BIG EMERGING MARKETS FUEL U.S. EXPORT OPPORTUNITIES

Medical Device & Diagnostic Industry Magazine | MDDI Article Index

Originally published May 1996

Victoria Kader, Paul Barry, and Mark Cooper

In 1993, under the leadership of the late commerce secretary Ronald H. Brown, the Clinton administration launched a national export strategy designed to streamline and focus U.S. government resources to help U.S. businesses export. In doing so, the administration selected for special emphasis 10 big emerging markets (BEMs), which are expected to account for the largest share of U.S. export growth and opportunities over the next 15 years.

The BEMs include the Association of Southeast Asian Nations (ASEAN) made up of Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam; the Chinese Economic Area (CEA; China, Hong Kong, and Taiwan); South Korea; India; South Africa; Poland; Turkey; Mexico; Brazil; and Argentina. These BEMs, which are all physically large, also share a number of other important attributes. They have significant populations and represent considerable markets for a wide range of products. Most have strong growth rates or clearly hold the promise of future economic expansion. Most are of major political importance within their regions; moreover, they are regional economic drivers--their growth will engender further expansion in neighboring markets. The BEM strategy for medical devices is a long-term approach to expanding U.S. exports that looks beyond short-term market fluctuations experienced by emerging economies.

The economic stakes for the United States in the BEMs are enormous. As a group, the 10 BEMs are importing about as much merchandise from the United States as Japan and the European Union (EU) combined. In fact, during the period 1990­2010, the BEMs could account for at least $1 trillion in incremental U.S. export growth. The Department of Commerce (DOC) expects the BEMs will double their share of world imports as well, increasing to 38% by 2010 from 19% in 1994. No other market category shows such dramatic growth potential.

BEMs AND THE DEVICE INDUSTRY

Health-care spending in BEMs is increasing two to three times faster than health-care spending in traditional markets such as Canada, Japan, or the EU. However, currently, the majority of U.S. medical product exports focus on Europe, Canada, and Japan. In 1994, U.S. exports to these three regions accounted for 65% of the total U.S. medical device exports. To continue to participate in the global growth, the U.S. medical device industry must shift its marketing efforts into the BEM regions, where demand for medical goods is growing rapidly.

The top consumers of U.S. medical equipment and supplies among the BEMs are South Korea, Taiwan, Hong Kong, Mexico, and Brazil. Between 1991 and 1994, with the exception of Mexico and South Africa, U.S. medical device exports to BEMs grew at significant rates (see Figure 1). Given recent trends and projected national population and income growth, U.S. medical equipment exports to BEMs can be expected to rise 20% a year through 2000 from 1994 levels, to nearly $1.6 billion in 1995 and to $4 billion by 2000. This article summarizes the opportunities available to device manufacturers and the issues they face in each region.

THE CHINESE ECONOMIC AREA

Only three decades ago, Asia accounted for just 8% of the world's gross domestic product (GDP). Today it accounts for 25% of the world's GDP and its share is projected to surpass that of Europe by 2020. By the middle of the next century, Asia is expected to represent half the world's economy.

The medical device markets in several Asian BEMs are growing at double-digit rates, ranging from 15 to 24% in China, Thailand, South Korea, and Taiwan. Growth rates for the United States, European Union, and Japan are much lower (5­7%), demonstrating the importance of shifting U.S. medical device exports to these Asian countries. The U.S. medical device industry has begun to take advantage of these markets. From 1991 to 1995, U.S. exports to the CEA grew by 69% while those to South Korea and India increased by 67 and 45%, respectively.

The CEA, which includes China, Taiwan, and Hong Kong, makes up one of the fastest growing markets for medical devices and supplies in the world. The CEA total market for medical equipment in 1995 reached more than $1.8 billion, of which imports comprised more than 60%. The United States remains the import market-share leader, totaling $388 million in sales in 1995. However, the United States faces increasing competition from local producers and serious competition from Japan and Western Europe.

The continued strong economic growth of China (nearly 10% GDP growth in 1994) is accompanied by an increasing standard of living, resulting in mounting pressure for improved health care. Such pressure will help ensure that China's market for medical equipment will remain strong at between 12 and 15% annual growth. Hong Kong and Taiwan are also placing increased emphasis on providing better health care and have maintained strong annual growth in their medical device markets (17 and 15%, respectively).

The CEA is increasingly emphasizing the development of its own medical equipment production industry in order to supply its own market and to become a major regional exporter. In particular, China's thrust for technology transfer means that joint-venture production is becoming increasingly common (about 20­25% of the total Chinese market) whereas direct sales have been slipping. U.S. companies can expect pressure to form joint ventures, license technology, or invest in Chinese manufacturing ventures rather than focusing on direct sales or establishing wholly owned foreign enterprises.

The U.S. medical device industry in the CEA is most competitive in high-technology products, especially those that lack domestic equivalents. Second-hand equipment, with proper service and maintenance, and some types of disposable equipment and supplies should also find significant markets.

Electromedical equipment remained the strongest segment of exports to the CEA at $136 million in 1995. Other key imports include surgical and medical instruments as well as x-ray and irradiation equipment. Exports of dental equipment and supplies to the CEA are increasing rapidly as well, nearly tripling in the last four years to $20 million in 1995.

U.S. medical exports to China declined in 1994 (see Figure 2) and have leveled off in 1995 for a variety of reasons, including reduced public financing of hospitals and reorganization of health insurance. Also, China's recent adoption of more restrictive credit policies mean that financing of new medical equipment purchases is more difficult. The slowdown in exports is partially attributable to the five-year-plan cycle during which spending typically drops at the end of the period (in this case the 1991­1995 plan).

China's regulatory system for medical equipment is currently undergoing reform that should help alleviate much of the confusion and delay U.S. exporters often experience. For example, the State Pharmaceutical Administration of China (SPAC) is consolidating its role as the primary regulator of medical equipment, both domestically produced and imported. SPAC offers an updated version of its Guide to Product Registration and Advertisement Examination on Medical Devices to inform exporters of procedural requirements. The most important new development in regulation is SPAC's recent decision to adopt a standards-based, third-party notified-body review system similar to the one adopted by the EU. Although many positive changes are occurring at the central level in regulation and procedural requirements, inconsistencies in implementation and enforcement still remain among the central, provincial, and local levels.

In Taiwan, the National Health Insurance Bureau (NHIB) has implemented a national health insurance plan that has created concern among U.S. manufacturers. In an effort to reduce costs, NHIB has attempted to reduce by 20­30% the amount it will reimburse U.S. companies for imported medical devices. This policy was scheduled to take effect late last year, but has been delayed due to protest from the United States that it discriminates against U.S. (and other foreign) products in favor of Taiwanese producers. The DOC and the Health Industry Manufacturers Association (HIMA) are working with Taiwanese authorities to reverse NHIB's recent policy decisions.

ASEAN

The newest designated BEM is the dynamic ASEAN region, consisting of Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. In 1994, this region represented more than 400 million people with a combined GDP of $470 billion. Over the next decade, the region's GDP is expected to more than double with the population exceeding 686 million by 2010. U.S. exports to the ASEAN region could easily equal or exceed exports to Japan or China by that time as well.

Dynamic growth has resulted in increased purchasing power and a demand for enhanced health care. An increased emphasis on services, falling barriers to trade, and urbanization are creating tremendous opportunities for equipment suppliers as each nation scrambles to modernize health-care facilities and services.

The ASEAN countries are not only an integrated trading market, but also a gateway to the northeast Asian economies of Japan and China. Many U.S. companies are establishing offices or representation in ASEAN countries, which readily and capably service the ASEAN region and northeast Asian countries.

ASEAN nations spent nearly $10 billion in 1991 on health-care equipment and services, and this is the fastest-growing market for U.S. exports of health-care technologies. The medical equipment market of that total has doubled in size since 1991 to an estimated $920 million in 1994. The total ASEAN market for medical devices and supplies is expected to grow about 18% this year alone. Singapore is the largest importer (53% of the total) followed by Thailand (28%) and Malaysia (15%). Singapore in particular is a popular reexport center to the rest of Asia for many U.S. companies.

As the region continues to expand and upgrade health-care facilities, significant opportunities exist for U.S. exporters in areas such as electromedical and electromagnetic diagnostic equipment as well as x-ray and other general hospital equipment and supplies. ASEAN countries are adept at low-technology, commodity-type products, but for the foreseeable future will continue to depend upon foreign imports for advanced devices and supplies.

ASEAN countries' expenditures on health-care facilities are expected to increase by 10% a year over the next five years, ensuring that tremendous market opportunities will continue to exist. Although ASEAN governments still play a major role in equipment procurement, an increased private sector role in the form of private hospitals and clinics will result in a demand for more sophisticated and specialized equipment.

Price, and often the lack of postsales service, preclude the United States from gaining a greater share of the ASEAN medical device market. The United States also faces serious competition from EU and Japanese producers who hold a respective 32 and 25% share of the ASEAN market, compared to 20% for the United States. In Indonesia, the gap is even more glaring because the United States holds only a fraction of the total market. Domestic producers are also expected to provide some competition in the ASEAN countries.

Reimbursement policy developments in several ASEAN nations have adversely affected profit margins for some U.S. companies. This profit drop is also partially attributed to increasing competition from lower-cost or domestic suppliers. Recent regulatory developments in some countries have also hindered the United States' ability to comply and compete in the country's market. The U.S. government and industry associations are participating in ongoing negotiations with ASEAN officials to address these developments.

HIMA recently opened a regional office in Singapore with the assistance of the DOC's Market Development Cooperator Program to help develop the entire Asian market. HIMA's Singapore office works with DOC's commercial service posts and with the U.S. device industry across Asia to help resolve regulatory issues, overcome trade policy barriers, and seek new opportunities for growth for the U.S. medical device industry.

SOUTH KOREA

The South Korean market for medical technology reached more than $700 million in 1993, making it the third-largest Asian market for most U.S. medical device and diagnostic manufacturers. In 1993, U.S. medical device companies accounted for more than 40% of South Korean medical imports and one-third of the country's overall medical market. Demand for sophisticated medical technology is on the rise in South Korea, and consumption of medical devices is expected to grow at an annual rate of more than 15% over the next few years.

The South Korean market for diagnostic imaging equipment, including ultrasonic diagnostic equipment, computed tomography scanners, and magnetic resonance imaging equipment reached $51 million in 1994. The market for patient monitoring systems was $10 million in 1994. Because this equipment has an average five-year life cycle, the demand for replacing and updating existing equipment is starting to grow. The medical laser market, growing at up to 20% annually, is another key sector. U.S. imports supply 98% of the total Korean demand, and the United States has 60­80% of the market. Dental applications are the only area for which there is a domestic producer of lasers--Dong Yang Medical.

South Korea's regulatory climate has created barriers for U.S. medical device companies in the past. Under the country's previous regulatory scheme, 11 categories of medical devices needed testing for quality control for each import shipment. U.S. companies exporting to South Korea were also asked to divulge proprietary business information. The country is now in the process of making its regulatory structure conform with international standards. New health-care regulations are due to be published in May and are tentatively scheduled to be effective in July. South Korea's Ministry of Health has published draft guidelines that will bring the Korean regulatory regime into conformity with international standards, introduce a classification system for medical devices based on degree of risk, abolish mandatory testing, and introduce GMPs and a postmanagement system.

The upcoming changes in Korean regulations should provide even greater opportunities for U.S. device companies. The U.S. government is working working closely with HIMA and other associations to continue to improve access to this dynamic market.

LATIN AMERICA

Prospects for U.S. medical device sales in Latin America are also favorable. The expansion of health-care coverage to all citizens, increased access to health-care services, promotion of strategic alliances between private and public sectors to improve health-care systems, and modernization of hospitals have created a better climate. Continued economic growth in major Latin American nations will make this region one of the fastest growing markets for the U.S. medical device industry.

U.S. medical device exports to major markets in Latin America are growing nearly twice as fast as exports to Western Europe and Canada. In 1994, total U.S. medical device exports to Latin America were $981 million, an increase of 25% since 1991. U.S. exports to this region are estimated to exceed $1 billion for 1995 (see Figure 3).

U.S. exports to Brazil and Argentina are growing at double-digit rates. Between 1991 and 1994, exports grew at an annual rate of 11% to Brazil and 24% to Argentina. Surgical appliances and supplies and electromedical equipment are the best prospects for Latin America. These two sectors constitute 47% of the total U.S. medical device exports to this region. The total medical device market for these two countries reached $1.3 billion in 1993, about the size of China's. Risk factors for the area include currency fluctuations, payment terms and conditions, and securing technically qualified service support for high-technology equipment.