Those wondering how long it will take China to make the leap from churning out cheap, low-end (and sometimes low-quality) goods to higher-tech stuff might want to pay attention to Guangzhou TK Medical Instrument Co. Ltd.
The company, with a heavy focus on plastic medical products, wants to become one of China's first globally recognized medical device makers.
It's an ambitious goal because selling medical products in the world market is a lot tougher than the televisions and electronics sectors China dominates, and executives admit one of their big challenges is that the country's melamine-tainted milk powder and solvent-laced cough syrup have made hospitals around the world wary of buying Made in China products.
But TK has gotten some early help: Last year it secured funding from one of China's largest venture capital firms, Shenzhen Capital Group Co. Ltd., and it brought in a new CEO, a Chinese-American with broad experience in the medical device industry.
Plastics News caught up with Charlie Yu, who became TK's CEO in September, to talk about how the five-year-old company hopes to transform itself, and whether China can duplicate in medical devices where manufacturing mistakes can hurt or kill people what it has done in industries like toys and consumer electronics.
Yu previously ran Asian operations for American medical device firms Cook Inc. in Bloomington, Ind., and Merit Medical Systems Inc. in South Jordan, Utah.
He said he was drawn to TK because the Guangzhou-based firm already had a strong mix of about 150 patents developed from its relationships with doctors, as well as a solid research and development focus.
That research includes patents on some traditional plastic products made from polycarbonates and thermoplastic polyurethanes, such as laparoscopic surgery devices and a medical-waste system for sterilizing fluids that's helpful in combating communicable diseases like the H1N1 virus.
TK also has patents in some high-tech areas, like an artificial esophagus and miscrospheres with drugs attached that can be delivered via catheters directly to tumors, aneurysms or other diseased parts of the body.
One of the immediate goals, Yu said, is to use those traditional products to generate revenue, while the firm figures out how to sell or find partners for some of the higher-tech patents, most of which are used inside the body and would require more resources for clinical trials and overseas government approvals than the small firm can muster.
My goal here is to change over from an R&D company to a company that can bring in revenue and be more manufacturing and sales oriented, Yu said.
Right now the company owns its own molds and other intellectual property but outsources its manufacturing. TK is in the midst of a second round of raising capital with the goal of bringing much of the manufacturing in-house, in a new plastic and metal alloy facility in Guangzhou.
The firm plans on expanding from its current 60 employees to about 350, in three years. TK does not aim to be large, but wants to operate at global standards and earn a reputation for quality and innovation, Yu said.
The long-term goal for the company is we have a solid manufacturing base of plastics and alloys, he said. We have bits and pieces, but [our goal is] to have more comprehensive alloy and plastics manufacturing.
That's the manufacturing foundation. I want us to be very strong on the R&D side. The new facility will also have an innovation center.
Yu cautioned that it's hard to predict some things, such as TK's manufacturing footprint in its new Guangzhou factory, since it has only in the last year received regulatory approval to begin exporting to Europe, starting with an organ-retrieval bag and a trocar.
TK has reported that its medical markets remain solid even in the economic downturn, with the firm breaking even in 2008 for the first time and targeting a profit this year on expected sales of about 22 million yuan (US $ 3.2 million).
TK is starting to expand sales channels: In early June it struck an agreement with a large Chinese retail pharmacy and hospital product distributor to both get its own products into China's market and create a channel to bring in other imports, Yu said.
The company brought in venture capital both for funding and for management expertise to help it commercialize its products. The firm is targeting an initial public offering possibly in the Shenzhen stock market in three years, said Xing Zhou, TK's chairman and one of the company's founders.
The gap between Chinese and overseas medical production is closing, he said.
'Made in China' label
remains a handicap
A big hurdle, however, remains the negative reaction outside China to Chinese-made medical devices, Yu said. That has prompted TK to develop a two-pronged strategy of both manufacturing its own products and also licensing products to overseas firms if it's easier to open sales channels that way.
There is this innate resistance from many doctors and companies in many countries to use Chinese-made medical devices, so I recognize that and it's a reality we cannot run away from, he said.
For the company to move forward we will have our own brand, but we will also look for some co-manufacturers that can use our IP and our design and manufacture under their own name, so even though it may be exactly the same product but manufactured in Korea or the U.S. or wherever it may be better accepted.
I'm looking at both ways to move forward, because I recognize the global situation with the reputation of Chinese products, Yu said.
But there are some advantages for the Chinese medical industry, he said.
The first is not a surprise: cost. TK thinks it can sell a trocar kit, with four trocars and needle, for the price some European firms would charge for a single trocar. Also, animal trials are cheaper in China, Yu said.
Beyond cost, though, China also has a potential R&D advantage with its huge population, Yu said.
It means doctors treat more patients, and that translates into knowledge gained for those doctors that companies like TK can then more easily tap for new products, he said.
Many of the U.S. physicians who come over here ... are very experienced in, for example, liver work, but their [U.S.] volume in six months may be what one [Chinese] doctor does in a couple of weeks, Yu said. That is why in some of the interesting diseases we are seeing now, the Asian doctors have more experience than the U.S. doctors.
But there are challenges with the Chinese supply chain, such as obtaining from local companies the high levels of documentation of materials and transparency in manufacturing processes that global medical firms and governments require in medical devices.
There also are significant challenges with China's factory-floor workforce, mostly migrant laborers who come from rural places to areas like Guangzhou without much formal education.
Such workers lack exposure to complex machinery or the kind of attention to quality and detail that is critical in medical manufacturing, and that means a lot more training, Yu said.
It's the same all over the developing world, he said. It takes time to raise the standards.
Yu, who emigrated with his family from Taiwan to the United States as a child and was educated in the U.S., admits to being motivated by his desire as an ethnic Chinese who joined the global diaspora to try to build inside China the same kind of company he's been part of in the west.
Ethnic Chinese or ethnic Asians have found success in America, he said. Why can we not be successful from over here, from within China, to grow a company that can be successful globally?
Yu compares China's development in areas like medical manufacturing to Japan, which at one time also focused on lower-end products, but now has a reputation for quality. He believes it's inevitable that China will became a major player in medical device manufacturing.
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