In 1982 after graduating with a MBA from Columbia University, I worked as an overpaid yuppie helping Japanese institutional investors buy American skyscrapers and companies from 1982–1988. Japan, Inc. was taking over the world. Of course, this all ended when the Japan bubble burst in 1989-1990. Today, coming back to the United States after a recent trip to China, it feels like the same phenomenon with China dominating the world. This time however, this trend may not burst.

After President Trump met with President Xi Jinping several months ago in Florida, the Chinese, at least outwardly, seem to be pushing harder for North Korea to reform. In exchange however, the United States has significantly reduced its demands on China by not talking about the Chinese artificially lowering the value of their currency and not asking China to slow down in its construction of man-made military islands in the South China Sea. Who has won this “deal”? In my mind, not the United States.

China’s Belt and Road Initiative dominated the headlines in China and the world during my recent trip there. President Xi Jinping proposed this Silk Road Economic Belt or the 21st Century Maritime Silk Road in 2013. This is the reincarnation of the old Silk Trail, which has China and other countries along the way, planning to build new railroads and highways between China, Europe and Africa. Once completed, this Silk Road will provide direct access to many of the world’s markets for the goods the Chinese want to export. As the Chinese ambassador to the United States said, “It is about building connectivity that leads to peace, prosperity, openness, and development for all”. Of course, “all” means China, right?

Besides this initiative, the Chinese have already invested millions of dollars in places like Southeast Asia, Africa, South America, etc. to enhance local infrastructure, purchase needed raw materials and build trusting relationships. This is all occurring while the United States pulls back from the world by exiting the TPP (and our trade advantage in 40% of the world), chastising NATO and taking an American-first attitude. Is there any doubt which strategy will win in the long run?  How can we compete with China by acting this way?

China is also interested in dominating the global medical device business. Chinese device companies can make almost all the Western device products—albeit oftentimes with a less quality product, but this will change over time, too. China is quickly catching up in the medtech quality area, and I do believe in five to 10 years they will be able to export drug-eluting stents to the United States, perhaps with a price advantage. Chinese device makers are already selling their drug-eluting stents to Brazil, some EU countries and Southeast Asia. While the United States still has an overall advantage in medtech R&D and creativity to develop new medical devices, China is focusing lots of investment in this area, too. This advantage is narrowing quickly, especially since we train bright Chinese with technical Ph.Ds. at our best Western universities and then are unwilling to provide visas where their work can be used to our advantage.

China’s domestic medical device manufacturing business is the largest threat to the West’s past dominance in this area. While China is still open to innovative Western device products, it is quickly closing their market to foreign devices that they can either copy, or in the near future, “develop” on their own.

Recent device regulation in China’s medtech markets is a clear impediment to Western device companies succeeding there. Now unless on the exempt list, all Class II and III devices require local clinical trials to get Chinese approval. Chinese hospitals are encouraged to purchase domestically made products. Also, device reimbursement determined mainly by the provinces (as opposed to the national level now), normally only covers locally made products. Finally, local testing, a key requirement for product approval, has gone from a two- to three-month process five years ago to 6 months or longer today. In short, the time to get a new Western device on the Chinese market has gone from less than one year to two to four years now. Similarly, the cost to register Western devices in China has increased dramatically, especially with the added requirement of more local clinical trials.

Given these dynamics, how can Western medtech products win in China today?  First, as I have mentioned in earlier blogs, purchasing medtech components made in China can help Western device companies lower their overall cost of the devices they make. In addition, Western hospitals will continue to buy low-tech finished medical devices from China to help reduce costs. Going forward, however, more large healthcare systems in the West should be able to purchase such low-tech medical devices without the need for the traditional Western middleman, if they want.

Second, innovative smaller device companies now have more opportunities to license their technologies in China to partners who are willing to pay upfront money and “real” royalties. Also, Chinese device companies and investors have lots of money to invest in Western start-ups with good products, and by doing so, enhance their funding. Over the last few years, there have been quite a few Chinese device companies and investors who have fueled the growth of smaller financially strapped Western device companies.

Third, mid-size to larger device companies that can get Chinese patents and have the funds to support such patents in Chinese courts may still find some opportunities to sell in China, especially if they can provide advantages over their copycat Chinese competitors.

In short, there are still opportunities in China’s medtech markets but to be successful there, one must be very familiar with these dynamics.