China Med Device, LLC compared the list of products that will be imposed with tariffs from both the US and China side. We think that US medical device companies will be impacted more than the China ones especially for imaging companies.
The Office of the United States Trade Representative (USTR) on April 3 published the list of 1,300 products that included diagnostics and major modalities of medical imaging equipment (CT, X-Ray, MRI, ultrasound etc).
China has responded by slapping tariffs of its own on 128 U.S. products, mostly agricultural products: (port, beef, fruit, nuts ), auto, chemical, airplane, etc. No impact on medical devices. The Chinese tariffs took effect on April 2.
On China side, US medical devices companies have benefitted from setting up factories in China. With 5 times the U.S. population and low healthcare standards as well as very under-developed medtech industry, most of the large US companies have benefited with setting up local factory to reduce cost and provide easier access to local population.
In the past three years (2015 to 2017), China CFDA has approved about US medical devices 1,300+ each year on average. According to the 2017 CFDA registration report released on March 28, 2018, CFDA approved US medical devices was 1,469 in 2017, about 35% of the total newly approved imported medical device. The 2nd largest country is Germany with 827 approvals. The 3rd largest country is Japan with 404 approvals. US has 642 devices more than Germany and 1,065 more devices than Japan. US still dominates the China premium market. Top US medical device companies now get at least 30% to 50% more sales from a single country, China.
China needs western countries technology to improve its healthcare. At the same time, it needs to reduce healthcare cost to provide access to its huge population. US companies will benefit more from the positive policies from the Chinese government and population needs. The top five imported medical devices categories registered in 2017 are: implantable materials and artificial organs, optical and endoscopic equipment, dental materials, medical polymer materials, and major electronic equipment. In the recent China National Congress meeting in March, Chinese Premier Li Keqiang announced that “tariffs for cancer drug and medical devices imported to China could be reduced to zero.”
In addition, the CFDA has created the innovation approval pathway to expedite the access of new devices to Chinese population. Companies such as Johnson and Johnson, Medtronic, Abbott, and most recently, Edwards lifesciences have all benefited.
The tariffs could have more negative effects on the medical imaging industry, as many firms that once manufactured scanners in the U.S. have moved operations to China to take advantage of lower labor costs. However, most of the imaging products made in China are mid to low end products. US hospitals tend to purchase higher end products. Imaging centers and outpatient centers who are more price sensitive may hurt more.
The tariffs could also affect the nascent Chinese imaging equipment export industry. Homegrown Chinese companies have begun to look beyond their home markets to find international customers in the U.S. and Europe, among other locations. A 25% tariff could negate much of the price advantage of these companies but mostly in the mid to low end tier.
We guess the public knows better. The stock market did not react too terribly with these announcements. Since Trump announcements on tariffs on March 22nd, the stock prices of the medical device companies with big presence such as GE, Philips, Siemens, Smith Nephew, Abbott, Medtronic and Edwards Lifesciences, did not change much. But airplane company, Boeing dropped 3.77% and construction equipment company, Caterpillar dropped 3.27% on April 3 when Trump administration detailed the tariff plan.
I remember running into a couple of managers from Caterpillar a few years ago in China. They mentioned that 50%+ of their sales came from China. How could we say US did not benefit from China economic development?
For the US tariffs on China, at least it is not going to be put into effect right away thanks our check and balance system. United States Trade Representative is taking comments on the proposed tariffs through April 23, and it will hold a hearing on the proposal on May 15 in Washington, DC.
If China opens up its financial market and promises more on IP protection and US companies fight against the tariffs more, Trump’s tariff policy could be modified and even revoked. At the end it could all be negotiation tactic.