Sourcing Medical Devices in Asia: A Guide to Doing Business
Not Every Asian Country Is Created Equal, and Knowing the Differences Can Help Avoid Pitfalls
Ames Gross and John Minot, Pacific Bridge Medical
There’s no denying that China has become a dominant manufacturer in the world market, and developing countries such as Vietnam and India are coming up quickly behind it. When it comes to outsourcing opportunities, some Asian countries have significant advantages—low labor costs, widely available technical talent and, in some cases, business-friendly regulations. In this environment, many medical device companies are turning to Asia to find a new supply of companies to source their products or even set up their own factories.
However, despite the advantages of Asia in terms of cost savings, it’s not quick and easy to set up a profitable relationship there. With differences in culture, legal systems and business outlooks, due diligence is even more essential in Asia than it normally is in the West. Unfortunately, companies may neglect crucial steps because they are excited about the promise Asia holds. Issues such as quality control and local regulations are difficult for even the most careful of companies. Technical issues also are crucial in Asian countries such as China and India, where the industry has less experience with more sophisticated medical devices.
Sourcing from China has become more dicey in 2007. China’s export of defective, flawed or contaminated products, including toys, food and drugs, has been widely reported in the news media. In addition to the generally poor practices of some Chinese manufacturers, China’s medical regulatory structure also has taken much of the blame. After many local deaths from substandard or counterfeit drugs, much corruption was revealed in the State Food and Drug Administration (SFDA) itself. Zheng Xiaoyu, the former SFDA chief, was executed in July for taking bribes. The SFDA currently is conducting a shakeup, increasing penalties for fraudulent applications and bribery, ramping up inspections and tightening the recall system for drugs and medical devices. No doubt, it will be some time before Chinese medical products enjoy complete public confidence in the West.
As you follow the steps in this article to source a medical device product in Asia, you should note that it is critical to proceed carefully and with a good understanding of the local landscape. Otherwise, the potential cost savings might never materialize.
The first step in the sourcing process is to identify appropriate manufacturers in Asia for your medical device. Referrals, business-to-business directories, trade catalogs, trade shows or the Internet all are sources for beginning a search. Knowledge of an Asian language can be especially helpful for navigating Web sites that do not have English versions, which often is the case for Asian manufacturers that serve primarily domestic markets. On the other hand, in countries with Anglophone histories, such as Singapore, India and the Philippines, English is the standard language used in business.
Even though it is mostly promotional information, an Asian manufacturer’s Web site can provide certain clues about the company—whether the site is professionally designed, how well the English language is written, what qualifications or references are listed,etc. Again, the Internet should play only a minor role in finding and researching manufacturers.
One of the key points to keep in mind while searching is the difference between a manufacturer and a trading company. Many manufacturing companies operate through trading companies because they lack the language skills or expertise to conduct international sales. If a company advertises products that vary widely in sophistication (for example, both medical gloves and MRI machines), it probably is a trading company, even if it says it is not.
There are certain advantages to dealing with a trading company. If you want to source several product lines or source from many different countries, it may be easier to deal with a single trading company, which can be in touch with a network of suppliers. Trading companies often are better able to deal with foreign customers in both language ability and business practices.
The advantages of dealing directly with Asian suppliers, without a middleman or trading company, are somewhat obvious. The foreign device company can negotiate prices (without a markup) and quality directly and, over time, a “relationship” will be formed. Relationships are key to doing business in Asia.
Handling of quality control (QC) is another issue. Once a deal is in place, the trading company commonly inspects the first shipment of products but only makes irregular checks afterwards. It is easier to set up a long-term QC presence when your relationship is directly with a manufacturer.
After potential manufacturers or trading companies have been identified, the next step in sourcing is to initiate contact and make some basic inquiries to determine which companies are viable choices.
When first making contact with a company and determining its capabilities, it is a great advantage to have a bilingual person as the main point of contact. Many Asian companies will have salespeople or product managers who speak English, but other companies, particularly the smaller ones, may not. Even if suppliers do speak English, a discussion of more detailed or technical issues may be harder for them.
A key element of an initial investigation, especially when sourcing non-commodity products, is a discussion about the technical specifications for your product. If you expect to make changes to the existing product, it is important to determine whether the manufacturer can handle specifications adjustments. You should figure out whether the company, in fact, has the manufacturing process know-how and equipment to make what you need. Product samples should be obtained and tested very carefully.
If you are looking to source a product with unique specifications that will require the manufacturer to make changes, the first sample you receive for your product may not be right for your needs. For example, it may not take your specifications into account. However, this sample still can be used to get an idea of the manufacturer’s quality level, technological sophistication and so forth.
If your sample contains significant intellectual property, it should not be transferred until a later stage, when potential partners have been qualified and a contract has been signed. If it is sent to unreliable partners, they could try to reverse-engineer its technology. If successful, your suppliers may bring their own copycat product to market very quickly.
In examining different companies, you may find that a number of prospective manufacturers are concentrated in one region of a country. There may be advantages to choosing a manufacturer in this region because there will be an accessible local pool of technical staff with experience in the same field. In addition, this may help reduce your overseas travel. In China’s case, the Shanghai-Nanjing and Guangzhou-Shenzhen areas are especially dense with medical device makers. In places such as Hong Kong and Singapore, however, such areas are not as important.
Qualifying the Manufacturer
After an initial investigation of potential manufacturers, you likely will have narrowed the field down to a handful of serious candidates. However, there is still a long way to go before any money changes hands. It is crucial to qualify every potential manufacturer prior to doing business. This evaluation process will be much more rigorous, entailing lots of due diligence and background checks. At the end, you should have a smaller list of companies that are promising enough to visit in person.
Information on companies in Asia can be elusive, since they tend not to be listed in conventional business references. In any event, company profiles will not address your real questions, such as whether the manufacturer is a reliable company to do business with and who really owns the company. The qualification process should include obtaining references from the company’s other Western customers (if possible), asking locally about the company’s reputation and having local contacts or consultants evaluate the factory in person prior to your visit.
Finding out the type of sterilization done on products is an important part of due diligence. This information should tell you whether the type of sterilization being used is appropriate for your product. Third-party sterilization service companies, when used, also should be investigated. In China, many medical schools and universities have reputable sterilization centers that private enterprises may use.
Ideally, any company you work with should have all of the major quality certifications, such as ISO or Good Manufacturing Practices (GMPs). You should ask for copies of any quality certificates the company has earned, as well as FDA or European Union registration information, and check that they are up to date. In some countries, such as China, information on local GMP certifications or product registrations is accessible from regulatory bodies. GMP standards are common in most of the Asian countries, but their specific details will vary from country to country. Taiwan device regulators recently implemented GMP requirements based on ISO 13485, whereas India’s requirements are based on World Health Organization recommendations as of 1992 and do not apply to many types of devices. Other countries, such as Singapore and Malaysia, have not mandated GMP for medical devices by law, but their export industries more commonly receive international certifications. Chinese device GMP standards, based on ISO 13485, are to be implemented gradually over the next few years.
Before you undertake a formal visit to a qualified factory, you should have a local consultant or partner resident in Asia make a visit on your behalf. These professionals should not only visit the appropriate staff, but take pictures and make observations on the factory’s cleanliness, equipment in use, treatment of workers, power supply, how much manual labor as opposed to equipment is used, etc. Such prescreening will cut down on your visits to factories that do not make sense.
Factories in some countries, such as China and India, may use human labor for some tasks that would routinely be done by automated equipment in the West. This may not necessarily hurt quality, depending on the standards to which these workers are held. However, since wages are significantly higher in Taiwan and Singapore, greater use of machinery will be standard there.
The factory’s suppliers and subcontractors also should be investigated, if possible. In Mattel’s recent toy recalls, lead was present in its products because Mattel’s Chinese partner—which itself had a long history with Mattel and was trusted—bought paint from an unreliable subcontractor.
By now, you should have two or three Asian suppliers that are solid candidates for sourcing your device, and it is time to visit their factories yourself. Any factory in this group should have demonstrated the capability to produce your device to your specifications at prices that make importing attractive. In addition, you should be confident that the company is honest, stable and operating legally.
Face-to-face meetings are an important part of developing business relationships with Asian companies, so you should carefully plan your visit in advance. This is a further opportunity to look at the factory’s condition and quality in person. The Asian company typically has senior management present at such meetings; thus, sending a low-level junior associate to meet with them would be viewed as disrespectful. You should prepare small gifts for the people you meet with and spend time getting to know them during the visit.
While there, you can confirm important information and, at the same time, demonstrate that you are serious about a relationship by looking at the same issues of quality and capability your consultant did earlier: examining quality, making sure equipment is appropriate and well-maintained, seeing that any cleanrooms are properly managed, etc.
Once you have found a manufacturer with whom you want to do business—a company that has passed your checklist and is able and willing to sell the product you want—the next step is drawing up a contract. The contract establishes the basic terms of the business agreement, mainly product specifications, price and quantity. It also will address other issues such as dispute resolution and return policies. The contract should be clear and concise and keep foreign “legalese” to a minimum. It should be specific enough to avoid ambiguity and misinterpretation, but also it should not be too constraining in detail.
It is important to keep in mind that, while Westerners are used to viewing a contract as a binding legal agreement, Asians often may view the signed contract only as a starting point from which to negotiate. An Asian manufacturer’s standard contract often is shorter and simpler than a Western contract, leaving much unspecified. If a clause states that “the manufacturer will provide X number of products at Y price in accordance with the buyer’s requirements,” you should see to it that those specific requirements or specifications actually are listed in the contract.
At the stage of contract negotiations, be careful to avoid thinking, “We’ve done all this work and come all this way, so we have to finish with an agreement.” Because of a sense of investment in the process, buyers can be reluctant to quit in the later stages of talks. This problem is common to negotiations worldwide, but it is especially common in Asian deals because of the perception that “Asia is the future” and that using Asia is vital to your company’s survival. Asian negotiators are aware of this perception and will jump at the opportunity to exploit it. A bad agreement can be worse than no agreement at all, though, so you always should be willing to walk away, if necessary.
Choice of Law
When doing business with Asian companies, it should be specified which country’s laws will govern the contract. US companies will naturally want to operate by US laws, while Asian companies will want to operate by their own country’s laws.
Before assuming whether US law is advantageous, it is important to find out how useful this would be in practice. In a number of Asian countries, particularly China, it is usually very difficult to enforce a contract based on foreign laws. Because the current Chinese legal system is much more reliable and fair to foreign litigants than it was in the past, it has become preferable there to specify that a contract will be subject to Chinese law and litigated in Chinese courts.
Other countries that do not enforce judgments of foreign courts well (or at all) include Indonesia and Vietnam. Taiwan and Hong Kong, on the other hand, do have systems that allow enforcement, though not automatically.
It may be necessary to transfer technology to an Asian supplier in order to make a product with the right level of quality, or to make it at all. Alternatively, once a sourcing relationship for lower-end goods has been established, the option of sourcing a higher-end product may open up later.
The consequences of a bad technology transfer are more severe than the risks in ordinary sourcing. A lot of time and money may be put in to train people in the new technology. In countries such as India and China, unreliable partners may abandon the relationship to copy or sell the technology. If you’ve already been purchasing other products from a supplier and have developed some trust, it is good to try to use them, if possible.
A technology transfer agreement should specify exactly what form of assistance is to be given. This might include manufacturing equipment, blueprints, design specifications, quality control assistance, capital investment or training. The types and quantities of any equipment, assistance or capital also should be detailed. Technology transfer should not begin before the agreement has been signed.
Effective quality control begins much earlier than monitoring at the production line. It starts with the initial product design and continues throughout the rest of the manufacturing process.
If you are sourcing a relatively simple device, the first step is ensuring that the product and quality specifications are correct and that they are clearly understood by the manufacturer. From this point forward, you can monitor QC at the factory. Ideally, someone from your firm should be able to have an onsite presence at the factory. Alternatively, you can use a local consultant to act as a resident QC representative.
In selecting a QC representative for Asia, keep in mind language issues. Examining and critiquing manufacturing quality requires a large technical vocabulary, and limited language abilities can lead to serious miscommunication. It is ideal to send someone fluent in the local language, with a technical background, who can translate accurately.
It also may be wise to have the products routinely tested by an independent testing laboratory in the country of origin. You can authorize shipment of the goods to be contingent on successful completion of a thorough inspection of product quality. There are a variety of testing labs throughout Asia. In addition, the QC representative can monitor the loading of goods into containers.
If a more complicated medical device is being sourced, the quality control process will be more involved. During the product design process, your engineers and QC personnel should ensure that all of the technical specifications and requirements are implemented accurately. They also should obtain more information about the existing quality checks and testing that the Asian supplier conducts on its products. Does the supplier also use an independent testing laboratory to test its products? If so, is the laboratory truly independent and reliable?
Before any production begins, both companies should work to develop a formal QC system that involves checks and testing during various steps in the production process. Both parties should agree with these checks, and the process should be clearly outlined so that the supplier knows how its products will be evaluated. To keep everyone on the same page, it can be useful to create a comprehensive quality checklist that both your QC representative and the manufacturer’s quality personnel will use.
If your device is modified at any point during the design process, the supplier should send you new samples for your testing and approval. This may take a few iterations before you are satisfied. In addition, if your device requires the creation of a new mold, you should ask to see and approve the molds upfront. Ownership of the molds is another important issue, especially if the relationship goes sour.
Lax enforcement of intellectual property (IP) rights throughout Asia (especially China, Indonesia, the Philippines and India) is a well-known problem. The most visible intellectual properties being violated are in pharmaceuticals and entertainment, but technological products also are routinely at risk. On the other hand, Singapore is a country that takes IP protection very seriously.
Now that WTO accession for India and China is complete, IP laws for these two countries have been changed to comply generally with international standards. However, for these laws to be a significant deterrent to IP theft, they must be enforced fully and uniformly. Enforcement in Asia is increasing slowly, but in many countries, it has not yet reached an acceptable level.
A supply agreement should contain clauses guaranteeing confidentiality of information and penalizing any breaches. However, in many Asian countries, this will not be much of a guarantee. Your main line of defense should be based around keeping the information from leaking in the first place. For example, many companies divide production tasks, leaving any IP out of the device sourced and adding it in their home country, or sourcing different sections of the device and assembling them later at a different location.
It also is a useful precaution to register any relevant patents or trademarks with the local Asian country’s government. In the future—especially if you plan to market your products in an Asian market—this will make your IP much easier to defend in court. You also should register local-language versions of trademarks, so that counterfeiters do not use them before you.
If you are sourcing medical devices in an Asian country, the product and manufacturing facility may have to be registered with the local medical device regulatory authorities. Currently, product registration is mandatory in China, Taiwan, Thailand and Vietnam. It is mandatory in India only for some devices. It is optional, on the way to being mandatory, in Malaysia and Singapore. Obviously, it should be verified that a potential partner is selling its products legally. In China, product registration information is available from a public database on the SFDA’s Web site, www.sfda.gov.cn (in Chinese only).
In many developing Asian countries, the rule of law is not well established. Depending on the situation and country, some questionable practices may be unavoidable even with good manufacturing partners. However, foreigners, as a rule, will be held to higher standards.
Make sure during due diligence that your partner’s manufacturing site is completely licensed and legal in terms of business registration, labor laws, medical regulations and other laws. Chinese partners may explain that they have many local connections (guanxi) that will protect them from any legal risk. Guanxi certainly are important, but prominent, well-connected businessmen still can run afoul of the law. Obviously, avoid any illegal or improper activity on your own part.
Ethical standards in business are rapidly rising in China and elsewhere, and this is especially true for foreign businesses. Illegal activities by foreigners may be labeled as “taking advantage of” China and the Chinese people. Exposing them can enhance the reputation of the government officials or journalists responsible. Because of this, it is very important to stay within the law at every opportunity.
In other, more developed Asian countries such as Taiwan, there will be more effective regulatory oversight that may feel burdensome. In these countries, it is important not only to stay within the law, but to be respectful and accommodating to regulators, who have a good deal of social authority and power.
Asian Business Culture
When going Asia to inspect partners, make deals or maintain relationships, you always should be prepared for their local customs and business practices. Remember that there is no single Asian culture. Despite some common characteristics, there are strong differences from country to country and from region to region.
In general, being open and direct about major concerns, while a virtue in the United States, may be considered rude in Asia. Problems must be dealt with firmly but not in a confrontational format that would be construed as an embarrassment to the responsible person.
People from Korea or Japan are especially group-oriented and tend to seek consensus solutions among their group before moving forward. This is less true in China and Southeast Asia, where there is still a group orientation, but decisions may be made more unilaterally.
In appointments, keep in mind that in parts of Asia, there is a looser attitude toward punctuality than in the United States and Europe. In Southeast Asia, when a contact is somewhat late, you should not assume they are incompetent or do not care about you.
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There are many potential pitfalls when going to Asia for your products—quality shortfalls, untrustworthy partners, intellectual property theft and more. However, when due diligence is done covertly and a good relationship is set up, the benefits in cost savings for many medical devices can be considerable. By being smart, taking your time and learning as much as possible, you can outperform your competitors who rush into Asia and do less due diligence.