China is Reopening, But Do Medical Device OEMs and CMOs Still Care?

Last fall, column co-author Dave Sheppard moderated a nearshoring panel discussion at the MPO Summit in Austin, Texas (“Shifting Manufacturing: Is Nearshoring the Answer for MedTech?”). Just weeks later, China began re-opening for business. Coincidence? Maybe, though it would be nice to imagine that MPO’s influence in the global OEM/contract manufacturing (CM)/contract development manufacturing (CDM) marketplace and the supply chain had something to do with it.

Obviously, this topic was chosen for the Summit in light of the supply chain’s pandemic-induced shifting dynamics. An elite group of panelists with different insights participated in the discussion; key executives from the Dominican Republic, Costa Rica, Mexico, and the United States shared shared their perspectives on the purported manufacturing shift from Asia to either the United States or nearby Central American countries.

Yarisol Lopez, deputy executive director for the Dominican Republic’s National Free Zones Council, said her country is experiencing “record growth” in new manufacturing, especially in medtech. From 2019 to 2022, she reported, exports climbed 16%-17%, and the number of companies swelled by 9%. “We have seen interest not only in medical device manufacturing and services in general, but also from companies in the U.S. and Asia,” Lopez told the audience. “Companies in Asia want to come here because of the (proximity) to the U.S. market.”

Carlos Wong, managing director of Costa Rica’s Coyol Free Zone, claimed his country has become a “hub of medtech manufacturing” in the past decade as various OEMs and CMs/ CDMs established a presence. He supported his assertion with mind-blowing statistics, noting a more than 10-fold increase in the number of medical device companies over the last two decades (from eight in 2000 to 85 in 2021), and a near 18-fold jump in device export value (from $288 million in 2000 to $5 billion in 2021). “The medical device sector was a strategic sector during the pandemic. No one shut down. Thirteen of the 30 largest medical device companies have operations in Costa Rica…the growth of the medical device sector has been among the fastest in the country,” he said.

Mexico, however, should not be ignored, as it leading medical device exporter in Latin America and is growing is medtech manufacturing presence, according to Steven A. Colantuoni, director of Corporate Marketing for The Central American Group, a conglomerate of companies with operations that are located throughout Latin America.

Market supply challenges have made it difficult to maintain some current operations, which in turn, can complicate attempts to support a manufacturing line transfer. Lisa Anderson, founder and president of LMA Consulting Group, shared her advice on nearshoring project timing, advising Summit attendees to invest in local-for-local manufacturing operations sooner rather than later. Her comment reminded me of something my grandmother used to say: “If you don’t begin now, when do you start?” No time like the present.

Flexan President Tony Gonzalez brought balance to the discussion by stressing the importance of all regional manufacturing operations in Asia, Europe, and the Americas. “Thinking about the challenges we’ve had in the last several decades, we’ve seen a lot of companies moving back to this [Western] hemisphere,” he said. “To serve customers better, it’s important to have in-region operations—China for China.”

Road to the Middle Kingdom

While the “China for China” philosophy makes sense, the pandemic has proven that an over-reliance on any one manufacturing location can have devastating consequences. Consider the history behind the world’s dependence on China for low-cost medtech manufacturing: During the 1970s and 1980s, major OEMs began outsourcing more of their manufacturing to less expensive locales—especially operations that were not “core” to their central technology.

OEMs, CMs, and CDMs began transitioning some of their manufacturing to Mexico upon implementation of the NAFTA agreement in the mid-1990s. That prompted other countries like Costa Rica and the Dominican Republic to open their own free trade zones, and Puerto Rico (though part of the United States) to offer tax incentives to attract business.

Then China joined the club. While some adventurers established manufacturing operations in China before 2000, it was really about 20 years ago that medtech organizations began to turn the Middle Kingdom into the world’s leading component manufacturer. Low labor costs made the country an attractive option for companies seeking more economical production strategies.

Medtech manufacturing’s migration to China helped create a new consumer middle class, which enabled the world’s third-largest country to evolve into an economic global powerhouse. This growth, along with the government’s “China-centric” policies, encouraged many OEMs, CMs, and CDMs to not only make their goods in China for worldwide distribution, but also to establish growth strategies for the local markets.

Slowly (and sometimes swiftly) but surely, China’s manufacturing expansion created a global medtech ecosystem that became heavily (but not solely) dependent on the country’s supply chain capabilities. This rapid growth led to higher costs in China due to both rising infrasctructure and labor rates. However, it was working for the most part, so the industry didn’t pay too much attention.

The pandemic served as a wakeup call, though. While the strategy of manufacturing “in the region for the region” (i.e., Asia for Asia, Americas for Americas, Europe for Europe, etc.) had been somewhat acknowledged and was a growing trend before SARS-CoV-2, COVID-19-related supply chain challenges proved that manufacturing “strategy” needed some tweaking.

Various adjustments over the past three years has made nearshoring popular once again amongst medtech manufacturers.

Thus, the industry must determine whether China’s reopening for business will erode interest in nearshoring and impact global manufacturing trends and supply chain challenges. Hopefully, the restart will help iron out some of those challenges, as China is and will remain an important part of any global organization’s growth plans (that “in the region for the region” stratagem is still relevant, too).

Nevertheless, China is no longer the “place to be” for the world’s manufacturing. Even many Asian companies are moving some of their sub-assemblies to lower-cost countries like Vietnam and Malysia while maintaining their final assembly in China (for government policies). Even for Chinese companies, ironically, having access to outside markets and supply chains may lead them to establish manufacturing operations in other geographies in order to expand beyond their domestic market.

So, should the medtech industry still care about China? Absolutely, for a number of reasons.

First, the Chinese market is significant; companies would be foolish to ignore it. Second, establishing local manufacturing operations for domestic distribution is practical and economically sensible. However, there are certain instances in which manufacturing in China for global distribution is still more prudent (reason No. 3), though larger companies will likely begin setting up redundancies in the Americas and Eastern Europe.

As has been stated more often in politics than business, let no crisis go to waste. The supply chain crisis caused by the COVID-19 pandemic has facilitated the medtech industry’s implementation and execution of its “in the region for the region” manufacturing strategy. But, the sector cannot totally turn its back on China—it’s too important of a market to overlook. The same holds true for the Americas and Europe, too. And that’s a good thing for the medtech industry’s future stability.

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Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at [email protected].

Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at [email protected].