Sourcing Medical Devices in Asia: An Introduction
The multiple advantages of lower overhead, lower labor costs, and increasing technical capabilities are leading more medical product manufacturers to establish facilities in Asia. However, manufacturing in Asia is a more complex proposition than its reputation for cheap, reasonable-quality products might suggest. Differences in language, culture and business practices can require a significant investment of resources to achieve a productive working relationship with a medical device supplier or subcontractor.
The most common motive for sourcing products from Asia is lower costs. In most countries, particularly China, India and Vietnam, labor costs are significantly lower than in the West. For example, the highest minimum wage in China (in Shenzhen) is just RMB 810 per month, approximately $1,284 US annually. There also is a large pool of well-educated scientists and engineers who are significantly cheaper than in the West. Lower rent, utility and equipment costs are contributing factors as well. And, the Internet has reduced the expense of international communication.
Free trade or special economic zones—specific areas created to attract foreign investment and development—offer another incentive. Foreign companies moving into these areas benefit from tax breaks, lower tariffs, etc.
In the past, Asia was known for manufacturing simple, low-tech goods, like gauze and surgical tape. Today, while plenty of factories still churn out low-tech medical supplies and instruments, many others are producing technologically advanced products. More-developed Asian countries like Taiwan, Singapore and South Korea have been manufacturing sophisticated medical devices for the past 10 years. Manufacturers in these countries are already familiar with international quality requirements and regulatory standards. These same capabilities are developing quickly in mainland China and India.
Asia has become a major end market for device sales as well. As Asian countries become wealthier, their demand for medical products increases. In fact, many international companies have chosen to source or manufacture in Asia partly due to easier access to the Asian market.
However, significant risks that are not as prevalent in the West, including theft of intellectual property (IP), poor quality control and regulatory hurdles exist in Asia.
This article discusses five Asian countries—China, India, Vietnam, Taiwan and Singapore—as possible outsourcing locations, with their strengths and weaknesses.
China, India, and Vietnam: On the Rise
China, sometimes described as the “world’s factory,” has a large medical device manufacturing base that is growing in sophistication. Some Chinese factories have been certified by the US Food and Drug Administration (FDA) and other international organizations. The business environment is also improving rapidly. China’s accession to the World Trade Organization (WTO) in 2002 obligated it to enforce more Western-style legislation, including tightening IP rights and easing restrictions on foreign companies selling medical products in China.
In addition to developing its manufacturing capacity, China created five Special Economic Zones (SEZs) to attract foreign investment and development. Firms in these areas may be exempt from paying income taxes during an investment project’s first few years. Dozens of other economic zones across the country offer varying incentives.
Currently, manufacturers must pass a State Food and Drug Administration (SFDA) quality audit to receive a medical device manufacturing license. These audits, however, are based upon locally developed—rather than international—standards. SFDA is developing compulsory GMPs for China’s medical device industry. During 2007-08, standards equivalent to ISO 9001 and ISO 13485 are being implemented for sterile and implantable devices. SFDA plans to extend these standards to all medical devices by 2012.
The primary medical device manufacturing regulations are the Provisions on Supervision and Administration of Medical Device Manufacturing (2004) and the Provisions on the Daily Supervision of Medical Device Manufacturing (2006). Guidelines on the new implementation of GMPs also were issued in 2006 and 2007.
For many years, India was seen as a poor second to East Asia for contract manufacturing due to cumbersome government oversight, poor infrastructure, etc. However, over the past decade, significant advances have occurred at the bureaucratic and the productive level. India also has lower labor costs than China. Technical capabilities are improving, and the availability of English-speaking workers makes collaboration easier.
India has more than 60 SEZs, which offer companies five-year income tax holidays and many other exemptions for taxes and customs duties. The government is also working to relax labor laws in these areas, making them particularly attractive to international business.
The current Indian regulatory structure does not cover medical devices. Device manufacturers require approval of their facilities only if their products are regulated as drugs. Regulated products include disposable syringes and needles, IVDs, sterile single-use disposable devices, cardiac or drug-eluting stents, catheters and orthopedic implants.
Indian medical device GMPs are based upon the World Health Organization’s 1992 GMP guidelines. In addition to passing Indian GMP inspections, manufacturers must be able to demonstrate that their production supervisors and testing unit heads have appropriate degrees and experience. Manufacturing licenses for many devices can be granted by the Indian States’ food and drug administrations, rather than the national regulatory body.
The Drugs and Cosmetics Act of 1940 is the principal Indian legislation regulating drugs and some medical devices, Additional regulatory details, including Indian GMPs (Schedule M), are included in the Drugs and Cosmetics Rules. GMP requirements for regulated devices are specifically laid out in Schedule M-III.
Some expect Vietnam to be the next China. Its expanding local markets and manufacturing base appear to be on an economic trajectory similar to China’s, but at an earlier point in development. As wages in China’s well-developed coastal regions increase, Western, Chinese and Taiwanese companies are turning to Vietnam for its lower labor costs. Medical device manufacturing currently focuses on low-end products, but some foreign investors are making products like imaging equipment.
Vietnam has a number of industrial parks, export processing zones, and high-tech zones. Enterprises in these zones that export more than 80% of their production may receive corporate two- to eight-year income tax holidays and pay a reduced income tax rate after that period. Many import duties on equipment and materials can also be exempted or refunded.
Official pharmaceutical GMPs will be implemented by Vietnamese authorities in 2008, but there are none for medical device manufacturers.
Taiwan and Singapore: Mature and Capable
Since Taiwan is one of the most advanced medical device markets in Asia, manufacturing there is more expensive than in China, India or most Southeast Asian countries. Taiwan offers fewer wage advantages, with a minimum salary of approximately $500 per month ($6,000 annually). High-tech medical equipment production is more common in Taiwan than elsewhere. Domestic Taiwanese medical device manufacturing is expanding, but is primarily export-oriented and still somewhat fragmented, with relatively small companies.
The Taiwanese government is driving the country’s medical device industry toward advanced, high-value products. The Industrial Development Bureau is collaborating with the Industrial Technology Research Institute to help medical device companies develop and market new products. This assistance includes small-scale test production, clinical trials, frontier research and drafting of mass production plans.
Taiwan began phasing in international medical device GMPs in 1999 under the Pharmaceutical Affairs Law; the requirements were fully implemented in 2004. The Department of Health (DOH) certifies all local manufacturers, except those producing class I, nonsterile and nonmetrological devices. The medical device GMPs are based upon ISO 9001, 13485 and 11137. To be certified, a manufacturer must submit procedure documents for specific GMP requirements, a quality manual, a manufacturing flow chart, and a list of major equipment. Taiwan’s GMPs were designed to be very similar to FDA standards.
Singapore is a very good location for sourcing sophisticated medical devices. It offers a large pool of English-speaking scientists, researchers and engineers, highly developed electronics and precision engineering infrastructure, and plentiful support services such as sterilization and logistics companies. Many large medical device companies have chosen to manufacture their products in Singapore. In addition, Singapore provides robust IP protection.
Singapore’s Economic Development Board promotes and sustains the country as a global business and investment hub, and offers numerous incentives to companies locating manufacturing operations there. For example, the Pioneer Incentive fully exempts corporate income taxes on profits for strategic projects leading to the creation of “desirable industries” in Singapore.
A Voluntary Product Registration Scheme (VPRS) covering the manufacture and sale of medical devices was established in April 2002 to give industry and government experience with a Western-style device regulatory system before one was actually implemented. Participating companies required an establishment license from the Health Sciences Authority (HSA) to manufacture medical devices. A quality system certification was needed to obtain this license. This certification was not required of export-only Singaporean manufacturers.
On 12 February 2007, the legislature passed the Health Products Act, which mandates device registration. However, this system has not yet been implemented. The VPRS was terminated 31 March 2007 to make way for the new system. The Health Products Act will govern most future medical device matters.
Recent Western Manufacturing Activity in Asia
Over the past two decades, numerous medical device companies have decided to source products from Asia, invest in joint ventures or set up their own manufacturing facilities. Table 2 lists some companies that have begun or expanded Asian operations in 2006-07.
Asian Business Culture
Companies wishing to do business in Asia must take the local culture into account. Although some characteristics are common to the region, significant country-specific differences should be considered.
For example, while many cultures encourage open discussion of problems, this is considered offensive in Asia. Serious business difficulties should be mentioned obliquely or privately. Companies should bear in mind that across Asia, relationships are the key to business success.
Different Asian countries can be excellent locations for sourcing or manufacturing different types of medical devices. However, it is wrong to assume that sourcing in Asia will necessarily be quick and cost-effective. Issues such as quality control, intellectual property, changing regulatory requirements, and reliability of manufacturers can extend the process. Comprehensive due diligence is essential. The sourcing or manufacturing process could take longer than using a Western contract manufacturer, but conscientious efforts can lead to considerable financial rewards.
Ames Gross is the President and founder of Pacific Bridge Medical. He is recognized nationally and internationally as a leader in Asian medical markets.
John Minot is an Associate at Pacific Bridge Medical. Minot works on research and writing projects.
Pacific Bridge Medical is a leading independent consulting firm dedicated to assisting medical companies in Asia.