Michael Barbella10.12.10
International Smorgasbord
Overseas operations have become an essential part of the device manufacturing and outsourcing process, but the move is not without risk.
Managing Editor
in·no·va·tion1 : the introduction of something new 2 : a new idea, method or device
Merriam-Webster dictionary
In most instances, Jeffrey P. Rouleau is not the kind of person who will challenge authority. But several weeks ago, he found himself at odds with Merriam-Webster, the universally accepted connoisseur of language, spelling and word meaning, and the ultimate voice of authority for the planet’s most inquisitive minds. The source of Rouleau’s discontent was not the preeminence of the reference book but rather the definition of one simple word.
Innovation.
To Rouleau, the dictionary meaning of innovation is too simple. It is much more than the birth of a new idea, or the introduction of something new. Innovation is not merely an invention; it is the process of making changes by introducing new methods, ideas, products, or processes. It goes beyond building that better mousetrap to thinking differently and doing things differently. Innovation may indeed result in an invention but it also could spawn a new belief, an organizational method or a discovery. Innovation, Rouleau argues, is a value-creation mechanism.
“What is innovation? Normally, we think of innovation as that light bulb that goes on in our heads when we have a novel idea,” he said. “But it’s more than that. Innovation does not come from inspiration; perspiration has to have a hand in order for innovation to take place. And innovation does not come from technology alone. My preferred definition of innovation is this—it is something new that brings value. Research is about turning money into knowledge. Innovation is turning that knowledge into money.”
Throughout much of modern history, innovation (and attempts to profit from it) has been personified by the idiosyncratic lone genius in a workshop or laboratory. Some of the most brilliant innovators of the last millennium were solo artists: Johannes Gutenberg toiled tirelessly on his own perfecting the first printing press; Leonardo da Vinci took advantage of the solitude of churches and monasteries to introduce the notion of atmospheric perspective in art (the seclusion also gave da Vinci the time to fill 13,000 journal pages with notes and drawings, including sketches of designs for musical instruments, hydraulic pumps, reversible crank mechanisms, finned mortar shells and a steam cannon); only one other person was with Benjamin Franklin in June 1752 to witness (but not help) the future Founding Father conduct his legendary kite-flying experiment that proved lightning is electricity; and four men working independently (unbeknownst to each other) perfected the telephone. Two of those men, Elisha Gray and Alexander Graham Bell, filed for a patent on their designs on the same day, with Bell edging out Gray by only two hours.
Though he invented the quadruplex telegraph on his own, Thomas Edison used funds from the sale of that machine to establish the first industrial research lab. Built in Menlo Park, N.J., the institution was the first to be set up for the sole purpose of producing constant technological innovation and improvement.
While the research lab approach was embraced for decades and copied by such industrial conglomerates as Bell Laboratories, RCA, General Motors and DuPont, the dynamics of the innovation ecosystem have changed due to business costs, governmental regulations and most importantly, globalization. Individual genius no longer is the sole catalyst that advances technology. To successfully innovate, companies must rely less on single-handed ingenuity and more on collaborative partnerships. Put simply: “Look beyond your own walls,” Rouleau advises.
Though it sounds simple enough, many companies fail to take advantage of collaborative partnerships to help them foster innovation. At Medtronic Inc., where Rouleau, Ph.D., serves as a technical fellow and senior manager of strategy and scientific operations, employees can participate in two programs that enable them to share their knowledge and ideas both internally and globally.
“There is far more talent outside our walls than inside our walls. Shame on us if we don’t look outside our walls for talent,” Rouleau said. “Where are the scientists and the engineers innovating today? Not just in the United States, but across the globe. We all should be looking across the globe.”
Choosing Costa Rica
Searching the world for talent, financial support and product development partnerships has become quite common in recent years as companies—particularly those in the medical device industry—strive to lower costs, improve the efficiency of their manufacturing process and stay ahead of the competition.
Most OEMs have been operating on a worldwide basis for years in an effort to better serve their domestic and international customers. Contract manufacturing firms that partner with OEMs are now following suit, establishing operations in places such as Asia, Latin America and Europe to better serve and retain the business of their multinational cohorts. Those that fail to establish an international presence, industry experts claim, risk losing the partnerships they have forged and profits they have reaped with OEMs.
“We want to be a tier-one supplier to market-leading OEMs and in order to do that, a low-cost country option is a must,” explained Tom Burns, vice president of business development for Tegra Medical, a contract manufacturer based in Franklin, Mass. “This has become a requirement with most companies. OEMs want suppliers that can service them not only in one division or in one location, but across many divisions and many manufacturing sites. Plus, cost pressures are increasing. OEMs have always had to deal with this issue but I think things have really accelerated with all the reimbursement challenges that we’re seeing out there. It’s getting more difficult to get new products approved, and these products have to be cost effective. Developing nations can’t afford to pay for new technology they way the U.S. has historically. Cost has definitely become more important for OEMs.”
To satisfy their partners’ expectations (and perhaps ensure their own long-term growth), Tegra acquired a manufacturing operation in La Aurora, Heredia, Costa Rica, earlier this year. The 20,000-square-foot facility specializes in various types of metal working capabilities that includes electrical discharge machining, precision grinding, turning, milling, stamping and assembly.
Tegra executives considered setting up shop in other countries (Mexico and China, in particular) but settled on Costa Rica for its stable democracy and economy, its solid educational infrastructure, and its growing medical device industry. The country virtually was unknown to device firms when Baxter International opened a manufacturing plant in Cartago 23 years ago. Since then, the industry has grown to encompass nearly 10,000 employees from such companies as Boston Scientific Corp., Hospira Inc., St. Jude Medical Inc., Hologic Inc., Koros USA Inc., Arthrocare Corporation and Allergan Inc.
Overall, medical device exports have grown three times faster than the country’s other free trade zone exports. The device industry has grown so rapidly, in fact, that it is now the third largest exporter in Costa Rica; last year, the export of medical products generated more than $1.34 billion for the economy and accounted for 15.5 percent of the nation’s total exports, according to government data.
“The medical device manufacturing industry in Costa Rica is growing rapidly and there’s a large base of OEMs that are already there. So our decision to establish a low-cost country option naturally coalesced around Costa Rica,” Burns said, noting some of the other reasons Tegra Medical established a presence in the Central American country. “You can liken it to the automotive model where companies like to have suppliers close to their plants. It’s a good, Lean manufacturing practice. Plus, it reduces lead times and allows for better communication between their plant and our plant. There are lots of reasons why we did what we did.”
Executives at The MedTech Group Inc., Sterigenics International Inc. and St. Jude Medical may have had some of those same reasons in mind when they decided to expand their respective operations to Costa Rica this year.
The decision was relatively simple for MedTech Group bigwigs. Having operated a manufacturing facility in Costa Rica for the last six years, officials already were familiar with the country’s medical device market, its talent base and the economic incentives for locating a business there. Expanding the company’s international footprint somewhere else just didn’t make sense.
So the South Plainfield, N.J.-based contract manufacturer stayed put, opening a second facility in Costa Rica in January, adjacent to its first plant in Zona Franca Metropolitana, Heredia. With space for two clean rooms and assembly operations, the new facility provides MedTech with more than 60,000 total square feet of medical device manufacturing space in Central America. The extra space should help the company meet customer demand, expedite the mold-building process and become more competitive with its pricing—moves that can help MedTech ensure its future growth in finished product manufacturing.
Sterigenics officials cited similar market needs and the growth of their customer base as the main factors in their decision to build a state-of-the-art ethylene oxide sterilization plant near San Jose. The Oak Brook, Ill.-based company—which operates facilities throughout the world, including Mexico, Thailand, China, the Netherlands, Denmark and the United Kingdom—plans to invest $7 million in Costa Rica to complete the first phase of its expansion project next year. Officials expect the new plant to be fully operational by January 2012.
“Having a new distribution channel and more capacity in this strategic location will have a significant and positive impact on our company,” said Patrick J. Hughes, vice president of sales and marketing for Sterigenics in the Americas. “We build or add capacity where the market needs our services and we will continue to analyze other expansion opportunities.”
St. Jude executives had a similar mindset several years ago when they were considering options for international expansion. Like their counterparts at Sterigenics, they settled on Costa Rica for its strategic location and its potential impact on sales.
Last month, St. Jude officials celebrated the opening of a heart valve manufacturing plant in the El Coyol Free Zone in Alajuela, a high-tech business park that also houses Hologic (a provider of healthcare systems for women), BeamOne LLC (a provider of electron beam sterilization services) and Moog Inc. (a manufacturer of precision control components and systems).
St. Jude built the Costa Rica facility to boost production of its heart valve products and augment the manufacturing capacity of its Cardiovascular division. One of the products manufactured there will be the Trifecta tissue valve, a device that replaces a damaged or malfunctioning aortic heart valve (which controls blood flow from the heart throughout the body).
St. Jude’s 350,000-square-foot facility in Alajuela employs about 250 people. The company has promised to create an additional 50 jobs there before the end of the year and invest $670 million in Costa Rica over the next five years. The expansion is expected to boost St. Jude’s Costa Rican workforce to about 2,000 people.
“The arrival of St. Jude is not only a great opportunity for Costa Rica, but it also represents an enormous challenge that will test our institutional muscle,” Costa Rica President Laura Chinchilla said during a Sept. 10 ribbon-cutting ceremony at the plant, where she ceremoniously labeled the first product for shipment. “It obliges us to strengthen our innovation technology, commit greater effort to developing our young professionals, and keep fighting to improve the competitiveness of our economy.”
Decisions, Decisions: Diversity and Dependence
Chinchilla’s struggle for economic dominance is likely to continue as Costa Rica and other low-cost labor countries position themselves to capture a greater share of the global medical device outsourcing market, expected to reach $42.6 billion in the next five years. Various factors are expected to drive this growth, including customer demand, manufacturing cost reductions and the re-evaluation of business strategies. Though it officially ended last June, the recession that decimated economies around the world also is expected to continue influencing the market as OEMs search for low-cost labor destinations to reduce production costs and stay competitive.
Indeed, low-cost labor realms can help relieve some of the pressure medical device manufacturers currently face to reduce expenses and sell their products at reasonable prices. But low labor costs should not be the driving force behind a company’s decision to establish or expand its international footprint, industry experts warn. Such tunnel vision can backfire.
Cheap labor is not always the best labor, either. Companies that solely focus on labor costs risk sacrificing talent that can help them improve a product or create an innovative new device, industry experts told Medical Product Outsourcing. Before deciding on an overseas locale, manufacturers should closely examine the labor pool to determine whether the workers are well educated and have the necessary skills for the job. As one industry expert noted, “Talent follows money and talent goes where opportunity exists.”
Sometimes, though, talent begets opportunity. Such was the case four years ago when executives at CEA Technologies Inc. were exploring options for international expansion. After eliminating Mexico and Costa Rica from contention, officials settled on the Dominican Republic, a country traditionally known more for textile manufacturing than medical device production. In fact, more than half of the companies located in the country’s Free Trade Zone (FTZ) business parks produced textiles as recently as 2005, according to an analysis of the Dominican Republic’s medical device manufacturing and export potential compiled by global consulting firm Chemonics International. By contrast, only 3 percent of FTZ companies manufactured medical devices, the analysis concluded.
Unfazed by the focus on textiles (and poor scores in an assessment of factors that attract manufacturing firms), CEA officials opened a 25,000-square-foot manufacturing plant in San Pedro de Macoris, a city about 40 miles east of the capital, Santo Domingo. The challenges in opening the Caribbean waterfront facility (dubbed CEA Global Dominicana) were not exclusive to the Dominican Republic, executives said.
“The initial challenges were not much different than those you would encounter establishing a presence anywhere else,” noted Marcus Boggs, president and CEO of the Colorado Springs, Colo.-based provider of device development, assembly and packaging services. “You have to identify good resources in those countries that you can rely on to get good information on everything from corporate procedures to hiring a talented staff. We had some very good resources in the Dominican Republic that we were able to rely on for that kind of assistance. You also have to make sure there’s a good infrastructure in place, especially if you are exporting products. The Dominican Republic has one of the largest ports in the Caribbean—that’s important for us because we ship our products all over the world. There are a lot of U.S.-based and Korean-based companies investing a lot of money in the country to educate the population in running specific types of equipment. That’s important too because you’ll obviously want to hire a highly skilled workforce.”
Indeed, professional training and continuing education programs can be an important prerequisite for device manufacturers that want to establish a presence overseas. But it’s just as important for manufacturers to be cognizant of the diversity in business practices and implement the proper organizational structures in their new ventures.
Companies that conduct a large amount of business in Japan, for example, should create a separate office specifically for that country and establish a regional hub in Singapore or China (Hong Kong) to cover all other Asian transactions, industry experts note. The Japanese office should report directly to the company’s Western headquarters rather than through the office in Singapore or China. Requiring a Japanese office to report to the regional hub can be awkward for executives, particularly if sales in that office are greater than all other Asian countries combined.
Visits to a foreign country certainly can help foster a better understanding of the local business culture and customs. Those sojourns, though, should not be limited to corporate managers or CEOs. Requiring foreign staff to work at manufacturing facilities in the United States can provide them with technical training that may not be available in their own country as well as an appreciation for the way Americans conduct their workday. It also helps them feel more connected to the company and their Western co-workers on a daily basis.
“People in different countries are used to working in different ways,” said Vanessa Rodriguez, business development manager for Precision Concepts Costa Rica S.A., sister company of Precision Concepts Group LLC in Winston-Salem, N.C., a contract manufacturer of medical devices and electromedical assemblies. “For example, people in Mexico, Nicaragua and Asia work in a certain way that is different than how we conduct business in Costa Rica. Sometimes the differences in the way you work and conduct business affects your operations. A sense of urgency for us may not be the same as for someone in another country. There are certain cultural barriers that can make it hard to conduct business at first, even if you’re dealing with people who speak English. Every country has its own customs, work ethic and way of doing things.”
That is why it’s important for companies to be sensitive to the diversity that exists in the country in which they plan to establish operations. In Asia, for example, cultures vary widely from Thailand and Singapore to China and Japan, and each culture may be home to numerous religions and philosophies (Buddhism, Hinduism, Taoism and Confucianism). In addition, the religious composition of each country is different; most Chinese citizens, for instance, practice either Buddhism or Taoism, while Koreans can be Christians, Buddhists or followers of some other religion.
Diversity can vary widely within a country’s borders, too. Within the vast amounts of geographic territory covered by nations such as India and China are regions and cities that have their own specific dialects, languages, cultures and income levels. Such differences can make it difficult for device firms to create one overall strategy for the entire country, experts said.
“Cultural harmony and thus social security are key factors that allow individuals to think and innovate,” observed Dr. Philip Wong, CEO and chief technical officer of Innoheart Pte Ltd., a Singapore-based preclinical contract research organization that conducts studies in biomedical devices, biologics and medical implants. “If the social environment is unstable, human resources departments waste valuable time and assets settling these issues within companies, distracting from more important issues. Strict government enforcement of cultural and social harmony is critical for companies to innovate and grow; governments where there is good ‘rule of law’ and enforcement are natural magnets for both startups and multi-national corporations.”
The China Syndrome
The Chinese economy has become downright invincible of late. While most of the world still struggles to recover from a brutal recession, China’s powerhouse of an economy continues to surge. During the first half of 2009 (while the recession was still wreaking havoc with world markets), the top 500 companies in China surpassed their equivalents in the United States in profits for the first time in history. The top 500 firms in China reported $170.6 billion in net profits compared with $98.9 billion in net profits for the top American companies.
Over the summer, China solidified its place as a world superpower (economically speaking, anyway) when its economy sprinted past Japan’s to become the world’s second largest.
The country’s medical device industry has experienced double-digit growth in recent years, making the country a sound investment for U.S.-based manufacturing firms. The market had an estimated value of $11.2 billion in 2007, and is expected to reach $20.6 billion by 2012.
With such opportunity beckoning, device firms would be remiss not to consider establishing a presence in China. In fact, many already do: Medtronic, Becton Dickinson & Co., B. Braun, Johnson & Johnson, Stryker Corp., Smith & Nephew and Boston Scientific all operate facilities there.
Expanding to China, however, can be a double-edged sword. Though its growing medical device market is up for grabs, the process of establishing a presence in the country is fraught with challenges and potential roadbocks. One of the most common concerns among companies—particularly OEMs—is intellectual property (IP) protection. While the Chinese government takes violations of IP protection agreements very seriously and has begun punishing offenders, the country still cannot shake the stigma of trademark copycat.
“Intellectual property issues are very important to most companies,” noted Doug Mowen, managing director, Pharmaceutical and Life Sciences Practice at PricewaterhouseCoopers. “The Chinese market is very daunting for a lot of companies because of counterfeiting and IP protection concerns. Many companies are reticent about partnering with a Chinese firm because of concerns over losing local control of their products. So the question becomes do you partner with somebody or do you go it alone? It’s a hard question for companies to answer. Due diligence and local relationships are critical.”
Relationships certainly are critical. But so are the various other factors that can influence a company’s decision to partner with a contract manufacturer or supplier, regardless of whether that teammate is foreign or domestic, industry experts said. Dealmakers or dealbreakers such as regulatory compliance, quality standards, core competency and auditing provisions are essential in evaluating a potential partner.
Other considerations more specific to international collaborations include workforce training, language barriers, distance, government regulations (including directives and guidelines from the U.S. Food and Drug Administration), and vendor/supplier controls.
“It all boils down to being able to work together as a team on a project. Nothing is better than a face-to-face meeting, but the second best thing in the world—and most companies have been doing this for years—is the conference call or videoconference,” said Ronald Lilly, vice president of sales and marketing at Forefront Medical Technology Pte Ltd., a medical device contract manufacturer based in Singapore. “For example, at Forefront, I’m in Connecticut, our engineering team is in Singapore and our customers can be anywhere in the world. We jump on a conference call to discuss the project, review their drawings, set up a timeline, schedule monthly meetings and start moving through the project. At the end of the day, it comes down to people, clear communications and a common technical ground. As with any partnership, you have to be able to work together as a team.”
* * *
With device innovation now more of a collaborative effort, OEMs must look beyond the walls of their cleanrooms and assembly lines to locate the talent that will help advance medical technology. Often, this means going overseas to establish an international presence and taking advantage of the resources (whether it be skills, technological know-how or raw materials) other countries have to offer. While the international market provides plenty of opportunities to U.S.-based manufacturing firms, it also offers just as many challenges. One of the most important pieces of advice for firms that are considering expanding overseas comes from CEA’s Boggs: “When you go to another country it’s just like forming a relationship with a new partner in the United States. It takes time. You have to become a part of that country and help it to develop. I believe we have a responsibility to help build a country, not just take advantage of it. To really be successful in another country, you have to become part of that community and figure out how to encourage, coach and support the country so it can become more educated and economically sound.”
Overseas operations have become an essential part of the device manufacturing and outsourcing process, but the move is not without risk.
Managing Editor
in·no·va·tion1 : the introduction of something new 2 : a new idea, method or device
Merriam-Webster dictionary
In most instances, Jeffrey P. Rouleau is not the kind of person who will challenge authority. But several weeks ago, he found himself at odds with Merriam-Webster, the universally accepted connoisseur of language, spelling and word meaning, and the ultimate voice of authority for the planet’s most inquisitive minds. The source of Rouleau’s discontent was not the preeminence of the reference book but rather the definition of one simple word.
Innovation.
To Rouleau, the dictionary meaning of innovation is too simple. It is much more than the birth of a new idea, or the introduction of something new. Innovation is not merely an invention; it is the process of making changes by introducing new methods, ideas, products, or processes. It goes beyond building that better mousetrap to thinking differently and doing things differently. Innovation may indeed result in an invention but it also could spawn a new belief, an organizational method or a discovery. Innovation, Rouleau argues, is a value-creation mechanism.
“What is innovation? Normally, we think of innovation as that light bulb that goes on in our heads when we have a novel idea,” he said. “But it’s more than that. Innovation does not come from inspiration; perspiration has to have a hand in order for innovation to take place. And innovation does not come from technology alone. My preferred definition of innovation is this—it is something new that brings value. Research is about turning money into knowledge. Innovation is turning that knowledge into money.”
Throughout much of modern history, innovation (and attempts to profit from it) has been personified by the idiosyncratic lone genius in a workshop or laboratory. Some of the most brilliant innovators of the last millennium were solo artists: Johannes Gutenberg toiled tirelessly on his own perfecting the first printing press; Leonardo da Vinci took advantage of the solitude of churches and monasteries to introduce the notion of atmospheric perspective in art (the seclusion also gave da Vinci the time to fill 13,000 journal pages with notes and drawings, including sketches of designs for musical instruments, hydraulic pumps, reversible crank mechanisms, finned mortar shells and a steam cannon); only one other person was with Benjamin Franklin in June 1752 to witness (but not help) the future Founding Father conduct his legendary kite-flying experiment that proved lightning is electricity; and four men working independently (unbeknownst to each other) perfected the telephone. Two of those men, Elisha Gray and Alexander Graham Bell, filed for a patent on their designs on the same day, with Bell edging out Gray by only two hours.
Though he invented the quadruplex telegraph on his own, Thomas Edison used funds from the sale of that machine to establish the first industrial research lab. Built in Menlo Park, N.J., the institution was the first to be set up for the sole purpose of producing constant technological innovation and improvement.
While the research lab approach was embraced for decades and copied by such industrial conglomerates as Bell Laboratories, RCA, General Motors and DuPont, the dynamics of the innovation ecosystem have changed due to business costs, governmental regulations and most importantly, globalization. Individual genius no longer is the sole catalyst that advances technology. To successfully innovate, companies must rely less on single-handed ingenuity and more on collaborative partnerships. Put simply: “Look beyond your own walls,” Rouleau advises.
Though it sounds simple enough, many companies fail to take advantage of collaborative partnerships to help them foster innovation. At Medtronic Inc., where Rouleau, Ph.D., serves as a technical fellow and senior manager of strategy and scientific operations, employees can participate in two programs that enable them to share their knowledge and ideas both internally and globally.
“There is far more talent outside our walls than inside our walls. Shame on us if we don’t look outside our walls for talent,” Rouleau said. “Where are the scientists and the engineers innovating today? Not just in the United States, but across the globe. We all should be looking across the globe.”
Choosing Costa Rica
Searching the world for talent, financial support and product development partnerships has become quite common in recent years as companies—particularly those in the medical device industry—strive to lower costs, improve the efficiency of their manufacturing process and stay ahead of the competition.
Most OEMs have been operating on a worldwide basis for years in an effort to better serve their domestic and international customers. Contract manufacturing firms that partner with OEMs are now following suit, establishing operations in places such as Asia, Latin America and Europe to better serve and retain the business of their multinational cohorts. Those that fail to establish an international presence, industry experts claim, risk losing the partnerships they have forged and profits they have reaped with OEMs.
“We want to be a tier-one supplier to market-leading OEMs and in order to do that, a low-cost country option is a must,” explained Tom Burns, vice president of business development for Tegra Medical, a contract manufacturer based in Franklin, Mass. “This has become a requirement with most companies. OEMs want suppliers that can service them not only in one division or in one location, but across many divisions and many manufacturing sites. Plus, cost pressures are increasing. OEMs have always had to deal with this issue but I think things have really accelerated with all the reimbursement challenges that we’re seeing out there. It’s getting more difficult to get new products approved, and these products have to be cost effective. Developing nations can’t afford to pay for new technology they way the U.S. has historically. Cost has definitely become more important for OEMs.”
To satisfy their partners’ expectations (and perhaps ensure their own long-term growth), Tegra acquired a manufacturing operation in La Aurora, Heredia, Costa Rica, earlier this year. The 20,000-square-foot facility specializes in various types of metal working capabilities that includes electrical discharge machining, precision grinding, turning, milling, stamping and assembly.
Tegra executives considered setting up shop in other countries (Mexico and China, in particular) but settled on Costa Rica for its stable democracy and economy, its solid educational infrastructure, and its growing medical device industry. The country virtually was unknown to device firms when Baxter International opened a manufacturing plant in Cartago 23 years ago. Since then, the industry has grown to encompass nearly 10,000 employees from such companies as Boston Scientific Corp., Hospira Inc., St. Jude Medical Inc., Hologic Inc., Koros USA Inc., Arthrocare Corporation and Allergan Inc.
Overall, medical device exports have grown three times faster than the country’s other free trade zone exports. The device industry has grown so rapidly, in fact, that it is now the third largest exporter in Costa Rica; last year, the export of medical products generated more than $1.34 billion for the economy and accounted for 15.5 percent of the nation’s total exports, according to government data.
“The medical device manufacturing industry in Costa Rica is growing rapidly and there’s a large base of OEMs that are already there. So our decision to establish a low-cost country option naturally coalesced around Costa Rica,” Burns said, noting some of the other reasons Tegra Medical established a presence in the Central American country. “You can liken it to the automotive model where companies like to have suppliers close to their plants. It’s a good, Lean manufacturing practice. Plus, it reduces lead times and allows for better communication between their plant and our plant. There are lots of reasons why we did what we did.”
Executives at The MedTech Group Inc., Sterigenics International Inc. and St. Jude Medical may have had some of those same reasons in mind when they decided to expand their respective operations to Costa Rica this year.
The decision was relatively simple for MedTech Group bigwigs. Having operated a manufacturing facility in Costa Rica for the last six years, officials already were familiar with the country’s medical device market, its talent base and the economic incentives for locating a business there. Expanding the company’s international footprint somewhere else just didn’t make sense.
So the South Plainfield, N.J.-based contract manufacturer stayed put, opening a second facility in Costa Rica in January, adjacent to its first plant in Zona Franca Metropolitana, Heredia. With space for two clean rooms and assembly operations, the new facility provides MedTech with more than 60,000 total square feet of medical device manufacturing space in Central America. The extra space should help the company meet customer demand, expedite the mold-building process and become more competitive with its pricing—moves that can help MedTech ensure its future growth in finished product manufacturing.
Sterigenics officials cited similar market needs and the growth of their customer base as the main factors in their decision to build a state-of-the-art ethylene oxide sterilization plant near San Jose. The Oak Brook, Ill.-based company—which operates facilities throughout the world, including Mexico, Thailand, China, the Netherlands, Denmark and the United Kingdom—plans to invest $7 million in Costa Rica to complete the first phase of its expansion project next year. Officials expect the new plant to be fully operational by January 2012.
“Having a new distribution channel and more capacity in this strategic location will have a significant and positive impact on our company,” said Patrick J. Hughes, vice president of sales and marketing for Sterigenics in the Americas. “We build or add capacity where the market needs our services and we will continue to analyze other expansion opportunities.”
St. Jude executives had a similar mindset several years ago when they were considering options for international expansion. Like their counterparts at Sterigenics, they settled on Costa Rica for its strategic location and its potential impact on sales.
Last month, St. Jude officials celebrated the opening of a heart valve manufacturing plant in the El Coyol Free Zone in Alajuela, a high-tech business park that also houses Hologic (a provider of healthcare systems for women), BeamOne LLC (a provider of electron beam sterilization services) and Moog Inc. (a manufacturer of precision control components and systems).
St. Jude built the Costa Rica facility to boost production of its heart valve products and augment the manufacturing capacity of its Cardiovascular division. One of the products manufactured there will be the Trifecta tissue valve, a device that replaces a damaged or malfunctioning aortic heart valve (which controls blood flow from the heart throughout the body).
St. Jude’s 350,000-square-foot facility in Alajuela employs about 250 people. The company has promised to create an additional 50 jobs there before the end of the year and invest $670 million in Costa Rica over the next five years. The expansion is expected to boost St. Jude’s Costa Rican workforce to about 2,000 people.
“The arrival of St. Jude is not only a great opportunity for Costa Rica, but it also represents an enormous challenge that will test our institutional muscle,” Costa Rica President Laura Chinchilla said during a Sept. 10 ribbon-cutting ceremony at the plant, where she ceremoniously labeled the first product for shipment. “It obliges us to strengthen our innovation technology, commit greater effort to developing our young professionals, and keep fighting to improve the competitiveness of our economy.”
Decisions, Decisions: Diversity and Dependence
Chinchilla’s struggle for economic dominance is likely to continue as Costa Rica and other low-cost labor countries position themselves to capture a greater share of the global medical device outsourcing market, expected to reach $42.6 billion in the next five years. Various factors are expected to drive this growth, including customer demand, manufacturing cost reductions and the re-evaluation of business strategies. Though it officially ended last June, the recession that decimated economies around the world also is expected to continue influencing the market as OEMs search for low-cost labor destinations to reduce production costs and stay competitive.
Indeed, low-cost labor realms can help relieve some of the pressure medical device manufacturers currently face to reduce expenses and sell their products at reasonable prices. But low labor costs should not be the driving force behind a company’s decision to establish or expand its international footprint, industry experts warn. Such tunnel vision can backfire.
Cheap labor is not always the best labor, either. Companies that solely focus on labor costs risk sacrificing talent that can help them improve a product or create an innovative new device, industry experts told Medical Product Outsourcing. Before deciding on an overseas locale, manufacturers should closely examine the labor pool to determine whether the workers are well educated and have the necessary skills for the job. As one industry expert noted, “Talent follows money and talent goes where opportunity exists.”
Sometimes, though, talent begets opportunity. Such was the case four years ago when executives at CEA Technologies Inc. were exploring options for international expansion. After eliminating Mexico and Costa Rica from contention, officials settled on the Dominican Republic, a country traditionally known more for textile manufacturing than medical device production. In fact, more than half of the companies located in the country’s Free Trade Zone (FTZ) business parks produced textiles as recently as 2005, according to an analysis of the Dominican Republic’s medical device manufacturing and export potential compiled by global consulting firm Chemonics International. By contrast, only 3 percent of FTZ companies manufactured medical devices, the analysis concluded.
Unfazed by the focus on textiles (and poor scores in an assessment of factors that attract manufacturing firms), CEA officials opened a 25,000-square-foot manufacturing plant in San Pedro de Macoris, a city about 40 miles east of the capital, Santo Domingo. The challenges in opening the Caribbean waterfront facility (dubbed CEA Global Dominicana) were not exclusive to the Dominican Republic, executives said.
“The initial challenges were not much different than those you would encounter establishing a presence anywhere else,” noted Marcus Boggs, president and CEO of the Colorado Springs, Colo.-based provider of device development, assembly and packaging services. “You have to identify good resources in those countries that you can rely on to get good information on everything from corporate procedures to hiring a talented staff. We had some very good resources in the Dominican Republic that we were able to rely on for that kind of assistance. You also have to make sure there’s a good infrastructure in place, especially if you are exporting products. The Dominican Republic has one of the largest ports in the Caribbean—that’s important for us because we ship our products all over the world. There are a lot of U.S.-based and Korean-based companies investing a lot of money in the country to educate the population in running specific types of equipment. That’s important too because you’ll obviously want to hire a highly skilled workforce.”
Indeed, professional training and continuing education programs can be an important prerequisite for device manufacturers that want to establish a presence overseas. But it’s just as important for manufacturers to be cognizant of the diversity in business practices and implement the proper organizational structures in their new ventures.
Companies that conduct a large amount of business in Japan, for example, should create a separate office specifically for that country and establish a regional hub in Singapore or China (Hong Kong) to cover all other Asian transactions, industry experts note. The Japanese office should report directly to the company’s Western headquarters rather than through the office in Singapore or China. Requiring a Japanese office to report to the regional hub can be awkward for executives, particularly if sales in that office are greater than all other Asian countries combined.
Visits to a foreign country certainly can help foster a better understanding of the local business culture and customs. Those sojourns, though, should not be limited to corporate managers or CEOs. Requiring foreign staff to work at manufacturing facilities in the United States can provide them with technical training that may not be available in their own country as well as an appreciation for the way Americans conduct their workday. It also helps them feel more connected to the company and their Western co-workers on a daily basis.
“People in different countries are used to working in different ways,” said Vanessa Rodriguez, business development manager for Precision Concepts Costa Rica S.A., sister company of Precision Concepts Group LLC in Winston-Salem, N.C., a contract manufacturer of medical devices and electromedical assemblies. “For example, people in Mexico, Nicaragua and Asia work in a certain way that is different than how we conduct business in Costa Rica. Sometimes the differences in the way you work and conduct business affects your operations. A sense of urgency for us may not be the same as for someone in another country. There are certain cultural barriers that can make it hard to conduct business at first, even if you’re dealing with people who speak English. Every country has its own customs, work ethic and way of doing things.”
That is why it’s important for companies to be sensitive to the diversity that exists in the country in which they plan to establish operations. In Asia, for example, cultures vary widely from Thailand and Singapore to China and Japan, and each culture may be home to numerous religions and philosophies (Buddhism, Hinduism, Taoism and Confucianism). In addition, the religious composition of each country is different; most Chinese citizens, for instance, practice either Buddhism or Taoism, while Koreans can be Christians, Buddhists or followers of some other religion.
Diversity can vary widely within a country’s borders, too. Within the vast amounts of geographic territory covered by nations such as India and China are regions and cities that have their own specific dialects, languages, cultures and income levels. Such differences can make it difficult for device firms to create one overall strategy for the entire country, experts said.
“Cultural harmony and thus social security are key factors that allow individuals to think and innovate,” observed Dr. Philip Wong, CEO and chief technical officer of Innoheart Pte Ltd., a Singapore-based preclinical contract research organization that conducts studies in biomedical devices, biologics and medical implants. “If the social environment is unstable, human resources departments waste valuable time and assets settling these issues within companies, distracting from more important issues. Strict government enforcement of cultural and social harmony is critical for companies to innovate and grow; governments where there is good ‘rule of law’ and enforcement are natural magnets for both startups and multi-national corporations.”
The China Syndrome
The Chinese economy has become downright invincible of late. While most of the world still struggles to recover from a brutal recession, China’s powerhouse of an economy continues to surge. During the first half of 2009 (while the recession was still wreaking havoc with world markets), the top 500 companies in China surpassed their equivalents in the United States in profits for the first time in history. The top 500 firms in China reported $170.6 billion in net profits compared with $98.9 billion in net profits for the top American companies.
Over the summer, China solidified its place as a world superpower (economically speaking, anyway) when its economy sprinted past Japan’s to become the world’s second largest.
The country’s medical device industry has experienced double-digit growth in recent years, making the country a sound investment for U.S.-based manufacturing firms. The market had an estimated value of $11.2 billion in 2007, and is expected to reach $20.6 billion by 2012.
With such opportunity beckoning, device firms would be remiss not to consider establishing a presence in China. In fact, many already do: Medtronic, Becton Dickinson & Co., B. Braun, Johnson & Johnson, Stryker Corp., Smith & Nephew and Boston Scientific all operate facilities there.
Expanding to China, however, can be a double-edged sword. Though its growing medical device market is up for grabs, the process of establishing a presence in the country is fraught with challenges and potential roadbocks. One of the most common concerns among companies—particularly OEMs—is intellectual property (IP) protection. While the Chinese government takes violations of IP protection agreements very seriously and has begun punishing offenders, the country still cannot shake the stigma of trademark copycat.
“Intellectual property issues are very important to most companies,” noted Doug Mowen, managing director, Pharmaceutical and Life Sciences Practice at PricewaterhouseCoopers. “The Chinese market is very daunting for a lot of companies because of counterfeiting and IP protection concerns. Many companies are reticent about partnering with a Chinese firm because of concerns over losing local control of their products. So the question becomes do you partner with somebody or do you go it alone? It’s a hard question for companies to answer. Due diligence and local relationships are critical.”
Relationships certainly are critical. But so are the various other factors that can influence a company’s decision to partner with a contract manufacturer or supplier, regardless of whether that teammate is foreign or domestic, industry experts said. Dealmakers or dealbreakers such as regulatory compliance, quality standards, core competency and auditing provisions are essential in evaluating a potential partner.
Other considerations more specific to international collaborations include workforce training, language barriers, distance, government regulations (including directives and guidelines from the U.S. Food and Drug Administration), and vendor/supplier controls.
“It all boils down to being able to work together as a team on a project. Nothing is better than a face-to-face meeting, but the second best thing in the world—and most companies have been doing this for years—is the conference call or videoconference,” said Ronald Lilly, vice president of sales and marketing at Forefront Medical Technology Pte Ltd., a medical device contract manufacturer based in Singapore. “For example, at Forefront, I’m in Connecticut, our engineering team is in Singapore and our customers can be anywhere in the world. We jump on a conference call to discuss the project, review their drawings, set up a timeline, schedule monthly meetings and start moving through the project. At the end of the day, it comes down to people, clear communications and a common technical ground. As with any partnership, you have to be able to work together as a team.”
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With device innovation now more of a collaborative effort, OEMs must look beyond the walls of their cleanrooms and assembly lines to locate the talent that will help advance medical technology. Often, this means going overseas to establish an international presence and taking advantage of the resources (whether it be skills, technological know-how or raw materials) other countries have to offer. While the international market provides plenty of opportunities to U.S.-based manufacturing firms, it also offers just as many challenges. One of the most important pieces of advice for firms that are considering expanding overseas comes from CEA’s Boggs: “When you go to another country it’s just like forming a relationship with a new partner in the United States. It takes time. You have to become a part of that country and help it to develop. I believe we have a responsibility to help build a country, not just take advantage of it. To really be successful in another country, you have to become part of that community and figure out how to encourage, coach and support the country so it can become more educated and economically sound.”