After years of independent innovation, a leading Chinese medical device maker Mindray Medical International Ltd. (NYSE: MR) is striding on the international market. Throughout its growth from a small Chinese medical device agent to a well-known medical device manufacturer, independent innovation, financing and a shift to overseas markets have combined to contribute to the success story of this Chinese homegrown enterprise.
On September 26, 2006, Xu Hang, president of Shenzhen-based Mindray Medical International Ltd. pushed the starting bell button in the hall of the New York Stock Exchange to start the trading day. But Mindray was just a small medical device agent 15 years before. When Mindray attended its first exhibition, it had only signed contracts totaling RMB360,000 (US$47,000). But at the exhibition, a well-known medical instruments agent had signed RMB8 million (US$1 million) worth of contracts.
Things have changed since then: that once well-known company is long gone, and Mindray has become the first Chinese medical device maker to list on the NYSE.
The Power of Independent R&D
“A key turning point in Mindray’s history came in 1997, when it was decided that Mindray should do independent research and development,” explains Xu Hang. He’s glad that his company geared a shift from simply agency to independent research and development. Like all other Chinese companies in the medical devices field, Mindray started out as an agency with just three people at the beginning. For Xu, the most impressive thing about medical devices at that time was that they were very expensive. “We made RMB1 million (US$131,000) in the first year as a distributor,” claims Xu. Although basically all these domestic companies were essentially reselling for Hong Kong companies, they still did very well.
But unlike other distributors, Xu Hang, who holds a degree in medical engineering, started independent innovation of some products in 1992. Mindray’s first products included China’s first single-parameter blood oxygen saturation monitor. “At the time, as China’s hospitals had never used Chinese-made devices, they preferred the imported multi-parameter monitors. So our products did not sell well,” says Xu. Customers didn’t try Mindray’s equipment until 1995 because of problems in technology, quality and sales service. In the early stages of its development, Mindary was basically an opportunist. It hadn’t gone deep in researching the industry. It would generally sell anything that appealed to the market. It even sold products that had nothing to do with medicine.
As an agent, Xu gradually realized the importance of transforming his business: the newly established Mindray was unable to compete with Hong Kong companies which had much greater financial clout; in addition, the after-sales services of those foreign companies in the Chinese market were intolerable. There was one time when Mindray ordered the necessary spare parts for a malfunctioned monitor of a well-known overseas medical device maker. The parts didn’t arrive until two months later, and they were unbelievably expensive. The customer blew up and Xu decided to give up being an agent for that company.
But the real reason to give up being an agent and pursue independent R&D was the intervention of the global venture capital firm Walden International in 1997. Because of conflicting views about the participation of Walden, some members of Mindray left the team. At the time, Mindray’s annual profit was about RMB10 million (US$1.3 million). “What would Mindray want to be? What are your plans for the next three years?” Xu Hang was unable to provide answers to the questions Walden posed. “Three years? We only keep records for one year,” he said. Xu had to begin to think carefully about the future of the company. It was soon clear that Mindray should research and develop medical devices independently. Since then, 10% of its annual revenue is reinvested in R&D, and the R&D team has grown to 800 people.
Mindray spent four to five years developing its first-generation of products. Eventually, three product lines were established. Now Mindray is able to provide 30-40% of the equipment needed by hospitals: monitoring devices for operating rooms, emergency departments, Intensive Care Unit (ICU) wards; the biochemical analyzers and blood cell analyzers for clinical laboratories; and the black-and-white photographic and color ultrasonic equipment for medical imaging. In addition, Mindray has just introduced an anesthesia apparatus to support operations.
Xu says that foreign companies have small market shares in China for more than half of Mindray’s product lines. Mindray’s patient monitoring devices now occupy 40% of the global market. Mindray has also become the world’s largest manufacturer of tri-classified blood cell analyzers.
The Powerful Hand of Capital
In 1997, when Mindray was dealing with venture capital investors, both state-owned enterprises and private companies showed some appetite for investment. Private companies, however, were much more diligent and wanted to know how much dividends they could expect each year. Xu says the negotiation with Walden was the first time he had ever dealt with a venture capital company. Thanks to the cooperation, Mindray was able to realize the real value of the company. That, of course, was in addition to the fact that Walden helped restructure it. Walden’s suggestions that Mindray should research and develop products independently and go to overseas markets also turned out to be correct. The Walden-Mindray combination was a success.
