What entrepreneurs should know about China

Recent visits to China by the UK Prime Minister David Cameron and the French Prime Minister Jean-Marc Ayrault were clearly intended to pave the way for new partnerships between companies in China and those in Europe. One obvious area for cooperation is in the life sciences field where China is looking for help to improve the healthcare of its massive population – now 1.35 billion people growing and ageing.

Healthcare a priority for China

While China is the world’s second largest economy after the US, it still lags behind other nations in terms of its healthcare outcomes. A recent survey by the World Health Organization (WHO), ranked China 144th in terms of the equity and quality of its healthcare system. Recent experience suggests that the Chinese authorities are determined to make progress on this front, and are looking for innovative approaches to tackle a raft of healthcare needs from manufacturing diagnostics and vaccines, to developing new medicines for chronic diseases such as cancer. They want to do this through sustainable partnerships with western companies including small and medium-sized enterprises (SMEs).

There are tremendous opportunities as well as considerable risks for entrepreneurs wanting to do business in China

It's not plain sailing.There are tremendous opportunities as well as considerable risks for entrepreneurs wanting to do business in China. The chief executives of SMEs need to be aware of both. On the one hand, the Chinese healthcare market is huge, and is expected to grow by an estimated 15-20% per annum in the coming years. On the other hand, the market is complex with both a state-controlled healthcare system and a system of private insurance.

Low cost Healthcare solutions for the entire chinese Market

In most cases, the Chinese authorities do not want to replicate the healthcare models that are prevalent in the West. They want access to innovation, but they want this to be delivered on a scale that hasn’t been tried elsewhere. For example, China cannot afford to buy magnetic resonance imaging (MRI) machines for each of its more than 20,000 hospitals. Yet the authorities are aware that they need to upgrade their diagnostic services. They are therefore ready to consider simpler and less expensive solutions such as the widespread use of echograph machines.

Business Model adapted to the chinese Market

A western entrepreneur seeking to start up or bring an existing business to China needs to be prepared to operate a different business model than would be the case in his home country. First of all, he must engage pragmatically with the local business community. Public funding and state-of-the art facilities are almost unlimited in China. But they are only available to local companies. The regulatory system is complex and is primarily designed to meet the needs of generic manufacturers. Chinese generic companies are in fact the main beneficiaries of the regulator’s ‘fast-track’ drug approval system, also known as the ‘green path.’

Most western SMEs therefore need to enter the Chinese market through joint ventures. To get started, the entrepreneur needs to identify, select, and establish a working relationship with a Chinese partner – very often a difficult task. Very little is publically known about small to medium-sized Chinese companies which means that it is difficult to assess how sustainable, reliable, and committed the future partner will be. Running due diligence on a potential partner is exceptionally difficult given that the documentation is usually only in Chinese. An informal rule of thumb therefore is to ‘select a partner who has a lot to lose if the project fails.’ It is essential to seek the support of outsider advisors in order to get an unbiased view of the future partner. As stated above, the Chinese market is huge. This has consequences for the roll-out of any new technology. The Chinese authorities are willing to test new products and technologies on a limited geographical basis – at first. But thereafter they want the product to be made available throughout the country.

Problems to scale up for the Chinese Market

One of the companies I advise encountered this problem of scale in trying to make a diagnostic for detecting the human papillomavirus (HPV) available. At the time, the company could only produce and deliver 2-5 million of tests per annum of the product, when the authority said it needed 10 times that number. The authorities would not agree to screen only 10% of the women at risk of the virus; they wanted large-scale screening. In general, the Chinese authorities do not want to limit the supply of innovative products to the population because this puts them in the invidious position of having to choose between spending on people in cities versus those in rural areas, or between people on the east coast versus those in western provinces. They want to make new products broadly accessible. For the managements of western SMEs this presents a real challenge: to find a way to scale up production and distribution at a cost that is acceptable.

The Chinese authorities are aware that this is far from a trivial matter. They are therefore proposing that western SMEs perform their validation studies, prototyping studies as well as their scale up with the selected partner in China first, in order to shape and adapt the final product to the Chinese market. Local public funding to perform such studies is easy to obtain through a well-selected partner. Unfortunately there is still too little private R&D investment, and even more worrisome, too few venture capital firms.

Both regional and national Chinese authorities say they want to climb the value chain and provide more innovative solutions to the Chinese healthcare system. This might look paradoxical given the authorities’ demand for fast, robust and inexpensive healthcare solutions. But if European SMEs are willing to be flexible, there will be rewards. One colleague summed up the situation this way: In china everything is possible although nothing is easy.

In China everything is possible although nothing is easy

Author : Jean-Claude MULLER, Special Advisor, Innovation & International Relationship (I&IR)

Discover our services in Marketing & Business Development:

• Strategic Business Development
• Operational Marketing & Business Development

​

All News about China