Following last month’s U.S. “Biodefense Bill” targeting Chinese companies in the CXO field, recent developments suggest that the EU may launch another investigation, potentially putting Chinese medical equipment companies in a challenging position.
EU to Initiate Probe into Chinese Medical Equipment Procurement, Potentially Restricting Chinese Participation in Bidding
According to Bloomberg on April 15th, the EU is poised to launch an investigation into Chinese medical equipment procurement to address concerns about unfair favoritism towards Chinese suppliers due to government policies.
Sources familiar with the matter revealed that this investigation could be announced as early as mid-April and may result in EU restrictions on Chinese participation in their bidding processes.
This would mark the first utilization of the EU’s so-called International Procurement Instrument (IPI), a regulation from 2022 aimed at promoting reciprocity in access to public procurement markets. The introduction of the IPI reflects the EU’s desire to rebalance the situation and promote reciprocal measures. This also marks the debut of what the EU calls International Procurement Documentation (IPD).
Unnamed sources stated that the investigation would gather information from enterprises and member states, with the initial objective being to engage in dialogue with China to ensure that both markets are open fairly. However, the sources noted that nothing is certain yet as the investigation has not been made public.
Upon this news, Siemens Healthineers saw a 1.2% increase in stock price, while Philips saw a 2.1% rise.
China’s Promotion of Domestic Production Raises EU Concerns
The EU views China’s efforts to encourage domestic hospitals to use more domestically produced equipment as stemming from a decision by the State Council in 2015. Over the past two to three years, provinces including Anhui have taken further steps to help Chinese companies increase their opportunities to supply hospitals. These measures are part of the broader “Made in China” initiative, which aims to boost domestic industries, including medical devices, by 2025.
In recent years, with Chinese authorities setting strict domestic product requirements for many categories of equipment, China has increasingly emphasized locally and nationally-led procurement of medical technology. According to data cited in a recent EU report released earlier this month, this shift resulted in a trade deficit of €1.3 billion (¥9 billion) for these goods in 2019 turning into a surplus of €5.2 billion (¥36 billion) just a year later.
The EU has long been dissatisfied with access to the Chinese procurement market, with both European Commission President Ursula von der Leyen and EU Trade Commissioner Valdis Dombrovskis raising the issue during visits to China last year. Other issues include opaque definitions of market access terms, the transfer of industrial data out of China, and intrusive requirements imposed on cosmetic companies.
German Chancellor Olaf Scholz arrived in China over the weekend, warning Chinese officials to promote free trade and equal business opportunities, echoing similar messages conveyed by European and American Treasury Secretary Janet Yellen a week ago.
Sources stated that negotiations over the past 12 months have seen little progress. They added that with the situation in the Chinese market leaning towards further domestication and more extreme discrimination against foreign companies, the EU must respond.
According to data from the China-based research institution Merics, the Chinese medical technology market is projected to reach €135 billion (¥1.05 trillion) by 2022. Major European manufacturers in this industry in China include Siemens and Philips.
The EU believes that China has been implementing measures and practices that favor domestic markets to realize its “Made in China” policy and achieve its goal of Chinese companies capturing 85% of the domestic market share of “core medical device components” by 2025, with high-end equipment at 70%. It also alleges discrimination against imported products by the Chinese government and sometimes imposes strict requirements on foreign companies, including investment obligations or technology transfers to Chinese entities.
If the investigation, which needs to be completed within nine months, proves the EU’s concerns about medical devices, the EU can take measures to restrict Chinese participation in public tenders. Under the provisions of the IPI, these steps could mean score adjustments or the complete exclusion of non-EU bidders. The number of subcontracts that bidders can obtain from enterprises subject to IPI measures would also be limited, or else they would face charges. In special circumstances, such as when there are no other bids, the contracting authority may decide not to apply certain IPI measures.
Sources stated that if dialogues with China lead to tangible corrective actions, the investigation can be suspended at any time.
How Will Chinese Medical Device Companies Be Affected?
The news of the EU’s plans to investigate Chinese medical equipment procurement has garnered widespread attention.
Several medical device companies have been affected in terms of stock prices:
1. Mindray Medical: Europe accounts for 8-10% of total revenue.
2. Shinva Medical: Excluding Russia and Turkey, Europe accounts for 10% of overseas sales and 3.5% of total revenue.
3. Asclepius Meditec: European revenue in 2023 was over ¥700 million, accounting for 10% of total revenue.
4. Drever Medical: Europe accounts for 15% of total revenue.
5. Kangli Medical: Europe accounts for 20% of overseas revenue and 10% of total revenue.
As a result of this investigation, the stock prices of these companies, which have a presence in the European market, have declined to varying degrees.
In response to this investigation, Mindray Medical, a leading Chinese medical device company with operations in Europe, has issued a response. Mindray Medical stated on April 16th, “The company has always actively practiced the concept of free trade, strictly complied with the laws and regulations of various countries, and participated in market competition in compliance with the law.”
Mindray also stated, “The company’s current revenue proportion in Europe is not high, and there are no single purchase orders exceeding €5 million, so the investigation will not have any impact on our business in Europe.”
According to financial reports, Mindray Medical achieved revenue of ¥30.366 billion in 2022, with overseas revenue reaching ¥11.698 billion and European revenue amounting to ¥1.998 billion. The proportions of European revenue to total revenue and overseas revenue were 6.58% and 17.08%, respectively.
Similarly, a staff member from the securities department of Shinva Medical stated, “The impact we encounter is the same as that of the entire industry, and we are definitely not within the scope of single purchase orders exceeding €5 million.”
In 2022, Shinva Medical achieved revenue of ¥381 million, with overseas revenue reaching ¥298 million, accounting for a high proportion of 78.22%. As of the time of writing, Shinva Medical has not responded to inquiries regarding the proportion of European revenue and subsequent response measures.
In contrast, Asclepius Meditec told reporters, “The company’s business in Europe mainly involves ODM, and the products bear the logos of customers, so it has little impact on us.” In 2022, Asclepius Meditec achieved revenue of ¥371 million, with revenue from Europe amounting to ¥99.9354 million, accounting for 26.93% of the total.
The secretary of the board of directors of Ausnoble Endoscopy, a leading company in the field of medical flexible
endoscopes, also told reporters, “Currently, there are only Japanese and Chinese manufacturers of flexible endoscopes in the European market, and Europeans do not produce flexible endoscopes, so focusing on flexible endoscopes is meaningless, and the investigation is not relevant to the company.” The company revealed that its business in Europe accounts for around 10%.
Furthermore, a staff member of a leading IVD (in vitro diagnostics) enterprise told the Sci-tech Innovation Board Daily that compared to companies involved in multiple segments like Mindray Medical, “Chinese enterprises focusing on in vitro diagnostics do not have a large presence in Europe. During the pandemic, there might be more COVID-related products, but after the pandemic, companies engaged in non-COVID testing products generally have a small market share in Europe.”
China’s Domestic Policy Fairness: Mindray Responds
It is rumored that Mindray and Lianying have made specific responses to this matter, which can be summarized as follows:
Fairness of China’s Policies: Mindray Medical pointed out that the Chinese government encourages the purchase of medical devices produced in China, but the policy does not specifically target Chinese brands; it includes all medical devices produced in China, including those of foreign companies. This means that although the policy encourages domestic production, products of foreign companies manufactured in China are considered domestic and enjoy the advantages brought by the policy.
Compliance with the International Trade System: China’s policies do not violate the rules of the international trade system, such as WTO rules. At the same time, other countries, such as the United States, have similar policies, such as prioritizing the purchase of domestically produced products by federal government hospitals in the United States. This indicates that countries to some extent all have policies to protect their domestic industries, and China’s approach is not an exception.
Import Tariff Policies: Mindray Medical mentioned that China does not restrict the import of medical devices through tariffs, unlike other countries such as the United States, India, and Russia. This indicates that China’s medical device market is relatively open.
Impact of Non-Market Policies: The medical device industry is referred to as a sector of non-market economic policies rather than export controls and sanctions. This means that the impact and purpose of relevant policies are different from directly restricting exports or implementing sanctions.
Humanitarian Considerations: Medical devices fall within the humanitarian category, and even in specific political conflicts, the sale of related products is often exempt from sanctions. This reflects the particularity of the medical device industry.
Limitations of the Trade and Technology Conference (TTC): The Trade and Technology Conference (TTC) does not have legislative power, and its discussions and recommendations are not legally binding.
Lianying Medical’s Response, Minimal Business Proportion: Lianying Medical stated that its business in Europe is proceeding as usual and that European revenue accounts for a small proportion of its total revenue. At the same time, the company emphasized the fairness of China’s policies, stating that foreign companies producing medical devices in China enjoy equal treatment in government procurement.
Localization of Foreign Companies: Major foreign medical device giants have achieved localization in China, with local production factories and a dominant position in high-end medical equipment. This indicates that foreign companies have deeply integrated into the Chinese market and benefited from Chinese policies.
Mindray Medical emphasized that the company has the ability to stand out in market competition and advocates for a purely market-oriented competitive environment. This reflects the efforts and confidence of Chinese medical device companies in improving their competitiveness.
On August 13, 2023, the State Council of China issued the “Opinions on Further Optimizing the Foreign Investment Environment and Increasing the Attraction of Foreign Investment.”
The “Opinions” propose 24 policy measures in six areas, including improving the quality of foreign investment utilization, expanding channels for attracting foreign investment, ensuring national treatment for foreign-invested enterprises, continuously strengthening the protection of foreign investment, improving the facilitation level of investment operations, increasing financial and tax support, encouraging reinvestment by foreign-invested enterprises domestically, and improving foreign investment promotion methods.
The “Opinions” state that eligible foreign investors are encouraged to establish investment companies and regional headquarters, and enterprises invested and established by relevant investment companies may enjoy treatment for foreign-invested enterprises in accordance with relevant national regulations.