Philips integrates Chinese products into imaging equipment portfolio

Philips Medical Systems has long prided itself on the performance and sophistication of its imaging hardware. The company's focus on the upper tier of the market has resulted in a rich portfolio of high- and premium-end scanners. But work is now under way at Philips to develop a parallel portfolio for budget-conscious consumers. The company is using a joint venture in China to achieve this goal.

Philips signed a deal last year to ally with Neusoft Digital Medical Systems for the R&D and manufacture of medical imaging hardware in China. The joint venture, known as Philips and Neusoft Medical Systems, now operates out of Neusoft's base in the northeastern city of Shenyang. Philips holds a 51% stake in the registered $30 million capital, and Neusoft has a 49% share.

Neusoft had been actively seeking a wider international exposure for its relatively low-cost medical imaging scanners, rolled out first to hospitals throughout China (DI SCAN 5/14/03). Philips sought a way into local development in China for its medical imaging business. The partnership serves both goals.

"We were looking for a factory that could do the R&D, the local procurement, and the manufacturing. We wanted it to develop products for worldwide sales, not to be 'made in China, for China,' but to be a global feeding factory," said Paul Smit, head of strategy and business development for Philips Medical Systems.

At the launch of the joint venture in June 2004, Neusoft was already marketing a comprehensive range of low- to midrange digital medical imaging equipment, including whole-body single-slice CT, dual-slice spiral CT, and 0.23T open MR scanners. Philips aims to work with Neusoft on the development of more entry-level hardware.

"We have road maps in place for most of the modalities. We'll start with the existing products and then build on them using R&D competencies and know-how that Philips has elsewhere in the world," Smit said.

The first fresh products released under the joint venture are already being shipped for sales. X-ray bucky units, in the works at Neusoft when Philips took a controlling interest in the venture, have been launched in China. Approvals for marketing and distribution to other global destinations are in the works. Future product releases are likely to include basic CT and MR scanners with a view to capturing sales throughout the Asia-Pacific region, Africa, Latin America, and certain areas of Europe.

"This is an expansion of our business," Smit said. "We believe that with our top-end products, we are serving 50% to 60% of the market for medical imaging equipment. So there is a large part of the market that we have not been able to reach in terms of requirements for price points and performance. This changes all of that."

Smit referred to the slice race going on in CT but noted that there is still a large market for single- and dual-slice CT. These are now being made for Philips in China.

Philips is also shifting production of its existing lower tier offerings to China. The midrange EnVisor ultrasound, previously made in North America, is now put together and shipped from Shenyang. Philips' 0.23T open MR scanner is also being manufactured at the Neusoft plant.

Production of the company's 0.6T and 1T open MR systems, however, which rely on superconducting magnet technology, will stay in Helsinki for the foreseeable future, according to Smit. The technology for these open MR systems is not available in Shenyang, as the MR supply base in China is geared toward low-field permanent magnet technology.

"The big advantage, the cost-price advantage, of manufacturing in China is not the manufacturing itself but the local supply base," Smit said. "For our top-end products, our supply base is elsewhere. Although we probably could move our high-end production to China, it wouldn't make a lot of sense, because the suppliers would still be elsewhere."

The idea that partnering with a local company in China could provide an effective way of realizing the potential economic benefits of China-based manufacturing did not originate with Philips medical imaging business. Royal Philips Electronics, the parent company of Philips Medical Systems, has more than 20 such joint ventures in the country at the moment. It was one of the first multinationals to start investing in the region and now generates more revenue than any other company from products made in China.

This long-standing investment in China's manufacturing base, stretching back to the 1930s, has given the name Philips a good reputation in China, Smit said. Experience garnered from the raft of joint ventures is also ensuring that modalities built at Shenyang meet the standards expected of a Philips-branded scanner.

Nonetheless, operating within China is never smooth sailing for Western companies. It can take time to learn how to best cooperate with federal and local governments, Smit said. Having a local partner who understands unspoken but assumed rules of engagement can be a significant help there. Regular exchange visits between Philips' staff in Europe and the U.S. with their colleagues in China is also promoting good communications.

"Starting a joint venture in China is much different from doing this in Europe or North America," Smit said. "We have to learn how to work out our cultural differences and build a working relationship that is fluid and transparent. That takes time."