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Are the authorities now going after foreign medical equipment makers?

The Siemens logo is seen during the IFA Electronics show in Berlin

Siemens is one of the dominant sellers of medical devices in China

In March 2013 an anonymous insider alleged that GlaxoSmithKline’s research head in China had fabricated data published in the scientific journal Nature Medicine. GSK withdrew the paper and two researchers were sacked.

As it turned out, the incident led to the opening of a veritable can of worms for the British firm’s China business. More damaging leaks followed, alleging that GSK sales staff were involved in widespread bribery. (A secretly filmed video of GSK’s China head with his Chinese girlfriend was also emailed to senior executives, see WiC238.) It led to a sweeping review by the Chinese authorities of GSK and other foreign pharma firms, and an investigation that made public widespread corruption in the healthcare system. GSK was handed a $490 million fine a year later. (Some thought foreigners were being singled out: none of China’s drug distributors were named and shamed in the same way.)

The scandal laid bare a common practice: how doctors were offered bribes to prescribe certain medicines. Some analysts quickly deduced other parts of the medical supply chain might be behaving in a similar fashion.

In January, an article titled “An open letter to the medical equipment distributors of Siemens” began to make the rounds on Chinese social media. It was written by a disgruntled distributor of Siemens products and accused the Munich-based company of various “hidden practices” such as forging sales contracts. These accusations were then reported in the print media by 21CN Business Herald and CBN.

More bad press for Siemens followed this month, when Reuters cited insider sources as confirming that the State Administration for Industry and Commerce (SAIC) has been investigating Siemens’ healthcare unit over medical equipment sales.

It was alleged SAIC’s probe was looking at whether the German group and its Chinese middlemen had violated competition law by donating medical devices to hospitals and clinics in return for agreements that commit to buying the chemical reagents required to run them.

Such a practice is illegal in China, Reuters reported, but is still thought to be relatively common in the country’s healthcare sector.

“The Siemens investigation, which involved as many as 1,000 hospitals, could signal further probes into other medical device makers,” Reuters reported, citing another insider. “It comes as Beijing pushes hospitals to use more locally-made medical devices and reduce a reliance on imports that account for three-quarters of a Chinese market worth around $34 billion.”

Apparently the same group of whistleblowers has been in touch with Bloomberg, although the newswire reports that Siemens isn’t the only multinational being singled out. Beginning last year, SAIC and other local regulators began investigating some of Siemens’ rivals too.

General Electric, Philips and Siemens – dubbed by the Chinese media as ‘the GPS’– command over 80% share of the market for large medical apparatus such as CT and MRI scanners. The probes don’t necessarily mean the three companies have done anything wrong, Bloomberg has suggested. But Chinese regulators are looking at whether they have come to dominate the market by offering bribes.

SAIC then clarified on its website that it hasn’t launched a bribery investigation into Siemens’ healthcare unit nor those of the other foreign players. A statement from Siemens noted that the competition watchdog’s Shanghai branch has been looking into its “marketing and business model” but that it was a routine review. The company was working with the agency “to dispel its concerns and expects to resolve the matter in the near future,” it added.

Chinese media thinks it has smelled something fishy, however. The Chinese market accounted for 8% of Siemens’ global income last year (its operations span business areas from railways to energy). However, 21CN noted that the order book for the German firm’s medical equipment division had shrunk 50% in the first quarter of this year. “Foreign companies are facing increasing competition from local providers. And the central government is also tightening control over the procurement of medical products in the healthcare system,” the newspaper suggested.

Time Weekly magazine also believes that – despite SAIC’s denials – the probes signal a “mutating” business environment for the “GPS trio” in China. As was the case for the pharmaceutical industry, where the dominance of foreign drugmakers has been blamed for high prices for medicines, Beijing would like to see local medical equipment makers grab more market share from their international peers.

Healthcare authorities have also been encouraging public hospitals to purchase more locally-made medical equipment products.

“The dominance of GPS at the high-end of the value chain is a reason why medical costs are so high in our country,” Bohai Securities, a local brokerage, suggested in a research report last week. “The incident [reports of SAIC’s probe on Siemens] may hopefully speed up the localisation of the medical equipment market.”

Of the overseas giants, General Electric has already embraced a localisation strategy, developing a range of locally-designed equipment for the Chinese market. Rachel Duan, appointed head of GE’s healthcare unit in 2010, can recite Beijing’s medical reforms word for word, says Time Weekly. Under Duan, GE has extended its sales efforts into smaller cities where hospitals cannot afford more expensive foreign machines. According to her, GE has rolled out more than 30 new products over the past four years, with 70% of the new medical devices manufactured at a price designed to meet the budgets of hospitals in relatively poorer areas.

Her reward? Last year, Duan was the first local to be appointed as GE’s chief executive in China (and the first woman to hold the role).

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