In the twenty-first century, the market for international goods will be dominated by Asia. In China alone, 200 million of the country’s 1.2 billion people are now “middle-class” consumers. Opportunities are especially abundant in such areas as medical technology, a rapidly expanding field in a region that has been underserved in health care. According to the 1995 annual report of Amway Pacific, Ltd. (referring to a new health- and personal- care products manufacturing facility in China), “Although risks exist, we believe that the potential for this new market is immense. China’s GDP growth has expanded approximately 11% annually over the past five years. Equally as impressive, 22% of the world’s population — one out of every five potential customers in the world — lives in China.” Throughout Asia, governments are spending large sums on health- and medical-care services. In Taiwan, for example, the government has begun a national health insurance plan for its population of 21 million and has already spent more than $1 billion on hospital expansion. In Hong Kong, the medical device market, which was about $400 million in 1995 and has continued to grow by some 15% annually, is now dominated by foreign suppliers. In Malaysia the medical-device market has an annual growth rate of 18%, a figure that more than doubles every six years. The United States is the world leader in medical research, technology, and products, and opportunities for U.S. medical-products companies in this region are great. If such companies hope to penetrate the Asian market, however, they must produce products in Asia rather than simply sell or distribute products made outside the Asian marketplace.
Fortunately, there are a number of benefits to be had in producing goods in Asia. First, labor costs are still cheap in China, India, and all the ASEAN countries except Singapore (note that Vietnam is now an ASEAN country). Second, if a company manufactures locally, products can be altered (if necessary) to meet the needs of the local market, with opportunities for input from relevant members of the community. This is especially important in the medical-products area, where consumers, doctors, clinics, hospitals, and government officials procuring medical products can be quite easily polled and consulted. When consumer feedback is immediate, manufacturers can respond in kind. Finally, if a company sources parts in Asia, it will be both easier and cheaper to manufacture there than to import those same parts from Asia into the United States, use them in the production process, and then export the finished product back to Asia for sale.
Foreign companies are increasingly locating their plants to Asia, putting U.S. manufacturers who do not follow suit at a disadvantage. Although a growing number of U.S. medical-products companies is now active in Asia, many of them continue to limit themselves to selling and distributing imported medical products, perhaps because they are fearful of differences in language, culture, transportation, and labor, or are reluctant to commit to the investment required to establish a grater presence in the region.
If the U.S. medical-products industry is to enjoy long-term success in the Asian market, it must first learn discipline and patience, find local partners, and establish production facilities throughout the continent. Finding local partners for joint or cooperative ventures is not easy, but it is often an essential prerequisite to doing business in Asia. As reported by International Business in December 1994, the vice minister of China’s Ministry of Posts and Telecommunications delivered an unusually blunt message to the head of a large U.S. company seeking to establish a presence in China: “We’re not going to open our markets without the trade-off of access to American technology and know-how…This is not the age of pillage and plunder.” A senior officer in the U.S. Embassy in Beijing stated that American companies “are not going to be able to export forever on a large scale without making any commitment to the market. Companies that haven’t started thinking about direct involvement in the Chinese market are missing the boat.”
In the United States, the vast majority of businesses operate at arm’s length, using agents, lawyers and accountants. Asian business practice, by contrast, seldom relies on lawyers, and bonds of trust among the parties involved — not complicated documents — are integral to its functioning. The down side of this practice is that it takes time and patience to establish trust; the up-side is that once trust has been established, everything is possible. Americans must be willing to adjust to this practice in order to comply with Asian business customers.
Asia Versus Mexico
To understand why it can be beneficial to manufacture goods in Asia, it may be useful to look at manufacturing operations in another country. In recent years, many U.S. firms have established production facilities in Mexico, which, since the passage of NAFTA, has been touted as the ideal solution to the problem of costly production. Yet by most objective measures, as a location for the production of goods, Asia beats Mexico hands-down.
U.S. businesses generally locate their production facilities abroad to take advantage of cheaper labor costs and more favorable laws. Here, Mexico loses out to Asia on both counts: Mexican wages are higher than those in most Asian countries, and at least 30% of the Mexican labor force is unionized, with the percentage in the manufacturing subsector being even grater. In Thailand, by contrast, only 10% of the work force is unionized, and in Malaysia, only 2%. The U.S. State Department estimates that in Taiwan, 35% of the labor force is unionized, in Indonesia; 6% and in Hong Kong, just over 18%. Strikes are rare and short-lived in Asian countries, whereas in Mexico, labor disputes are fairly common, and their resolution is often time-consuming and expensive. Furthermore, labor costs in Mexico are controlled by rigid laws that mandate, among other benefits, high overtime rates. In Asia, most countries have non minimum-wage requirement. Asian countries focus not on labor law but on job-creation incentives to attract foreign investment, and the Asian work force is educated, reliable, hardworking, and very productive.
Economic conditions and capital investment are also important considerations. After NAFTA was enacted, U.S. businesses flocked to Mexico, but the Mexican economy soon collapsed as foreign investors began to withdraw their capital. The value of the peso plummeted, driving up the cost of imported goods needed for production. Inflation in excess of 36% a year followed, and suddenly, what had seemed to be the ideal production location now appeared to be an economic disaster. Virtually none of these problems exists in Asia, where savings rates are among the highest in the world, often reaching 30%. This plentiful supply of local capital can be used for long-term investment, not just for consumables.
What’s more, state control of foreign investment in Asia is relatively liberal, though the actual regulation varies from country to country. Although China has a long way to go (despite making strides) and Indonesia is still somewhat restrictive, their huge populations and markets make these countries attractive places to do business. Malaysia, for its part, encourages foreign investment and offers incentives. In Singapore and Hong Kong, where all types of foreign investment are sought, it is relatively easy for Westerners to do business.
NAFTA has brought Mexico up to par in the area of foreign investment. Investment rules have been relaxed and modernized, making it easier and more desirable to invest there. Nevertheless, corporate and business taxes are higher in Mexico than in Asia, and Mexico still does not offer the tax incentives promised by many Asian countries. Corporate tax rates now are substantially lower in Taiwan, Hong Kong, Korea, and Malaysia than Mexico.
Asian countries, most of which have healthy and growing economies, additionally offer special interest rates, tax exemptions, free-trade zones, and export incentives. And many Asian governments put a premium on foreign investment and bolster that initiative with excellent education systems and future-oriented economic policies. Taken together, these factors render the Asian region superior as a location for establishing foreign production facilities.
Of course, foreign companies seeking to invest and manufacture in Asia do face some difficulties. Each country has its own bureaucracy, each with its own legal system, and all of these legal systems are quite unlike ours. Language and cultural differences are great and can be a source of frustration, delay, and misunderstanding. There are issues about infrastructure as well. Nonetheless, today it is for the most part easier to establish and expand production operations in Asia than in Mexico.
Some U.S. Companies Now Producing Medical Products in Asia
Medical Equipment and Devices
In July 1994, Hewlett-Packard Company’s Medical Products Group, headquartered in Andover, Massachusetts, expanded its manufacturing operations in China by opening Hewlett-Packard Medical Equipment Products (Qingdao), Ltd. in a high-tech corporate park in eastern China’s Shandong Province. This is a 12-year join venture with China National Corporation of Medical Equipment Industry (CMIC), with Hewlett-Packard having 75% ownership. Through its manufacture of a variety of medical products, including patient monitors, cardiographs, ultrasound systems kits, and printed circuit assembles, the Qingdao plant projected an output of $10 million for 1994 and a goal of $33 million by 1997. It has apparently reached its first goal and is well on its way to achieving the second. Testifying to the plant’s significant expansion, Shirley Horn, worldwide press and consultant relations manager for Hewlett-Packard’s Medical Products Group, states, “In August 1994, the plant had 70 employees and 2,100 square meters of space. Now there are 120 employees and the plant has been expanded to 3,800 square meters.” Forty percent of production is sold in the local market, and the remainder for export, mostly to the Asia-Pacific market. Horn asserts, “There is absolutely no question that making this type of commitment to the Asian marketplace gives Hewlett-Packard a competitive edge over companies that don’t manufacture in the region.”
Medtronic of Minneapolis, Minnesota, has been in the Chinese market since the 1970s and over the years has built a network of relationships with the government and with doctors and others in the medical field. A February 7, 1996, company press release stated that Medtronic had been qualified as a Wholly Foreign Owned Enterprise (WFOE) and planned soon to establish a new manufacturing facility in the Zhangjiang Hi-Tech Park near Shanghai. With $10 million invested in this project, Medtronic expects this plant to be devoted initially to the assembly of pacemakers, most notably a new model for China and for developing nations. Michael J. Costello, the company’s Vice President, has declared that the investment “demonstrates Medtronic’s continuing commitment to the building of long-term relationships and to leadership in the development of cardiovascular medicine in the People’s Republic.” Already the market leader in China for pacemakers and several other product lines, Medtronic anticipates that Chinese markets for angioplasty catheters and coronary shunts will develop rapidly, affording additional growth opportunities. Medtronic is also one of many U.S. companies now producing medical products in Japan, where it assembles pacing devices in Chitose on Hokkaido.
Some companies, such as GE Medical Systems (GEMS), elect to launch assembly projects to test the market before they commit to manufacturing directly in an Asian country, particularly if they have other production facilities elsewhere on the continent. Based in Milwaukee, Wisconsin, GEMS first began to assemble computed tomography (CT) scanner kits in China in 1991, in a joint venture with the Ministry of Public Health and the Beijing Changfeng between GEMS and Yokogawa Medical Systems, Ltd. Originally formed to meet the needs of China’s rapidly expanding market for high-quality medical equipment, GEMS is now preparing to undertake direct production of some of the basic components for the CT scanners. According to company literature, “GE diagnostic imaging systems… are already operating in medical facilities in every province and autonomous region in China…. The company, in cooperation with MEHECO (the China National Medicine and Health Products Import and Export Company), operates the industry’s leading parts and service operation.” In a recent move to expand its manufacturing capabilities, GEMS announced the creation of yet another joint venture, this time in China’s Sichuan Province. Intended to develop, manufacture, install, and service x-ray equipment, the new company, GE Medical Systems (Xinan) Co., Ltd., is a partnership between GEMS and the Xian Medical Equipment Company, Chengdu, PRC. GEMS is investing more than $6 million and will have 75% ownership. According to Laurie Bernardy, GEMS’s global communications manager, “The joint venture will help provide us with the local manufacturing and service presence necessary for us to meet the x-ray equipment needs of customers in the region.”
Pharmaceuticals and Related Products
Merck & Co., Inc. the world’s largest prescription pharmaceutical company, planned its foray into China carefully, beginning with the creation of Merck Sharp & Dohme (China), Ltd. (MSD) in 1992. MSD announced its first Chinese joint venture, involving the manufacture and marketing of certain tableted pharmaceutical products for the Chinese market, in 1994. The Chinese partner in this joint venture, in which Merck claims 75% ownership, is the Hangzhou East China Pharmaceutical Group, a state-owned company that produces antibiotics, chemicals, and biological products. Known as Hangzhou MSD Pharmaceutical Co., Ltd., the enterprise currently has a 12,367 square-meter plant and employs more than 120 people, with the latter figure expected to more than double in the near future. The company began operation in July 1995 with an initial production capacity of 100 million pills, with plans to expand to twice that capacity by the year 2000. The medications produced are intended for the treatment of symptomatic benign prostatic enlargement, high cholesterol levels, Parkinson’s disease, cardiovascular diseases, arthritis, hypertension, and osteoporosis.
Also in mid-1994, Merck and China’s Shenzhen Kangtai Biological Products Co., Ltd., inaugurated a manufacturing project in Shenzhen and Beijing to produce a genetically engineered (recombinant) hepatitis B vaccine. Hepatits B, a serious liver ailment, is epidemic in China and is the country’s most urgent health problem, according to Merck. The reported 150 million Chinese who suffer from disease comprise half the total number of chronic carriers worldwide. Together, the two plants will produce some 40 million pediatric vaccine doses annually, which, added to China’s preexisting production, will supply the country with enough vaccine to inoculate all of its newborns each year. The World Health Organization has in fact recommended that a hepatitis B vaccination be included in the routine vaccination schedule for all the world’s infants by next year.
In 1990, Pfizer International, Inc., began a $50 million joint venture with Dailan Pharmaceutical Factory to produce antibiotics and antifungal, vascular, and related drugs. Pfizer also has a wholly owned manufacturing facility in Nagoya, Japan, which provides human and animal health pharmaceuticals for the local market and for export to Asia and the rest of the world. In addition to these, Pfizer operates a large pharmaceutical manufacturing facility in Sydney, Australia, and a local tableting production facility in Manila, as well as smaller production projects in Korea and elsewhere in Asia.
Other pharmaceutical companies manufacturing in Asia include Johnson & Johnson, Abbott International, and Warner-Lambert. Johnson & Johnson has the largest joint venture pharmaceutical company in China, known as Xian-Janssen Pharmaceutical Co., Ltd., located in Xian. The facility, which began operations in the late 1980s, turns out finished pharmaceutical products. Abbott International, Ltd., headquartered in Abbott Park, Illinois, undertook a $4 million joint venture in China in 1990 to produce diagnostic reagents in cooperation with Shanghai Medicine Industry research Institute and Ningbo Pharmaceutical Factory. Finally, Warner-Lambert Co. has invested in a $14 million joint venture in Suzhou, China, with China’s State Pharmaceutical Administration (SPAC), to produce empty hard gelatin capsules for standard pharmaceutical or over-the-counter vitamin dosage forms. This facility began production in 1989. On a “lighter” note, Warner-Lambert is also building a $30 million confectionery-manufacturing plant in Guangzhou, China.
Heath and Personal Care Products
In 1993, health- and personal-care products company Amway, headquartered in Ada, Michigan, created Amway Asia Pacific Ltd. (AAP) to consolidate and take the place of its earlier Asia Pacific entities. AAP’s 1995 Asia-Pacific sales skyrocketed to $718 million, up from $636 million in 1994. Through its affiliates, it will continue to produce, distribute, and market health and fitness, personal and home-care, and home-tech products in Australia (1995 sales, $125 million), New Zealand (1995 sales, $30 million), China (six-month sales, $412.5 million), Hong Kong, and Taiwan (1995 sales, $279 million), Thailand (1995 sales, $127 million), and Malaysia (1995 sales, $93 million). AAP is headquartered in Hong Kong, and Amway itself is no stranger to the Asian Pacific area: it first marketed products in Australia in 1971. AAP offers its products in the region through more than 510,000 local independent distributors. On January 18, 1995, the company demonstrated its long-term commitment to China with the opening of a 152,000 square-foot state-of-the-art manufacturing plan in the Guangzhou Economic and Technical Development Zone. This new AAP factory makes at least ten different cleaning, health-care, and fitness products. Its sales are helped by traditional Chinese family networks and other groups that quickly formed to take advantage of the Amway marketing style. AAP has announced plans to expand from Guangdong and Fujian provinces into eastern China, with sales activities starting in Shanghai.
Bausch & Lomb (B&L), headquartered in Rochester, New York, boasted worldwide sales of $1.19 billion and profits of $112 million in 1995. The company has for some years been involved in a 60/40 joint venture with Beijing 608 Factory. Their contact-lens and lens-care-solution manufacturing plants in Beijing began operations in 1988 and 1995, respectively. In 1995, Bausch & Lomb also began assembling its Ray-Ban sunglasses in China. Along with these manufacturing facilities, B&L has sales offices in six Chinese cities and may soon add offices in two more.
The Asian medical market is huge and will dominate trade in the coming century. American medical products manufacturers need to establish a presence there very soon, whether through manufacturing facilities or joint ventures with local partners, if they expect to seize, hold, and expand a significant market share. All of this will take time, of course, as well as a willingness to work within Asian business practices, which place the highest premium on trust and respect. A number of U.S. medical-products companies are already leading the way in Asian manufacturing by heeding these very traditions. Many more must follow.