China corporate risk spreads to Western medical device companies
According to BMI analysts, about two-thirds of Chinese medical devices used by local hospitals and clinics are imported from Western groups.
China corporate risk has spread to Western medical device companies. As big European exporters like Volkswagen (VOWG_p.DE) and Siemens (SIEGn.DE) wrestle with the challenges of de-risking their operations from the People’s Republic, Beijing this summer launched a year-long anti-corruption crackdown on the domestic medical sector.
Hospitals are now being extra cautious on ordering devices, hurting near-term growth at the likes of $55 billion Siemens Healthineers (SHLG.DE), $16 billion Philips (PHG.AS) and $29 billion GE Healthcare (GEHC.O). The question is whether local Chinese rivals use the hiatus to fast-track what has up to this point been more of a slow-burn loss of market share.
According to BMI analysts, about two-thirds of Chinese medical devices used by local hospitals and clinics are imported from Western groups. China’s localisation policy aims to flip that by requiring domestic industry players like $43 billion Mindray (300760.SZ) to supply 70% of these medical devices by 2025.
But so long as Western groups keep updating their products with technologically superior models, that target will remain hard to achieve.
The graft edict from China’s National Health Commission may help, though. In late July the Commission announced it would crack down on physicians receiving kickbacks from distributors when hospitals purchase medical devices such as CT scanners.
The cleanup has led to hundreds of hospital directors being investigated and detained. As a result, hospitals are holding back from placing orders of scanners and MRI equipment that detect cancer and other chronic diseases, and which cost millions of dollars apiece.
That implies a direct hit to the order and revenue growth for medical device firms. Both Philips and GE Healthcare have over $2 billion of their revenue exposed to China, making up some 14% of their global total in 2022.
Meanwhile, the Middle Kingdom is Siemens Healthineers’ second-largest market after the United States. Shares in these three big foreign suppliers are all down over 10% since July, appreciably more than the market.
The real danger for the foreign players is that local rivals steal a march on them. Hospitals withholding orders thanks to the anti-corruption reform may limit Western firms’ ability to keep introducing new device updates to maintain their competitive lead, allowing others to catch up.
Domestic brands, which have historically lagged in the advanced end of the medical device market, took the whole of last decade just to hike their share from around 20% to 30%, Deloitte says. They may now be able to go quicker.
