Recovering economies throughout Asia offer promising markets for foreign firms as well as opportunities for local product development and manufacturing.
In the wake of Asia’s recent economic crisis, many foreign medical device manufacturers have been debating whether or not to continue their operations in the region. The crisis nearly halted the growth of medical device markets in many Asian countries, lowering imports to the region and dampening business expectations.
While the declines in business have been substantial, they are certainly not permanent. A fall in economic prowess, not market demand, has been the main factor causing the Asian medical device markets to slump. Thus, as the region’s economies recover, its medical device markets will also begin to resume their impressive precrisis growth. South Korea and Thailand are already taking aggressive measures to rebuild their markets, and the GDPs of countries with comparatively stronger economies, such as China and Taiwan, are still expected to grow at least 5–6% during the next few years.
This transition toward economic recovery has provided a number of immediate opportunities for foreign medical device firms in Asia. While the currencies of most Asian countries have rebounded significantly from the region’s sudden and sizable depreciations in 1997, they have yet to attain their precrisis strength against the U.S. dollar. As a result, prices for labor, rent, and raw materials are still very low, creating numerous local manufacturing opportunities for firms looking to establish a long-term presence in Asia. To give a few examples, Safeskin Corp. (San Diego), GE Medical Systems (Waukesha, WI), Bausch & Lomb (Rochester, NY), and Johnson Industries Group of Companies (Switzerland) have already begun capitalizing on the region’s lowered costs by boosting their operations in the region, and many other foreign medical device firms are following their lead.
Ultimately, foreign medical device companies should not doubt their opportunities in Asia. As Asian economies strengthen over the next few years, growth rates in medical device markets should rebound close to their previous double-digit levels. The major concern foreign medical device firms should now have is how quickly they can move to take advantage of the promising market opportunities that currently exist in the region.
ECONOMIC RECOVERY: RENEWING DEMAND FOR MEDICAL DEVICES
Before the crisis, the Asian medical device markets were growing at double-digit rates (Table I). Rapid economic growth led to a booming healthcare sector, and rising healthcare expenditures as well as rapidly aging populations in Japan, Singapore, South Korea, and China drove local demand for the technologically innovative, cost-effective devices that foreign medical manufacturers could provide. For this reason, many countries in Asia became dependent on medical device imports—more than 90% of medical device markets in Malaysia and the Philippines rely on imports, and even “high-tech” Singapore meets more than 80% of local demand through medical devices from abroad.(1)
|
Country
|
Precrisis
(1996-1997) |
The Crisis and After
(1997-1998) |
||
|
%Change(a)
|
Size(b)
|
%Change(a)
|
Size(c)
|
|
|
Singapore
|
16
|
423
|
-3
|
410
|
|
South Korea
|
12
|
942
|
-36
|
600
|
|
Thailand
|
15
|
610
|
-49
|
312
|
|
Taiwan
|
16
|
529
|
3
|
545
|
|
China
|
15
|
1400
|
10
|
1540
|
| (a) Percent change in market size between the years listed above (not average growth rates). | ||||
| (b, c) Size of the medical device markets in 1997 and 1998, respectively (US$ millions). | ||||
Table I. Trends in the medical device markets in various Asian countries. Source: U.S. Department of Commerce, 1996–1998.
While the Asian crisis and widespread currency depreciations lowered income-based demand for foreign medical devices, economic recovery during the next few years should restore GDP growth and consumer confidence (Table II). Furthermore, other forces driving Asia’s demand for foreign medical technology have not been affected by the crisis. The population continues to age (Singapore, for example, has the fifth-highest growth rate of the elderly in the world), and demand for more efficient healthcare has only intensified with recent economic reforms. However, some countries will do better than others in the coming years. The most promising markets are examined in the following sections.
| Country | 1998 | 1999E | 2000E |
| Singapore | 1.5 | 1.0 | 4.0 |
| China | 7.8 | 7.0 | 6.5 |
| Malaysia | -6.2 | 1.7 | 3.0 |
| South Korea | -5.5 | 2.0 | 4.0 |
| Taiwan | 4.8 | 4.9 | 6.3 |
| Thailand | -8.0 | 0.0 | 2.5 |
| Hong Kong | -5.1 | -0.5 | 2.0 |
| Asia(a) | 2.6 | 4.4 | 5.1 |
| (a) Including South Asia and excluding Japan. E = estimate. | |||
Table II. Recovering GDP growth in Asia. Source: Asian Development Bank Statistics, 1999.
Japan. Japan’s $21 billion medical device market is currently the second largest in the world, trailing only that of the United States. Market demand grew approximately 13% annually from 1993 to 1995, but slowed between 1996 and 1998 as Japan’s economy dove further into recession, the yen lost about 16% of its value, unemployment rose, and traditional political mechanisms collapsed.
However, Japan’s economy is now beginning to recover, and demand for medical devices will continue to grow by approximately 6% annually for the next few years. The forces driving this demand are manifold. By the year 2000, for example, nearly 20% of Japan’s population will be older than 65, causing demand for cardiac pacemakers to increase by 30–40% during the next 10 years. A growing number of Japanese are also being diagnosed with cancer, heart disease, and other conditions common in industrialized countries, further driving demand for advanced medical treatment. And since Japan’s domestically manufactured medical equipment is among the most expensive in the world, the country is looking increasingly to foreign medical companies that can supply innovative products at a much lower cost.
In 1998, Japan also began deregulating its medical industry to reduce burgeoning healthcare costs (Japan’s national health insurance system currently loses more than $7.7 billion a year). Deregulation should be complete by the year 2000 and will remove numerous barriers to foreign companies by untangling many of the country’s complicated product testing and registration regulations.
China. With a rapidly aging population, a rising standard of living, and the government’s commitment to improving access to basic healthcare, China’s $1.5 billion medical device market is currently the second largest in Asia after Japan. Although rising unemployment and structural problems in industry and finance slowed economic growth during the past year, China has remained relatively insulated from the Asian crisis, and its economy should surpass its 7% growth target for 1999 following a strong first-quarter performance.
As a result, China’s medical device market is expected to grow a healthy 10% during the next three years, with electromedical diagnostic and imaging equipment as the most popular products. Imports have grown and now account for more than 50% of China’s medical device purchases, and there are more than 200 foreign medical device companies operating in China. While local production is expanding, Chinese domestic strengths will continue to be in the low- to medium-technology range, and therefore will not be directly competitive with many imported products.
Singapore. Singapore’s healthcare facilities are widely recognized as the best in Asia, with a strong bias toward U.S. and European products and an emphasis on quality over price. Despite the crisis, for example, almost 60% of ultrasound scanners purchased in Singapore in 1997 were from the high-end segment (scanners priced above U.S. $100,000), and even in 1998, buyers were still seeking state-of-the-art product features for diagnostic equipment like picture archiving and communication systems and teleradiology.(2) As a result of this, while Singapore’s economy is currently in recession, national per capita healthcare expenditure—which is about U.S. $700 per person, the second highest in Asia behind Japan—is not likely to change. Furthermore, a rapidly aging population and double-digit growth in the incidence of cancer is also driving the medical industry’s commitment to maintaining its high standard of care. The device market is expected to grow 7.3% in 1999, and both the overall market and the import market for medical devices are expected to grow an average of 5% annually for the next two years.
Taiwan. Like its mainland counterpart, Taiwan has avoided the worst effects of the region’s crisis. Compared with such countries as South Korea (to which Taiwan has already offered $2 billion in soft loans), Taiwan maintains a diffuse and flexible industrial structure dominated not by a few colossal conglomerates but by thousands of small and midsized enterprises. As a result, Taiwan has been able to respond rapidly to the region’s changing market conditions. Despite a 9.4% fall in exports in 1998, the country is recovering much more quickly than its neighbors, and its lowered GDP growth of 4.8% in 1998 (compared with 6.8% in 1997) was still among the highest in the region that year. Furthermore, better-than-expected export performance in the first quarter of 1999 and stable consumer prices have pushed Taiwan’s growth expectations to near 6% for the next few years.(3)
With incomes therefore remaining high in Taiwan (per capita income is approximately U.S. $14,000–$15,000, one of the highest in Asia), there is money available to spend on quality healthcare. Taiwan’s currency depreciation from the crisis has also been small compared with other countries, and medical device imports continued to grow at 3–5% between 1997 and 1999. Total market demand in Taiwan for medical devices is currently around $700 million, with imports accounting for nearly 80% of this figure.(4)
Due in part to an increased incidence of cancer and heart disease, the demand for sophisticated medical services and technology has also increased rapidly. The market for cancer diagnostic and therapy equipment, for example, has been growing at approximately 8 to 10% per year since 1995, and the most frequently imported instruments and devices in Taiwan today include cardiosphygmomanometers, CAT scanners, ultrasonic diagnostic machines, and electronic diagnostic devices.(5) Furthermore, local clinics and hospitals continue to prefer U.S. medical equipment for its quality and innovation, and U.S. medical manufacturers can benefit greatly from the 42% import market share their products hold in the Taiwanese market.
India. Compared with the rest of Asia, India’s economy has remained relatively insulated from the crisis. Its economy is expected to grow by 4–5% during the next two years—one of the fastest in Asia—and its medical device market, although relatively small, has been growing at an impressive 15–18% annually.(6) Private hospitals outnumber state facilities by two to one, and since most of their doctors are trained in the United States and Europe, they tend to favor sophisticated foreign medical devices. Overall, private hospitals purchase approximately 40–50% of imported devices in India.(7)
Unlike countries such as South Korea and Taiwan, there is no central regulatory approval body in India, and thus only the approval of the healthcare provider is needed to market a medical device in the country. At the moment, however, exporting to India is highly preferable to manufacturing locally because of the country’s weak intellectual property protection, its poor infrastructure, and an entrenched national and local bureaucracy. Despite the lure of a large and untapped market, foreign medical device manufacturers should proceed cautiously in India and work with an experienced local representative.
LOWERED COSTS: NEW OPPORTUNITIES FOR LOCAL MANUFACTURING
While most Asian economies are recovering, still-depreciated currencies have lowered the purchasing power of many countries whose markets were once completely dependent on foreign medical device imports. Thailand and Malaysia are two important examples: while Thailand is making a strong economic recovery, its currency is still 17% weaker against the dollar than it was before the crisis (currently 36 baht/U.S. dollar compared with 31 baht/U.S. dollar in early 1997). And despite foreign-exchange controls, Malaysia’s ringgit per U.S. dollar ratio has fallen to 4.8 from 2.8 in early 1997.
However, as mentioned above, income-based demand only tells half the story. Purchasing power in these countries may be down, but overall demand for foreign products based on quality standards and a lack of domestic competitors is still strong. Thus, until countries like Thailand and Malaysia recover completely, foreign medical manufacturers can tap into local demand by taking advantage of depreciated currencies and establishing a cheaper local manufacturing presence. Because of the lower labor, capital, and administrative costs these countries’ depreciated currencies provide, the costs to local consumers and the costs of establishing a long-term local presence in Asia are lower today than they were two years ago.
Thailand. While its economy is still in recession, Thailand has been making one of the region’s faster economic recoveries from the crisis. Between 1998 and 1999, Thailand’s currency appreciated from 53 to 36 baht/U.S. dollar, its inflation rate fell from 5.3% to about 3%, and consumer spending rose slightly.(8) However, the baht’s previous depreciation has raised the cost of imported medical products anywhere from 15 to 40%, and thus medical device imports are still lagging. Many importers and distributors in Thailand are applying “wait-and-see” policies for new devices from abroad until the economic situation returns to normal.
These conditions have not stopped foreign medical device firms from tapping into the Thai market. Taking advantage of a 40–70% drop in land prices and a 36% drop in office rents since 1997; an oversupply of industrial real estate; and lower costs for labor, overhead, and materials, Safeskin Corp., a leader in the growing U.S. disposable glove industry, is consolidating its examination, surgical, and synthetic glove production in a new state-of-the-art facility in Thailand this year. The company, which prides itself on being one of the lower-cost producers in the industry, is planning to fill 1600 jobs at the Thailand operation, its third glove-manufacturing facility in the country.
GE Medical Systems, a $4.5 billion provider of medical diagnostic imaging systems and services worldwide, in October 1998 established GE Medical Systems (Thailand) as its Southeast Asian headquarters. The operation, based in Bangkok, will provide a wide range of services to users of diagnostic imaging equipment. The company also plans to emphasize digital technology in medical imaging, which can improve speed and image clarity—in 1999, for example, the company expects to install Asia’s first fully digital mammography system in Thailand.
Malaysia. Although Malaysia’s economy contracted by more than 6% in 1997–1998, intensive reform efforts have raised projected GDP growth estimates to 2% for 1999 and 3–4% for 2000. This is a far cry from the 8–9% annual growth the country enjoyed before the crisis, but a high level of foreign reserves, continued inflow of direct investments, and a good supervisory system should provide a platform for economic recovery.(9)
Foreign companies should closely watch Malaysia’s manufacturing sector, which has been the recipient of substantial foreign investment and which the Malaysian Industrial Development Authority is counting on to be the growth engine of the country’s economy. Malaysia’s industrial production index rose 3.9% year-on-year in February 1999 after 12 months of decline, and many foreign medical technology manufacturers are taking advantage of Malaysia’s better-skilled workforce (compared with most other countries in Asia), favorable foreign-investment policies, and renewed emphasis on modernization. Current conditions in Malaysia are especially favorable for foreign manufacturers: low wages prevail (there are currently no plans to establish a minimum wage); interest rates have fallen (short-term rates have fallen to 3.1% from 5% a year ago and the Bank of Malaysia has cut base lending rates to 7.25% from 11% a year ago); and many Malaysian industrial estates, such as the Port of Tanjung Pelepas (PTP) in Jahor, still offer low land prices.
Bausch & Lomb, for example, plans to continue investing in its Malaysian operations, which—despite the crisis—have registered double-digit growth during the past two years. Its Malaysian subsidiary, Bausch & Lomb (M) Sdn Bhd, also plans to increase its marketing base through training and educational programs. Currently, the company has relationships with six or seven colleges in the country and carries out training programs in local hospitals.(10) Overall, Bausch & Lomb’s manufacturing operations in Asia garner a 23% share of the global vision market, and potential growth will be approximately 7–9% during the next few years.
The Johnson Group of Industries, a Swedish-owned manufacturer with headquarters in Switzerland, has also doubled its production in Malaysia each year since 1993, when it first set up its Malaysian R&D center for medical equipment through its subsidiary, Johnson Medical Equipment Sdn Bhd. Since establishing this center, the company has created 12 patented designs, and all of its products produced in Malaysia have received international manufacturing accreditation, such as the EU’s CE mark.
Most of Johnson Medical’s new product development in Malaysia stems from a close collaboration with local doctors and nurses, and the company also procures a number of medical equipment parts from local manufacturers. Overall, excluding the Swedish technology, the local content of the firm’s products in Malaysia is between 80 and 95%. According to Johnson Medical’s general manager, the Malaysian R&D center has become the firm’s R&D center of excellence worldwide for medical equipment, and plans to export its Malaysian-made devices to other Asian countries are under way.
LOCAL MANUFACTURING: WHY NOT LOCAL PRODUCT DEVELOPMENT?
Projects such as GE medical’s efforts to implement digital technology in Thailand or Johnson Medical’s R&D undertaking in Malaysia are important signs that the crisis has not diminished these countries’ interest in obtaining state-of-the-art foreign medical technology. In spite of the economic slowdown, for example, many private hospitals in Thailand have refrained from reducing the quality of their medical treatment, and instead have started concentrating on particular specializations (e.g., cardiology, neurology, etc.) in order for each institution to maintain an undiminished standard of care.(11) And in Malaysia, the government is planning to implement telemedicine in hospitals as part of its new nationwide Multimedia Super Corridor project.
In such countries, foreign medical technology provides not only increased quality but also greater efficiency. In the midst of economic reforms and increased pressure to cut healthcare expenses, many Asian countries are relying on foreign medical devices to help reduce hospital stays and associated administrative costs.
With the continued emphasis on technology and modernization, local conditions have become increasingly favorable for foreign medical manufacturers to develop and distribute sophisticated medical technology in Asia. The advantage that companies like GE Medical and Johnson Medical enjoy is that they have not only established low-cost local manufacturing and distribution centers in Asia, they have also begun generating a successful, low-cost, local product development base. Given the region’s anticipated economic recovery during the next few years, increased competition among foreign medical device firms is inevitable, and companies that can establish a strong local presence in Asia now—when setup costs are low—will be a step ahead.
CONCLUSION
Foreign medical device firms should not be misled by the events that have plagued Asia since mid-1997. Most countries are making a strong economic recovery, jump-starting consumer demand, and thus rejuvenating high-growth industries like the region’s medical equipment markets. Asia’s medical device markets may not return to their 10–15% annual growth rates in the next year or so, but the outlook is positive, and many foreign medical device companies have already resumed flooding the region with exports and building local production facilities.
Not all countries are performing equally, however, and business opportunities within each medical device market segment vary from one country to another. Among other things, foreign firms should carefully plan their strategies in Asia based on specific product demand, local market conditions, and the trade-offs between exporting and manufacturing locally. Now more than ever, Asia’s enormous and diverse medical market is providing valuable opportunities to foreign firms—but to ensure success, foreign manufacturers should evaluate their options in the region thoroughly.
REFERENCES
1. Industry Sector Analysis—Singapore Medical Device Report, U.S. Foreign Comercial Service, U.S. Department of Commerce, 1998.
2. Amarjit Sahota, “A Diagnosis for Southeast Asia,” Medical Device & Diagnostic Industry 21, no. 3 (1999): 76–84.
3. “Taiwan to Revise 1999 GDP Growth Forecast,” Kyodo News International, May 5, 1999.
4. Industry Sector Analysis—Taiwan Medical Device Report, U.S. Foreign Commercial Service, U.S. Department of Commerce, 1998.
5. Industry Sector Analysis—Taiwan: Cancer Diagnostic/Therapy Equipment, U.S. Department of Commerce, May 1998.
6. Pratap S Khanwilkar, “Your Medical Device Business and India,” in Proceedings of Medical Design & Manufacturing West 98 Conference and Exposition (Santa Monica, CA: Canon Communications, 1998), 106-5.
7. Victoria Kader and Duaine A Priestly, “India’s Medical Device Market Is Becoming Too Big to Ignore,” Medical Device & Diagnostic Industry 19, no. 4 (1997): 85–86.
8. “Thailand’s Uncertain Upturn,” Asiaweek, April 23, 1999.
9. “Goldman Sachs Sees Malaysian Economy Up 2% in 1999,” AFP Asia, April 19, 1999.
10. “Bausch & Lomb Remains Bullish on Asia,” New Straits Times, March 10, 1999.
11. “Cost-Cutting Essential, But Quality of Care Must Prevail: General MDs Learn Business,” The Bangkok Post, March 8, 1999.
Ames Gross is president and founder of Pacific Bridge Inc. (PBI), a Washington, DC–based consulting company that provides services to international medical manufacturers in Asia. The firm helps medical companies penetrate, retain, and expand their presence in the Asian marketplace. Gayatri B. Koolwal is an associate at PBI.