Growth in the Chinese healthcare market has been impressive. Over the past five years, total healthcare spending in China has grown at an average rate of nearly 15 percent annually. Although this is certainly an impressive growth rate, it should be kept in mind that much of this growth was in relatively low-cost items such as low-tech medications and basic care. Relatively less growth has occurred recently at the high-end of the market, including areas such as advanced diagnostic modalities and high-tech treatments.
One of the main factors accounting for uneven growth in the healthcare sector is the wide divergence of standards of care within China. While per capita healthcare spending in 2004 equaled only $100, there are huge disparities between high-income and low-income areas. In rural areas, where average per capita income is less than $500 per year, spending on healthcare is extremely limited, and a major illness can quickly bankrupt a poor family. In the most prosperous urban areas, where per capita incomes are ten times higher, many families can easily afford routine medical care, and even purchase a private health plan to cover major medical expenses. In these areas, many families can comfortably spend more than $1,000 per year on healthcare.
Many private facilities in the major cities of Shanghai, Beijing, Shenzen, and Guangzhou offer the highest standard of care, featuring the latest diagnostic modalities, treatment options, and administrative systems. However, it is estimated that only four percent of the Chinese population has access to the standard of care offered in top-tier facilities. This amounts to approximately 40 million people, out of a total population of 1.3 billion.
Fifteen years ago, less than 1 percent of the population had incomes of $5,000 or more. If past growth patterns hold up, the proportion of high-income healthcare consumers could double by 2020, translating into an average annual growth rate of 5 percent over the next fifteen years. As a result, many of the major global healthcare companies have positioned themselves in China with an eye to the market's future growth potential.
Although healthcare spending in China in 2004 totaled approximately $90 billion, less than one percent of this amount, or about $900 million, was spent on major medical systems and equipment. Thus, foreign companies investing in China should be cautious with regard to overly aggressive investment strategies. Indeed, there is growing concern about possible over-capacity in the high-tier medical segment. Although there have been no stories of major bankruptcies, profitability among top-tier hospitals is a growing worry, particularly in the coastal Special Economic Zones (SEZs), where competition between hospitals is particularly fierce.
Despite these factors, many medical equipment vendors look to China as their fastest growing market. However, while top-line growth is important, companies should also keep a keen eye on the bottom line. For example, although the Chinese PACS market doubled in the last four years, reaching a market seize of $30 million in 2004, it is still one of the smallest PACS markets globally. In addition, profit margins in China are being squeezed tremendously as low-cost local equipment manufacturers finally ramp up to compete with the multi-nationals. In sum, although the long-term growth potential in China is quite formidable, in the medium term, foreign competitors will have to exercise healthy doses caution and restraint in order to avoid major setbacks.
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