Tony Freeman, President, A.S. Freeman Advisors06.02.21
Even casual readers of OEM product websites and the device industry press are aware medical devices contain increasing amounts of digital technology. Putting numbers to the trend, recent Medtronic product announcements show 13 of 17 new products and 24 of 27 of planned products are digitally enabled. Of MPO’s Top 30 OEMs, 26 offer or plan to sell analytics or artificial intelligence products. Nine of the Top 30 offer or have announced robotic surgery devices. Another four are concentrating on digital products to enhance robotic systems. Driving these innovations are economics. Digitally capable, linked devices often produce superior outcomes to mechanical and electromechanical devices that have been the mainstays of OEM product lines for decades. Superior results often lead to lower cost per procedure, pleasing the governments and insurance companies worldwide that pay for healthcare.
The Last Great Revolution
The last transformation of device design in scale and impact comparable to digitization was the launch of disposable devices in the late 1950s and early 60s. Thermoplastics, a new technology, offered lower costs over then-standard glass and metal reusable devices. Besides cost savings, disposables reduced infections. Cheap and safe, disposables quickly replaced rugged but expensive devices requiring sterilization after each use.
Yet plastics changed more than how devices were designed and manufactured. The rise of disposables changed which managers and companies made money in the medical device industry. OEM managers involved in disposable products saw their stars rise at device companies. Suppliers of medical glass and many metal components saw orders decline and, for some firms, completely disappear. In response to the changeover, the device industry saw the rise of thermoplastic molding in OEM facilities. Additionally, plastic molders who had concentrated on consumer and automotive projects soon joined the medical device supply chain. So lasting has this revelation been that some current plastics suppliers are built on the roots of the original medical plastic molders of the 20th century.
Lessons in the Rise of Disposables—Revolutions are Powerful Things
What lessons can be drawn from the switch from reusable devices to plastic-centric disposables? The first lesson is that a seismic shift in product design is more than a change in a product catalog. The successful introduction of disposables rewarded managers with experience designing, manufacturing, selling, marketing, or distributing these game-changing products. They moved up in their organizations. A new regime of decision-makers with shared, relevant experience in launching disposables moved to the forefront of corporate strategy and leadership. Managers working on traditional, multi-use product lines had less chance to advance as their products were harvested to bring in cash to grow the new disposable lines. It is said the winners write history, but in this case, the winners wrote the future of the industry for decades following their ascendence.
The second lesson was that new suppliers with relevant skills came to the forefront. As more of the economic value of a device depended on new technology, these companies assumed a more important place in the supply chain. In short, the successful revolution rewarded the revolutionaries.
The Digital Revolution Within OEMs—Who Develops Products?
An early sign of the remaking of OEMs is the change in the staffing of product development teams. Software developers, data scientists, electronic engineers, and interface designers are joining the mechanical engineers who, in a lonely way, dominated new product teams for decades. Proof of this shift is in the numbers. Becton Dickinson and Company employs 1,500 software engineers. GE Healthcare has developed over 200 digital applications for using and managing its latest round of products. Beyond hiring, OEMs have acquired software firms to more quickly meet their product goals. Examples include Medtronic’s acquisition of Klue for diabetes management, Baxter International’s purchase of True Process for enhanced bedside results tracking, and Globus Medical buying Nemaris to enhance surgical planning.
It is reasonable to assume the digital newcomers will have more to say on product design as the economic value of their devices proves out. Eventually, they are likely to lead the development of new, flagship products. Success of these products will be a route to coveted senior positions at OEMs.
Few members of the device industry or supply chain have colleagues or customers with digital pedigrees. If the understanding of digital products becomes important for success in the future, it is reasonable to ask how today’s OEM managers, steeped in tangible products, will move forward in a world where the value of a device may skew to its intangible capabilities.
The Digital Revolution and the Supply Chain
Digital products will change both supply chain structure and leadership. A minority of the largest plastics, metals, and assembly suppliers to the device industry have meaningful experience building digital devices. While some larger suppliers like Flex and Jabil have deep experience in design and development of digital products, this unique expertise has not been at the forefront of their medical device offering. Longer-serving members of the device supply chain, particularly metals, plastics, and assembly suppliers, often have no meaningful digital experience. As OEMs turn to supply chain firms to build the next generation of digital devices, two trends will develop. The first is a large number of electronics and software companies will be added to OEM approved vendor lists. The second is a battle for prime contractorship on devices will ensue.
The growth in numbers of digital suppliers alongside traditional metals and plastics houses is hard to dispute. Someone has to do the work. However, as these newcomers gain experience and success, they will seek to supplant tangible product suppliers through sourcing of components and acquisition. Two reasons stand out. The first is the consolidation trend in the industry. If a product has largely digital content, an OEM may prefer to have the digital contractor handle the entire device. While tangible parts will be outsourced at first, there may be reason to eventually bring manufacturing in-house via capital expenditure or acquisition. Given time, the digital newcomers will prove to be both colleagues and competitors to incumbent suppliers.
Prime contractorship in the medical device supply chain has an interesting wrinkle worth watching. Unlike the auto and aerospace industries, large medical device OEMs have largely served as their own prime contractors. In recent years, the role of prime contractor has begun to pass to a group of Tier 1 suppliers, most with sales topping $100 million annually. This group is dominated by companies with roots in electronics manufacturing. They have the expertise to develop and build digital devices by making use of internal capabilities. Many of the larger “pure play” medical device manufacturers who might otherwise serve as prime contractors lack electronics and software capabilities, placing them at a disadvantage on digital devices.
When Will the Revolution Take Place?
Bill Gates commented that we always overestimate the amount of change we are likely to see over two years and underestimate the amount we expect to see over 10. This “creeping but continuous” model applies to the makeup of decision makers at OEMs and the transformation of the supply chain companies favored by digitization. The trend is starting but is likely to take several years to play out in the regulated, tight manufacturing controls world of medical devices. It is my position digitally-capable manufacturers will clearly be in a competitively advantaged, if not dominant, position within five years.
Summary
As medical devices increasingly add digital capabilities, existing managers and suppliers will be confronted by new players knowledgeable in electronics and software. As more of the value of the device is a function of its information management capabilities, responsibility will shift to the managers and companies with relevant experience to bring this class of product to market. Current market leaders unable to lend a hand in the transition are at risk to be sidelined. As much as digitalization will remake the product lines and corporate suites of OEMs, this revolutionary trend will remake the supply chain, threatening firms that have comfortably competed for decades.
Tony Freeman is the president of A.S. Freeman Advisors based in New York City. The firm advises on mergers and acquisitions among specialty materials and precision manufacturing companies as well as providing consulting on strategic direction and corporate value enhancement. He can be reached at tfreeman@asfreeman.com.
The Last Great Revolution
The last transformation of device design in scale and impact comparable to digitization was the launch of disposable devices in the late 1950s and early 60s. Thermoplastics, a new technology, offered lower costs over then-standard glass and metal reusable devices. Besides cost savings, disposables reduced infections. Cheap and safe, disposables quickly replaced rugged but expensive devices requiring sterilization after each use.
Yet plastics changed more than how devices were designed and manufactured. The rise of disposables changed which managers and companies made money in the medical device industry. OEM managers involved in disposable products saw their stars rise at device companies. Suppliers of medical glass and many metal components saw orders decline and, for some firms, completely disappear. In response to the changeover, the device industry saw the rise of thermoplastic molding in OEM facilities. Additionally, plastic molders who had concentrated on consumer and automotive projects soon joined the medical device supply chain. So lasting has this revelation been that some current plastics suppliers are built on the roots of the original medical plastic molders of the 20th century.
Lessons in the Rise of Disposables—Revolutions are Powerful Things
What lessons can be drawn from the switch from reusable devices to plastic-centric disposables? The first lesson is that a seismic shift in product design is more than a change in a product catalog. The successful introduction of disposables rewarded managers with experience designing, manufacturing, selling, marketing, or distributing these game-changing products. They moved up in their organizations. A new regime of decision-makers with shared, relevant experience in launching disposables moved to the forefront of corporate strategy and leadership. Managers working on traditional, multi-use product lines had less chance to advance as their products were harvested to bring in cash to grow the new disposable lines. It is said the winners write history, but in this case, the winners wrote the future of the industry for decades following their ascendence.
The second lesson was that new suppliers with relevant skills came to the forefront. As more of the economic value of a device depended on new technology, these companies assumed a more important place in the supply chain. In short, the successful revolution rewarded the revolutionaries.
The Digital Revolution Within OEMs—Who Develops Products?
An early sign of the remaking of OEMs is the change in the staffing of product development teams. Software developers, data scientists, electronic engineers, and interface designers are joining the mechanical engineers who, in a lonely way, dominated new product teams for decades. Proof of this shift is in the numbers. Becton Dickinson and Company employs 1,500 software engineers. GE Healthcare has developed over 200 digital applications for using and managing its latest round of products. Beyond hiring, OEMs have acquired software firms to more quickly meet their product goals. Examples include Medtronic’s acquisition of Klue for diabetes management, Baxter International’s purchase of True Process for enhanced bedside results tracking, and Globus Medical buying Nemaris to enhance surgical planning.
It is reasonable to assume the digital newcomers will have more to say on product design as the economic value of their devices proves out. Eventually, they are likely to lead the development of new, flagship products. Success of these products will be a route to coveted senior positions at OEMs.
Few members of the device industry or supply chain have colleagues or customers with digital pedigrees. If the understanding of digital products becomes important for success in the future, it is reasonable to ask how today’s OEM managers, steeped in tangible products, will move forward in a world where the value of a device may skew to its intangible capabilities.
The Digital Revolution and the Supply Chain
Digital products will change both supply chain structure and leadership. A minority of the largest plastics, metals, and assembly suppliers to the device industry have meaningful experience building digital devices. While some larger suppliers like Flex and Jabil have deep experience in design and development of digital products, this unique expertise has not been at the forefront of their medical device offering. Longer-serving members of the device supply chain, particularly metals, plastics, and assembly suppliers, often have no meaningful digital experience. As OEMs turn to supply chain firms to build the next generation of digital devices, two trends will develop. The first is a large number of electronics and software companies will be added to OEM approved vendor lists. The second is a battle for prime contractorship on devices will ensue.
The growth in numbers of digital suppliers alongside traditional metals and plastics houses is hard to dispute. Someone has to do the work. However, as these newcomers gain experience and success, they will seek to supplant tangible product suppliers through sourcing of components and acquisition. Two reasons stand out. The first is the consolidation trend in the industry. If a product has largely digital content, an OEM may prefer to have the digital contractor handle the entire device. While tangible parts will be outsourced at first, there may be reason to eventually bring manufacturing in-house via capital expenditure or acquisition. Given time, the digital newcomers will prove to be both colleagues and competitors to incumbent suppliers.
Prime contractorship in the medical device supply chain has an interesting wrinkle worth watching. Unlike the auto and aerospace industries, large medical device OEMs have largely served as their own prime contractors. In recent years, the role of prime contractor has begun to pass to a group of Tier 1 suppliers, most with sales topping $100 million annually. This group is dominated by companies with roots in electronics manufacturing. They have the expertise to develop and build digital devices by making use of internal capabilities. Many of the larger “pure play” medical device manufacturers who might otherwise serve as prime contractors lack electronics and software capabilities, placing them at a disadvantage on digital devices.
When Will the Revolution Take Place?
Bill Gates commented that we always overestimate the amount of change we are likely to see over two years and underestimate the amount we expect to see over 10. This “creeping but continuous” model applies to the makeup of decision makers at OEMs and the transformation of the supply chain companies favored by digitization. The trend is starting but is likely to take several years to play out in the regulated, tight manufacturing controls world of medical devices. It is my position digitally-capable manufacturers will clearly be in a competitively advantaged, if not dominant, position within five years.
Summary
As medical devices increasingly add digital capabilities, existing managers and suppliers will be confronted by new players knowledgeable in electronics and software. As more of the value of the device is a function of its information management capabilities, responsibility will shift to the managers and companies with relevant experience to bring this class of product to market. Current market leaders unable to lend a hand in the transition are at risk to be sidelined. As much as digitalization will remake the product lines and corporate suites of OEMs, this revolutionary trend will remake the supply chain, threatening firms that have comfortably competed for decades.
Tony Freeman is the president of A.S. Freeman Advisors based in New York City. The firm advises on mergers and acquisitions among specialty materials and precision manufacturing companies as well as providing consulting on strategic direction and corporate value enhancement. He can be reached at tfreeman@asfreeman.com.