Medical Device Link.

Originally Published MX November/December 2005

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

In today's global market, New Mexico and New Delhi can both be viable candidates for medtech outsourcing.

Steve Halasey

In the medical device industry, outsourcing company operations is frequently an executive's best business strategy. Those who have adopted the strategy agree that it can often improve a company's productivity, reduce product development time, and cut overall costs—all important achievements in today's competitive medtech marketplace.

Keeping some operations close to home has certain advantages. But medtech company leaders are increasingly choosing to outsource activities to locations all around the globe. The decision faced by such executives is not whether to outsource, but where to outsource. This article looks at some of the regional options available to medtech executives who have already determined that their companies should outsource certain functions.

Big Concerns

Colantuoni

The core concerns of medical device manufacturers remain the same regardless of the location of their outsourcing firms. "Medtech companies that we have dealt with are concerned mainly with cost reduction, quality of product, and the protection of their intellectual property (IP)," says Steven A. Colantuoni, director of market research and communications at the Offshore Group (Tucson, AZ), a business development advisory firm.

But when medtech executives begin to consider outsourcing company functions to firms outside the United States—or, sometimes, even outside their home state—more-serious questions arise. In theory, medtech companies can benefit from outsourcing company functions to firms in nearshore or offshore locations rather than keeping them within U.S. borders. Access to low-cost labor and proximity to emerging markets are among the top reasons that many medical device companies are exploring such moves. But experts caution that moving operations to distant locations presents a whole new series of challenges.

"When outsourcing overseas, one needs to consider distance, language, and cultural differences that can result in misunderstanding of contract requirements," says Chang-Hong Whitney, president of Whitney Consulting (Littleton, MA). "And the effect of these factors can become magnified for products or services that have a high-technology component or require significant training."

Before taking the first step outside the United States to nearshore locations such as Mexico or Puerto Rico, companies should first evaluate whether the functions to be outsourced are appropriate for the newly proposed location. "New product development is a good candidate for nearshore outsourcing, and use of this strategy has grown recently," says Whitney.

The list of functions suitable for outsourcing narrows as a company begins to look farther afield to offshore regions such as China or Eastern Europe. "Any parts of the manufacturing process that are labor intensive—such as fabrication and assembly—are good candidates for offshore sourcing," says Whitney. "In many industries, Asia has become the world's manufacturer for such operations because of its huge manufacturing base and very low wages. Such opportunities exist for the medical device industry as well."

Global Solutions

Meeting the varied requirements of medical device manufacturers is a tough challenge, but one that the global outsourcing community has accepted in earnest. Along the way, such firms have enlisted the assistance of many countries that share the desire to participate in the growing medtech community.

When searching for an outsourcing firm, medtech executives want "a company that has the size and geographic reach into lower-cost regions to be able to offer their customers a variety of options," says Tom Podesta, vice president for sales and marketing at the Tech Group (Scottsdale, AZ). In addition to its U.S. headquarters, the Tech Group has operations in Mexico, Puerto Rico, and Europe.

Marcelo Pelaez is executive director of the Ensenada Economic Development Corp. (COPREEN), an organization that represents business development interests in Ensenada, Baja California, the largest municipality in Mexico. With the support of the state government, the municipality, and the city's business community, COPREEN is seeking to attract new business ventures to Ensenada. "Right now, our interest is mainly in manufacturing," says Pelaez. "But in the future, it is possible that the city could support R&D activities for certain life sciences. After all, Ensenada has more scientists per capita than any other city in Mexico. But at the moment, almost 80% of their research is related to the ocean."

Bingham

The U.S. Commonwealth of Puerto Rico is another choice destination for nearshore medtech operations. Lured initially by federal tax credits for the income earned by their island subsidiaries, many U.S.-based medical device manufacturers have had facilities in Puerto Rico for a decade or more. According to Gary Bingham, director of economic research for new business development at the Puerto Rico Industrial Development Co. (PRIDCO), companies such as Becton Dickinson, Guidant, Medtronic, United States Surgical, and Zimmer invested more than $100 million in facilities on the island during 2004 and 2005.

Although most medtech concerns in Puerto Rico are subsidiaries of finished product manufacturers based on the U.S. mainland, the advantages offered by the island have not been lost on medtech outsourcing firms. The MedTech Group (South Plainfield, NJ) maintains operations in both Puerto Rico and Costa Rica. According to Gil Reich, president of the MedTech Group, operating in Puerto Rico enables his firm to offer "local supply for the Caribbean Basin, with lower costs." For Costa Rica, the business advantages are somewhat different. "The key advantages of Costa Rica are its low-cost manufacturing capabilities and stable business climate," says Reich.

Camacho

Edna Camacho, general director of the Costa Rican Investment Promotion Agency (CINDE), agrees that the capabilities of the country's workforce are an attraction for medical device manufacturers. Costa Rica, she says, offers a "high-quality, educated workforce—many with engineering and master's degrees—at a very competitive cost. This is an opportunity, because companies are slowly learning about the advantages of this level of labor."

In addition, the government of Costa Rica offers an attractive package of incentives to export-oriented companies, says Camacho. "Among the fiscal benefits granted under the provisions of Costa Rica's Free Zone legislation are 100% exemption from import duties on raw materials, components, and capital goods; 100% exemption from taxes on profits; 100% exemption from export, excise, and local sales taxes, and taxes on profit repatriation; and other benefits that directly contribute to reducing companies' operational costs."

While the medical device industry has tended toward conservatism in its outsourcing arrangements, companies in the global electronics and consumer high-tech markets have taken full advantage of outsourcing opportunities throughout the world. Such experience gives a leg-up to outsourcing companies such as Jabil Circuit Inc. (St. Petersburg, FL), an electronics manufacturing services (EMS) provider with more than 45 design, manufacturing, and repair facilities worldwide. In addition to its operations in the United States, the company also has facilities in China, Hungary, India, Mexico, and the UK.

According to Tony Allan, Jabil's vice president for medical and instrumentation, facilities in different locations serve very different strategic purposes. "Sites in Western countries offer close proximity to customer design centers for rapid prototypes, value engineering, and product support. They can also perform high-mix, low-volume manufacturing of systems close to Western markets." By contrast, he says "offshore locations offer low-cost capabilities, close proximity to established non-Western markets, and access to emerging markets."

Beh

Electronics manufacturing has played a key role in the emergence of Singapore as a center for medical technology. "Over the years, suppliers in Singapore's large electronics sector have been diversifying to become key suppliers to medtech companies," says Beh Swan Gin, MD, director of the biomedical sciences group in the Singapore Economic Development Board. "Medtech companies are able to leverage a very wide base of suppliers that produce electronics as well as plastic, rubber, silicon, and metal components. In addition, there are many providers that offer mold design and tooling services, prototyping, and industrial automation solutions.

Singapore supports the growth of start-up medtech companies by offering attractive tax incentives, manpower training support, and research grants. In addition, says Beh, "medtech companies can look to raise equity financing in Singapore through venture capital firms or listing in the public market."

Evans

When a company's network of collaborating companies can include facilities almost anywhere in the world, keeping the lines of communication open can be an important consideration—especially for companies that have decided to outsource early-stage research and engineering services. From its headquarters in the Melbourne suburb of Mount Waverley, Victoria, Australia, Invetech offers outsource engineering consultant services in North America, Europe, and Asia-Pacific regions, with support from a subsidiary in San Francisco and from sister-company offices in Boston and Hemelhempstead, UK. "This arrangement of support offices allows us to have substantial business-hours overlap with our clients, wherever they are on the globe," says Andrew Evans, business development manager at Invetech. Being prepared to handle the future needs of the marketplace can often mean taking a dynamic approach to outsourcing decisions.

Supporting such an approach is an integral part of the diverse facility geography strategy adopted by Avail Medical Products (Ft. Worth, TX), an outsourcing firm that currently has manufacturing facilities in the United States, Mexico, and China, with distribution and fulfillment facilities in both the United States and Europe.

Keene

"As product lines mature, they often require a manufacturing relocation to support ongoing cost-of-goods improvements," says Avail president J. Randall Keene. "In turn, this may require an offshore manufacturing move." Avail's strategy provides product lifecycle planning in an environment that ensures a common quality system is used across all facilities.

Getting Help

With such a variety of options at their disposal, medtech executives might be forgiven for feeling a bit overwhelmed. Fortunately, getting assistance from economic development agencies (EDAs) with an interest in attracting medical device business isn't difficult (see sidebar above).

According to Jabil's Allan, most EDAs are "very helpful and willing to establish contacts with relevent resources and to assist in set-up and trade in the area."

Podesta at the Tech Group says that his company's experience has been similar. "We have had experience in dealing with agencies in Puerto Rico and Europe," he says. "They can typically offer financial incentives such as lower tax rates, funds for employee training and development, and a local network of suppliers and potential customers."

Business development assistance is also widely available for companies doing business in the Asia-Pacific regions. "Singapore's economic development commission has been very useful in helping to introduce Invetech to potential clients," says Evans at Invetech.

China may be a newcomer to medtech manufacturing, but it is quickly learning the value of providing support to companies that can bring jobs and trade to its shores. "We have had reasonable support from Chinese government agencies," says Whitney. "Most provincial and city governments in China encourage foreign investment."

Conclusion

Experts' best advice to company leaders who are seeking to solve the outsourcing equation are as varied as the list of factors that companies need to address. "Company leaders should not underestimate the impact that working with an outsource partner will have on their own internal organization," says Jabil's Allan. "An internal change agent is required to make the process a success."

Making sure that a new outsourcing facility does not become a hindrance to essential performance levels is also important. "Assuming ready access to a well-motivated and appropriately educated workforce, the most important elements in selecting a domestic or international site are those related to quality systems, the supply chain, and logistics," says Avail's Keene. "Companies must ensure that the new site will not inhibit the installation or proper execution of their existing quality systems, negatively affect the robustness and cost-efficiency of their supply chain, or prevent them from satisfying the logistical requirements of their customers."

To make its decision pay off, "a company should choose the location that will optimize its competitive position within its markets," says Colantuoni. "Company leaders should be exceedingly pragmatic and focused in this regard. They should spend the time and money necessary to do effective site selection research. In the end, this expenditure will pay for itself."

Copyright ©2005 MX