local clinical trials. These local clinical trials often make it difficult for small, innovative Western device companies that do not have the money to conduct local clinical studies, especially if there is a risk that they will be copied down the road. Additionally, hospitals in China are given “extra credit” to buy Chinese-made devices. China’s government also often provides strong incentives to local companies to conduct new medtech research and development.

Today, similar to Japan in the 1980’s, China has plenty of cash to invest in shares or buy foreign investor device companies. For example, this can be seen by Microport’s acquisition of a part of Wright Medical, and Chinese investors pooling their money to invest more than $200 million in Mevion (proton therapy).

Larger Western device companies can survive and succeed in China because they have a lot of money and state-of-the art-products. They also oftentimes develop a cheaper “B line” of their triple AAA products and can get Chinese patents and pay lawyers a lot of money to protect their IP. On the other hand, small innovative foreign device companies will struggle in China for some of the reasons previously mentioned. Copying is rampant in China, and small device companies do not have enough cash to go after Chinese copycat manufacturers.

In some instances, small Western device companies can accept Chinese cash (purchasing stock) or sell their company for exclusive distribution rights in China. Joint ventures with reputable Chinese partners may work too, but significant and ongoing due diligence needs to be conducted to pursue this path.

One large opportunity in China’s device market is for Western device companies to increase their sourcing of commodity medtech components and finished products. Importing new innovative Class III products in the West may work, but normally Chinese suppliers require a thorough quality audit and remediation plan before they can export such products to the West. If your auditor does not speak fluent English and Chinese, your audits may be meaningless.

Looking at the local Chinese talent issue provides opportunities and pitfalls as well. It is hard to understand why the U.S. government doesn’t give every Chinese Ph.D. in related technical fields a U.S. visa so that they will stay here and help grow Western medtech companies. By not giving Western-educated Chinese U.S. visas, the Ph.D.’s must return to China, hence starting or growing new Chinese medtech companies ,which will be very competitive with the West’s medtech products.

While there are great opportunities for Western medical device companies to succeed in China, always conduct extensive due diligence so that you will not get involved with unscrupulous Chinese medtech companies. When I say extensive due diligence, I mean it. In China, extensive due diligence includes calling references (hopefully Western medtech companies) who the local Chinese factory has worked with. You also need to make other local Chinese medtech contacts who will have inside information about the Chinese supplier (or distributor/partner) you want to work with. Always remember that even after the contract is signed, they might go back to try and negotiate key points again.