My good friend Ben Shobert wrote an article a while back for Forbes entitled, A New Wrinkle For China’s Medical Device Market, with the following as its opening paragraph:

This week, China’s National Health and Planning Commission (NHPC) threw foreign medical device manufacturers a wrinkle: going forward, the Chinese government would pursue policies explicitly designed to favor domestic manufacturers over foreign manufacturers. The NHPC’s announcement was clear: “We want to strongly advocate health ministry organizations to use domestically-made medical devices, especially pushing top level class III hospitals to use domestically-made products.”

To which I say Duh-uh.  

Ben’s little finger knows more about China’s medical device market than I do (or just about anyone else for that matter), but I really do not view the above announcement as big news, and here’s why.

Our China lawyers have done quite a lot of work for medical device makers and other companies that supply product and services to Chinese hospitals and we have always told those companies the following:

China hospitals are under government pressure to buy local, but in the end, they generally do want the best product at the cheapest price. What this means is that if your product is truly the best and the cheapest product by a wide margin you will probably get the sale. But what this also means is that if your product is just marginally better than a Chinese competitor product and your product is a little bit more expensive you may not get the sale. What can you do to increase your chances of making the sale? Try to look more local.

What does it mean to “look local”? This means that the procedure for the sale to the Chinese hospital must look the same as a purchase from a Chinese manufacturer. The more the sale appears to be domestic, the better your chance of making the sale. This means that the purchase must be denominated in RMB and the purchase must be made from a Chinese company. If you force the hospital to pay in dollars for a direct purchase from a foreign manufacturer, you are not likely to succeed in selling your product or your services to a Chinese government owned hospital. This advice of ours holds true for any China industry with heavy Chinese government involvement.

In more detail, there are the following levels of “local” for making a sale in China, starting with the least local:

1. No China presence. No China distributor or sales agent. No China agent. Just your company based in Toledo, Ohio, making medical products and trying to sell those products to China. With this structure, you are not likely to ever make a sale to a Chinese owned hospital unless you have no legitimate Chinese domestic competitors.

2. Your company is in the United States, but it has a China distributor or sales agent that imports the product into China and then sells it to the Chinese hospital in RMB. This constitutes a domestic sale and it is generally the minimum required to have a chance of selling success as against Chinese domestic competitors.

3.You form a China joint venture and that company sells your U.S. made products to China’s hospitals.

4. You form a China WFOE and that company sells your U.S. made products to China’s hospitals.

5.  You form a China WFOE and that company uses a domestic Chinese distributor or sales agent to sell your product to China’s hospitals.

6. You form a China WFOE and that company actually makes your medical products and sells to China’s hospitals. Under this approach, you would create a Chinese brand identity for the product, registering a trademark for the Chinese name of the product. Since a WFOE is a Chinese legal person, the sale would constitute a sale by a Chinese company to a Chinese hospital, which meets the basic requirement for a domestic sale.

7. You form a China WFOE and that company actually makes your medical products and uses a Chinese distributor or sales agent to sell your product to China’s hospitals. It is almost certain that you will need to use an established Chinese distributor or sales agent, since these traditional traders control the market. If you set up this sort of arrangement, you should be certain to use an appropriate China product distribution agreement.

8. You form a China joint venture and that company actually makes your medical products and sells them to China’s hospitals.

9. You form a China joint venture and that company actually makes your medical products and uses a Chinese distributor or sales agent to sell your product to China’s hospitals.

10. You license the manufacturing of your product to a Chinese manufacturer. The Chinese manufacturer manufactures your product, makes the sales to China’s hospitals and pays you a royalty on each sale. The manufacturer sells the product through normal distribution channels. If you set up this sort of arrangement, you must be sure to use an appropriate China licensing agreement.

This last approach is the most “local.” It is also the result the Chinese government wants when it makes its “buy local” announcements. The idea is to pressure foreign medical device makers to transfer their technology to Chinese companies. Of course, medical device makers resist the pressure to make this kind of transfer. However, the Chinese government has shown that it is quite willing to use its purchasing power to encourage transfer of technology. Medical device makers seriously interested in entering the China market should try to become as local as possible. Those who are serious about entering the China market should even consider the licensed manufacture alternative, since in some circumstances this may be the only way to make significant sales in China.