Choosing a European Site

Medical Device & Diagnostic Industry Magazine
MDDI Article Index

An MD&DI June 1998 Column

BOTTOM LINE

Finding a location to open a facility is a complex but manageable process. It begins with teamwork.

The European Union (EU) is the site of almost two-thirds of U.S. international acquisitions, joint ventures, new plants, and plant expansions. Europe is particularly popular among medical device manufacturers as a growth location. It facilitates entry into emerging East European markets by saving customs duties and cutting transportation and distribution costs. Yet whether a manufacturer is relocating to enter new markets or to lower operating costs by combining multicountry headquarters, it is important to consider all of the issues involved in choosing an overseas location.

FACTORS LEADING TO OVERSEAS EXPANSION

Medical device manufacturers face economic conditions that are very different from those of years past. The emergence of HMOs and managed care organizations, which demand lower prices and purchase in bulk, has begun to drive the U.S. health-care market. Lower profit margins have caused manufacturers to consolidate distribution and manufacturing in order to retain enough profit to support research, development, and clinical trial costs.

As a result, companies like St. Jude Medical (St. Paul, MN) began adding facilities in Europe to lower development costs by decreasing time to market. They chose countries with a strong record for regulatory approval.

The arrival of new technologies in several countries, the EU's efforts to liberalize markets, and the integration of corporate entities worldwide are changing the merits of competitive regions. According to a study by the Boston Consulting Group, Sweden stands out by providing medical device manufacturers with well-accepted regulatory procedures. An extensive central database of patients, physicians, and hospitals in Sweden provides ease of access and integrity of long-term data for device trials.

KPMG Canada analyzed location-sensitive factors for eight industries in 42 cities in seven countries. The study found that, for the medical device manufacturing industry, Canada had the lowest overall costs, with Sweden coming in second. Karlskoga and Göteborg, in Sweden, were the least expensive cities in Europe with regard to site selection considerations.

PENETRATING THE OVERSEAS MARKET

There are many economically sound ways for device manufacturers to reach the international market. Forming research alliances with major medical university centers is one way to enhance the product and position the company internationally. After a company has started a research activity in a country with easy access to major European markets, the next step is to develop distribution and service support. This requires evaluating sites in Europe suitable for the company's needs.

Deciding where in Europe business investments should be located is a long-term planning issue requiring careful consideration of cost, profitability, and competitiveness. How will the European facility further the corporation's overall mission and goals? How will the company be perceived by its customers, shareholders, and regulators? Is it time to reduce costs and consolidate facilities or to change the organizational structure? How will a foreign center affect the U.S. home base? Will the time difference require increased hours and more support personnel?

DEVELOPING A TASK FORCE

Before site selection can begin, the manufacturer should set up a task force that includes marketing experts, production managers, engineers, and prospective plant managers—people from different divisions within the company, not just board members. If a device's product life cycle is short, the task force should include an in-house site team that will expedite the decision.

The site team should include specialists in international taxes, human resources, customs and duties, real estate, and process engineering. Each member should have clearly delineated responsibilities. For example, the tax specialist can examine crucial issues such as repatriation of profits to the United States, and the human resources representative can examine labor-management relationships, wages, national unions, and workforce expectations regarding vacations.

Clear companywide delineation of authority is important—a company should not have its corporate development team and site selection team working independently. If necessary, an outside consultant can be used to initiate the process, create proprietary databases, organize site visits, develop community surveys to evaluate locales, and conduct confidential property negotiations.

WORKING IN EUROPE

Although the EU is moving toward political and monetary union, Europe remains a complex region. A dense and diverse market of 370 million people, it currently has 11 languages and 250 dialects in different areas. Economics and values can vary dramatically from one region to the next. Managers should think in terms of regional, not just national, opportunities. Spending time in a country is necessary to understand its culture. The CEO of a company opening an international branch should set up a one- or two-person operation in the country first. With little risk, the company can determine whether a market exists for the medical device and can experience the many nonquantifiable aspects of operating in a given location. Then, if the site is found unacceptable, the company can easily move.

When considering site selection issues, the "location, location, location" concept in the United States must be replaced in importance by "people, people, people" in Europe. How a U.S. company deals with interpersonal relationships will determine its success in establishing itself. Europeans tend to concentrate more than Americans do on building relationships and do not use first names as readily. In addition, most Europeans do not appreciate a fast-talking sales approach.

U.S. device manufacturers should also remember the three "T"s of operating in Europe: things take time. Many Europeans believe that U.S. CEOs are primarily concerned with the next business quarter, not the long term.

EVALUATING LABOR

The most complex and deceptive variable to analyze when making a site selection decision is probably labor. Yet, labor quality and availability are likely to dominate location decisions. A common mistake is to look simply at hourly wages. Other factors that should be considered include the following:

Manufacturers are unlikely to need to be concerned about a language barrier—Europe now accepts English as the language of international business, and English is the predominant second language in most northern European countries. Moreover, when setting up a European operation, companies are likely to use predominantly local staff rather than U.S. personnel.

CONSIDERING OTHER CRITERIA

Other site selection criteria to be considered, of course, vary according to the nature of the intended establishment. New manufacturing plants, clinical trial facilities, distribution centers, R&D development centers, and European headquarters all have different requirements.

Research and development centers, crucial to the medical device industry, should evaluate the availability of universityeducated labor and workers with high-technology skills. They must also consider the availability of reasonable international transport and telecommunication links, financial incentives, and a location relatively central to primary markets.

Corporate headquarters buildings should be located near an international airport. However, companies that want to take advantage of emerging markets will probably choose a different location than those carrying out manufacturing at the same site; manufacturing makes lower labor and land costs more important than convenience of transportation. Combining corporate headquarters with manufacturing facilities is probably best for small companies with close links between administration and production.

Refining a company's priorities and site selection criteria involves far more than simply outlining these issues. The team must also address qualitative factors. What will be important to the company's expatriate staff? Good international schools, affordable housing, and an amenable quality of life are key considerations for U.S. citizens who will be working in Europe.

STARTING JOINT VENTURES

When foreign investment takes the form of acquisitions and mergers, finding the right location is less important than finding a suitable company with which to merge. Locating modestly sized providers of research and development, manufacturing, and distribution can go a long way toward cementing relations with international markets. Joint ventures can be particularly attractive to medical device firms—by pooling capital, firms reduce risk and R&D costs, gain new technology, and expand markets. Such ventures are also profitable where there is foreign competition or short product life cycles. Not only can two companies share production and management experience, but large companies joining with a small company can gain the smaller company's advantages of flexibility and faster decision making.

One consideration to keep in mind, however, is that although joint ventures can help a U.S. company get up and running in Europe more quickly, issues of control, trust, and secrecy are important. A joint venture partner may ultimately become a competitor. Keeping communications open between managements about profit and loss sharing and strategic priorities is vital.

Corporate alliances are another way to facilitate international market entry for a device. In its early days, Medtronic, Inc. (Minneapolis), used the European network of service representatives of Picker International (Cleveland) to aid its entry into the European market. Since Picker was already an established x-ray and medical electronics company in Europe, Medtronic established a service referral network through a contractual agreement with Picker. This gave the small, struggling Medtronic credibility with the European medical centers and physicians that after the Medtronic products were purchased, they would be serviced by a much larger and stable company.

To reduce international distribution costs, Medtronic located miniature assembly plants in key areas around the world that held the greatest promise for sales. Using these plants helped Medtronic enter countries or regions that were using high tariffs to encourage local production. A small assembly plant with just a few employees can provide a finished product in an otherwise economically hostile environment.

Corporate, rather than partnership, organization is ideal for medical device firms. Corporate organization limits the debt liability created by highly speculative ventures involving new technology. Partnerships, on the other hand, do not consider the corporate entity to be separate from its members and thus involve unlimited liability.

Companies must also be aware of foreign legal considerations such as exchange control, arbitration or court proceedings in case of disputes, corporate and partnership requirements under local commercial law, enforceability of agreements, and investment control rules. Manufacturers must meet local-content rules or else goods produced at European plants may not be regarded as being locally manufactured. In such cases, the tariffs and import restrictions the company hoped to avoid by locating in Europe will still apply.

FINDING HELP

The U.S. Department of Commerce will help U.S. companies export their products, but it offers no assistance in setting up plants or creating jobs overseas. European government and economic development agencies can provide vital assistance in this regard. In the United States, business managers tend to see the government as an adversary, but in the EU there is a greater sense of harmony among government and business interests. Government agencies in Europe are actively interested in helping businesses enter markets and create jobs.

In addition, site selection publications, economic development agencies, consulting firms, and similar but noncompetitive companies may be useful when selecting a site. Funding for capital improvements and job creation is available from a variety of sources, including the EU itself, which offers development grants for poorer regions. Creating local job openings in manufacturing can also lead to receiving benefits from local development agencies.

In addition, manufacturers considering a move to Europe should evaluate the regional development authorities. Are they pro business? Do they have a coherent development strategy? Are they customer oriented or bureaucratic? Excessive paperwork can be costly. A careful preliminary examination of an area's business climate will help prevent future complications.

CONCLUSION

Moving a device manufacturing facility to Europe is an extensive operation requiring a great deal of strategic planning. Developing a site selection team is only part of the effort—the team must then evaluate a number of issues associated with each proposed site, including the hard-to-pin-down, qualitative differences between doing business in Europe versus in the United States. However, moving to a European site can be very beneficial to device manufacturers seeking to penetrate the overseas market in a cost-effective manner.

Ed Doyle is managing director of the management consulting firm Questar-Avante, Ltd. (Irvine, CA), and is an economic development consultant with more than 40 years of experience in the medical device field. Invest in Sweden Agency is one of his clients.

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