HTDK's Three Strategic Pillars to Break Through China's Trillion-Yuan Medical Device Distribution Market

The distribution segment of medical devices is hailed as the “central nervous system” of the pharmaceutical industry, with core distributors and logistics enterprises connecting upstream manufacturers to end customers and reaching a vast market akin to capillaries.

Beneath the complex “central nervous system” lies a vast market. In 2020, the commercialization market size of medical devices in China reached RMB 93.2 billion. Within this nearly trillion-yuan market, China’s medical device commercialization sector exhibits a “three lows” pattern: low market concentration, low overall industry efficiency and profitability, and low innovation capacity.

In recent years, under the influence of policies such as the Two-Invoice System and volume-based procurement, this trillion-yuan market characterized by “three lows” is reaching a watershed moment for development and transformation.

The external forces driving industry transformation stem primarily from policy initiatives. Policies such as the “Two-Invoice System” and volume-based procurement have spurred continuous industry consolidation, leading to steadily increasing market concentration. Drawing on the U.S. pharmaceutical distribution market, where three major players account for 80% of the market, China’s domestic market concentration is poised to rise further.

The internal drivers propelling industry transformation stem from distribution enterprises advancing toward scale, specialization, digitalization, and standardization, while expanding value-added services beyond their core capabilities in distribution and logistics.

Undoubtedly, driven by internal and external forces of change, the distribution industry will undergo a rigorous process of survival of the fittest. Some vessels will fall behind in the storm, while powerful fleets will seize the opportunity to grow stronger.

As one of the earliest medical device commercialization enterprises in China to obtain an operating license, DKSH, as an industry pioneer, has also achieved leapfrog development amid centralized procurement.According to the Frost & Sullivan report, in terms of GMV in 2020, DKSH was China’s second-largest commercial solutions platform (with a market share of 12.3%) and the largest private commercial solutions platform in the global high-value medical devices segment (including in vitro diagnostic equipment).

The medical device distribution industry has low gross profit margins, and volume-based procurement has further reduced corporate gross profit margins; however, DKSH has achieved high operational efficiency.Amid the backdrop of centralized procurement, channel gross margins are being squeezed, and supply chains face pressure to reduce costs and improve efficiency, making profitability a more critical core competitiveness for distribution enterprises.

How DKSH Stands Out in a Highly Competitive Distribution Market to Become the No. 1 Private-Platform by Market Share: VCBeat (WeChat ID: vcbeat) Interviews DKSH CEO Cheng Xuehui.

Let us first examine the medical device distribution market, which is currently a low-gross-margin industry.

Medical device distribution is characterized by small batch sizes, high frequency, strong segmentation, multiple tiers, and high professionalism. The wide variety of products, complex specifications, and significant differences in personalized demands increase the challenges of ensuring delivery timeliness, safety, and service professionalism. Distribution enterprises need to extensively deploy warehousing and distribution networks, equip themselves with efficient information systems, and maintain a substantial talent reserve, while investing in infrastructure such as warehouses, distribution channels, and digital systems.

Undoubtedly, this leads to higher operational and service costs, resulting in lower gross profit margins in the medical device distribution market.

From the perspective of the competitive landscape, the medical device industry is not highly marketized, with state-owned enterprises such as Sinopharm, Shanghai Pharmaceuticals, and China Resources holding dominant positions.

As a global enterprise, DKSH’s predecessor was among the earlier companies to obtain operating licenses, similar to leading state-owned enterprises. In recent years, the distribution industry has undergone significant consolidation, with more than 10,000 companies exiting the market. Nevertheless, DKSH has secured a strong position in the distribution of high-value medical devices and achieved operational efficiency far exceeding the industry average.

The Secret to DKSH’s High Operational Efficiency Lies in Three Key Areas: Differentiated Market Entry, Digital Infrastructure for Cost Reduction and Efficiency Enhancement, and Diversified Value-Added Services.

First, there are differences in market entry strategies.In the overall medical device distribution and delivery market, foreign-funded high-value products represent the largest segment. In China's medical device market, mid-to-high-end products account for 25% of the total, with two-thirds of these high-end products manufactured by foreign companies; domestic medical device enterprises in China primarily produce low- to mid-range products.

In recent years, driven by the pandemic, markets for pandemic-related medical devices and low-value consumables have experienced rapid growth. However, major global medical device brands remain the core customers of distribution and circulation enterprises. High-value consumables in key segments such as in vitro diagnostics (IVD) reagents, orthopedics, surgery, and interventional procedures continue to be the primary drivers of market growth.

While many domestic companies compete for high-value products, DKSH has focused on the cross-border high-value medical device market, which presents higher barriers to entry.

In China’s high-value medical device market, global brands held a 56% market share in 2020. Historically, global brands entering China have had to navigate a strict and complex regulatory environment, establish and manage high-quality, compliant distribution channels and supply chain infrastructure, handle extensive SKUs and specifications for medical devices, and understand regional characteristics, among other challenges. Therefore, global brands increasingly require mature commercial partners to provide them with efficient and professional solutions for market entry and penetration in China.

DKSH is capable of providing comprehensive commercialization solutions tailored to the needs of global brands.

Taking DKSH’s services for sequencing giant Illumina as an example. Behind the rapid growth of Illumina’s China market lies the indispensable support of its commercialization partner, DKSH. DKSH has helped Illumina establish a nationwide supply chain network in China, enabling swift business expansion across multiple cities. As Illumina’s primary warehousing solutions provider, DKSH designs and provides deep-freeze, cold-storage, temperature-controlled, and ambient-temperature warehouses, while also handling product importation, inbound processing, and warehousing and distribution for Illumina.

With over a decade of deep engagement in the Chinese market, there are many service cases similar to that of Illumina. DKSH’s client roster includes numerous global corporations such as Alcon, MicroVention, Smith & Nephew, Roche, Abbott, and Procter & Gamble. Notably, DKSH has maintained a 17-year partnership with Alcon, a leading brand in global eye care.

These multi-departmental products from global brands enable DKSH to better mitigate the risks associated with volume-based procurement. In terms of gross margin contribution, global brand products offer higher value-added and stronger bargaining power in downstream markets, thereby enhancing DKSH’s competitive advantage in a fiercely competitive landscape.

Becoming an “invisible champion” in the medical device commercialization platform sector, DKSH’s advantage lies not only in its differentiated market entry strategy but also in extending its service chain within vertical segments. By developing value-added services beyond traditional distribution, warehousing, and logistics, DKSH has shifted from horizontal expansion to vertical deepening, achieving end-to-end coverage along the service chain.

In the commercial market for medical devices, Chinese enterprises primarily engage in direct sales, distribution, and providing SPD (Supply, Processing, and Distribution) services to end-user hospitals. An analysis of the capabilities of companies within China’s medical device distribution industry chain reveals that warehousing, logistics, and channel development constitute the foundational competencies of this sector, while the ability to empower both upstream and downstream partners serves as the key competitive differentiator.

The key to DKSH’s ability to forge long-term, in-depth partnerships with global brands lies in its end-to-end service platform. Unlike companies that offer only direct sales or distribution, DKSH provides comprehensive coverage across the entire value chain—including product registration, import and export, warehousing and distribution, channel management, inventory management, and after-sales services—delivering a one-stop solution for the commercialization of global brands in China.

Over the past decade, DKSH has provided brand partners with high-value-added services and solutions tailored to their specific industry or product attributes, supporting their rapid growth in China.

Cheng Xuehui stated, “We provide not only traditional warehousing, distribution, and logistics services but also a wide range of high-value-added services. For orthopedics, for instance, we offer instrument management services; for ophthalmology, we provide inventory and sales data management under consignment models. By delivering efficient empowerment beyond conventional distribution, we maintain strong stickiness with upstream enterprises and have become an indispensable link in the commercialization value chain of medical device products.”

Taking orthopedic surgery as an example, a typical procedure often requires the use of instrument trays containing bone screws and plates of various sizes and models tailored to different surgical needs, along with surgical instruments. Due to the high value, diverse specifications, and significant variability across procedures associated with high-value medical consumables, hospitals do not stockpile large quantities in warehouses. Instead, they place orders with suppliers only after preliminary surgical requirements are identified by clinical departments. Furthermore, after the surgery is completed, some of these high-value consumables must undergo a recovery process.

To address the pain points in the orthopedic sector, DKSH has developed a customized IT service system to help brand owners manage their instruments. The system provides precise production and marketing data, enhances distribution channel efficiency, and mitigates risks associated with the circulation of critical surgical instruments.

DKSH’s diversified value-added services foster strong customer stickiness and enhance its competitive edge in a fiercely contested market.

DKSH’s third major strategic advantage for achieving high profit margins is establishing digitalization as industry infrastructure.

Under the traditional medical device sales model, upstream manufacturers often encountered issues such as low communication efficiency, difficulties in data collection, distorted feedback, and high management costs when managing numerous downstream distributors using conventional methods. Consequently, manufacturers had limited control over various distribution links, including downstream distributors and end-user hospitals.

In its early development stages, DKSH foresaw that digital capabilities would become the industry’s infrastructure. In 2006, DKSH obtained its Medical Device Operation License, and in 2007, it began rolling out the core components of its ERP system.

To address the management challenges inherent in the medical device distribution industry—characterized by a vast variety of devices, complex specifications, and frequent transitions among inventory, temporary storage, and surgical support statuses—DKSH has developed and operates multiple efficiency-oriented systems built on SAP infrastructure. Leveraging the platform’s robust scalability, these systems rapidly integrate with those of upstream and downstream partners through deep customization, connecting with hospitals, retail stores, customs systems, drug regulatory platforms, and national tax platforms. This integration streamlines information flows and enables data sharing across the supply chain. By utilizing such data-driven systems, DKSH enhances information connectivity, achieves visibility into transaction flows, and provides clients with business intelligence analytics, thereby further improving operational efficiency.

Cheng Xuehui stated, “The barriers to providing these services are very high. From the outset, we invested heavily in human resources and systems to build up our capabilities in tool management, technical management, and regulatory registration-related resources.”

The cost reduction and efficiency gains driven by digitalization are not only reflected in operational efficiency but also empower DKSH to face challenges posed by external policy changes in the industry with greater confidence.

The compression of gross profit margins in medical device distribution channels, driven by centralized volume-based procurement, poses challenges to the distribution industry. Winning upstream manufacturers are free to select their own distributors and procurement platforms; considering factors such as management costs, these manufacturers tend to favor distribution enterprises with scale advantages and professional management capabilities.

DKSH has a strong sense of the market shift driven by centralized procurement. Cheng Xuehui stated, “Amid the trend of volume-based procurement (VBP) policies, distribution channels are being compressed, and the traditional multi-tiered distribution model is being replaced. With streamlined distribution processes, the competitive advantages of one-stop commercialization platform providers like us have become more prominent, actually bringing us more orders post-VBP.”

For commercial enterprises, volume-based procurement (VBP) truly tests foundational capabilities such as cost control, operational efficiency, value-added services, and multi-category management. DKSH’s prior investments in building these capabilities have enabled it to respond to VBP challenges with greater ease and confidence.

Over the past decade of development in the Chinese market, DKSH has grown into a leader in the commercialization of medical devices in China, relying on diversified value-added services and digital management capabilities amidst fierce market competition.

Over the next decade, China’s medical device market will undoubtedly continue to expand, but its structure is undergoing changes, and the drivers of market growth are becoming more diversified.

As the hub linking upstream manufacturers with downstream distributors and end customers in the medical device market, how will DKSH strategize for the next decade?

In the more complex and diversified market landscape of China's medical device industry,From a segment perspective, DKSH continues to focus on four core specialties: ophthalmology, medical aesthetics, cardiovascular and neuro-interventional procedures, and consumer healthcare.

The rationale for maintaining a strategic focus on these four key specialties lies in the expectation that the market shares of high-value consumables subject to centralized procurement—such as those used in vascular intervention and orthopedics—will stabilize after an initial short-term decline, while high-value consumable segments with consumer healthcare attributes, such as dentistry and ophthalmology, will continue to experience rapid growth. Based on epidemiological data, these niche sectors will remain the primary growth pillars of China’s medical device market.

From the perspective of service brand layout, DKSH’s strategy includes actively exploring incremental markets and developing existing markets. The incremental market mainly focuses on global innovative products that have never entered the Chinese market; the existing market mainly focuses on global brands accumulated through long-term cooperation in the past.

Cheng Xuehui stated, “For products that fill gaps in the Chinese market, we aim to establish deep, strategic partnerships and secure long-term commercialization rights in China. For instance, we can introduce these innovative products to China through license-in arrangements. When selecting such products, we prioritize those resistant to volume-based procurement (VBP) and addressing unmet needs where no domestic alternatives exist. The second evaluation criterion is that the product’s sales scale should be at least RMB 1 billion.”

Taking the collaboration between DKSH and SOFWAVE MEDICAL LTD, an Israeli market-leading brand in the field of ultrasound-based anti-aging, as an example, DKSH provides end-to-end professional commercial solutions. On one hand, it facilitates the registration and approval of SOFWAVE MEDICAL LTD’s products with the National Medical Products Administration; on the other hand, it accelerates comprehensive commercialization in the Chinese market, including product promotion, distribution, and sales.

The selection of this ultrasound-based anti-aging product is based on DKSH’s assessment of the domestic medical aesthetics market. Its unique ultrasound anti-aging technology addresses a current market gap, as no Class III focused ultrasound products have yet been approved for launch in China. In its "White Paper on Energy-Based Devices in Medical Aesthetics," VCBeat Research Institute projected that relevant focused ultrasound products would likely gain approval in 2023. If successfully launched, the sector is expected to experience a modest surge over the following three years, with a compound annual growth rate (CAGR) of 20%, before transitioning into a phase of steady growth at an annual rate of 18%. The market size is projected to reach RMB 3.68 billion by 2031.

In tapping into the existing market, DKSH has categorized the demands of its global brand partners from past collaborations into two major groups. One category comprises products that have been in the Chinese market for over 10 years and have already achieved a certain sales scale; the other category includes new products introduced to China by global brands.

Cheng Xuehui pointed out: “Some products from global brands have been in the Chinese market for over 10 years, accounting for 20%-30% of these brands’ global sales. These products may also be included in centralized volume-based procurement (VBP). For such mature products, global brands have a stronger need to control operational costs, making DKSH’s one-stop service platform more competitive. As for new products from global brands, leveraging their strong R&D capabilities, a large number of innovative products enter the Chinese market each year. DKSH can help these innovative products achieve efficient market entry in China based on its mature commercialization platform.”

Currently, DKSH has undergone multiple industry challenges,With insights into China’s diverse market and a distribution network deeply rooted across the country like capillaries,welcoming a more resilient and inclusive market.

The market is accelerating the restructuring of China’s medical device distribution industry. After another round of intense consolidation, the sector has entered a phase of integration. It is foreseeable that companies with differentiated advantages and stronger cost-control capabilities will advance into a new stage of development. For distribution and circulation enterprises, innovation and service are the keys to success; basic distribution and logistics services alone are insufficient to build competitive differentiation. Those who seize the opportunities presented by industry transformation will secure their future.