1. An Overview of the China Healthcare Market
Presented by Michael Zakkour
Contact:
Michael Zakkour, principal Technomic Asia

2. China Healthcare – a sector in transition
China has a challenge on their hands … how to care for the health of over 1.3 billion people.
Healthcare used to be guaranteed under the old State-owned enterprise system but that social safety net has gone away as the economy has privatized
Four factors will drive the growth of China healthcare:
GDP Growth: As GDP increases, health spending as a percent of GDP will also increase, at a higher rate (>13%) than GDP (~8%), driven by middle class consumers willing to spend more on healthcare.
Urbanization: The urban population in China will increase by about 150 million over the next ten years, and these people will have greater access to quality care, driving up underlying demand.
Lifestyle Shift: Middle class and urban consumers tend to consume more calories of meat and fat, driving up incidence of “modern” chronic diseases such as hypertension, diabetes, and heart disease.
Demographic Shift: The population over 50 will increase by about 100 million over the next ten years, and these people will have greater need for healthcare.

3. Population in millions
Age-shift in China
There will be 181 million people aged 65+ in China by 2020, more than the entire population of Russia, 25% of the world's total elderly
The high savings rate in China – average 35% of total income – is attributed, in part, to people’s concern over being able to afford healthcare for their parents and themselves
140
120
100
1978
2008 80
Population in millions 60 40 20
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80+
Age
Source: China Statistics Yearbook; Euromonitor, Technomic Asia analysis

4. China Healthcare vs the U.S.
China has seen explosive growth in their healthcare sectors. However, there is still additional room for growth compared levels in the US.
$ (billions)
Historical Healthcare Expenditures: China & the U.S.
Healthcare Overview – China & the US
China US
Healthcare annual growth
+20%
6.9%
Public/private sector control
90% /10%
10% /90%
Beds per 1,000 population
~2.30
~3.60
Basic health insurance penetration
~30%
~84.7%
Source: WHO World Health Statistics 2009, China and India Ministries of Health; Technomic Asia analysis

5. China Healthcare Share of Wallet
Healthcare expenditure in China is estimated to double in the next two decades in terms of its percentage of a consumer’s total spending. Government reform and tremendous domestic demand will drive increased consumer spending from 2009.
Evolution of the Chinese Consumption Portfolio
Today
Transportation and communication
Recreation and education
Personal items
Discretionary
Semi-Necessity
Necessity
Household Items
Housing and utilities
Healthcare
Apparel
Food items
Source: China Statistical Yearbook; McKinsey; Technomic Asia analysis

6. China Healthcare: Rural/Urban
China healthcare is characterized by inefficient allocation and use of healthcare resources between rural and urban areas – 80% of government health expenditures go to urban areas, even though only 45% of the population lives in urban areas.
Allocation of Urban/Rural Healthcare Resources (2006)
Unit: USD
Large urban hospitals are overused, resulting in unnecessarily high number of patients per doctor and costs per patient.
Instead of quality patient care, excessive market-orientation creates incentives for over-prescription and overutilization of services.
<10% of hospital income comes from the government, with the rest coming from fees; >44% from drug sales alone.
Gov’t. Spending
Per Person
Physicians
Per 10,000 People
Hospital Beds
Per 10,000 People
Source: Ministry of Health, McKinsey and Company, Technomic Analysis

7. Chinese Medical Institutions (2008)
There nearly 289,000 medical institutions in China in 2008, of which 19,700 were hospitals. Clinics perform only basic outpatient services, while community health centers do limited diagnosis & testing.
Chinese Medical Institutions (2008)
China Hospital Ownership (2008) 5%
25%
<10%
■Grade III
■Grade II
■Grade I
■Ungraded
29% 2%
16% 7%
50%
66%
>90%
Hospitals
19,701
Source: China Ministry of Health; Technomic Asia analysis

8. Utilization of Graded Hospitals (2008)
Hospital Utilization
China’s core issue in providing healthcare services is that the top hospitals – Class III – are the fewest in number but care for a disproportionate volume of patients.
Utilization of Graded Hospitals (2008)
Grade III
The Chinese government will be investing heavily in Class II hospitals to improve the level of service and make them more attractive places to seek treatment
Grade II
Grade I
9, billion million
Source: Ministry of Health, Technomic Analysis

9. Challenges for Foreign Companies in China Healthcare
While the high growth rate in China healthcare – over 20% annually – is attractive, foreign companies need to pay close attention to several key features of China’s healthcare markets
Quality and pricing tiers – while the Class III hospitals will spend on imported equipment, the real growth opportunities are in Class II hospitals where quality and pricing expectations are a bit lower.
Complex purchasing procedures – State-owned hospitals typically work through a bidding process to purchase medical equipment and pharmaceuticals and suppliers need to work with distributors who have access to this process.
Fragmented distribution – no distributor in China healthcare has nationwide access and suppliers must work with many distributors to get broad yet effective coverage. There may also be
Many competitors – there are many Chinese suppliers (over 3,000 pharmaceutical companies and over 10,000 medical device manufacturers) flooding the market, most of them sub-scale but with strong footholds in very local markets.
Complex and “flexible” regulatory environment – medical equipment and pharmaceuticals need to go through a complicated and often-opaque regulatory process that takes significant time and guanxi (relationships) to navigate

10. Foreign Investment Trends in China Healthcare
Foreign companies are doing several things to give them their best chance of success in penetrating the China healthcare market…
Know your customer – gather deep market intelligence on who your target market is … what they want, how much are they willing to pay, how they purchase.
Refine your target market – and find the distributors most able to get you to those segments. Don’t contract with a distributor without knowing just where they are strong and where they are weak.
Know your competitors – you will always have Chinese competition … they will often have “good enough” products, good pricing and will typically have very good relationships among the buyers.
Think “acquisition” – more and more, foreign companies are looking to acquire companies already in the market, gaining access as well as speed to market. This is particularly successful when trying to penetrate the Class II hospital market.