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Border Breaches

Turning to emerging markets for long-term growth can be a savvy business strategy—as long as companies can overcome the challenges associated with setting up shop in these areas.

The choices we make by accident are just as important as the choices we make by design.

Mankind has always been curious about his place in the cosmos. Since the dawn of time, he has struggled—unsuccessfully—to understand the meaning of life and the very purpose of his existence, to attach some sort of significance to his own creation (or, as Darwinists would argue, evolution).

In his quest to unravel the Big Mystery, however, man has uncovered an even greater conundrum—the role of fate/destiny and choice/free will in the Grand Scheme of Life. The word “destiny,” derived from the Middle English term “destinee,” refers to a pre-determined course of events relegated by some “irresistible power or agency,” according to Merriam-Webster. Primitive civilizations assigned various identities to this “power or agency,” ranging from the Moirai (Greek), the Parcae (Roman) and the Norns (Norse). Throughout the ages, philosophers, playwrights, scholars, authors, politicians and actors as well as ordinary citizens have chosen sides in the epic battle between two dichotic beliefs—one that claims our lives are pre-destined, that Fate maps out a blueprint for each of us at birth, and another that contends we shape our own lives by the choices we make, that we are masters of our own destinies.

In her book “Destiny vs. Choice,” author Marie D. Jones contends that humans possess the ability behaviorally to make both good and bad choices, and therefore, have some say in their own life’s path.
“We humans know we have free will. The founding father of political philosophy, Thomas Hobbes, states that freedom is the ability to do what we wish without hindrance or constraint,” Jones wrote in a 2010 Web article. “Yet over thousands of years, we have battled with the sense that both destiny and free will or choice play a huge role in our lives, and certainly in how the world around us came to be. If we are honest with ourselves, many of us do feel called, as if we have a path, or a destiny, that we are moving towards. When we ignore that path, or deviate from it, we are unhappy and dissatisfied. When we feel on path and on purpose, life flows. And yet, always, we have choices. The choice to walk that path, to not walk it, to run or skip or bike it. There may be one destination we are moving towards, but we get to choose the route by which we get there.”

Sometimes though, that route can take some unexpected twists and turns.

Consider the backstory of Autocam Medical, for instance. Thomas O’Mara will contend that his company’s decision to enter the Brazilian medical device market was more intentional than accidental.
But it also could be argued that destiny, or perhaps fate, influenced that decision as well.

Autocam Medical is a Kentwood, Mich.-based manufacturer of precision-machined components for medical applications. The company is part of the Autocam Network, which consists of Autocam Medical and its transportation-related sister firm, Autocam Automotive. The global Autocam network includes 12 facilities on four continents, all linked to a single quality and management system with a single point of contact.

Autocam, founded in 1982, is a tried-and-true byproduct of the American automotive industry. From a young age, the company was tasked with making small, high-precision metal alloy parts for the automotive industry. Autocam survived the 1990-91 recession by capitalizing on the auto industry’s renewed desire to make safer, more efficient vehicles. The company began producing parts for anti-lock brakes and airbags, but the components mostly were still being sold to General Motors. Autocam managers realized the company needed to further diversify its product base and reduce its dependence on GM if it was going to survive the next economic slowdown. So in 1992, the company purchased Rehrig Manufacturing, a Fremont, Calif.-based manufacturer of precision medical and electronic components. For Autocam, that decision arguably can be considered the first of several that eventually would shape its destiny.

The next auspicious choice occurred in late 1997 with the purchase of a controlling stake in Qualipart Industria E Comercio Ltda., a Brazilian fuel injection component manufacturer. That too, was driven more by free will than fate. Over the next decade or so, Autocam cemented its foothold in the Brazilian market for precision auto components, working on global platforms for power steering valves, air conditioning compressors, and gasoline fuel injectors.

As Autocam worked to conquer the automotive precision component market in Brazil, executives soon realized that they could apply the same expertise and business strategy there to its medical business, which had been growing steadily but was not the central focus of the company. Recognizing a trend toward supplier consolidation and globalization, Autocam executives decided in 2006 that it was time to start building up the company’s medical division. And they turned to the Brazilian medical equipment market last year to help make that happen.

“The opportunity in Brazil is enormous. It’s one of the fastest-growing economies in the world,” noted O’Mara, Autocam Medical’s executive vice president. “There’s nearly 200 million people there plus the economy is growing and the middle class is growing at a rate unparalleled to anywhere else in the world. From a growth market perspective, it gives Autocam Medical the opportunity to expand our footprint beyond the U.S. Knowing what’s going on with healthcare here in the United States, we need to look at other opportunities to expand our business. The healthcare market itself is very attractive there. Having a local manufacturing presence in Brazil supports our local customers but also helps us grow our business to a point where we don’t have to depend as much on the U.S. market.”

Fewer medical device companies are depending on the American market for profit these days due to increased regulatory scrutiny, more stringent reimbursement rates, a greater demand for comparative effectiveness research and the medical device excise tax (set to take effect next year). These factors have made it difficult at best to launch a product quickly and easily in the United States; speed-to-market increasingly is becoming a guessing game as U.S. Food and Drug Administration (FDA) officials crack down on medical device firms by asking for more detailed data in their product approval applications and suggesting they conduct more clinical trials. Both moves only have increased device approval lag times, which in many cases, have become so protracted that some device makers now debut their wares in Europe rather than wait for FDA clearance. On occasion, the FDA’s review has taken so long that companies have begun selling second- or third-generation models abroad while they wait for initial approval in the United States.

“The regulatory environment has become very difficult in the U.S.,” former Boston Scientific Corp. CEO J. Raymond Elliott said before his retirement last year. “Soon it will take as long in the U.S. as in Japan to get product to market.”

Such a lag would prove to be a nightmare for device manufacturers: The average review period for medical devices and in-vitrodiagnostics (PMA equivalent products) in Japan was 21.1 months between 2006 and 2008, more than double the average U.S. approval time, according to industry data. For 510(k) equivalent products, Japanese regulators took about 14.3 months, or seven times theaverage FDA review.

While the FDA’s review times are nowhere near as long as Japan’s, they nonetheless are on the rise. An Emergo Group study released last summer found that FDA reviewers took 37 percent longer to clear a device in 2010 than they did in 2006, averaging 132 days in 2010 compared with 96 days in 2006. But the study also noted that more than half of the 13,621 applications submitted for 510(k) clearance between Jan. 1, 2006, and May 23, 2010, were processed in less than three months and more than 80 percent were reviewed within six months. Still, the wait can be frustrating, which is why device makers increasingly are turning their backs on the U.S. market and flocking to places where the regulatory environment is much more stable and costs are significantly lower—places such as Brazil, Russia, India, China (commonly referred to as the BRIC countries) and lesser-known but still promising locales like Chile, Colombia, Costa Rica, Malaysia, Nicaragua and Peru, among others.

One of the most appealing aspects of emerging markets—particularly the BRIC nations—is the potential spending power of their growing middle classes. China, for example, has vaulted to a venerable position globally in terms of gross domestic product at purchasing power parity per capita, thanks mostly to economic reforms, urbanization, massive development, and an exponential increase in exports. Over the last two decades, China’s Gross National Income per capita has expanded 13 times, giving Middle Kingdom consumers the potential power to become a new long-term source of global aggregate demand, according to a June 2011 report on the country’s retail sector by Thomas White International Ltd., a research-driven investment manager and independent research provider based in Chicago, Ill., and Bangalore, India.

With their incomes on the rise, Chinese consumers likely will spend more money on goods and services in the future, including healthcare. By 2015, per capita consumption in China is expected to swell to 17,000 renminbi ($2,502) from 13,400 renminbi ($1,975) in 2008. Total urban consumption in 2015 likely will exceed 13.3 trillion renminbi ($1.96 trillion), making the country the third largest consumer market after the United States and Japan, states a 2009 Annual Chinese Consumer Study by global management consulting firm McKinsey & Company.

Per capita income is projected to grow steadily over the next 30 years, eventually reaching $85,000—more than double the forecast for the European Union, and significantly higher than the spending capacity of Indian and Japanese consumers.

“In other words, the average Chinese megacity dweller will be living twice as well as the average Frenchman when China goes from a poor country in 2000 to a super-rich country in 2040,” Robert Fogel, director of the Center for Population Economics at the University of Chicago Booth School of Business, and winner of the 1993 Nobel Memorial Prize in Economics, wrote in the Jan/Feb 2010 issue of Foreign Policy magazine. “Although it will not have overtaken the United States in per capita wealth, according to my forecasts, China’s share of global GDP—40 percent—will dwarf that of the United States (14 percent) and the European Union (5 percent) 30 years from now. This is what economic hegemony will look like.”

Such radical improvements in middle-class spending over the next three decades most certainly will impact China’s healthcare system. With more discretionary money at their disposal and a greater susceptibility to afflictions that have long plagued developed nations—namely, heart disease and diabetes—industry experts predict that growing middle classes in China and other emerging markets will pay more attention to their health, leading to a domino effect demand-wise on providers, hospitals and medical supply companies.

In Sao Paulo, Brazil’s largest city (10.6 million residents, according to the Brazilian Institute of Geography and Statistics), the dominoes have been tipped by an estimated 30 million people entering the consumer healthcare market every year. That demand has prompted more than 90 percent of the city’s public and private hospitals to expand their facilities, therapeutic areas or specialties, leading to an additional 1,230 new private hospital beds by 2015. Eleven private hospitals in the city are slated to receive $1.4 billion in the next five years to decentralize services and create new separate units for tests and specialized outpatient care. Many new hospital construction projects throughout the city are being driven by an increase in the number of residents with health insurance, authorities said.

“In Sao Paulo, almost 50 percent of the population has health insurance,” noted Luiz Henrique de Almeida Mota, president of Brazil’s National Association of Private Hospitals. “In the past decade the amount barely reached was 30 percent. This has brought a new reality for private hospitals.”

Orthopedic OEMs are intent on becoming a part of this newreality and benefitting from the future flow of healthcare spending in emerging markets. Most, if not all of the major medical device manufacturers are making the BRIC brethren a cornerstone of theirlong-term growth strategies, establishing either research and development operations, training facilities or learning centers at universities in one or more of the markets. Stryker Corp., for instance, is attempting to conquer the Chinese healthcare sector with a three-pronged approach that includes a mobile training unit, a manufacturing facility in Suzhou and an orthopedic learning center at the Chinese University in Hong Kong, where the Kalamazoo, Mich.-based company has trained about 1,500 surgeons over the last 10 years. The mobile training center (more or less a truck, really) toured 10 Chinese cities last year, including regions with limited access to advanced medtech and educational resources. The truck is equipped with medical devices and other tools that enable local healthcare workers to receive hands-on training with Stryker products.

Other orthopedic firms are following similar paths to fortune in the Far East. Medtronic Inc. is eyeing up mergers and acquisitions and hoping to double the number of Chinese employees in the next four years. Late last year, Zimmer Holdings Inc. opened a research and development center in Beijing to create new technologies designed specifically for the Asian market, and Smith & Nephew realigned its operations last summer to grow emerging market sales from $120 million to $500 million by 2016.

“We are very much focused, unsurprisingly, on the BRIC countries,” Phil Cowdy, head of Smith & Nephew’s corporate affairs, told Chicago-based independent investment research firm Morningstar Inc. “We are putting in place more sales teams. We have stepped up the amount of medical education we do by a very significant degree. These countries have many trained doctors, but they may not be trained in orthopedics. If we offer that training, they benefit and they get used to our products and the Smith & Nephew brand. In addition, we are looking to tailor the products that we give there. If we just import Western products, the price points there will just be too high for a majority of the population. So we are developing a range of products we would call good-quality products, but they come at a price point more appropriate to the mass market. If we deliver that, then we believe we will get the growth that is clearly there.”

Obstacles and Pitfalls

Indeed, a huge potential for growth exists in emerging markets. Brazil’s orthopedic sector is projected to grow 35.2 percent over the next five years, reaching an estimated value of $778.6 million in 2017, according to GBI Research data. In China, the market is expected to expand 70.6 percent to $1.5 billion, while India’s sector is forecast to more than double, reaching a staggering $878.3 million in five years. With such solid growth expected at least through the latter half of this decade, emerging markets certainly have the potential to become prospective gold mines for the world’s orthopedic manufacturing firms. No wonder these companies are flocking overseas.

But despite all the forecasts of explosive growth (both population wise and economically) and an insatiable appetite among its residents for healthcare products and services, establishing a presence in an emerging market remains a risky venture. Firms with successful operations in foreign lands have overcome various obstacles, not the least of which included communication, quality assurance and a detailed knowledge of local regulatory requirements.

Autocam Medical, for instance, had to learn the intricacies of the local sales channel in Brazil as well as the required certifications for contract manufacturers. The firm makes implants such as bone screws and plates as well as highly polished hips, knees and shoulders. It also manufactures precision surgical instruments such as drills, screwdrivers, taps, reamers and rotary cutting tools. Last year, Autocam Medical became a certified contract manufacturer in Brazil and developed an agreement with Cedar Grove, N.J.-based Jewel Precision to manufacture, sell and distribute surgical trays and cases to the South American market.

A similar learning curve existed for Oberg Medical managers when the company entered the Costa Rican medical device market 10 years ago. Though it often gets lost amid all the BRIC propaganda, Costa Rica nonetheless has grown into quite an impressive and respectable medical device market over the last decade. In just 11 years, the number of medical device companies has grown nearly five-fold, and foreign direct investment has averaged 13.5 percent, according to Luis Liberman, second vice president in Costa Rica. In addition, the country’s per capita Gross Domestic Product is nearly seven times higher than China’s, and medical device exports have grown four times fasters than other exported products under the free zone regime, at an average rate of 31 percent each year from 2002 to 2010.

“The challenges are the same whether the plant is 30 miles away or 3,000 miles away. Communication has to be perfect and that’s where you need to have strong program managers in place,” noted Dave Bonvenuto, executive vice president and general manager of Oberg Medical, a division of Oberg Industries, a Freeport, Pa.-based medical device contract manufacturer. “We program manage all of our OEMs work out of Costa Rica from a single point of contact in the United States. We think that’s a little unique from what we see from other contract manufacturers, whereby we do not do just a handoff to Costa Rica. We will have our United States program manager lead the overall project.
We have also structured the Quality Management System in Costa Rica to be the same as our system in the US. The protocol for our heat treating in the U.S., for instance, is the exact protocol that is being used in Costa Rica. We believe this enhances communication and creates efficiency over the course of the project.”

Matching quality protocols, however, doesn’t automatically guarantee success. The cultural differences, potential language barriers and the ability to fully comprehend operational procedures can make it difficult for an overseas facility to make changes to a product in development, experts told Orthopedic Design & Technology.

Before a company establishes an operation overseas, it must carefully examine the kind of product it wishes to manufacture offshore. Expertise in both the device and the manufacturing process is essential for success, as is a comprehension of the product lifecycle. An OEM such as Smith & Nephew, for example, might be better off producing its newer products in-house and outsourcing legacy items that have been on the market for a while and are approaching the end of their lifecycle.

“It’s one thing to set something up in a foreign country, but when you have to make changes to a product, the communication and the ability to make those changes as you develop the device can be very challenging,” said Kelly Lucenti, president of Millstone Medical Outsourcing, a company in Fall River, Mass., that provides customized outsourcing solutions to the medical device industry. “There are cultural differences you have to think about, communication issues, understanding the systems that are in place in the United States, and making sure the same systems are being followed overseas. We have very effective document control systems in the U.S. They’re very good overseas at setting something up to run a million in a row, but when a company has to make changes to the product or process, that’s when I worry about the quality of the final product. That’s the kind of challenge you face when you start an operation overseas.”

* * *

The globalization of the medical device market over the last several decades has sparked a demand for more innovative products worldwide, particularly in emerging markets where growing middle class populations are spending more of their disposable incomes on discretionary items and services such as healthcare that were impossible just 10 years ago. The United Nations Population Division and Goldman Sachs estimate that China’s middle class, for instance, will be roughly four times the size of America’s middle class within a generation. India’s middle class, meanwhile, is expected to hit 1.07 billion people in just 20 years.

Consequently, orthopedic manufacturers no longer can afford to disregard such markets. Armed with a burgeoning consumer buying ability and economies that have shown remarkable resiliency to the globe’s financial follies (both past and present), international locales have evolved from low-cost country options to a necessary ingredient for long-term growth. As Oberg’s Bonvenuto told ODT: “You can’t ignore the population growth and the wealth accumulation that is occurring in the [emerging] regions of the world. They will be a source of growth for the orthopedic industry in years to come. The OEMS’s are clearly focused on these (emerging) regions for growth. As a contract manufacturer you have to develop a strategy that has your business participating along side the OEM’s.”

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