New Regulations, Localization the Only Option for Foreign-Owned Machinery Companies?

Recently, a new State Council document on the Pilot Project to Enhance the Capacity of High-level Hospitals in Clinical Research and Transformation of Results has sparked discussions in the industry. The new regulation proposes to adopt the same policies as those supporting

innovation in universities and research institutes in the procurement of scientific research instruments and equipment, and to adopt more flexible and convenient procurement methods for imports urgently needed for scientific research in accordance with relevant regulations. The new regulation proposes to adopt the same policy as supporting innovation in universities and research institutes in the procurement of scientific research instruments and equipment, and to adopt more flexible procurement methods for the import of urgent scientific research needs in accordance with the relevant provisions, and to simplify the approval process and application materials.

Some industry insiders interpret that the introduction of this document is to “timely adjust and correct some of the negative effects of the domestic substitution policy at the same time”. At the end of last month, the website of the NMPA released the Notice of the General Department of the NMPA on Further Strengthening the Service Work for Foreign-funded Enterprises, proposing to deepen the “reforms to delegate power, streamlining administration and optimizing government services”，and increase the assistance of enterprises.

1. Domestic substitution policy surging ahead

 According to the Guidance Standards for Government Procurement of Imported Products jointly issued by the Ministry of Finance and the Ministry of Industry and Information Technology last year, there are clear requirements on the proportion of domestic medical devices and instruments to be procured by government agencies (government-affiliated institutions).

“All 137 kinds of medical devices are required to be 100% domestic; 12 kinds of medical devices are required to be 75% domestic; 24 kinds of medical devices are required to be 50% domestic; 5 kinds of medical devices are required to be 25% domestic. The scope of purchase covers monitors, imaging equipment, in vitro diagnosis, high-value consumables and other categories.”

Even under the local policies since then, “no imported products shall be purchased without approval” has gradually become a consensus, which can be said to further compress the market space of imported equipment, especially high -priced equipment and instruments.

According to statistics, during 2017-2021, the number of varieties with a localization rate of more than 50% increased year by year, from 810 in 2017 to 907 in 2021, and the compound growth rate of imported alternative dominant categories in the past five years was 2.87%.

Taking imaging equipment as an example, on the road of domestic replacement of products in the Grade-A Tertiary Hospital。, the policy has greatly accelerated the replacement process, from the localization of ordinary X-ray machines to ultrasonic machines, and then to nuclear magnetic resonance. Public hospitals are subject to more and more restrictions when purchasing medical equipment and instruments. They need more reasons to complete the import demonstration and purchase imported equipment. Some foreign imported equipment agents have expressed anxiety more than once: “some imported products cannot enter the directory, and the approval cycle for entering the directory is also relatively long”.

2. Domestic substitution leaves a “hole”

In the current critical period of industrial upgrading, the localization of medical equipment is of great significance to improve the industrial chain of high-end equipment, but the negative impact brought by the implementation of the localization substitution policy is also worthy of attention.

The “List of Imported Medical Devices” has been issued by all regions, and the types and quantities of imported medical devices have been tightened one after another. Under the relatively vague demonstration standards and applicable scenarios, the approval cycle has been gradually lengthened, affecting the normal development of scientific research tasks and clinical application needs.

The above-mentioned industry insiders said that the clinical level of medical institutions in different places is quite different, and the needs for equipment and instruments are different. Large hospitals pay more attention to the reliability and convenience of equipment, and would rather spend high prices on imported high-end equipment, just hope the images can be clearer a little, the detection level is a little higher.

From the perspective of local practice, local policies have also “left a hole”, and imported equipment generally refers to “imported products”, not foreign brands.

For foreign investors, even though the market share of “big” hospitals is decreasing year by year, actively promoting localization strategy seems to be their only choice.

3. Promoting localization of the industry chain

Driven by the policy, more and more foreign-funded enterprises have begun the process of localization. First AstraZeneca signed the Chengdu Hi-tech Industrial Base , and then Siemens issued a new localization strategy of “National Intelligence Innovation”, officially announcing its deep participation in the construction of “Healthy China” as a “Chinese company”.
While reducing costs in order to compete with domestic brands in the middle and low-end market, domestic labor and domestic spare parts production are used to supply domestic users, and the product registration certificate is obtained in China. Foreign investors also hope to get the same treatment as “domestic” when entering the hospital.

With the comparative advantages of foreign capital in innovation ability and the transformation of scientific research in localization, the tug of war between domestic manufacturers and foreign brands may continue for quite a long time in the future.

But at present, “The equipment produced by foreign enterprises in China has not been clearly identified at the policy level as domestic, so this is where foreign enterprises have been working.”
Finally: in this offensive and defensive war in the public hospital market, at present, foreign capital and domestic brands are still in a delicate balance. How can foreign capital make a strategic layout? Is it to reach a further localization strategy through innovative cooperation with local enterprises, or is it a strategic retreat, only retaining part of the high-end market? The whole industry is waiting to see when and how the domestic brand breakers will appear.

BradyKnows localization team has extensive experiences in facility establishment, audit, supplier evaluation, manufacturing, registration, and marketing in China. Pls feel free to let us know any questions on China entry via info@bradyknowsmedical.com

Source：Zhongcheng Medical Equipment , by Jin Long

Edited and Translated by BradyKnows