We recently had the opportunity to travel with Amsino International to visit several of Amsino’s medical device manufacturing facilities located in and around Shanghai, China. The experience prompted two key observations regarding the global health care system and its impact on medical device manufacturers. Investors in medical device companies would be well served to factor these two key issues into plans and projections.   

1.                  The “China Price” is Not Just Labor Cost Driven. Many commentators have spoken about the importance of the “China Price” in driving lower cost of medical devices, pharmaceuticals and medical supplies. At the same time, there has been concern expressed about whether the “China Price” will remain low if labor costs increase significantly in China. This has particularly been a concern as recent protests at auto manufacturing plants and other activities have shown that the Chinese government and Chinese workers may push for higher compensation, and benefits for Chinese workers. However, in talking to medical device manufacturers in China, it is clear that the “China Price” is not just driven by low-cost labor. Instead, many manufacturing districts in China have organized in such a fashion that they are able to deliver extremely low-cost and high-quality medical products due to the mix of resources that is available in these manufacturing districts. 

The resources include the availability of supplies and suppliers, the availability of low-cost machines and tooling, access to transportation, expertise in manufacturing, quality control, and other necessary inputs. Shanghai in particular has organized itself around manufacturing and delivery of low-cost, high-quality goods with its convenient port access to the Yangtze River and the Pacific Ocean. It is clear that although labor costs may rise in China, the other factors that elevated China into a manufacturing hub will not soon change. Therefore, even if labor costs go up, there will still be significant value that Chinese manufacturers can deliver. 

2.                  The Growing Middle Class and China’s Version of Health Care Reform Will Significantly Expand the Market for Medical Devices, Supplies, and Pharmaceuticals in China. The second observation that one immediately comes to in traveling around Shanghai is the amazing growth of the Chinese middle class. This increasingly fairly compensated group is demanding more from their government class in the form of health care and other essential services. It is this growing middle that has pushed the government in part to announce last year an ambitious health care reform plan that will “fix the ailing medical system” and “insure fair and affordable health services for 1.3 billion citizens”.

Over the past year the Central Committee of the Communist Party of China and the State Council have expanded on what China’s version of health care reform will encompass. Most importantly, it will include the spending of approximately 850 billion Yuan ($124 billion US dollars) over the next three years. One of the cornerstones of this reform is the construction of an astounding number of new hospitals and health care facilities throughout rural China. Each of these new hospitals will require initial equipment purchases, as well as a new source of medical supplies and pharmaceuticals. These health care reform activities will clearly drive increased utilization in China.