Competing in China

China will continue to be a critical market for MedTech multinational companies despite market uncertainties. Big moves are in order, says a McKinsey report.

Many MedTech multinational companies (MNCs) have established leading positions China—the second-largest and fastest-growing MedTech market globally—by introducing a steady stream of new products and continually raising clinical standards. For some MNCs, China has become a top contributor to their overall growth. Today, the five largest MedTech MNCs generate an aggregate 10 to 15 percent of their global revenue from China. Leaders have also invested heavily in localized operations and supply chains. For instance, one large global medical-imaging company’s four factories in China produce 40 percent of its global ultrasound units and more than half of its CT and MRI equipment.

The stakes in China are high for MedTech MNCs, and the market demands leadership attention; however, the growth path has become more complex and challenging. First, an increasingly multipolar world requires companies to reconfigure their global business footprints. Second, in China specifically, companies are facing escalating pressure in pricing and reimbursement, pressure to localize sourcing and production, and an increasingly competitive local MedTech industry.

These considerations are daunting for MedTech MNC senior leaders, but China is still a market with sizable opportunities. It will not only continue to contribute to global growth but also remain a critical point of access to innovation, manufacturing capabilities, and local capital, all of which can help fuel the continued growth of MedTech MNCs.

MNCs should develop new value chain capabilities to explore new business models, advance commercial and operational excellence, and boost resilience. These actions will take substantial effort for MedTech companies, but they are nonetheless essential to address current challenges and capture future opportunities.

An increasingly fraught path for MedTech companies
Commercial pressures are mounting for MedTech MNCs operating in China because of a variety of factors.

Volume-based procurement (VBP). VBP, aimed at lowering unit prices through centralized tendering, is becoming common for medical consumables and in vitro diagnosis (IVD) products.

Although VBP had previously been focused on high-spend, reimbursable categories, it has now expanded into noncritical care products such as dental implants. VBP tenders based on provincial alliances are further boosting purchasers’ efficiency and bargaining power in parallel with national VBP.

These tenders pose a threat to MNCs’ traditional business models and growth strategies. A review of past VBP tenders at the province, multiprovince, and national levels shows that they have reduced prices in hospitals by 50 to 90 percent. Accurately anticipating the rollout of VBP has been difficult, and informed business planning has accordingly been more challenging since the inception of VBP.

Localization pressure. Pressure from Chinese government authorities to localize in China threatens MNCs’ positions. The Made in China 2025 industrial policy and the dual-circulation strategy are both aimed at advancing domestic manufacturing capabilities in high-tech, high-value industries, including MedTech.

Local competition. Competition from China-based MedTech companies continues to intensify. With their entrepreneurial energy, funding, agility, and knowledge of the local market, China’s domestic MedTech companies are accelerating launches, expanding and upgrading their portfolios, and issuing fast-follower products to MNCs’ offerings. As a result, local companies have gradually developed brand recognition and captured market share across categories. Chinese MedTech companies’ market share has surpassed 50 percent for products in categories such as medical imaging and many types of orthopedic and cardiovascular devices. Moreover, having gained scale and experience in their home market, these companies are now looking to expand beyond China, bringing more competition to global markets.

China remains an attractive market and is critical for global success
Many general managers (GMs) of MedTech MNCs’ China businesses remain confident about the opportunities in China. A recent McKinsey survey of 20 MedTech GMs revealed that these in-country MedTech leaders expect quick postpandemic recovery and solid growth in the high single digits for their China businesses in the next few years. Fourteen of the 20 also expect continued investments into China from their parent company. None reported plans to scale back their China businesses.

To senior executives based out of their companies’ global headquarters, these China GMs’ predictions of growth and investments may seem optimistic. In reality, some parts of the market may no longer be commercially sustainable for all participants. On the other hand, China will continue to be a major source of global growth. It remains the second-largest and fastest-growing market for MedTech, and the central government has a strong imperative to support the healthcare industry. Planned healthcare expenditures are projected to grow from USD 1 trillion in 2020 to a “Healthy China 2030” goal of USD 2.4 trillion. Based on underlying factors such as demographic shifts and urbanization, China’s MedTech market will likely grow at a 5 to 10 percent CAGR and double from about USD 70 billion in 2021 to USD 110 billion to USD 165 billion by 2030.

An ongoing presence in China will also be essential for MNCs to secure access to innovation and manufacturing capabilities. Local companies are not only launching fast-follower products but also producing and commercializing research breakthroughs, sometimes on a global stage.

And then there is capital. Capital in China can cofund growth. Consider that the number of private equity and venture capital investments in MedTech in Greater China grew from about 200 in 2017 to 330 in 2021. Cumulative deal value more than quadrupled, from about USD 772.0 million in 2017 to about USD 3.4 billion in 2021. The total market capitalization of publicly listed Chinese MedTech companies reached USD 355 billion in 2022. At the same time, transaction volume dipped in 2022 because of Covid-19, leaving more dry powder to spend in 2023.

Succeeding as an MNC in China in the future
Many MedTech MNCs are in the process of reviewing their strategic options in China. They should start by asking two questions: What are the stakes in China for the global business? And how well is the business positioned to succeed in China in the future?

Explicitly or implicitly, the answers to these questions have guided MNCs’ distinct strategic approaches in the Chinese MedTech market. Now, they can inform MNCs’ future choices.

Four courses of action for MNCs to define their strategic posture in China
Multinational companies (MNCs) can evaluate their current value at stake in China and how their strengths stack up against the competitive environment–their right to win in the market. Companies can expect to fall into one of four archetypes, each with a distinct set of options.

Selectively accelerating–such as adopting an asset-light model to expand business in China in attractive segments or focusing on a part of the global portfolio that is competitive in China, potentially including developing China-specific offerings. One consumer-facing MNC focuses its investments in China on flagship locations and e-commerce while using distributors to expand the rest of its footprint.

Renewing commitments–such as expanding the value of the company’s global business model in China, with local adaptations. For instance, some MNCs localize their production in China and may even localize the majority of their value chains to compete the way Chinese companies do. A large high-value consumables company is investing tens of millions of dollars in a fourth manufacturing base in China to produce its core portfolio.

Reducing stakes–such as selling parts (often a large part) of a company’s China business to local companies or investors.

Diversifying–such as hedging supply chain risks to build resilience outside China. For instance, some companies manufacture in an alternate locale in addition to China. Others may shift their operations to focus on high-value segments.

Companies that have built sizable businesses in China in line with its market potential will likely choose to renew their commitments. Doing so involves strengthening and expanding local value-chain capabilities, exploring new business models for China, and pursuing commercial and operational efficiencies.

However, many companies—for at least portions of their portfolios and operations—may need more nuanced strategies. These companies would need to evaluate the viability of their product offerings and the related commercial models and make deliberate choices about where to allocate or withdraw their finite resources.

To be sure, this kind of strategic decision making is difficult, partly because of the fast-moving market context. It’s also difficult because many leaders have had decades of experience with China as a reliable all-around growth market. Adjusting to and communicating objectively about each business’s updated strategy in China and the rationale behind it will likely take time and require thoughtful fact-based and trusting conversations between global and local leadership.

A fresh look at value creation in China
As MedTech MNCs revisit their China strategies, they are striving to achieve a balance that allows them to tap into current and future opportunities while managing uncertainties that are hard to quantify. Often, this boils down to the questions of how local the organization needs to become across the value chain to succeed and whether that degree of localization is feasible and desirable from the parent company’s overall viewpoint.

Five questions can help leaders frame a holistic discussion on China while opening the aperture beyond traditional strategic moves.

How interdependent is China and the global business?
China’s contributions to a MedTech MNC’s revenues and profits can be readily quantified. However, deeper analyses often reveal less obvious interdependencies. For instance, one MedTech company analyzed the effect of product volumes destined for the China market on cost of goods sold (COGS). It found that without the China volumes, COGS of some products would increase by as much as one-third, adversely affecting competitiveness and profitability far beyond China. Many companies will find their supply chains deeply intertwined with China-based manufacturing sites—and even more so with Chinese suppliers of intermediate goods and products. Mapping out the streams of value and goods is a prerequisite to an informed strategic discussion on China, and it demands dedicated analytical effort for most MedTech companies.

Which portfolios actually create value in China?
VBP has catapulted some product categories into commoditization; the attractiveness of others has been steadily eroded by local competition. Sharp reprioritization of portfolios is likely in order, but deciding what to let go is often a difficult decision. Local organizations may feel the need to maintain complete product lines in certain therapeutic areas to serve their customers and sustain their commercial organizations. At the same time, innovative pipelines are often lagging behind from a China perspective: new products may not be earmarked for an early launch in China, and regulatory processes may also not fully tap into the options of accelerated approvals that exist for innovative products. At both ends, bold decisions are required to reshape portfolios for profitable growth in China.

Who is the optimal owner of portfolio assets?
For several decades, as MNCs shaped China’s MedTech sector, leaders believed it necessary to maintain full ownership of portfolio assets. Today, upon closer analysis, many companies might find that for some parts of their business—a certain product category, geography, or customer segment—different ownership may make the most sense and create more value. For example, commoditized products may be margin dilutive from an MNC’s point of view; however, a local distributor with a different commercial model and different cost and overhead structure might well generate economic value from them. A MedTech company could, therefore, license parts of its portfolio to create incremental value for itself and keep products available for patients and healthcare professionals. To be sure, this discussion gets more fraught when considering larger parts of portfolios or entire business units. In some other industries, entire China businesses have been carved out, enabling them to operate under different ownership and in line with local market requirements. Although such moves have yet to take place in MedTech, an open discussion on ownership and entity structure in China should be part of any strategic discussion.

Which partners can best help the company compete and succeed in China?
Many MNC MedTechs have relied on their own resources and capabilities to build their businesses in China. Today, trying to do things alone may be unnecessarily limiting. MedTech companies need to serve a broader market than in the past, including county-level hospitals. A vibrant local industry has sprung up; China’s digital ecosystem is rapidly evolving; and local investors are looking for attractive business ideas to fund. In this environment, MedTech leaders should routinely be asking this question: Which local partner (or partners) could help us achieve our business objectives? Companies that apply this principle sometimes find attractive solutions, ranging from asset-level licensing and complementary portfolios to joint ventures that provide funding and market access. These partnerships also create a shared interest in business success with a local entity whose secondary effect is welcome and appreciated.

How can China’s innovation potential be harnessed?
China is still a net recipient of MedTech innovation: MNCs often create innovative products elsewhere and then bring them to market in China. This is gradually changing, however, as China is increasingly becoming a center of MedTech innovation. MedTech MNCs can tap into this innovation in many ways. For instance, products invented in China might be licensed to complement product portfolios. Chinese MedTech companies are also potential M&A candidates. For instance, Boston Scientific acquired a majority stake in Acotec in 2022, incorporating a locally made portfolio of cardiovascular intervention devices.18 Additionally, China’s digital ecosystem abounds with innovation. Consider the large consumer health platforms operated by China digital giants and the advances China is making in the field of remote healthcare. These are but a few examples of product and business model innovation playing out in China’s MedTech and healthcare industries that can be harnessed by MNCs to set themselves up for success in China and beyond.

Mind the basics: Elevating commercial and operational efficiencies and compliance
Beyond these strategic considerations, best practices in commercial and operations will remain a source of competitive advantage for leading companies.

The market context in China requires many MedTech MNCs to operate with lower prices, higher volumes, and broader footprints. Companies that respond well to these conditions are those that quickly transform the traditional high-touch model into one that emphasizes efficiency and agility and leverages omnichannel engagement.

Last, it is important for companies to stay up to date on evolving policy frameworks. For instance, China’s evolving data privacy and data security laws mean many MNCs need to adjust the ways they collect, store, and process data originating in China to ensure regulatory compliance. Likewise, the regulatory framework for local manufacturing, local procurement guidelines, and pricing and reimbursement policies continues to evolve, calling for MNCs to strategize and operate in China with agility.

Despite structural uncertainty, China will continue to be the second-largest MedTech market in the world. Serving this market and tapping its vast potential will remain squarely at the top of many MedTech senior leaders’ global agendas. Although there are many ways to succeed, success is more likely to come to those that act quickly.

Based on MedTech Pulse: Thriving in the next decade, McKinsey & Company