By 2010, China is expected to overtake Japan to become the global #2 market for medical devices and pharmaceuticals. But don't let the size of the China market fool you - because as big as the market is, it is also extremely fragmented with many suppliers selling through multiple channels to highly concentrated end users.

So rather than think of China as one big market, it is more effective to think of it as many markets somewhat linked together.

Successful foreign participants in China's medical markets are doing the following:

• Understanding the details of the market demand for their products: who is buying; what are they buying; at what price do they want to buy.
• Identifying the proper distribution channels that are often very fragmented, depending on the geographical region and end user (consumer, hospitals, etc.).
• Establishing efficient warehousing and distribution, either self-run or through distributors and 3PLs.
• Finding the right partners through a rigorous identification and qualification process.

Below is a brief perspective on the China pharmaceutical market, particularly the complex distribution approaches to the market. You can also download this information in a PDF.

Supply Chain Characteristics

Total demand in 2008 (the majority from the coastal area): USD 90 billion. Top ten suppliers account for about 20% of total supply, but none of them is a multi-national corporation. The top ten best-selling pharmacy companies in China are dominated by local China companies. It might take several years more for multi-national corporations to catch up with them in China. All of the global top twenty pharmaceutical multi-national corporations have set up their factories in China, and some of the products made in China are exported.

Annual growth: 24% in 2008, estimated to be down to 20% in 2009. The top five pharmaceutical multi-national corporations have an annual growth rate of over 30% in 2008.

Intensive competition: more than 6,000 registered pharmaceutical wholesalers and over 140,0000 pharmacy retailers in 2007.

Buyers: hospitals (over 70% of total medical sales), retailers (less than 5%), and pharmacies (over 25%) buy from a national or regional distributor (called pharmaceutical companies) or its sub-companies, whereby tendering practice is required for most procurement of medicines; except for a few items, a factory is not allowed to sell directly to hospitals or pharmacy outlets.

Logistics cost: Represents 10% of the sales revenue. For new distribution centers, there are requirements for the technology level, such as auto picking and conveyor systems, so the barrier to enter the distribution business is high.

China Challenges

Fragmentation: There are over 4,000 factories competing in the market.

Low research and development investment and mid-low end focus: Chinese companies invest about 5% of profits on research and development, while global leaders invest 10-15%.

Marketing: The focus is more on under-the-table kickback deals instead of a full set of marketing solutions.

Logistics: A poor economy of scale because of many orders with low volumes; best markets are mostly in the coastal areas; not enough attention is paid to logistics costs.

Safety and Quality Assurance: Many factories do not have sound quality control systems, but are still protected by their local governments.

Bad debt: Customers are often very bad at paying on time, so distributors end up carrying a lot of cash flow risk.

Pharmacy Sales of Top 5 Pharmaceutical Multi-National Corporations in China in 2007

* Includes both imported and locally produced products. All companies listed are joint ventures. Exchange rate: 1$=6.8RMB

For more details about the market in Asia for pharmaceuticals, download this PDF.

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