Lucrative Latin American Locales
Contract manufacturers, OEMs say proximity to the United States is top advantage to having manufacturing plants in Latin America.
Tim Sohn, Associate Editor
Real estate agents often note that location is the most important factor to consider when purchasing a home.
It’s not much different in the medical device industry. Executives with contract manufacturing firms cite location as the top factor when deciding where to establish device manufacturing facilities in Latin America.
An aerial view of Pexco’s Monterrey, Mexico, manufacturing facility. Photo courtesy of Pexco.
“We have customers in the two largest medical manufacturing hubs in North America, which are Tijuana (No.1) and Juarez, Mexico (No. 2). We used to ship truckloads of product from the Boston area all the way down to western Mexico. Now, we supply much of this product from our Monterrey, Mexico, facility shipping to our customers in Mexico, thereby reducing our customers’ freight costs and inventory levels” said Brooks. He added that “customers don’t want to hold on to inventory anymore; they want to receive it on an as-needed basis.”
Heriberto Diaz, vice president of operations for The MedTech Group, based in South Plainfield, N.J., agrees that location is an important factor. The contract manufacturing firm offers injection molding and plastic components for medical devices.
The MedTech Group, which opened a facility in Vega Baja, Puerto Rico, in 1990, and a plant in Barreal de Heredia, Costa Rica, in 2005, anticipates a growing market in South America. “It was a strategic decision anticipating that the market was going to grow there and that some of our existing customers were going to move to Costa Rica. In this type of business, you need to be aggressive and have some risk,” Diaz said.
The MedTech Group conducts about 20 percent of its medical device business in Latin America, Diaz noted. Other factors company officials considered when deciding to open the Costa Rica facility included:
• Labor costs;
• A well-educated work force;
• Proximity to the United States;
• Political stability; and
• Business-friendly government.
Command Medical Products Inc., a contract manufacturer headquartered in Ormond Beach, Fla., has a plant in Managua, Nicaragua. Core competencies at that facility include extrusion capabilities, assembly and packaging, said Stephanie McGee, sales and marketing director.
The company, which makes disposable medical products, opened the Nicaragua facility in 2004. “The whole thrust of the reason we went to Nicaragua is we had established ourselves as a contract manufacturer. We’d been doing very well, and we had significant growth; however, we were losing business because products would get to a certain point, and they [OEMs] would need to cut costs because of market pressures,” said McGee, adding that OEMs were looking for lower labor costs.
Command Medical wound up in Nicaragua in an unconventional way. Command Medical’s president has a son that lives in Nicaragua, and he has a successful non-medical manufacturing operation there, according to McGee. “We felt that this was going to be the best move for us. So, we started out with a small 10,000-square-foot plant within a free trade zone, and we’ve had so much success with that, that we’ve expanded to a new 30,000-square-foot plant,” said McGee. She explained that OEMs often are hesitant to outsource work to Nicaragua, but the location can be advantageous because the country is adjacent to Costa Rica, which has a growing market for medical devices.
“We took a little while to get some traction in the marketplace because there was a lot of hesitation to go into Nicaragua. We’re somewhat of a pioneer for medical manufacturing to be located there. The irony is that Costa Rica is a medical hotbed, and it’s adjacent to Nicaragua. It is simply a matter of people being unfamiliar with Nicaragua. So, it’s really not like it’s out in the boonies, it’s just unfamiliar,” McGee noted. Another perk to manufacturing in Nicaragua, she said, is trade zones, which offer tax savings on imports. An additional plus is “direct dispatch,” a term used to describe the swift flow of products (i.e., merchandise does not sit at a customs house or on a dock).
Pexco also operates in a trade zone and works under the IMMEX program in Mexico. This program allows the company to import materials, products, parts, components and machinery into Mexico without having to pay customs duty on it. “The main benefit of this IMMEX program is the ability to defer taxes on goods that are temporarily imported into Mexico, and it gives us to ability consolidate import declarations,” said Brooks.
Some of the benefits to OEMs that outsource manufacturing work to Mexico include a tradition of manufacturing that dates back to the 1960s, the country’s proximity to the United States, “excellent [intellectual] property protection” and lower labor costs, said Steve Colantuoni, director of market research and communications for The Offshore Group, a manufacturing shelter service provider in Mexico.
One of the common misperceptions companies have about Mexico, however, is that everything is cheap, Colantuoni noted. Companies with fewer than 20 people, for instance, might not want to consider establishing operations there because the “economies of scale is in the labor costs,” he added. “Even though it’s a ‘low-cost’ country, that doesn’t mean everything is the country is going to be low cost, and to assume that is erroneous. Sometimes people get there, and they’re surprised by the fact that maybe transportation costs are not what they thought, electricity would be higher.” Companies should make sure they have enough employees to make it worth their while financially, Colantuoni concluded.
Safety, unfortunately, has become a significant obstacle facing U.S. contract manufacturers with operations in Mexico.
Not Without Challenges
Vanessa Rodriguez, business development manager at Alajuela, Costa Rica-based Precision Concepts Costa Rica S.A., said that Mexico has been exposed to security issues in recent years that other Latin American countries do not face. “Costa Rica has the advantage of being close to the United States,” she said, “with daily direct flights to major U.S. cities, a 95 percent literacy rate and a stable government that allows for an ideal business climate.”
Another challenge that contract manufacturers face when establishing operations in Latin America is successfully transferring technology. “In the medical market, even if Pexco is a validated supplier for customer X, and our name is on all of their specifications, if we change our production location, we must go through a new facility audit and validation. Validating an additional manufacturing facility is always a challenge because you have to convince the customer that its future freight, inventory and logistics savings will more than compensate for its validation resources,” said Brooks.
He added that part of transferring technology is ensuring that workers in both Massachusetts and Mexico are properly trained to ensure a seamless transition. “Pexco has this process pretty well down to a science. The only issue we have is some customers are very busy, and the validations could be delayed until sufficient customer resources are available,” Brooks explained.
Dave Mabie, vice president of business development forGrand Rapids, Mich.-based ATEK Medical, noted that his company’s biggest obstacle to gaining new business in Costa Rica often can be medical device OEMs themselves. ATEK opened its Costa Rica facility in 2008.
“In recent years, a few have come to Costa Rica looking at ATEK for their outsourced manufacturing needs. Some have become so enamored with Costa Rica and its business-friendly environment that they have decided to build facilities of their own. Still, most of the major OEMs look to ATEK Costa Rica for our operational excellence,” he said.
And companies aren’t just looking at Mexico and Central America. South America is also becoming a manufacturing option for medtech companies.
One example of a firm choosing to open its own Latin American manufacturing location is the Cardiovascular Division of St. Jude Medical, based in St. Paul, Minn. Company officials plan to open a plant in Brazil and move some production there from the United States. The Brazilian facility is currently being built, but executives hope to start shipping products from the plant by the fourth fiscal quarter of 2010. “The stability is fine, but the government is slow in processing and meeting our needs,” said Bryan Szweda, senior director of operations.
Despite the challenges that medical device contract manufacturers face, the Latin American medical device market is expected to grow at an annual rate of 4.6 percent until 2013, according to a report by Espicom Business Intelligence.
Mexico is the second-largest medical equipment market in Latin America, valued at $1.9 billion in 2009, the report stated. Brazil had a market size of $2.6 billion in 2009.
The Chilean market for medical equipment and supplies was at $334 million in 2009; at a per-capita level it is the second highest in South America, behind only Brazil, according to Espicom’s report.
In Colombia, expenditures on medical equipment is slightly under $11 per person. The medical device market there is heavily dependent on imports and is concentrated around its capital, Bogota, which offers a free trade zone. These factors encourage international companies to set up there, the report said.
Industry experts who spoke to Medical Product Outsourcing said business in Latin America is increasing. They expect it to continue to rise in the near future.
“In the last five years, the amount of product that Pexco has been shipping within the U.S. and Europe has gone down about 25 percent, and the amount that we are shipping to our customer’s Mexican facilities has gone up 25 percent,” said Brooks, adding that 20 percent of his company’s medical products business is done at Pexco’s Mexico plant.
McGee at Command Medical said that she also has seen a boost in business with the addition of the Nicaragua facility. “Unequivocally, it has had a positive impact on our business. It has broadened the depth that we are able to bring to the table. We’ve been able to solicit bids or participate in bids for larger pieces of business that we would have never been offered because of the cost structure,” she said.
Rodriguez at Precision Concepts Costa Rica said that Latin America continues to be attractive for businesses, especially for those headquartered in the United States.
“Despite the economic worldwide crisis, we have seen an increase in OEMs working with contract manufacturing companies in Latin America or opening their own facilities in the region, which clearly demonstrates that countries in the region offer the necessary infrastructure for a multinational company to establish itself,” she said. She also pointed out that Costa Rica, in particular, has many trade agreements with China, Singapore and Europe that allow companies to get raw materials and export finished goods to other parts of the world.
Another expected reason for future growth by contract manufacturers with plants in Latin America is the implications of healthcare reform. Included in the new healthcare reform law is a 2.3 percent medical device excise tax that will take effect in 2013. Industry experts told MPO that the law will put more pricing pressures on OEMs, forcing them to cut costs. One way of reducing costs is by outsourcing work to companies with Latin American manufacturing facilities.
Mabie said Costa Rica is hot right now “with more medical device companies and/or suppliers announcing each year their plans to establish a site in-country.” He added, however, that Mexico is probably experiencing the opposite effect, due to border violence. “The instability along the Mexican border has many companies running for cover.”
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Medical device contract manufacturers that MPO spoke with foresee only growth in Latin America. They said that location and logistics are the main reasons for opening operations south of the border. However, they also believe that a lower cost of labor is contributing to the increase in business from OEMs. In addition, healthcare reform signed into law this year, which will place a 2.3 percent tax on medical devices in 2013, is expected to further increase business to U.S. contract manufacturers with plants in Latin America, due to expected pricing pressures.