Michael Barbella, Managing Editor11.09.12
It doesn’t take much these days to trigger The Question.
James D. Carnall is well aware of The Trigger, but he simply cannot avoid it during routine business transactions. Not that he’d want to sidestep The Trigger—it’s become such an integral part of his company that Carnall can’t help but talk about it.
Thus begins the logistical and philosophical merry-go-round Carnall rides each time he talks to potential customers and discusses his firm’s Nicaraguan operation, a “nearshore” extension of manufacturing capabilities that invariably pulls The Trigger.
Which, of course, fires off The Question: “Why aren’t you in Costa Rica?”customers demand of Carnall.
It’s a loaded query, but a legitimate one nonetheless. With a life sciences sector that contributes nearly a quarter of the tiny country’s total exported goods, and a five-fold increase in the overall number of medical device/biotechnology companies since the Millennium began, potential patrons have a valid concern. Why isn’t Carnall’s firm in Costa Rica?
“We get hit with that question a lot,” Carnall noted. “When it comes up, we explain to customers all the reasons we are in Nicaragua—the low labor rate, the talent pool, the infrastructure, and its location. We’re a short plane ride from the United States and we’re right next door to Costa Rica. Companies may not be flocking to Nicaragua like they are to Costa Rica, but once we explain why we are there and customers hear about the [low-cost] labor pricing, they are very open to Nicaragua.”
More than open, actually. Wages in Nicaragua are only about one-third of the rates in neighboring Costa Rica, according to data from PRONicaragua, the country’s non-profit public-private investment promotion agency. When “fully loaded” to include fringe benefits, Nicaraguan rates are only about 90 cents to $1 an hour, compared with $1.68 in Honduras and $3.05 in Costa Rica.
Low-cost labor, however, is only partly responsible for the steady rise in foreign direct investment (FDI) in Nicaragua over the last decade. Like many of its Central American neighbors, Nicaragua is luring greater amounts of overseas capital with a tantalizing mix of business incentives and zealous economic development assistance. PRONicaragua, the country’s 10-year-old investment promotion machine, is considered one of the best in Latin America, second only to Costa Rica’s agency, CINDE.
Likely solidifying PRONicaragua’s top-notch reputation south of the border are initiatives like its Aftercare Department, which helps foreign companies overcome the challenges and difficulties of establishing an offshore operation in the country. The department channels investors’ concerns to the proper government institutions and solicits feedback on ways to improve both operational procedures and Nicaragua’s overall business climate.
Augmenting PRONicaragua’s Aftercare plan are one-stop service centers that centralize permit procedures and paperwork. Entrepreneurs interested in starting a business need only visit one government office to register their company and complete the necessary forms; exporters, on the other hand, can fill out all required paperwork online. Such streamlining of services, according to PRONicaragua and government officials, has halved business creation time over the last five years.
“The government has been very, very supportive,” said Carnall, vice president and chief operating officer of Command Medical Products Inc., which operates one offshore manufacturing facility in Nicaragua’s capital city of Managua along with a domestic manufacturing site in Florida. “These one-stop service centers that work with companies to overcome hurdles are reflective of a government that is supportive of foreign investment. We didn’t have a lot of hurdles getting into Nicaragua. Most of the companies near us are textile firms. We are one of the only medical device establishments down there.
The government is trying to build up its medical manufacturing sector, and we are the kind of company they want.”
Indeed, regimes throughout Latin America are rolling out the red carpet for companies like Command Medical Products as they attempt to convert their fledgling life sciences sectors into formidable global medtech meccas. The transformation won’t be easy, considering parts of the market (Bolivia, Ecuador and Venezuela, in particular) are mired in political unrest, and Mexico—the region’s second-largest economy—has become a battleground for ruthless drug cartels.
But the pockets of opportunity that do exist hold tremendous potential for future growth. In Argentina, for instance, roughly 11 percent of the 41 million inhabitants are aged 65 and older, a demographic that not only illustrates the country’s solid customer base, but also partially explains the 25 percent rise in imported medical devices during FY2011.
A similar spike in medtech imports occurred in Colombia and Peru last year as both countries worked to improve healthcare delivery to residents. Imports reached a record $799.3 million in Colombia, while Peru’s non-domestic medical equipment purchases jumped 16.9 percent to $253.3 million during fiscal 2011, data from United Kingdom-based Espicom Business Intelligence indicate. Diagnostic imaging devices accounted for the largest share of Peruvian healthcare imports ($87.4 million, according to Espicom) and experienced the most significant increase (40.7 percent).
Nicaragua depends heavily on imports as well: The 50,567-square-mile country (comparable to the state of Alabama) received $1.1 billion in goods from the United States last year, including cereals, mechanical machinery, textiles and apparel, oils and fats, medical and dental equipment, electrical machinery, vehicles, and plastics. In return, the country exported $2.6 billion worth of goods to the United States (an additional $1.6 billion went to other global trade partners).
Agricultural products like coffee, sugar, and meat have been consistent staples on Nicaragua’s export list but non-traditional items such as textiles and automobile parts steadily are gaining ground. So is the light manufacturing/assembly industry, which has helped create jobs and boost the economy in recent years.
Command Medical can take credit for some of that growth (albeit a tiny fraction of it)—the Ormond Beach, Fla.-based contract manufacturer employs about 40 people at its two facilities in Managua. Both plants primarily serve Nicaragua’s surgical and respiratory markets, though some products are shipped to Costa Rica and others are destined for the United States.
The company opened its first facility in Managua in September 2005. The 10,000-square-foot building, executives said, allowed the firm to test both its business model and distribution logistics.
A second building followed in December 2009. That 30,000-square-foot facility features class seven cleanroom assembly and packaging space and helped the company expand its capacity in high-volume, labor-intensive production.
“Part of the reason a company like ours needs a facility in Nicaragua is because we reached a point where our volumes started to grow and our product took off, so we needed a low-cost manufacturing option,” Carnall explained. “We could have gone to Costa Rica but a lot of companies are there and the labor rate is three times higher. China is also an option, but shipping containers to that part of the world takes weeks, and there are problems with IP. I think companies are starting to move away from Asia in general. You’re dealing with increased labor costs, the IP protection is not all that great, they’re far away both time zone-wise and shipping wise, and there have been problems with quality. You put all those things together and people are starting to wonder whether China really makes sense.”
Nothing in the Eastern Hemisphere, actually, made much sense to Command Medical executives during their hunt for an off-site, low-cost manufacturing platform. Turned off by lengthy Asian-bound maritime shipments (eight to 10 weeks, on average), the continent’s 12-hour time zone difference (impractical from a management standpoint), and potential language barriers, company bigwigs looked closer to home—and found a spot practically in their own backyard.
The spot, ironically, was one with which Command Medical President/CEO David Slick was already familiar. For the last dozen years or so, Slick’s son Benjamin has been operating a plant in Managua that specializes in cabinetry and molded kitchen countertops and sinks. “Over that period, he [Slick] saw his son’s business grow and prosper,” a company official told Medical Product Outsourcing.
In all likelihood, the Slicks’ success can partly be attributed to the generous incentives Nicaragua offers to foreign companies that make long-term domestic investments. Firms that base their operations within the country’s eight Free Trade Zones (FTZs), for example, are exempt from paying income tax for 10 years.
In addition, Foreign Investment Promotion Law 344 establishes equal treatment to foreign and domestic investment. It also eliminates restrictions in which foreign capital can enter the country, and recognizes the right of foreign investors to transfer profits to any foreign location.
Costa Rica: A Harmonious Blend of OEMs and Suppliers
Similar incentives exist across the border in Costa Rica, where FTZ companies are income-tax exempt for eight years (and thereafter subjected to a reduced rate). These zones—areas where goods are handled, manufactured or reconfigured, and exported without intervention by customs officials—also provide businesses with simplified investment, trade and customs procedures, which in turn, helps companies avoid the country’s burdensome commercial licensing process. More than 270 companies have taken advantage of Costa Rica’s FTZ program over the last three decades, according to government statistics.
The zones have attracted an impressive cache of medical device companies, from Boston Scientific Corp. and Hospira Inc. to St. Jude Medical Inc., Hologic Inc., SMC Ltd., and Oberg Medical. Over the last five years, medical device investment has represented roughly 50 percent of the total foreign direct investment generated by free trade zone companies, data from the Costa Rican Investment and Development Board (CINDE) indicate.
“We started our operation in Costa Rica in 2002 and have had a front-row seat to watch the growth play out over the last decade,” said Dave Bonvenuto, executive vice president and general manager at Oberg Medical, a Freeport, Pa.-based contract manufacturer that focuses on precision machining and turning, electrical discharge machining (EDM), stamping and assembly. “The growth has been staggering.”
And mind-boggling: Between 2001 and 2011, FTZ exports of medical devices have grown at an average annual rate of 8.6 percent. Last year, medical device exports accounted for 3 percent of Costa Rica’s gross domestic product and represented 11.8 percent of the total amount of exported goods ($1.2 billion), a volume that was surpassed only by Mexico, CINDE data note.
The meteoric rise of the device industry itself is equally as astounding. Since the start of the millennium, the sector has created more than 13,000 jobs and boosted its company ranking by more than five-fold, going from eight in 2000 to 41 in 2011. The newest arrivals to Costa Rica’s medtech mecca include MicroVention Terumo, which manufactures platinum coils (used in the embolization of cerebral aneurysms) in Alajuela; Helix Medical LLC, which provides silicone extrusion and thermoplastic molding services from a 17,300-square-foot facility in Alajuela; GW Plastics Inc., which opened a 10,000-square-foot manufacturing facility last year in the Cartago-Techno Park FTZ (the new plant is the third operation the company has outside the United States; the other two production facilities are located in China and Mexico); and OKAY Industries Inc., which produces high-precision metal components from a 15,069-square-foot plant in Alajuela. It is the company’s first international facility and is expected to employ 30 people by year’s end.
Many of the veterans are reinvesting in the sector as well. Boston Scientific is spending $10 million to expand its manufacturing plant in Heredia, while Freemont, Calif.-based Nitinol Devices & Components is quadrupling its payroll and building a new $4 million facility to manufacture guidewires and other nitinol products used in endovascular, orthopedic and coronary treatments. BeamOne LLC, meanwhile, is constructing a new plant for ethylene oxide sterilization services and is in the midst of expanding its 3-year-old electron beam sterilization facility in Alajuela. The United Kingdom-based firm is spending $10 million on both projects.
“Costa Rica is really beginning to develop as a major medical device manufacturing hub, with large OEMs surrounded by small and medium-sized suppliers. That kind of combination is really convenient,” said John O’Brien, former chairman and executive vice president of Point Technologies Inc. who now runs a Colorado-based consulting firm that helps medical device companies establish ancillary operations in offshore markets. “It’s something the other countries in Latin America don’t have. The Dominican Republic is trying to create something similar. There’s some medium-sized manufacturers there, but the country does not have the small supplier infrastructure yet to help supply these larger firms.”
Such a hybrid of OEMs and suppliers not only makes offshore manufacturing operations easier and more efficient, it also helps companies stay loyal to their core competencies. When Oberg Medical executives were searching for an offshore manufacturing site during the early 2000s, they were looking for a market with a skilled workforce that could be trained to operate multi-axis machining centers and integrate new technology to enhance its design-for-manufacturing capabilities.
“When we established our operation in Costa Rica, we wanted to accomplish two things,” Bonvenuto explained. “We wanted to establish an operation offshore in an area of the world where we saw growth occurring. The Central American/South American market provided that potential and growth. We also wanted to stay true to our core manufacturing competency of precision metalworking and assembly. We did not want to select a location strictly based on it being a lower cost than the United States. The location had to be able to provide value add into the technical nature of the products we manufacture. Costa Rica became our preferred location for expansion as we became more familiar with the education system and the technical schools and capabilities of the workforce.”
Brazil’s Identity Crisis
In 2001, Goldman Sachs Asset Management Chairman Terence James O’Neill coronated the BRIC brethren, a quartet of developing countries (Brazil, Russia, India and China) with the population base and economic growth rates to dominate world markets by mid-century (later revised to 2039, then 2032).
That same year, the Brazilian Trade and Investment Promotion Agency (Apex-Brasil) joined with ABIMO (the Brazilian Medical Devices Manufacturers Association) to form an initiative to promote medical device exports. The resulting Brazilian Health Devices project was designed to bolster the country’s image as a global center of medtech innovation.
In the decade or so since O’Neill shared his vision for the BRICs, the bloc has morphed from an unimposing afterthought of pecuniary prowess to a global linchpin of economic growth. The foursome have become a household name in both business and culture, shaping ways in which a generation of investors, financiers and policymakers view emerging markets.
“The BRIC concept…that O’Neill created…has become such a strong brand,” said Felipe Góes, secretary of development for Rio de Janeiro.
It’s a brand, though, that is stronger as a whole. Since their ordination, the quartet seldom have been recognized as individuals (China, however, usually attracts the limelight more than its brothers due to its size). Medical device behemoths such as Johnson & Johnson, Medtronic Inc., Smith & Nephew plc, Stryker Corp., and Zimmer Holdings Inc. all have developed BRIC business strategies; several dozen financial institutions now run BRIC funds; and business schools have created BRIC-themed courses. Even the art world is beginning to take the fearsome foursome seriously: Two years ago, New York, N.Y.-based art auction house Phillips de Pury & Company held a BRIC-themed sale of art collections from the four countries.
The attention, of course, is strictly superficial. Combined, the BRIC brothers are an investor’s dream date, having grown more than four-fold over the last decade. The siblings’ combined gross domestic product ballooned to $13.3 trillion last year from $2.8 trillion in 2002, and MSCI Inc.’s BRIC index gained more than eight times the value of the S&P 500 index during that same time period.
Such monstrous growth spurts easily overshadow any attempts at independence or self-sufficiency. They also can make it difficult for any single team member to showcase a market-boosting industry or product.
The BRIC bloc’s gains most certainly have complicated Brazil’s attempts to break free of its brethren and flaunt its growing medical device sector. Despite valient efforts by Apex-Brasil and ABIMO over the last 10 years, the country’s medtech capabilities remain largely unknown to most of the developed world.
“Brazilian medical technology is still a difficult sell abroad,” noted Paula Portugal, ABIMO’s international projects manager. “People don’t realize that Brazil is capable of producing high-tech medical products.”
Stereotypes are partly to blame for this ignorance (the country, after all, is more renowned for samba, football and Carnaval than its technological expertise) but Brazil contributes to the knowledge gap as well with its conservative business climate, affinity for homegrown merchandise, and heavy dependence on imports.
Healthcare-related imports have more than doubled over the last six years, going from $1.6 billion in 2006 to $4 billion in 2011, according to data from Apex-Brasil and ABIMO. Medical exports, meanwhile, grew 60.3 percent during that same time period—hardly enough to offset the 150 percent spike in foreign-made products.
ABIMO bigwigs attribute Brazil’s high import level to the country’s tax burden on domestic manufacturing activity and a regulation that absolves foreign manufacturers of import taxes on medical products without a national equivalent.
A nearly 2-year-old law, however, could help reduce the trade deficit. Issued in December 2010, the directive allows the government to buy domestic products at a cost up to 25 percent higher than foreign devices if they are priority technologies. The incentive is designed to foster investment and innovation in “national priority” areas like nanotechnology, imaging equipment, diagnostic reagents, haemodialysis vaccines, vascular access devices, robotics, implants, and prostheses.
ABIMO also has devised a plan to spur domestic investment in new technologies. Last year, the organization’s Innovation Health program awarded $50,000 real (U.S. $31,000) to IC Intercientifica for its efforts to advance prenatal and neonatal screening technologies. The small São José dos Campos-based firm beat out 27 other companies for the prize.
Augmenting these fiscal innovation incentives are government training programs that help domestic companies better understand foreign regulatory processes such as ISO certifications, CE Mark approval, U.S. Food and Drug Administration (FDA) submissions, and ANVISA (the Brazilian equivalent of the FDA) Good Manufacturing Practices certification.
Brazil’s financial sector is getting involved as well. Last fall, the Brazilian Development Bank opened a $200 million credit line to other South American importers to support the purchase of Brazilian medical equipment. The program will finance five South American countries for three to five years.
The government’s mounting export and innovation incentive stockpile should help medical device companies increase exports over the next few years. It may even move Apex-Brasil and ABIMO within striking distance of their $1 billion export goal in 2015. But it most likely won’t be the magic bullet needed to turn Brazil’s fledgling device sector into a world-renowned medtech manufacturing hub. That kind of transformation requires a better infrastructure and a solid supply base similar to the kind that exists in Costa Rica, industry experts claim.
“Brazil is an important market for exports. There’s a lot of manufacturing in Brazil—the country makes everything from airplanes to automotive parts but there are not a lot of medical device facilities there,” O'Brien said. “I would suspect that in the future, [medical device] companies will go down there to take advantage of slightly lower labor costs. But Brazil is going to have to build an infrastructure first. The big guys may not be able to get the supplies they need right away, things like stainless steel tubing or plastic injection molding, but the supply base will develop because it is a large market. It’s definitely going to be a market to watch in the future.”
Convincing the world to tune in may be challenging, though. Brazilian device firms still must overcome pre-conceived notions about product quality and workers’ skills—a situation that easily can be corrected with savvy public relations campaigns.
Such missions already are underway. Last fall, ABIMO and Apex-Brasil launched Brazilian Health Devices, a new brand that sells Brazil as a country of technology and innovation. The label is used on commercial missions and at international trade fairs to emphasize the quality of Brazilian devices and increase export volumes.
“The brand name encompasses the different sectors exporting medical equipment,” ABIMO’s Portugal noted. “We’re hoping to convey our credibility and medical technology with the Brazilian Health Devices brand. We want to tell people that Brazil has changed. It’s the dawn of a new era.”
* * *
Medical device companies have been on an extended discovery mission over the last few years as they circled the globe in search of untapped medtech markets that would deliver top-line growth. Many firms laid claim to places like China, India and Singapore, where growing populations and unmet clinical needs offer solid opportunities for long-term growth. Other companies have sought refuge in uncoventional territories such as Russia, Turkey, Australia and New Zealand.
These markets have provided a welcome respite from the vicious regulatory, reimbursement, and venture capital headwinds that have been swirling around device companies recently, but they also present their own set of challenges, namely operational and transportation logistics, workforce recruitment, and in some cases, political and social unrest.
As a result, medtech firms are sticking closer to home, exploring life sciences hubs in Central and South America. Though these markets still are maturing, they nevertheless provide device companies with all the right ingredients for sustainable growth: Low labor costs, proximity to the United States, good communication (bilingual employees), and perhaps most importantly, a strong work ethic. “Getting good people is key,” one industry expert said. “You need people with a good attitude to make your business successful. And that can be really refreshing.”
James D. Carnall is well aware of The Trigger, but he simply cannot avoid it during routine business transactions. Not that he’d want to sidestep The Trigger—it’s become such an integral part of his company that Carnall can’t help but talk about it.
Thus begins the logistical and philosophical merry-go-round Carnall rides each time he talks to potential customers and discusses his firm’s Nicaraguan operation, a “nearshore” extension of manufacturing capabilities that invariably pulls The Trigger.
Which, of course, fires off The Question: “Why aren’t you in Costa Rica?”customers demand of Carnall.
It’s a loaded query, but a legitimate one nonetheless. With a life sciences sector that contributes nearly a quarter of the tiny country’s total exported goods, and a five-fold increase in the overall number of medical device/biotechnology companies since the Millennium began, potential patrons have a valid concern. Why isn’t Carnall’s firm in Costa Rica?
“We get hit with that question a lot,” Carnall noted. “When it comes up, we explain to customers all the reasons we are in Nicaragua—the low labor rate, the talent pool, the infrastructure, and its location. We’re a short plane ride from the United States and we’re right next door to Costa Rica. Companies may not be flocking to Nicaragua like they are to Costa Rica, but once we explain why we are there and customers hear about the [low-cost] labor pricing, they are very open to Nicaragua.”
More than open, actually. Wages in Nicaragua are only about one-third of the rates in neighboring Costa Rica, according to data from PRONicaragua, the country’s non-profit public-private investment promotion agency. When “fully loaded” to include fringe benefits, Nicaraguan rates are only about 90 cents to $1 an hour, compared with $1.68 in Honduras and $3.05 in Costa Rica.
Low-cost labor, however, is only partly responsible for the steady rise in foreign direct investment (FDI) in Nicaragua over the last decade. Like many of its Central American neighbors, Nicaragua is luring greater amounts of overseas capital with a tantalizing mix of business incentives and zealous economic development assistance. PRONicaragua, the country’s 10-year-old investment promotion machine, is considered one of the best in Latin America, second only to Costa Rica’s agency, CINDE.
Likely solidifying PRONicaragua’s top-notch reputation south of the border are initiatives like its Aftercare Department, which helps foreign companies overcome the challenges and difficulties of establishing an offshore operation in the country. The department channels investors’ concerns to the proper government institutions and solicits feedback on ways to improve both operational procedures and Nicaragua’s overall business climate.
Augmenting PRONicaragua’s Aftercare plan are one-stop service centers that centralize permit procedures and paperwork. Entrepreneurs interested in starting a business need only visit one government office to register their company and complete the necessary forms; exporters, on the other hand, can fill out all required paperwork online. Such streamlining of services, according to PRONicaragua and government officials, has halved business creation time over the last five years.
“The government has been very, very supportive,” said Carnall, vice president and chief operating officer of Command Medical Products Inc., which operates one offshore manufacturing facility in Nicaragua’s capital city of Managua along with a domestic manufacturing site in Florida. “These one-stop service centers that work with companies to overcome hurdles are reflective of a government that is supportive of foreign investment. We didn’t have a lot of hurdles getting into Nicaragua. Most of the companies near us are textile firms. We are one of the only medical device establishments down there.
The government is trying to build up its medical manufacturing sector, and we are the kind of company they want.”
Indeed, regimes throughout Latin America are rolling out the red carpet for companies like Command Medical Products as they attempt to convert their fledgling life sciences sectors into formidable global medtech meccas. The transformation won’t be easy, considering parts of the market (Bolivia, Ecuador and Venezuela, in particular) are mired in political unrest, and Mexico—the region’s second-largest economy—has become a battleground for ruthless drug cartels.
But the pockets of opportunity that do exist hold tremendous potential for future growth. In Argentina, for instance, roughly 11 percent of the 41 million inhabitants are aged 65 and older, a demographic that not only illustrates the country’s solid customer base, but also partially explains the 25 percent rise in imported medical devices during FY2011.
A similar spike in medtech imports occurred in Colombia and Peru last year as both countries worked to improve healthcare delivery to residents. Imports reached a record $799.3 million in Colombia, while Peru’s non-domestic medical equipment purchases jumped 16.9 percent to $253.3 million during fiscal 2011, data from United Kingdom-based Espicom Business Intelligence indicate. Diagnostic imaging devices accounted for the largest share of Peruvian healthcare imports ($87.4 million, according to Espicom) and experienced the most significant increase (40.7 percent).
Nicaragua depends heavily on imports as well: The 50,567-square-mile country (comparable to the state of Alabama) received $1.1 billion in goods from the United States last year, including cereals, mechanical machinery, textiles and apparel, oils and fats, medical and dental equipment, electrical machinery, vehicles, and plastics. In return, the country exported $2.6 billion worth of goods to the United States (an additional $1.6 billion went to other global trade partners).
Agricultural products like coffee, sugar, and meat have been consistent staples on Nicaragua’s export list but non-traditional items such as textiles and automobile parts steadily are gaining ground. So is the light manufacturing/assembly industry, which has helped create jobs and boost the economy in recent years.
Command Medical can take credit for some of that growth (albeit a tiny fraction of it)—the Ormond Beach, Fla.-based contract manufacturer employs about 40 people at its two facilities in Managua. Both plants primarily serve Nicaragua’s surgical and respiratory markets, though some products are shipped to Costa Rica and others are destined for the United States.
The company opened its first facility in Managua in September 2005. The 10,000-square-foot building, executives said, allowed the firm to test both its business model and distribution logistics.
A second building followed in December 2009. That 30,000-square-foot facility features class seven cleanroom assembly and packaging space and helped the company expand its capacity in high-volume, labor-intensive production.
“Part of the reason a company like ours needs a facility in Nicaragua is because we reached a point where our volumes started to grow and our product took off, so we needed a low-cost manufacturing option,” Carnall explained. “We could have gone to Costa Rica but a lot of companies are there and the labor rate is three times higher. China is also an option, but shipping containers to that part of the world takes weeks, and there are problems with IP. I think companies are starting to move away from Asia in general. You’re dealing with increased labor costs, the IP protection is not all that great, they’re far away both time zone-wise and shipping wise, and there have been problems with quality. You put all those things together and people are starting to wonder whether China really makes sense.”
Nothing in the Eastern Hemisphere, actually, made much sense to Command Medical executives during their hunt for an off-site, low-cost manufacturing platform. Turned off by lengthy Asian-bound maritime shipments (eight to 10 weeks, on average), the continent’s 12-hour time zone difference (impractical from a management standpoint), and potential language barriers, company bigwigs looked closer to home—and found a spot practically in their own backyard.
The spot, ironically, was one with which Command Medical President/CEO David Slick was already familiar. For the last dozen years or so, Slick’s son Benjamin has been operating a plant in Managua that specializes in cabinetry and molded kitchen countertops and sinks. “Over that period, he [Slick] saw his son’s business grow and prosper,” a company official told Medical Product Outsourcing.
In all likelihood, the Slicks’ success can partly be attributed to the generous incentives Nicaragua offers to foreign companies that make long-term domestic investments. Firms that base their operations within the country’s eight Free Trade Zones (FTZs), for example, are exempt from paying income tax for 10 years.
In addition, Foreign Investment Promotion Law 344 establishes equal treatment to foreign and domestic investment. It also eliminates restrictions in which foreign capital can enter the country, and recognizes the right of foreign investors to transfer profits to any foreign location.
Costa Rica: A Harmonious Blend of OEMs and Suppliers
Similar incentives exist across the border in Costa Rica, where FTZ companies are income-tax exempt for eight years (and thereafter subjected to a reduced rate). These zones—areas where goods are handled, manufactured or reconfigured, and exported without intervention by customs officials—also provide businesses with simplified investment, trade and customs procedures, which in turn, helps companies avoid the country’s burdensome commercial licensing process. More than 270 companies have taken advantage of Costa Rica’s FTZ program over the last three decades, according to government statistics.
The zones have attracted an impressive cache of medical device companies, from Boston Scientific Corp. and Hospira Inc. to St. Jude Medical Inc., Hologic Inc., SMC Ltd., and Oberg Medical. Over the last five years, medical device investment has represented roughly 50 percent of the total foreign direct investment generated by free trade zone companies, data from the Costa Rican Investment and Development Board (CINDE) indicate.
“We started our operation in Costa Rica in 2002 and have had a front-row seat to watch the growth play out over the last decade,” said Dave Bonvenuto, executive vice president and general manager at Oberg Medical, a Freeport, Pa.-based contract manufacturer that focuses on precision machining and turning, electrical discharge machining (EDM), stamping and assembly. “The growth has been staggering.”
And mind-boggling: Between 2001 and 2011, FTZ exports of medical devices have grown at an average annual rate of 8.6 percent. Last year, medical device exports accounted for 3 percent of Costa Rica’s gross domestic product and represented 11.8 percent of the total amount of exported goods ($1.2 billion), a volume that was surpassed only by Mexico, CINDE data note.
The meteoric rise of the device industry itself is equally as astounding. Since the start of the millennium, the sector has created more than 13,000 jobs and boosted its company ranking by more than five-fold, going from eight in 2000 to 41 in 2011. The newest arrivals to Costa Rica’s medtech mecca include MicroVention Terumo, which manufactures platinum coils (used in the embolization of cerebral aneurysms) in Alajuela; Helix Medical LLC, which provides silicone extrusion and thermoplastic molding services from a 17,300-square-foot facility in Alajuela; GW Plastics Inc., which opened a 10,000-square-foot manufacturing facility last year in the Cartago-Techno Park FTZ (the new plant is the third operation the company has outside the United States; the other two production facilities are located in China and Mexico); and OKAY Industries Inc., which produces high-precision metal components from a 15,069-square-foot plant in Alajuela. It is the company’s first international facility and is expected to employ 30 people by year’s end.
Many of the veterans are reinvesting in the sector as well. Boston Scientific is spending $10 million to expand its manufacturing plant in Heredia, while Freemont, Calif.-based Nitinol Devices & Components is quadrupling its payroll and building a new $4 million facility to manufacture guidewires and other nitinol products used in endovascular, orthopedic and coronary treatments. BeamOne LLC, meanwhile, is constructing a new plant for ethylene oxide sterilization services and is in the midst of expanding its 3-year-old electron beam sterilization facility in Alajuela. The United Kingdom-based firm is spending $10 million on both projects.
“Costa Rica is really beginning to develop as a major medical device manufacturing hub, with large OEMs surrounded by small and medium-sized suppliers. That kind of combination is really convenient,” said John O’Brien, former chairman and executive vice president of Point Technologies Inc. who now runs a Colorado-based consulting firm that helps medical device companies establish ancillary operations in offshore markets. “It’s something the other countries in Latin America don’t have. The Dominican Republic is trying to create something similar. There’s some medium-sized manufacturers there, but the country does not have the small supplier infrastructure yet to help supply these larger firms.”
Such a hybrid of OEMs and suppliers not only makes offshore manufacturing operations easier and more efficient, it also helps companies stay loyal to their core competencies. When Oberg Medical executives were searching for an offshore manufacturing site during the early 2000s, they were looking for a market with a skilled workforce that could be trained to operate multi-axis machining centers and integrate new technology to enhance its design-for-manufacturing capabilities.
“When we established our operation in Costa Rica, we wanted to accomplish two things,” Bonvenuto explained. “We wanted to establish an operation offshore in an area of the world where we saw growth occurring. The Central American/South American market provided that potential and growth. We also wanted to stay true to our core manufacturing competency of precision metalworking and assembly. We did not want to select a location strictly based on it being a lower cost than the United States. The location had to be able to provide value add into the technical nature of the products we manufacture. Costa Rica became our preferred location for expansion as we became more familiar with the education system and the technical schools and capabilities of the workforce.”
Brazil’s Identity Crisis
In 2001, Goldman Sachs Asset Management Chairman Terence James O’Neill coronated the BRIC brethren, a quartet of developing countries (Brazil, Russia, India and China) with the population base and economic growth rates to dominate world markets by mid-century (later revised to 2039, then 2032).
That same year, the Brazilian Trade and Investment Promotion Agency (Apex-Brasil) joined with ABIMO (the Brazilian Medical Devices Manufacturers Association) to form an initiative to promote medical device exports. The resulting Brazilian Health Devices project was designed to bolster the country’s image as a global center of medtech innovation.
In the decade or so since O’Neill shared his vision for the BRICs, the bloc has morphed from an unimposing afterthought of pecuniary prowess to a global linchpin of economic growth. The foursome have become a household name in both business and culture, shaping ways in which a generation of investors, financiers and policymakers view emerging markets.
“The BRIC concept…that O’Neill created…has become such a strong brand,” said Felipe Góes, secretary of development for Rio de Janeiro.
It’s a brand, though, that is stronger as a whole. Since their ordination, the quartet seldom have been recognized as individuals (China, however, usually attracts the limelight more than its brothers due to its size). Medical device behemoths such as Johnson & Johnson, Medtronic Inc., Smith & Nephew plc, Stryker Corp., and Zimmer Holdings Inc. all have developed BRIC business strategies; several dozen financial institutions now run BRIC funds; and business schools have created BRIC-themed courses. Even the art world is beginning to take the fearsome foursome seriously: Two years ago, New York, N.Y.-based art auction house Phillips de Pury & Company held a BRIC-themed sale of art collections from the four countries.
The attention, of course, is strictly superficial. Combined, the BRIC brothers are an investor’s dream date, having grown more than four-fold over the last decade. The siblings’ combined gross domestic product ballooned to $13.3 trillion last year from $2.8 trillion in 2002, and MSCI Inc.’s BRIC index gained more than eight times the value of the S&P 500 index during that same time period.
Such monstrous growth spurts easily overshadow any attempts at independence or self-sufficiency. They also can make it difficult for any single team member to showcase a market-boosting industry or product.
The BRIC bloc’s gains most certainly have complicated Brazil’s attempts to break free of its brethren and flaunt its growing medical device sector. Despite valient efforts by Apex-Brasil and ABIMO over the last 10 years, the country’s medtech capabilities remain largely unknown to most of the developed world.
“Brazilian medical technology is still a difficult sell abroad,” noted Paula Portugal, ABIMO’s international projects manager. “People don’t realize that Brazil is capable of producing high-tech medical products.”
Stereotypes are partly to blame for this ignorance (the country, after all, is more renowned for samba, football and Carnaval than its technological expertise) but Brazil contributes to the knowledge gap as well with its conservative business climate, affinity for homegrown merchandise, and heavy dependence on imports.
Healthcare-related imports have more than doubled over the last six years, going from $1.6 billion in 2006 to $4 billion in 2011, according to data from Apex-Brasil and ABIMO. Medical exports, meanwhile, grew 60.3 percent during that same time period—hardly enough to offset the 150 percent spike in foreign-made products.
ABIMO bigwigs attribute Brazil’s high import level to the country’s tax burden on domestic manufacturing activity and a regulation that absolves foreign manufacturers of import taxes on medical products without a national equivalent.
A nearly 2-year-old law, however, could help reduce the trade deficit. Issued in December 2010, the directive allows the government to buy domestic products at a cost up to 25 percent higher than foreign devices if they are priority technologies. The incentive is designed to foster investment and innovation in “national priority” areas like nanotechnology, imaging equipment, diagnostic reagents, haemodialysis vaccines, vascular access devices, robotics, implants, and prostheses.
ABIMO also has devised a plan to spur domestic investment in new technologies. Last year, the organization’s Innovation Health program awarded $50,000 real (U.S. $31,000) to IC Intercientifica for its efforts to advance prenatal and neonatal screening technologies. The small São José dos Campos-based firm beat out 27 other companies for the prize.
Augmenting these fiscal innovation incentives are government training programs that help domestic companies better understand foreign regulatory processes such as ISO certifications, CE Mark approval, U.S. Food and Drug Administration (FDA) submissions, and ANVISA (the Brazilian equivalent of the FDA) Good Manufacturing Practices certification.
Brazil’s financial sector is getting involved as well. Last fall, the Brazilian Development Bank opened a $200 million credit line to other South American importers to support the purchase of Brazilian medical equipment. The program will finance five South American countries for three to five years.
The government’s mounting export and innovation incentive stockpile should help medical device companies increase exports over the next few years. It may even move Apex-Brasil and ABIMO within striking distance of their $1 billion export goal in 2015. But it most likely won’t be the magic bullet needed to turn Brazil’s fledgling device sector into a world-renowned medtech manufacturing hub. That kind of transformation requires a better infrastructure and a solid supply base similar to the kind that exists in Costa Rica, industry experts claim.
“Brazil is an important market for exports. There’s a lot of manufacturing in Brazil—the country makes everything from airplanes to automotive parts but there are not a lot of medical device facilities there,” O'Brien said. “I would suspect that in the future, [medical device] companies will go down there to take advantage of slightly lower labor costs. But Brazil is going to have to build an infrastructure first. The big guys may not be able to get the supplies they need right away, things like stainless steel tubing or plastic injection molding, but the supply base will develop because it is a large market. It’s definitely going to be a market to watch in the future.”
Convincing the world to tune in may be challenging, though. Brazilian device firms still must overcome pre-conceived notions about product quality and workers’ skills—a situation that easily can be corrected with savvy public relations campaigns.
Such missions already are underway. Last fall, ABIMO and Apex-Brasil launched Brazilian Health Devices, a new brand that sells Brazil as a country of technology and innovation. The label is used on commercial missions and at international trade fairs to emphasize the quality of Brazilian devices and increase export volumes.
“The brand name encompasses the different sectors exporting medical equipment,” ABIMO’s Portugal noted. “We’re hoping to convey our credibility and medical technology with the Brazilian Health Devices brand. We want to tell people that Brazil has changed. It’s the dawn of a new era.”
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Medical device companies have been on an extended discovery mission over the last few years as they circled the globe in search of untapped medtech markets that would deliver top-line growth. Many firms laid claim to places like China, India and Singapore, where growing populations and unmet clinical needs offer solid opportunities for long-term growth. Other companies have sought refuge in uncoventional territories such as Russia, Turkey, Australia and New Zealand.
These markets have provided a welcome respite from the vicious regulatory, reimbursement, and venture capital headwinds that have been swirling around device companies recently, but they also present their own set of challenges, namely operational and transportation logistics, workforce recruitment, and in some cases, political and social unrest.
As a result, medtech firms are sticking closer to home, exploring life sciences hubs in Central and South America. Though these markets still are maturing, they nevertheless provide device companies with all the right ingredients for sustainable growth: Low labor costs, proximity to the United States, good communication (bilingual employees), and perhaps most importantly, a strong work ethic. “Getting good people is key,” one industry expert said. “You need people with a good attitude to make your business successful. And that can be really refreshing.”