Why Total Cost of Ownership Matters When Working with Offshore CMOs

From a U.S. regulatory standpoint, it doesn’t much matter much where in the world medical devices are manufactured. Whether the path to market is the 510(k) or the PMA pathway, FDA doesn’t care if you make your products in Southern China, India, Costa Rica, or in Chicago. “Your regulatory submissions are all going to be the same regardless,” says Mark Bonifacio, president and founder of Bonifacio Consulting Services.

August 13, 2012

2 Min Read
Why Total Cost of Ownership Matters When Working with Offshore CMOs

At the MedTech Supplier Partnerships Conference held August 22-23 in Boston, Bonifacio plans on speaking on the subject of using contract manufacturing organizations (CMOs) to gain market entry in new territories and recent trends related to the offshore production in the medical device arena.

One of the most important of those trends is the redefinition of China for medtech companies. Not long ago, the country represented a low-cost manufacturing destination. “But that ship has mostly sailed,” Bonifacio says. “What many organizations are doing today is they are setting up shop in China so they can design, market, and sell their product right there.” As a result of this shift, the dynamic has become considerably different from the export relationships medtech OEMs previously had with their contract manufacturers in China.

For one thing, Chinese labor is not as inexpensive as it once was. “When you look at it in relative terms, despite the fact that they have had annual 10% wage increases, it is still at a fraction of what we would pay in North America,” Bonifacio says. “China may still be widely referred to as a 'LCC,' a low-cost country, but that advantage is evaporating.”

Device companies should look at the total-cost of ownership of their offshoring activities to a country like China. “When you start to do those calculations and you factor in things like: the travel, the freight, the 8 p.m. or 11 p.m. conference calls, the possibility of setting up a small quality office in that country, the extra inventory you are going to carry, whether it be here or there—and the time your products may be on the water of four to five weeks,” Bonifacio says. “When you start to put all of those pieces together, it doesn’t really make a whole lot of sense anymore from a strictly cost standpoint.”

There are, of course, exceptions. “Two instances where it would make sense for medtech companies are; in situations where the labor costs of their device are extremely high (60% or higher), or the product has been commoditized to a point that you have to squeeze every penny out of it,” he adds. Even in this last case the total cost of ownership needs to examined. 

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

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