ICFC STRATEGY
The CTC’s New Leadership

In August 2007, Chen rejoined the CTC to head up its operations, replacing Dorri. At that time, China’s central government had just announced that R&D was the country’s top priority, with a focus on areas such as energy, environmental protection, healthcare and transportation. In 2007, China’s R&D expenditure increased to CNY¥371 billion — 1.4 per cent of its GDP (versus ¥68 billion, 0.76 per cent of its GDP, in 1999). Chen noted:

I realized that China had become a good place for innovation, particularly in the healthcare industry. Healthcare innovation depends on user experiences and customer demands that are so different between developed countries and emerging markets. Immelt supported GE Healthcare China to develop new products suitable for the Chinese market.

To benefit from economies of scale and to start localizing, GE adapted its products that were designed for developed markets to China. The CTC, together with the business unit’s development staff, used a “partial re-design” approach to incrementally modify these upscale products. It typically took two to three years to complete a local development cycle.

However, local Chinese competitors were growing very fast and they were quickly moving up from the low-end market to the mid-range segment. Chen, and other senior executives in GE China, realized that the CTC had to originate projects that specifically met China’s unique needs as a means of speeding up its penetration. Yet, GE headquarters had never given real consideration to budgeting for China, partly because revenue generated from China was still relatively small to GE (less than 4 per cent). They did not see the immediate payoff of innovating “down” or “differently” for the low-end segments, and they worried about potential cannibalization. Nonetheless, Chen and several other executives at GE China decided to collectively approach Immelt to obtain his support. They proposed the initiation of ICFC R&D projects and received Immelt’s special funding of $15 million for 25 projects in the first year.

Project teams, however, faced various challenges. For example, initial products, developed from projects that were typically led by engineers and salesmen, did not sell well because these products were still too expensive in China. To solve this problem, the business unit adjusted the price and distribution channel. To ensure that the team understood the business unit’s marketing roadmap and customer needs, the CTC invited a product manager from a relevant business unit to join each project team, as well as to sell the innovative products back to headquarters. After implementing this solution, the CTC executed the ICFC strategy smoothly and continued to receive additional funding for more projects. Skeptical people also came on board in regard to this strategy. The CTC began to play a key role in working with business units in China and in developing goods and services that could meet the unique needs of this market.

Healthcare as an Example

History of GE Healthcare and Its China Operations

GE’s involvement in healthcare started in 1896, when Elihu Thomson built electrical equipment to produce X- rays, which manufactured images for diagnosing bone fractures and locating foreign objects in the body. X-ray technology was discovered and introduced only a year earlier.7 The company established GE Healthcare,8 headquartered in the United Kingdom, to provide medical technologies and services, including medical imaging and information technologies, medical diagnostics, patient monitoring systems, drug discovery, biopharmaceutical manufacturing technologies and performance improvement solutions. With more than 50,000 employees (by the end of 2014), GE Healthcare had sold its products to hospitals, medical facilities, pharmaceutical and biotechnological companies as well as life sciences research institutes worldwide.

In 1991, GE set up a joint venture, GE Hangwei Medical Systems, in Beijing to start manufacturing in the country. GE created two more joint ventures in 1996, and later combined these two with GE Hangwei to form GE Healthcare China. Its primary sectors included medical imaging, which covered ultrasound equipment9 and more technologically advanced equipment, such as X-ray, magnetic resonance imaging (MRI), computed tomography (CT) and positron emission tomography (PET). Its main customers were sophisticated hospitals in major cities.

In 2000, GE Healthcare China established an applied R&D and manufacturing base in Wuxi, Jiangsu Province, to develop and produce affordable ultrasound products. In 2001, by using the latest technologies developed at GE Global Research, it launched its first compact ultrasound product,10 the LOGIQ Book. This product was 30 to 40 per cent less expensive than the traditional console-type devices. Using the country’s low-cost advantage, the Wuxi plant started to manufacture the product and then export a significant portion of its production. In 2003, 80 per cent of the products made in Wuxi were exported.

In 2006, China’s total expenditure on healthcare was 4.6 per cent of its GDP, versus 15.9 per cent in the United States, and its total expenditure on healthcare per capita was $213, versus $7,110 (see Exhibit 2). Most of the hospitals and clinics in China were still poorly funded and equipped. However, there was market potential due to rising incomes, an aging population, increasing health consciousness and augmenting government expenditure. Domestic consumption of GE products made in Wuxi increased from 20 per cent in 2003 to 35 per cent in 2006.

GE Healthcare’s main competitors were Siemens Healthcare, Philips Healthcare and Toshiba Medical Systems. In 2006, these four players had a combined share of over 60 per cent of the high-end medical equipment market in China. Other foreign companies, such as Varian Medical Systems, Hitachi Medical Systems and Carestream Health, were niche players in several product categories.

Challenges from local Chinese competitors were also growing. Among them, Mindray Medical International Ltd. (Mindray) was the market leader for black-and-white scanners (see Exhibit 3). In 2006, Mindray launched its first color ultrasound scanner to target the mid-range market and was listed on the New York Stock Exchange. That same year, it made net revenues and a net income of $194 million and $46 million, respectively, growing at a five-year compound annual growth rate (CAGR) of 50 per cent and 58 per cent, respectively.

Of its net revenue, 49 per cent came from over 140 overseas countries, including growth markets that GE also targeted. Mindray had 30 per cent of its net revenue generated from the medical imaging sector that GE focused on. The company spent $19 million (10 per cent of its net revenue) on R&D (see Exhibit 4). Using an extensive network of third-party distributors in both urban and rural areas, Mindray sold medical devices to approximately 27,000 community hospitals and clinics in China.11 It also established service centers in every province to provide training as well as prompt, low-price repair and maintenance services. In contrast, GE’s third-party distributors were located primarily in large cities and provided limited after-sales services.