The Global Equation

Given the sector of the industry covered by MedicalDeviceNow it often has felt like a personal mission to educate people about the meaning of the word outsourcing—specifically outsourcing in medical device manufacturing.

Without a doubt, it is a term that is used inconsistently.

Outsourcing involves the contracting of a business function—commonly one previously performed in-house—to an external provider. The external provider could be next door, in a different city, or across the country. Outsourcing doesn’t automatically mean the contracted function is performed overseas. That would be called offshoring. Unfortunately, the mainstream media and others—even some in our own industry—use the two terms interchangeably, which is, I feel, a slippery slope. It’s like nails on a chalkboard when I hear someone declare: “Outsourcing is ruining manufacturing in the United States.”

That said, it may seem contradictory for me to say that for certain medical device manufacturers, a global manufacturing strategy—whether they selectively set up shop themselves or search for international partners—is part of a broader recipe for success. That success then bolsters the company’s financial position, increases new product research and development, and even expands the tasks tackled by the firm’s U.S. workforce. Don’t get me wrong. I’m not suggesting that companies fly off to open a facility or contract with a manufacturing partner half way across the world based on potential cost savings alone. There are numerous supply chain, quality and regulatory factors that must be considered before making such a leap. Making a move based solely on cost is shortsighted and doomed to long-term failure. But in today’s increasingly global environment, companies must pursue a growth strategy that includes international markets and—very often—manufacturing close by to serve those markets.

For example, current regulatory uncertainty in the United States has led to three out of four medical technology companies debuting their new products overseas before introducing them to the U.S. market, according to a study funded by the Institute for Health Technology Studies in Washington, D.C. The study found that 76 percent of companies have gone overseas with their new products during the last three years. Firms’ motivation for this exodus fell into three main categories: the cost of conducting clinical trials (cited by more than one in five, or 22 percent of respondents), quicker and easier regulatory processes outside the United States (cited by another 14 percent of companies) and unpredictable premarket approval 510(k) requirements (cited by the majority of participants, 64 percent). The study surveyed more than 350 professionals from device development companies closely involved in a recent 510(k) submission. The anonymous, 90-question electronic survey was completed by entrepreneurs, academic physician-inventors, product developers and regulatory affairs experts.

Yet another recent report, this one released by PRTM Management Consulting, a division of PwC, found that though nearly three quarters of the medical technology market in India is composed of products imported from developed areas, the next wave of growth likely will come from new innovation, developed specifically for the unique needs of the Indian market and manufactured in Asia. That means growth of indigenous firms, but also an increase in international medtech firms expanding in the area to serve the growing Indian market.

It is, of course, natural and prudent to evaluate medtech locales that are expanding consumer markets and bases of manufacturing. Why are these markets attractive? How do companies make the decision to move overseas and how long can these markets last? A critical eye is required. As is a long-term point of view. Because in today’s market, short-term can be costly.

“Many companies are sourcing from China now. But conditions in China are changing,” said Bruce Arntzen, Ph.D.,executive director of the Supply Chain Management Program at MIT’s Center for Transportation & Logistics in Cambridge, Mass., pointing out that nothing remains constant. He cited China as an example. “The ‘Green Revolution’ favors near-shore supply chains and environmentally responsible sourcing. Despite state controls, the Chinese yuan is slowly appreciating, meaning that the price of goods made in China is rising and less attractive to U.S. and European buyers. Sourcing strategies by these buyers is already shifting to other countries in Asia and Latin America.”

As we move into 2012, such global conundrums increasingly will be debated. It is important to remember, however, that expanding a company’s international reach doesn’t have to mean forsaking a solid home base.