With the United States emerging very slowly from a huge recession, some of Europe unable to pay its bills, and more restrictions coming from the US Food and Drug Administration (FDA), an area where medical device companies may want to focus on for product growth is Asia. The gross domestic product (GDP) growth in Asia has increased steadily. In terms of nominal GDP, Japan is the largest in Asia. In terms of purchasing power parity, China has the largest GDP in Asia and the second largest in the world.
Health and Medical Device Growth
In Asia, especially China, India, and Southeast Asia, there is a growing middle class that can afford more sophisticated medical products. In addition, the government in many Asian countries is ramping up efforts to increase medical insurance coverage and establish more hospitals. Health expenditures as a percentage of the GDP have also increased in many of the Asian markets. For example, Vietnam’s health expenditure as a percentage of its GDP increased from 6% in 2005 to 7.5% in 2007.
As more of the Asian countries become increasingly developed, the epidemiological profile is also shifting. Increased smoking and eating with less time for exercise means increased health problems, such as cardiovascular disease.
The growth rates for the medical device markets in Asia (excluding Japan) are 5 ~ 18%. For example, India’s medical device market was approximately $1.5 billion in 2006. In 2010, it is expected to be over $2.6 billion. China’s medical device market in 2006 was about $4.5 billion and is expected to grow close to $8 billion this year.
Many of the Southeast Asian countries such as Indonesia, Malaysia, the Philippines, Singapore, and Thailand have experienced 10 percent growth rate in their medical device markets over the last few years, too.
Sales and Exports to Asia
Medical device companies significantly have increased exports and sales in Asia during the last few years. For example, medical device exports from the US to Japan were $1.9 billion in 2005 and rose to $3.5 billion in 2008. With a weaker dollar, rising incomes in all the Asian markets (except Japan), and the need for more sophisticated products, Western device companies’ sales in Asia should continue to grow.
If your firm uses local Asian distributors to sell your products there, the main issue is whether you have the right distributor network and if your company is providing adequate distributor training, service support, etc. Too many device companies pick the wrong Asian distributor and then when sales are not growing, incorrectly conclude that the market for their products is really not that big.
If your firm has its own sales force in the Asian markets, what is the quality of your salespeople? Oftentimes, we have seen device companies not giving enough incentives or training to their salespeople to maximize opportunities. If there is high turnover within your sales force, something is probably not right ““ retaining key people is crucial to long term success.
Outsourcing and Manufacturing in Asia
In addition to sales, some Western device companies are manufacturing more cheaply in Asia than the West. While China has recently gotten more expensive in manufacturing compared to Vietnam and India, the quality of locally made China devices (from both local and foreign companies) in China is getting better. In the next 5 years, even some Class III products will be made in China and India at FDA approved factories.
The last few years have seen new regulations for product registration and increased regulation for many of the Asian countries (i.e., China/SFDA). In addition, in some cases international level quality standards for device manufacturing in Asia have been mandated.
In Asia, there is good availability of raw materials and equipment as well as a trained labor force with technical/managerial personnel. These factors should enable international companies to start device manufacturing plants in Asia (or at least utilize more qualified suppliers) in addition to relying on export sales. Also, many Asian governments have set up incentives for device manufacturers looking to export. For example, in some Asian countries the import of raw materials and capital goods to manufacture medical devices are now duty-free. Other Asian countries waive certain taxes.
With increased regulations and new GMP requirements, the quality and standard of medical devices in Asia has already risen considerably and will continue to do so in the future.
Research & Development in Asia
Some medical device companies are now doing some of their own R&D in Asia. The all-in cost of chemists, engineers, biologists can be a fraction of the cost in the West. IP is also improving in Asia albeit at a slower pace than Westerners want. As more and more Asians study science & engineering in the West and return to their home country for good employment opportunities, they will also improve R&D throughout Asia. Local Asian device companies with improved R&D and technical skills (particularly from such Asian returnees) will develop new companies and more sophisticated medical products. Such local Asian device companies will then be able to further compete with Western device companies in the Asian markets.
Foreign device companies that sell only grade “A” devices will need to set up production of grade “B” devices or basic models without all the bells and whistles to compete in many Asian markets. With local Asian device manufacturing improving quality and making devices at lower cost, foreign and local device products will compete for grade “B” devices in the developing Asian countries.
Capitalizing on Asia
One of the best ways for Western medical device companies to succeed in Asia is to set up their Asian business with global executives who know Asia. Making sure to have the right people in place for your medical device business is essential around the world but especially so in Asia. One cannot rely just on Westerners to run businesses in Asia where they do not know the local languages and are not 100% versed in the local culture or business practices. When in Rome, act like the Romans; when in Japan, have Japanese executives run your device business there.
While a truly global Indian executive can sometimes succeed in East Asia, a local Indian that is not that global will have problems getting Japanese and Chinese executives to follow her/his leadership. Similarly, while a truly global Japanese executive can sometimes succeed in East Asia, local Japanese that are not international players may have trouble operating outside of Japan where other Asian countries still do not feel comfortable working for Japanese.
Along with finding top-notch leadership in Asia, it is important that your Western headquarters be keenly aware of the opportunities in Asia. As Jun Tang, President of Microsoft China has said in the past, “China is a priority at Microsoft. Everybody understands that this is a country we cannot lose.”
Organization is Key
In addition to having the right people, the organization and reporting structures need to be correct and workable. For example, it may be fine to have a regional hub for your Asian activities in Singapore or Hong Kong covering the non-Japan Asian markets. However, having your Japanese subsidiary report to Hong Kong or Singapore may be awkward since oftentimes device companies’ sales in Japan may dwarf sales in non-Japan Asia. In addition, such a setup may insult your Japanese team that strongly prefers to report into the Western headquarters directly.
Most successful medical device companies have a separate Asia business (non-Japan) that reports to headquarters and a separate Japanese office that reports to headquarters on its own.
While the orthopedic sector in Asia is growing at 15% per year, this does not mean all Western orthopedic companies that set up in Asia will experience 15% growth. If the right key employees and organizational structure are NOT in place, some orthopedic companies may grow less than 15% in Asia while others with the right foundation may grow at higher than 20% and increase their market share.
Asia will continue to lead the world’s growth over the next 20 years. Whether Western device companies maximize their opportunities there will be a function of understanding the key points outlined in this article.
Reference: USITC Medical Devices and Equipment: Competitive Conditions Affecting US Trade in Japan and Other Principal Foreign Markets and US Department of Commerce Medical Device Industry Assessment Updated March 24, 2010
Ames Gross is the president and founder of Pacific Bridge Medical. He is recognized nationally and internationally as a leader in Asian medical markets.
Momoko Hirose is vice president at Pacific Bridge Medical. She works on consulting projects and research.