As Emerging Markets Grow, Outsourcing Drivers Shift

Posted by Brian Buntz on July 25, 2012

Much has been made of the growing pressures to reign in healthcare. In much of the developed world, those pressures are continuing to intensify as many Western nations wrestle with unprecedented debt loads.

Image from Flickr user tuppus.

Adding fuel to the cost-cutting fire is the global uptick in chronic conditions, which are notoriously expensive to treat. Last year, the World Economic Forum estimated that the global cost of treating five common chronic conditions could hit $47 trillion over the course of the next two decades.

While conditions such as heart disease and diabetes are often thought of as Western diseases but such diseases are becoming more common internationally. In fact, China may have a rate of chronic disease that has surpassed the global average. China’s Ministry of Health recently found that 85% of deaths in the nation are the result of chronic diseases. By contrast, the World Health Organization estimates that chronic conditions are responsible for 60% of mortalities globally.

In light of this, the pressures to cut the costs of healthcare technology across the globe are continuing to intensify. For device makers, outsourcing continues to be a common strategy to minimize costs related to manufacturing. A recent survey from Axendia of 125 medical device professionals found that 69% of those polled relied on outsourcing becaue of its cost savings.

The costs benefits of offshoring manufacturing, however, are gradually eroding in many emerging markets. “72% of those who responded anticipate that the labor cost is going to increase in emerging economies,” says Daniel Matlis, president of Axendia.

Meanwhile, the lure of emerging markets like China are shifting. These countries become increasingly important markets themselves as their appetite for medical devices grows, Matlis explains: “Some of the executives in our research told us is that they are looking to globalization more as a means to supply the local market with locally manufactured products.” 

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As for China, it continues to lead the pack for sourcing, contract manufacturing, and internal manufacturing, according to the Axendia survey. Rounding out the top five emerging markets are India, Malaysia, Mexico, and Brazil. These five nations were the most popular foreign destinations for respondents identifying where their companies plan to conduct business in the next three years.

Part of the allure of emerging markets for device makers are the regulatory advantages and tax or tariff savings to producing goods in the country your firm plan on selling to as well as the regulatory advantages this. Perhaps not surprisingly, the single issue most worrisome to executives in the device industry is the global regulatory environment. “And you need to really understand the local regulatory requirements in order to enter a specific market,” Matlis says, adding that being on the ground in the country you are doing business in can greatly help your firm understand the regulatory processes there.

Also of note is that many medical device professionals continue to worry about the pitfalls of doing business in certain regions. “We are also hearing that executives are more concerned about some of the geopolitical issues associated with single sourcing, which in the past, you wouldn’t have heard.” Depending on the geographical region in question, these concerns stem from topics such as political unrest or the threat of natural disasters. “[These issues] are shaping executives’ thinking about globalization and outsourcing,” Matlis says.

Meanwhile, the potential of emerging economies remains strong. In the aforementioned survey, 88% of those polled predicted growing product sales in emerging markets. By contrast, 69% of them expect product sale growth in developed economies. “There is still obviously a very positive and optimistic feeling in the industry but the shift is starting to happen where product sales will happen more in those emerging markets,” Matlis says.

Brian Buntz is the editor-at-large at UBM Canon's medical group. Follow him on Twitter at @brian_buntz.

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