Are you familiar with Microport, Mindray or BGI? What about Kanghui, Wego or Andon? You may not recognize the names, but you soon will. These health care product companies are among many Chinese exporters competing with multinational companies in the global market.
The value of health care products exported from China increased by an average of 18% a year from 2008 to 2013, reaching nearly $12.8 billion in 2014, according to the United Nations. Companies that are leading this effort are not only targeting Western countries but emerging markets as well.
Mindray gets almost 45% of its sales in emerging markets other than China. The Shenzhen-based medical device provider became the third largest company in the patient monitoring devices sector after it acquired Nasdaq-listed Datascope in 2008.
Andon has gained widespread consumer awareness with its iHealth brand apps for Apple's iPhones. Shanghai-based Microport, an international exporter of cardiovascular stents, expanded into orthopedics in 2013 via the acquisition of OrthoRecon, a subsidiary of Wright Medical of the U.S.
Shenzhen-based BGI's accomplishments are all in China; it is the largest genomic center for high throughput sequencing. In 2013, it moved into the next generating sequencing field, the most cutting edge technology in this sector, through the acquisition of California's Complete Genomics. Kanghui in Shanghai and Wego in Shandong are both medical device firms. Kanghui was acquired by Medtronic of the U.S. to expand its value line of products in China. Wego's $3.2 billion market capitalization and multiple product lines make it a dominant force in several healthcare segments.
A natural question for health care executives is how these brands will be perceived by new customers outside China. For Chinese companies, developing a clear understanding of brand perception in a new country is a key element of their entry strategies. Similarly, international companies that must now compete with Chinese brands in their established markets need to understand how these products will perform in the marketplace.
In a recent study with physicians and distributors, we looked at multinational medical technology companies' brands, local companies' brands and brands with Chinese names. While the study was focused on medical device brands, we believe the findings are applicable to other health care products.
Not surprisingly, physicians and hospital administrators in most countries view multinational brands as benchmarks in terms of quality and reliability. To compete with these brands, Chinese producers would have to establish an extensive track record and demonstrate their safety and reliability over time.
However, physicians and market participants are generally positive toward Chinese brands in relation to local competitors because they see a need for products that provide adequate quality at a reasonable price. These characteristics play to traditional Chinese strengths, although our results suggest that while Chinese brands are widely perceived to be competitive with local brands on price and quality, they are viewed considerably less favorably on value and reliability.
Views in some countries were extremely favorable. In Colombia, for example, Chinese brands are considered better than local brands in value, quality, price and reliability, while in Thailand they score highly for price and reliability. However, Thai physicians complain that Chinese brands lack some of the customer support and in-office training offered by local brands.
In Russia, Turkey, India, Brazil and Mexico, local products were regarded as better quality and more reliable than Chinese products. Chinese brands are also seen as copiers of technology rather than as leaders in research and development.
Despite these challenges, there appear to be opportunities for growth in many markets. In Brazil, for example, physicians report that Chinese brands would be competitive with local products in market segments where price is especially important, such as in the public health system. Furthermore, Brazilian physicians said they would be more likely to use Chinese brands if they demonstrated a greater commitment to investing in research and development.
Limited interest
For Chinese brands to overcome the current perceptions of physicians and distributors in emerging markets, they must improve their marketing and demonstrate a clear commitment to quality. This type of effort is already being made by Chinese brands in China's domestic market, where local teams are stepping into clinical education efforts and have strong technical support and services. Unfortunately, too many Chinese companies leave their international markets to their local distributors and express limited interest in establishing strong, long-lasting, quality-product brands.
This may be because many companies that have chosen to explore international markets are relatively small and focus only on the incremental revenue they can gain by exporting. For example, there will be more than 700 Chinese exhibitors out of the 5,000 attending the annual MEDICA conference in Frankfurt, Germany, in November.
Based on our estimates, more than 90% of these Chinese companies have less than $100 million in annual revenue, and only one in seven would consider venturing beyond finding distributors or customers that are original equipment manufacturers. Companies with more ambition, however, recognize the need to invest in their brands and their own presence. While some may jump-start the process via an acquisition, others are putting down roots organically.
As Chinese brands begin to compete on the global stage, some key questions arise for both Chinese producers and their multinational and local competitors in overseas markets. Multinationals need to decide on their strategic response to competition from China in their traditional home markets. Some of the Chinese products may be dismissed initially because they provide only basic features at lower cost, and target a different market segment than the multinational products. However, investment and successive generations of product improvements will eventually allow these companies to compete more directly with multinationals.
For Chinese companies, key questions include the appropriate level of investment needed to compete; which emerging markets to target first; and what kind of entry strategy is most likely to succeed -- joint venture, acquisition or greenfield development. As newcomers to the global stage, Chinese products will need to overcome unfavorable initial perceptions, just as Japanese and South Korean companies had to in consumer electronics and automobiles.
For investors, the question is which Chinese companies and brands are in the best position to succeed, and how should investments be allocated among brands? Most financial investors in the Chinese health care sector historically focused only on domestic business. This was sensible given double-digit growth rates in the Chinese health care products market at the time, and it should come as no surprise that exports were seen mostly as an afterthought.
For companies that are exporting, investors should examine the quality and sustainability of their overseas business, and the level of investment required to generate it. Are the companies chasing incremental revenue, or are they intending to build successful international businesses? For companies not yet going beyond China's borders, the key question is whether they should start to build export opportunities.
Chinese health care products today have the stereotypical "Made in China" reputation -- mid-to-low value products with reasonably good manufacturing quality, priced at a discount. There are definitely market segments where these are valuable and profitable positions, and being viewed in this way is an accomplishment.
In the global health care sector, however, industry leaders look beyond manufacturing quality to deliver innovations in clinical care and/or services. To match them, China's larger, more innovative and more capable companies have to start to think like multinationals, and begin to consider how to build clinical education, services and brands in international markets.
While international commerce is not yet completely seamless, global health care product markets are more interconnected than they used to be. If Chinese pharmaceutical and medical device companies can overcome these problems, it will be only a matter of time before Chinese health care brands will be as strong in the U.S. and Europe as their counterparts in consumer electronics.
Helen Chen is head of the China life science practice and co-head of the China practice of L.E.K. Consulting in Shanghai. Stephen Sunderland is a leader in L.E.K.'s life sciences practice based in Shanghai.
