China emerges as a global maker of neurotech devices

One does not need the future-telling skills of Ray Kurzweil to predict the rise and eventual dominance of China in manufacturing of neurotech devices. Outsourcing of medical device manufacturing to China has been on the rise in the last few years as evidenced, for example, by a reduced US export-import surplus for medical devices from $6 billion in 2005 to $3 billion in 2010 (according to US officials), of which $1.2 billion is the trade surplus with China. The market for medical devices in China is at $14 billion and is projected to double by 2014. The rise in China’s medical device market is fueled by an ongoing government-funded healthcare reform ($123 billion over the next four years), which aims, among other things, to make medical devices affordable by subsidizing their domestic manufacturing. The importance of such governmental  subsidies can be illustrated by the stunning revelation that in 2008 the number of cardioverter-defibrillator implants in China was fewer than 700 compared with 100,000+ implants annually in the United States.

Unlike the biomedical device industry as a whole, the implantable neural device industry has so far been resilient to migration to the land of rising dragon from its birthplaces in the US, Europe, and Australia. There are multiple reasons for that, which perhaps could be better explained by an economist. In my view, there had been two key obstacles: 1) assuring the regulatory conformance of the China-assembled medical device in the western countries; and 2) poor protection of intellectual property rights in China, making western device makers uneasy about sharing their fabrication secrets with Chinese subsidiaries. Both of these obstacles seem to be melting away. The regulatory conformance is rapidly improving as more reciprocal agreements are being ironed out between the US FDA and its Chinese counterpart, while inadequate IP rights protection no longer stops the leading electronics companies, such as Apple and Sony, from manufacturing their cutting-edge devices (e.g. iPhone, iPad, and PlayStation) in the Foxconn’s Chinese factories.  

With gradual dissolution of the economic barriers, we are now faced with a barrier of a different kind: an acceptance of the level-playing field in the emerging global medical device market. When Terry Gou, the CEO of Foxconn (the largest exporter and largest private employer in China), first approached Steve Jobs, the Apple’s CEO, he had to force Mr. Jobs to give him his business card. Now, a decade later, the relationship between the two companies has evolved from a contract manufacturing to a strong and dedicated partnership, with Foxconn being a main producer of iPhone and iPads. One can hope that a similar transformation is taking place in the mindsets of leading implantable neural device makers. China has recently begun fabrication of its own cochlear implants and DBS devices. The production rate of these domestically-made devices is not high enough to compete with large multinational companies, which still control 90+ percent of the Chinese market.

In anticipation of a looming challenge, the multinationals are expanding their operations in China. For example, Medtronic reported the opening a patient care center in Beijing in 2010 and its new regional headquarters in Shanghai earlier this year, with plans to double its workforce in China to 2,000 employees by 2015 (while reducing the same amount of workforce in other countries). Similarly, Boston Scientific announced a five-year, $150 million investment in China, including the construction of new manufacturing and research facilities and addition of 1,000 workers to the current 200. Following in the footsteps of its competitors, St. Jude Medical announced the opening of an R&D center in Beijing along with a manufacturing facility and training center in Malaysia. It makes sense for the neurotech device industry to embrace the Chinese emerging economy to utilize its consumers, labor, and innovation. According to this report from the Economist, Chinese R&D centers have already developed some innovative medical devices with a price tag one tenth of comparable products in the West. There’s no doubt that we’ll be seeing even more innovation from and investment in China’s neurotech industry. And with more than 1 billion of human capital at hand, it is easy to imagine the potential.