The medtech market in China is becoming increasingly dynamic and complex to navigate, raising questions around how to continue to tap into its vast population of potential patients. Earlier this year, GE HealthCare doubled down on its commitment to the China market by announcing plans to form a joint venture with Sinopharm to locally develop diagnostic imaging solutions for China’s vast lower tier market.
As the government continues to roll out policies to reform the China healthcare sector in areas such as tiered delivery systems, volume-based procurement (VBP), payment reform and local preferential policies, multinational medtech players are increasingly turning to local partnerships. These companies want to diversify and increase flexibility in their business models to continue to expand their business footprint in the market.
We have found that MNCs work with local partners to address five key challenges:
- Speed to market: To avoid lengthy delays with imported product registration, MNCs collaborate with a local player to spearhead this task.
- Portfolio mismatch: The MNC’s product portfolio does not meet the unique needs of the China market and is being outperformed by agile local players who quickly adapt and roll out new solutions.
- Improve margins: With continued pressure from price erosion, MNCs may need to optimize their cost structure with a manufacturing or inputs partner or by outsourcing low-margin product lines.
- Hedge revenue risk: To offset revenue shortfall from VBP, companies can strengthen their position in non-VBP categories or bridge a new product launch by licensing or acquiring the needed capability or forming a joint venture to bring it to market.
- Maintain access: As VBP continues to enable China-based brands to gain share, accelerate localization with co-development and manufacturing partners.
Based on ZS past China partnership research, we found that successfully establishing partnerships involves employing best practices in prioritizing potential opportunities, screening potential partners and designing the partnership model.
ZS recommends MNCs follow a systematic approach to evaluating the most impactful partnership opportunities across two dimensions.
- Attractiveness of the opportunity: What is the current size and future growth upside of the different partnership opportunities? Does the opportunity fill an existing portfolio or value chain gap or weakness? Does it complement a strength?
- Likelihood of partnership success: Is there a sufficient number of potential partners to make the opportunity worth pursuing? Are there risks that may impact the likelihood of success such as VBP or policies prohibiting MNC partnerships?
To screen candidates, we recommend an equally rigorous approach to evaluate and screen individual companies across four dimensions:
- Right product: Does the candidate have the right product offering to fill your portfolio gap? Solution preferences in China can differ with Western markets, so evaluating technologies through the China customer lens will be key. For example, given the large patient volumes in hospitals, higher throughput solutions are often more sought after than in Western markets.
- Strong operations: MNC offerings will more often be differentiated on quality. Understanding if the local partner has a track record of developing similar products of quality will be critical. Regulatory approval in key markets or quality certification such as the U.S. Food and Drug Administration, Communauté Européenne, Good Manufacturing Process system and TÜV Rheinland for their products, as well as national-level grants and awards, are indicators.
- Capable organization: Management ability and openness to collaboration also must be considered beyond its product and operations. When evaluating a company, look to understand if the candidate’s management has significant MNC experience or a successful track record of past collaborations with MNCs.
- Financial stability: Beyond typical financial indicators, understanding the company’s shareholding structure is often worthwhile. Often, specific government ownership may increase partnership complexities.
Finally, in partnership design, we believe there are four key elements that help ensure sustainable relationships.
- Global-affiliate alignment: Gaining support from key global stakeholders on foundational partnership parameters must serve as the prerequisite for any MNC-local related partnerships. This is to avoid investing significant resources, only to find a partnership is not feasible within the global headquarters’ framework.
- Win-win: A sustainable partnership requires all parties to articulate and align on the value they offer and the expected benefits on fair grounds. MNCs often assume that, because they’re a global company, local partners have much more to gain in partnering with them and request partnership terms that are perceived as unfair and lopsided.
- Trust: Sufficient delegation within an MNC and appropriate allocation of responsibilities with local partners will help glue the partnership and minimize the cost of communication. Even after establishing the partnership, some MNCs do not trust their partner and insist on absolute control, leading to a breakdown in the partnership operations.
- Compatibility: A local partner’s company culture could be significantly different than yours. In addition to screening for companies based on management fit, it’s also critical to take a compatible approach to the local partner’s culture, management philosophy and business norms.
While the China market continues to evolve and increase in complexity, it remains a must-win market for MNCs. We expect partnerships to become an even more prominent component of China medtech’s business landscape as companies adapt their portfolios and go-to-market models.
Disclaimer: The content of the article, including the main text and the charts, is for reference only. No liabilities will be assumed by ZS for readers taking or not taking any action according to any content of the article.