Despite the economic uncertainties prevalent after the events of 9/11, many western medical companies still see the advantages of investing in Asia. In the past year, a number of companies have continued their plans to set up their operations in the region. In general terms, costs for manufacturing in Asia are significantly lower than in the west. While labor is often less expensive, the quality of Asia’s work force can be very high. Many countries in Asia boast high literacy rates as well as English language proficiency. Besides these advantages, many governments in Asia also offer attractive incentives to foreign investors to establish their operations in Asia. In some cases, companies involved in high-tech manufacturing or “pioneer” investment activities can obtain special tax breaks or exemptions. Some governments also develop special economic zones or industrial parks that not only allow special tax conditions, but also provides companies an environment for cooperation and synergies. Whether it be manufacturing for domestic consumers (in Asia) or for export, Asia continues to be a viable and attractive region for investment by medical device manufacturers.
Companies interested in manufacturing in Asia can also benefit from the efforts in many Asian countries to strengthen and improve their healthcare systems. Countries such as Japan, Korea, and Taiwan have comprehensive healthcare plans for their citizens covering the bulk of their medical expenses. With the government supporting medical expenditures, people are able to afford, and thus, demand better and more sophisticated medical products and treatment. In China, the government is drafting new regulations for better healthcare for its people. With great numbers of people flocking to China’s major cities, the government is trying to find ways to allow more people access to medical care. The greater numbers of western trained doctors in Asia also contributes to the growing demand for more western medical products and equipment. Western trained doctors accustomed to prescribing western medical devices and drugs will foster greater demand for these products in Asia.
With China’s entry into the World Trade Organization (WTO) in December 2001, the country has become more accessible to foreign investors. The Chinese government is moving forward with changes in regulation in order to comply with WTO conditions for greater transparency and openness. The government is gradually leveling the economic playing field between foreign and local businesses.
In 1979, five areas in China were designated Special Economic Zones (SEZs). These five areas include several cities in the southern and coastal regions of China including Guangdong and Hainan province. These areas have developed rapidly and are now considered the most advanced in China. Due to the success of these SEZs, the Chinese government has established other areas designated for foreign investment. Some of the advantages of these SEZs are the significant tax concessions during the early life of the project. Normally, income taxes are exempt during the first five years of the company’s operations in China. This is calculated from the “start” date,” which occurs once the company reaches a specified percentage of its production capacity. Incentives may vary from area to area; therefore, medical manufacturers must do their research and compare the different incentive packages that are offered. It is also important to carefully examine the conditions placed on the incentives given. Oftentimes, the incentives are attractive, however, conditions, such as export quotas or price ceilings, may be too restrictive.
Recently, many medical device companies have chosen to subcontract their manufacturing to local Chinese manufacturers. This too can be a cost effective and profitable venture. Instead of building a manufacturing facility from scratch, a company can work together with a reputable local manufacturer to produce its products. For example, Medrad, a U.S. affiliate of Schering AG, Germany, announced in mid October 2002 that 5% of the company’s syringes would be manufactured in Dong Guan in Guangdong, China. The syringes manufactured by Vincent Raya (Dong Guan) Electronics Company are used in medical imaging procedures. Medrad, with its company headquarters in Indianola, Pennsylvania, has spent over 18 months working together with Vincent Raya to assist them in designing and building a class 100,000 clean room facility, training local Chinese employees, as well as implementing quality standards similar to Medrad’s own manufacturing facilities. Medrad’s president and CEO, John Friel said, “We expect continued growth in both domestic and international manufacturing as Medrad develops new, innovative products to help physicians identify illness faster and even more accurately, which will ultimately improve treatment outcomes.”
Varian Medical Systems, Inc., based in Palo Alto, California, announced on December 2, 2002 a cooperative agreement with Toshiba Medical Company and Sanko Medical Systems. Varian Medical Systems will authorize Sanko Medical Systems ( Tokyo, Japan), a joint venture partner of Toshiba medical, to operate a Tube Service Center in China. The Varian X-ray tubes are designed specifically for Toshiba scanners and radiology equipment. The cooperative agreement between the three companies will allow greater numbers of Chinese hospitals and clinics access to Varian’s X-ray tubes at a lower price. Previously, tubes were imported to China from Varian’s manufacturing facility in Salt Lake City, Utah. Varian announced that it would support Sanko in operating the Tube Service Center with materials and training for the factory staff.
In Malaysia, foreign medtech companies can partake of a number of incentives for manufacturing. The first of these incentives is the Pioneer Status. A company can be eligible for pioneer status if it meets a number of conditions. These include the project’s level of level of value-added; the type of technology used, and if the industrial category is listed as one of the government’s “promoted activities.” The government’s main objective in providing this incentive is to attract previously untried methods and technologies into the country. Investors that are granted the pioneer status are granted five years of partial exemption from payment of income tax. The company would only be liable to pay 30% of its statutory income. This is derived from deducting revenue expenditure and capital allowances from the gross income. These benefits are for investments in the western part of Malaysia. In the “eastern corridor” of Malaysia, which includes the states of Sabah, Sarawak, Kelantan, Terengganu, and Pahang, companies are only liable for 15% of their statutory income.
Another incentive provided by the Malaysian government for manufacturing companies is the Investment Tax Allowance (ITA). The eligibility requirements for the ITA are similar to the Pioneer Status. Companies that are granted the ITA receive an allowance equal to 60% of qualifying capital expenditure incurred for the first five years. This allowance can be used to offset 70% of their statutory income. For companies establishing their facilities in Sabah, Sarawak, or the “Eastern Corridor,” companies can obtain allowances of 80% of qualifying capital while also offsetting 85% of their statutory income.
Foreign medical companies that have already established their operations in Asia are also able to act as subcontractors and provide manufacturing services to other third party foreign companies. In March of 2002, Agilent Technologies Inc. announced that it would provide Light Sciences Corporation with optoelectronic design and fabrication services through their manufacturing facilities in Penang, Malaysia. Light Sciences Corporation, a privately owned company based in Seattle, Washington, is a pioneer of photodynamic therapy for cancer, eye, and cardiovascular disease based on Light Infusion Technology ™. Agilent Technologies Inc. will assist Lights Sciences Corporation in developing and manufacturing new light emitting diodes (LEDs) for use in the Light Infusion Technology ™.
Other foreign medical manufacturers choose to enter into Asian countries by cooperating with a local distributor. For example, Tyco Healthcare, headquartered in Boulder Colorado, announced on November 26, 2002, that it had appointed Goodlabs Medical (M) Sdn. Bhd. as the sole distributor of Valleylabs medical equipment products and accessories in Malaysia. Valleylab is a division of Tyco Healthcare Group. Goodlabs Medical specializes in the distribution of medical device products such as electrosurgical generators, ligasure vessel sealing systems, and cardio thoracic products.
The Thai government regulates foreign investment through the Foreign Business Act passed in October 1999. This act replaced the more restrictive Alien Business Law of 1972. Major changes from the Alien Business Law include the removal of restrictions for foreign shareholding and the allowance of foreign companies to enter into specific businesses that were previously not available to foreigners.
The regulatory body that is in charge of granting special guarantees, tax exemptions and other investment incentives in Thailand is the Board of Investment (BOI). Foreign companies interested in receiving investment promotion can apply by submitting the appropriate applications and documents to the Office of the Board of Investment. The turn-around time, at least in theory, is approximately 120 days from the date of submission to the granting of permission for investment promotion. There are certain factors that can increase a project’s chance of receiving investment promotions. For example, if the project is deemed to strengthen Thailand’s industrial and technological capacity, utilizes domestic resources, creates employment opportunities, or earns foreign exchange; the Thai government would be more inclined to grant the projects special promotions. Investment promotions can take the form of tax incentives, protection measures against government monopolies, or allowances from costs. These incentives would be granted on a project-by-project basis contingent on certain conditions being met.
In June 2002, Philips Electronics ( Bangkok, Thailand) celebrated 50 years in Thailand. The company has been expanding its presence in Thailand since 1952 and has been producing products such as medical systems, personal care products, and consumer electronics for domestic and foreign consumers. Philips Electronics ( Thailand) Ltd. now employs over 5,000 employees in Thailand and continues to formulate plans for further expansion. The company stated that when it entered Thailand, its intentions were not only to enter the Thai economy, but also to totally integrate itself into Thai society.
The Philippines proclaims to have one of the most liberal foreign investment policies and regulations among Southeast Asia’s countries. Restrictions on foreign investments, for the most part, are not based on the nationality of the foreign investor, but rather on the percentage of foreign ownership for a particular project. The Filipino Constitution provides basic guarantees for foreign investors including: freedom from expropriation without just compensation, right to remit profits, and right to obtain foreign exchange.
The incentives granted to companies can be obtained from the Board of Investments (BOI), the Philippine Economic Zone Authority (PEZA), the Subic Bay Metropolitan Authority (SBMA), and the Clark Development Corporation (CDC). Depending upon the type of project, the planned geographical area for the investment, as well as the industry in which the investment will be made, foreign investors can apply to the appropriate authority.
The BOI may grant incentives to projects in particular industries or activities that have been prescribed in the annual Investment Priorities Plan (IPP) written by the BOI and approved by the President of the Philippines. These prescribed activities or projects are divided into pioneer and non-pioneer activities. Preferred pioneer activities are projects that are deemed important to national economic development and at the same time involved in the production of goods or services that are not yet available in the Philippines. Non-pioneer activities involve products and services already available in the Philippines that are also considered important to the national economy. Some of the incentives granted by the BOI include: tax exemption for up to 6 years from the start of the project, tax credits for purchases of raw materials, and exemptions from wharfage duties.
The Philippine Economic Zone Authority (PEZA), similar to the Subic Bay Metropolitan Authority (SBMA) and the Clark Development Corporation (CDC), grants incentives to investors interested in investing in the country’s special economic zones. There are a number of different types of economic zones or “ecozones.” These include: industrial estates, export processing zones, and free trade zones. Each of these ecozones are developed independently with minimal government interference. PEZA grants incentives to ecozone companies depending upon their activities and industry type.
An example of a foreign medical company that has set up operations in the Philippines for many years is GE Medical systems. GE’s product lines include Magnetic Resonance Imaging (MRI), Computed Tomography (CT), Mammography Vascular X-Ray, and Ultrasound systems. GE Medical Systems – Oceania, based in Makati City, Philippines, continues to be a leader in supplying local hospitals and clinics in Asia with diagnostic imaging equipment.
In the past decade, countries in Asia have been working together in order to improve their economic relations as well as provide better investment access into each other’s countries. In 1992, the Association of Southeast Asian Nations (ASEAN) drafted the “Framework for Agreement on Enhancing Economic Cooperation” during their fourth ASEAN summit in Singapore. The agreement was meant to increase the ASEAN region’s competitive advantage by consolidating the countries into a single production unit. The agreement proposed a 15-year timeline to establish the ASEAN Free Trade Area (AFTA), which would promote greater economic efficiency, productivity, and competitiveness through the elimination of tariff and non-tariff barriers.
However, due to the rapidity of globalization movements around the world and the need for greater economic cooperation in Asia, the deadline for AFTA has been moved to 2003. Now, there are many other “AFTA Plus” initiatives proposing the inclusion of China, Japan, and Korea into the AFTA bloc. These initiatives will create greater opportunities for foreign companies to move about the Asian economies after “setting up shop” in the region. Medical manufacturers in Asia can take advantage of AFTA by marketing their products with little tariff restrictions within the ASEAN region. As more countries join the free trade area, the market for a medical manufacturer’s goods will also expand. Currently, tariffs on goods traded within the ASEAN region are determined through the Common Effective Preferential Tariff (CEPT). Goods are placed on either the “fast” or “normal” tracks to have their tariffs gradually reduced to zero. The CEPT is expected to reach zero on virtually all imports by 2010 for all original signatories and by 2015 for new ASEAN members.
Asia still holds many opportunities for foreign medical companies. For companies willing to manufacture or sub-contract manufacture in Asia, there are many attractions. However, it is necessary to thoroughly research each country and their respective investment promotion packages to fully determine which geographic area (and which special economic zone) may be most suitable for your Asian medical operation.