Outsourcing in Asia
As China’s Capabilities Grow, OEMs Face Pros and Cons of Sourcing from Chinese Market
Outsourcing to China has been ongoing for the past quarter century. We witnessed textile, toys and other labor-intensive and lesser technological industries contract out their production at the beginning of the outsourcing wave to China. Then we observed the electronic components, consumer electronics, computer, data communication and automotive industries go through this process. The medical device industry has been understandably slow to make this move.
Some medical device components have been made in China for U.S. and European medical device OEMs. These range from electronic components to cable and wire harnesses to plastic and metal parts. However, very few finished medical devices are made in this market, even among Class I medical devices. It is a lot easier for medical device OEMs to outsource components rather than assembled devices to China because component manufacturers do not need to register with the FDA and because OEMs are ultimately responsible for the quality of the finished devices.
Like other industries, medical device manufacturers are seeking the same opportunities to reduce their costs, be more competitive in the marketplace and improve their profits. Cost reduction is the key benefit for businesses to pursue the Chinese outsourcing opportunity. Global sourcing veterans from automotive, electronics and other market segments have been recruited by medical device OEMs to help with this effort. While the wide range of China’s manufacturing capabilities can benefit medical device OEMs, there are also many challenges.
As the world’s factory, China has been manufacturing products or components for a variety of industries. For example, about 40% of Wal-Mart products are made in China. The country shipped more than $593 billion worth of products globally in 2004 and is the third biggest trading nation in the world.
Some of its manufacturing expertise in other industries can benefit medical device manufacturing. These include plastic molding and welding, metal stamping and machining, printed circuit board and other electronic assemblies. Also, an increasing number of college graduates with engineering degrees will continue to strengthen Chinese manufacturing capabilities. This June, about 600,000 Chinese college graduates received engineering degrees, compared with 350,000 in India and 70,000 in the U.S.
Cost reduction and a wide range of manufacturing capabilities are only two of the benefits from participating in the Chinese market. OEMs can potentially realize another with the growing Chinese demand for medical devices. As the Chinese living standards improve, their disposable income increases. The size of the Chinese middle class has quadrupled in the past five years. It is currently the biggest cell phone market with 350 million users; it’s also the world’s second largest personal computer market. Recent visitors to China are noticing increased traffic congestion due to more and more people being able to afford cars.
Consequently, the Chinese medical device market has doubled its size in the past two years. For those medical device companies planning to capture a share of the Chinese market, being able to manufacture their products in that market is an enormous advantage. Not only does it address distribution, warranty, repair and other service issues, but it also makes the products more affordable for Chinese consumers.
The Challenges of China
Accompanying the benefits of outsourcing to China, however, are many challenges. Very few Chinese medical device contract manufacturers have the quality system in place to meet demanding medical quality requirements, and very few understand FDA regulations. About 9,680 Chinese manufacturers are FDA registered, and more than 99% of them are in the food, eyeglass and toothbrush businesses. More and more, Chinese medical device companies are being certified in ISO 13485, but some of these companies continue to struggle to meet FDA regulatory mandates and the needs of medical device end users.
Intellectual property protection is another challenge of outsourcing medical device manufacturing to China. Even though the Chinese government has made progress on legislating and executing IP protection laws, its record is still spotty. Without the protection of Chinese intellectual property law, only manufacturers that have a comprehensive IP protection strategy and procedures in their own organizations can protect their customers’ intellectual properties.
Most Chinese contract manufacturers are used to high-volume consumer product production and turn out hundreds of thousands or even millions of products from their conveyor belt lines. It is a challenge for Chinese manufacturers to set up production and procurement to the relatively small volume of medical device runs. Some Chinese contract manufacturers are unwilling to make small-quantity-run adjustments.
The supply chain for Chinese medical device contract manufacturers is a challenge as well. Unlike consumer electronics, computers and other industries, medical device supply chains are not established in China. Other industries can procure most components from China’s southeastern coastal cities that span from Shenzhen to Shanghai. They can purchase directly from component manufacturers or from major distributors who have Chinese distribution networks. Medical device manufacturers face a totally different market. A large number of component suppliers selected and qualified by U.S. design engineers do not have a presence in China. Only contract manufacturers that have vertically integrated manufacturing and global sourcing capabilities can overcome this challenge.
Still, these daunting challenges are not stopping medical device OEMs from outsourcing their products to China because they are under increasing cost pressures from competition, hospitals, insurance companies and the Centers for Medicare and Medicaid Services (CMS). Also, the emerging Chinese medical device market has become a large part of the growth strategy for more and more medical device companies. Furthermore, Chinese contract manufacturers in other industries such as consumer electronics are under tremendous price pressure. They are searching for business opportunities with higher margins.
Even though very few medical device contract manufacturers are established in China to address the challenges of outsourcing today, their numbers will surely gradually increase and become significant in three to five years. So despite these problems, China’s ability to quickly adapt will help ensure that the medical device industry will be able to source from this rapidly developing market in the near future. v
Wayne Meng is president and CEO of Sanbor Medical, a U.S.-based company that provides design services and contract manufacturing of medical devices, PCB assemblies and custom cables, wire harnesses and molded plastic components at its factory in China. He can be reached at 610-530-8500 or email@example.com.
Learn to Avoid Pitfalls when Transferring Box-build Assemblies
Asia in general, and China in particular, continue to attract a great deal of attention from medical device OEMs. Much has been written about the outsourcing of medical device component manufacturing to Asia. OEMs have sourced injection molded parts, printed circuit board assemblies (PCBAs) and various sub-assemblies from Asia for many years. However, the trend to outsource full box-build assembly to Asia is a more recent development. The process may be more complex and the pitfalls greater, but the potential rewards could be greater as well.
This article outlines two common models that have been successfully adopted by U.S. and European medical device OEMs in transferring box-build assembly to Asia.
High Mix, Low Volume
OEMs that have worked in Asia for some time know that large numbers of Asian contract manufacturers, especially electronics manufacturing services (EMS) providers, run high-volume production plants catering to customers in consumer electronics, home appliances or computer sectors. Typically, sophisticated medical devices do not fall into the high-volume category. In addition, relatively few high-volume Asian EMS providers meet regulatory requirements.
However, an increasing number of specialized contract manufacturers in Asia provide high-mix, low-volume production. COB Technology Pte Ltd, for instance, is a mid-sized EMS contract manufacturer that has provided full box-build assembly services to several global medical OEM customers since 2003 at its 150,000-square-foot Sungei Petani facility in Malaysia. The Singapore-based company is currently setting up additional box-build assembly lines for medical devices at its PCBA plant in Wuxi, China.
With a track record in high-mix, low-volume industries such as avionics, aerospace and medical, plus compliant regulatory certifications, these smaller, specialized contract manufacturers in Asia can be ideal partners for box-build assembly.
Two Common Models
In Asia, OEMs often follow one of two main types of box build transfer models:
• A phased, conservative rollout
• A rapid rollout (sometimes referred to as the “Big Bang” model).
The phased approach is slow but steady. It would typically take from one to three years to realize the full potential of the cost savings, assuming a transfer of two to three main products with 10-50 hardware/software/language variants in each product line (see Fig. 1). The outsourcing process can be delineated in several steps:
• Outsourcing of PCBAs and cable assemblies: The first step involves transferring all electronic and electro-mechanical assemblies either from in-house manufacturing or from an existing local supplier. This typically takes six to nine months from the first article stage to a point at which the supply chain is established for components needed for the assemblies.
• Outsourcing of sub-assemblies: During the second step, the OEM can gauge whether the contractor has the mechanical assembly capabilities to move to the next major step of box-build assembly. It also offers an opportunity to test the localization capabilities of the CM. This step typically takes three to six months, including validations.
• The Outsourcing of box-build assembly: “This is the start of a process requiring detailed cross-functional project management,” Lee Kwee Hiong, chief technology officer at COB Technology, explained of the stage. “Significant resources in manpower, time and money need to be committed by both parties. This phase involves the knowledge transfer of the full product-assembly process (currently done in-house) to the contract manufacturer through detailed, in-depth immersion type training. The new production lines or cells are then setup at the contract manufacturer’s site.”
Validations follow, and regulatory filings are updated. This entire step typically takes six to nine months for a single product with variants. The norm is 12 to 18 months for multiple-product group transfers.
• Localization of box-build materials: “This is one of the most difficult phases but has one of the biggest cost-savings potentials, provided both OEM and contract manufacturer put in the effort and the commitment to achieve the cost-saving goals”, Lee added.
During this step process complexity increases as new Asian vendors of mechanical parts (e.g. plastics and metal) need to be assessed and each piece or part to be localized must undergo full qualification. An OEM should expect its box-build assembly partner to lead the effort of identifying such vendors and maintaining the relationships. This entire step typically takes one or two years to complete and can start at about the same time as the box-build assembly transfer.
• Outsourcing the final system build: This is the final step of the transition whereby system software downloading, system integration, specific end customer customization, and final system level testing are carried out by the Asian contract manufacturer. Manuals and accessories are packed in and a full service contract manufacturer may subsequently take care of all logistics/distribution requirements.
The Rapid Rollout or ‘Big Bang‘ Model
The rapid rollout or “Big Bang” approach can shorten the overall transfer time but requires an allocation of additional project resources. A project time constraint that requires the OEM to free current assembly lines at its U.S. or European plant for a new product line will often require such an approach; the older, mature product line needs to be transitioned out quickly. This model typically takes nine months to two years to realize the full potential of the cost savings. The steps involved are:
• Transition of box-build/system build: Given the time constraints (e.g. full transfer within three months), priority is given to getting the assembly lines transferred in full and for all product lines and variants to be transitioned simultaneously. This requires the allocation of significant resources, primarily in man-hours, both from the OEM and from the Asian contract manufacturer. Multiple cross-functional teams are required to train, certify and transfer the various product lines. This critical initial step can typically take three to six months.
• The current supply base is transferred “as is”: Due to time constraints, the current supply base is transferred intact, and a new supply chain is set up to bring the box-build materials to Asia. Thus, a U.S. supplier would now become an “off-shore” supplier to the Asian manufacturer, but an Asian vendor becomes a local supplier. This may result in a reversal of the supply chain for certain box-build materials. An OEM sourcing bulky items (such as metal or plastic enclosures) from Asia no longer would need to ship long distances to the U.S. or Europe.
• Transition of PCBAs and localization of box-build materials: As there is insufficient time to complete the PCBA transition prior to the box-build/system build transfer, the Asian manufacturer may have to buy PCBAs from existing vendors. This would usually be required only a few months before the PCBA transition is completed. As in the phased model, the next step is the localization of box-build materials.
An experienced Asian contract manufacturer should be familiar with both transfer models. OEMs should look for partners with strong project management and communication skills. Ask to have the contract manufacturer describe the detailed implementation of past projects, in particular of medical devices.
Significant cost savings can be made by medical device OEMs sourcing components from Asia. However, outsourcing full box-build assembly to Asia may offer even greater cost reductions.
For companies that are new to Asia, outsourced manufacturing of individual components may be the best way to start. Excellent advice on how to identify and evaluate potential Asian contract manufacturers can be obtained from embassies, trade missions or consultants that have an intimate knowledge of the region.
For OEMs that have chosen to explore the outsourcing of full box-build assembly, success depends not only on the choice of contract manufacturing partner in Asia but also on the careful evaluation and selection of the most appropriate box-build transfer model.
Fredrik Nyberg is managing partner of Biomedical Strategy Consultants, a Singapore-based consultant that helps the establishment and international growth of medical device, diagnostic and biotechnology companies. He has 21 years of experience in the medical industry in senior sales/marketing and general management positions in Asia and Europe. He can be reached at firstname.lastname@example.org