Continental Divide

Brian S. Moore never truly subscribed to all the hype surrounding emerging markets. During his tenure as CEO and president of Symmetry Medical Inc., Moore was peppered with unsolicited advice about long-term growth prospects on the other side of the world.

“Three or four years ago, people were saying, ‘You’ve got to go to China.’ Every time I went on the road as CEO, one of the first questions I was asked was ‘What are your plans for China?” recounted Moore, who spent seven years as Symmetry’s chief executive before retiring in January 2011 (he remained with the Warsaw, Ind.-based company through June 2012, serving as a board member and president of business development).

“It was like mass hypnosis—for a period of time everybody has to be in China. But it’s never as clear-cut as the mass conscious would have you believe,” he noted. “Some people have to get in, some don’t. It’s not automatic that every business in every situation must go to every emerging market. It doesn’t work like that at all. It’s not a situation where you absolutely have to go to China no matter what. I would always respond to that kind of thinking by asking ‘Why?’ There might be a good reason to go [to China]. If there is, then you should certainly go. But if there’s not a very good reason, then you need to ask yourself why you should go.“

Moore’s simple yet sage rationale likely is inspired by the recent flock to emerging markets in Asia and South America. Over the last half-dozen years, orthopedic device OEMs have invested hundreds of millions of dollars in such countries as Brazil, Russia, India, China (the esteemed BRIC bloc), Costa Rica, Malaysia and Mexico to escape languid economic growth, flat sales, stubbornly high unemployment, and poor demand in developed nations.

While industry analysts expect the sagging U.S. and European orthopedic device markets to improve this year due to new product introductions, restructuring initiatives and share buyback programs, sales still are projected to trail those in Asia and Latin America for the next few years. Data from Los Angeles, Calif.-based industry research firm IBISWorld show the orthopedic device market in Asia/Pacific doubling the growth rate of North America through 2015 (9.8 percent vs. 4.9 percent). The Central/South American market is forecast to surge past its northern neighbor as well, rising 6.9 percent to $800 million.

Much of the Asia/Pacific growth is likely to come from China, where the number of orthopedic procedures is expected to swell 18.2 percent annually through 2015, according to an Elsevier Business Intelligence report. Joint replacements in the Middle Kingdom are forecast to grow 17.4 percent annually to 454,581 in 2015, while fracture management/repair procedures are estimated to skyrocket 25.2 percent to 1 million procedures. Disc/bone removals and spinal fusions also are projected to grow by double-digit rates.

Such promising performance rates have enticed the likes of Johnson & Johnson, Biomet Inc., Medtronic Inc., Smith & Nephew plc, Zimmer Holdings Inc., and other device manufacturers to the Far East. Stryker Corp. has fallen head over heels for the Chinese market—in addition to running a physician training center in Shanghai and a mobile training center (a convertible truck equipped with state-of-the-art medical technology and educational resources), the Kalamazoo, Mich.-based OEM soon will own trauma and spinal implant manufacturer Trauson Holdings Company Limited of Hong Kong. Stryker is paying $764 million for Trauson in a deal that significantly will expand its presence in the country’s orthopedic market.

Stryker’s public (and very expensive) display of Chinese affection came just five months after rival Medtronic opened a research and development center in Shanghai (where it also built a headquarters) and four months after the Minneapolis, Minn.-based device behemoth acquired local implant maker China Kanghui Holdings for $816 million. The Kanghui deal represents Medtronic’s first acquisition in China, and is key to the company’s efforts to grow its emerging market portfolio by 20 percent annually.

Smith & Nephew has a similar emerging market growth plan. In mid-2011, the London, United Kingdom-based medical technology giant revamped its corporate structure to streamline operations in developed markets and quadruple sales in the BRIC bloc within the next five years, from $120 million to $500 million.

“It’s the right time to change,” Smith & Nephew CEO Olivier Bohoun said after publicly revealing the company’s bureaucratic makeover. “You have one world but three markets. The established markets have issues with price structure and government issues. In these markets the growth is in the low single digits. I don’t foresee any big bump. Here the name of the game is not to surf on the market because there is nothing to surf.”

The BRICs, on the other hand, provide plenty of “cranking” swells. Brazil, Russia, India and China boast a combined population of 2.7 billion people, red-hot stock markets that could double in value by 2020, a gross domestic product that ballooned 92.7 percent in the 21st century’s first decade, and—perhaps most importantly—an insatiable appetite for healthcare products and services.

The Brazilian, Indian and Chinese markets for spinal implants and bone graft substitutes, for instance, is expected to exceed $3 billion by 2017, according to med-tech market intelligence firm Millennium Research Group Inc. The Toronto, Ontario-based company predicts the trauma/reconstructive joint implants sector to expand as well, topping $4.5 billion in the same year. Millennium Research analysts attribute the hikes to increasing demand from aging patients (those over 50) and significant economic expansion.

“The Brazilian economy is going at a zillion miles an hour right now because of its tremendous oil wealth,” one industry insider noted. “If you’re an OEM, you’ve got to go where the market is really taking off.”

And the best launching pads appear to be in China (naturally), which is forecast to rocket past the American economy in size by 2016, and India, which is likely to experience the world’s fastest economic growth (4.9 percent) over the next half-century, estimates from the Paris, France-based Organisation for Economic Co-operation and Development (OECD) indicate. By 2025, the cumulative gross domestic product of China and India will be larger than that of France, Germany, Italy, Japan, the United Kingdom, the United States and Canada (the G7) combined, OECD claims.

Selling vs. Saving
Indeed, the BRICs seem to have economic staying power. But chasing the healthcare jackpots in emerging markets could very well backfire on companies that fail to recognize the various challenges within these countries.

For example, widespread poverty—particularly in China and India—and the lack of prevalent health insurance make it difficult for uninsured patients to pay for procedures. Also, premiums can be expensive even for those who can afford coverage, and many insurance providers are reluctant to offer policies due to the risk involved in paying for poorly regulated healthcare. Consequently, penetration of spinal implant and bone graft substitute procedures as well as trauma and reconstructive joint implant surgeries likely will remain low compared with levels in the United States and Europe, Millennium Research data suggest.

With healthcare spending slated to skyrocket from $357 billion in 2011 to $1 trillion in 2020, China is among the planet’s most attractive medical markets and offers by far the largest growth opportunity of all the emerging economies. But longstanding issues like intellectual property protection, language barriers, tariffs, shipping times/costs, talent pools and labor costs can impede a company’s ability to compete both domestically and internationally. Such factors also can limit growth.

“The thing that never ceases to amaze me is the number of people who don’t ask the obvious stuff,” said Moore, a qualified accountant and mechanical engineer who now runs his own consulting firm. “You can easily get carried away and emotional about these markets and away you go. China is a current perfect example. You have to be very selective as to whether [emerging markets] are right for your business. You need to understand what your business mission is and in particular who your customers are and, who you are actually selling to in the new market. Sometimes it makes sense to go into these markets and sometimes it doesn’t.” To determine whether emerging markets (or any international locale, really) is a good fit, companies must first identify the main reason(s) for venturing beyond their home base. Moore claims only two plausible rationales exist—either to sell products or reduce manufacturing/operating costs.

“Before you go into any overseas market, you have to ask yourself why you want to go there. Focus on business basics and evaluate the demand and supply side. Do you want to enter a market to increase demand, which is sales volume, or do you want to improve the performance of the supply side, which is to reduce the operating costs? For example, if you have a labor intensive manufacturing operation which has volume and stability, then a move to a low cost labor market may be a good idea,” Moore told Orthopedic Design & Technology. 

“When carrying out this evaluation make sure that the total cost implications of operating in a new market are fully evaluated, not just the headline cost of materials and labor,” he continued. “Duties, local taxes, freight, increased inventory, political risk, taxation treatment of transfer pricing, cost of visiting and servicing a remote location, local grants and government assistance, insurances, serving a different time zone from your home base, etc., are some of the obvious ones, so make sure that the total cost of doing business is fully evaluated. The other key factor is to evaluate the local business culture and ethics with regard to work tempo, local licenses, hidden costs of intermediaries and maybe even bribery and corruption, which will eat into the headline margins. To go to an emerging market strictly to save operating costs could be like chasing your tail. You are always going to be chasing the cost dollar and that’s a dangerous game unless you fully understand what the total costs are.” Most orthopedic device OEMs have a vested interest in emerging markets for their potential customer base. India’s middle class—those with an annual household income (in 2007 dollars) between $4,376 and $21,882—is slated to grow 10-fold, from roughly 50 million people in 2007 to 580 million by 2025, McKinsey Global Institute figures show. And China’s population of elderly citizens (those 65 and older) will nearly double by 2030 to 233 million, from the current 122 million, McKinsey & Company data project.

But burgeoning population groups do not guarantee sales, particularly in markets such as China, where domestic manufacturers are favored for their knowledge of patient needs and the country’s complex regulatory system.

To overcome such hurdles, companies like Medtronic, Stryker and Zimmer have purchased local manufacturers to penetrate their distribution networks and utilize their domestic market knowledge. Others, such as Johnson & Johnson, have established local R&D centers to customize products to the local market.

Zimmer has gone a step further, signing a Memorandum of Agreement last fall with the Beijing Drug Administration (BJDA) to hold joint training sessions at the wholly owned Montagne subsidiary it purchased nearly three years ago. The two entities will share their respective expertise, with Zimmer providing product training and workshops on R&D processes, inspection, clinical use and quality systems management. The BJDA, on the other hand, will educate Zimmer on Chinese medical device regulations, including the country’s stringent product registration process.

“The trainings provide a platform by which both sides will be able to gain from each other’s strengths related to medical devices, especially in the area of orthopaedic reconstructive,” BJDA Deputy Director General Lu Aili noted.

The Tiered Approach
With emerging markets becoming increasingly complex and competitive, Western orthopedic device makers must devise new strategies for reaching customers. The most successful approaches will incorporate a mix of better market insight and change in mindset.

Case in point: Leading hospital bed and stretcher manufacturers Hill-Rom Co. Inc. and Stryker both sell high-tech, complex beds in Brazil that feature electronic positioning and advanced surfaces to prevent sores or pressure ulcers. These beds often are larger and more expensive (to purchase and maintain) than the simple, manually-operated metal bed frames sold by local manufacturers Mercedes IMEC, Hospimetal and D’Aqunio. The high-tech beds also are difficult to navigate in the small rooms and narrow hallways of older Brazilian hospitals, where space is limited but inexpensive nursing labor is plentiful. Thus, electronic adjustments to minimize time moving patients up and down are not valued as much as narrower bed dimensions and wheel configurations that make turns and storage easier.

In China, long-term survival depends on cracking the country’s hospital tier system. Multinational companies like Stryker, Zimmer, Smith & Nephew and DePuy Orthopaedics Inc. traditionally have targeted China’s top-tier healthcare institutions—those serving patients that can afford the premium prices charged by distributors. Though these hospitals have long been a source of solid growth for foreign companies, they represent only a small segment of the Chinese healthcare system. To capitalize on future growth, companies will have to access customers in middle- and lower-tier hospitals, industry experts contend.

“The top-tier hospitals are serving an upper-class population, and they have been pretty well penetrated by a lot of the major Western manufacturers for the last 10 years,” explained Greg Caressi, senior vice president of healthcare and life sciences at global business consulting firm Frost & Sullivan. “If you’re looking at really taking advantage of these emerging markets, then you’ve got to get into some of the Tier 2 hospitals which serve the middle class. This requires a lower price point and may require a domestic manufacturing partner. In many cases, it’s not going to be a product that is imported from the United States. You have to have a tiered approach to penetrate these [emerging] markets to the level that allows for sustainable, continued growth. “

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Emerging markets remain one of the last frontiers of untapped growth for the orthopedic device industry. To conquer this terra incognita, companies must be willing to learn, plan, organize and act like their local rivals—whether it be through pricing, distribution, or simple yet well-suited product designs (an easier-turning hospital bed wheel, perhaps). Partnering with domestic firms, professional societies and/or educational institutions is an effective way to become versed in the local culture and gain a better understanding of both patient and healthcare practitioner needs. Johnson & Johnson, for instance, has partnered with several large Indian hospitals to develop in-house training laboratories; executives say the move has helped the company achieve a 35 percent share in the country’s joint implant market. “Every emerging market is different and there are many factors that must be considered in order to be successful,” one industry observer noted. “It really comes down to a checklist of questions: Why are you going [to that market]? Have you checked out customs, the price of supporting the product, or transfer pricing? What about the airfares of executives flying back and forth? What about inventory? Or the potential for obsolescence…damage…insurance? There are no answers, just questions. And the answer to every question is different for every market, every company and what the company is trying to do.”