An MD&DI July 1998 Column
Despite its currency crisis, Asia still offers manufacturers many opportunities.
Asia's recent currency crisis has caused some U.S. medical device companies to wonder whether there is still a market for their products and services. Concern has risen that Asians have lost their purchasing power, meaning a decrease in U.S. exports to Asia and an unstable economic environment in which to invest. However, not all manufacturers have fled the region. Several companies feel that the crisis has opened new opportunities for manufacturing in Southeast Asia.
For example, U.S. glove maker SafeSkin Corp. (San Diego) announced in April 1997 that it would spend $40 million to expand its manufacturing operations in Thailand. Although the Asian currency crisis frightened many manufacturers, SafeSkin reported a positive net income of around $1 million in the third quarter of 1997. Forging ahead, the company's second and third Grand Master production lines were also completed at the end of 1997.
Becton Dickinson (Thailand) Ltd., a manufacturer of medical supplies and diagnostic systems, continues to be optimistic about its operations in Thailand and the Asian Pacific region. By the end of 1998, the company expects production in its Thai factory to grow by 20%, exceeding 300 million baht ($7.5 million).
These manufacturers understand that the Asian currency crisis is only temporary. Moreover, the crisis has affected the region in different ways. Indonesia, Thailand, Malaysia, and South Korea are bearing the brunt of the currency crisis, whereas Hong Kong, Taiwan, China, Singapore, and the Philippines are still growing at 58% a year. As a result of the crisis, the former countries are now inexpensive manufacturing bases, while the latter still import U.S. medical technology.
MANUFACTURING IN ASIA
Countries like Malaysia, South Korea, Thailand, and Indonesia may not be importing many medical devices at present, but they are promising regions in which to establish manufacturing operations. With currencies in the crisis-stricken countries devalued as much as 40%, these countries again resemble the low-cost export bases they were 5 to 10 years ago.
If a company sources parts in Asia, it is easier and cheaper for it to go ahead and manufacture the entire device there. There's little point in importing parts from Asia into the United States, using them in the production process, and then exporting the finished device back to Asia. Altering a device to meet the needs of the local Asian market is faster and simpler if a company manufactures in Asia. Such companies can easily poll consumers, doctors, clinics, hospitals, and government officials in the region about their needs and then make adjustments to the medical devices or services being sold to them.
In addition, foreign companies are locating their plants in Asia, so U.S. manufacturers who do not follow suit will be at a disadvantage. Many U.S. medical device companies limit themselves to selling and distributing imported medical products in Asia. The U.S. medical device industry must find local partners and establish production facilities throughout the region if it wants to compete in the future. Manufacturers in Asia who can pay for raw material and labor costs with the depreciated domestic currency will profit by selling their exports abroad for U.S. dollars.
Thailand, Malaysia, Indonesia, and South Korea have suffered sharp setbacks as a result of the recent currency crisis. The widespread currency depreciations have reduced costs for labor, rent, and raw materials in those countries. As a result, manufacturing there is less expensive and can be a profitable way for foreign companies to enter the Asian medical technologies market. In addition, Thailand and Korea have granted, respectively, 18 and 30% increases in reimbursement rates for U.S. medical device companies. Although growth will be slow in the region for the next two or three years, growth rates are still expected to be high and will far exceed growth in the West (Table I).
|Annual Per Capita
|Projected Per Capita
Overall, the Bank of America predicts that average GDP growth for Southeast Asia from 1997 to 2001 will be 6.3% despite the crisisalmost three times as high as the U.S. average of 2.5% and the European average of 2.6%. Although the bank's projected growth rate for the ASEAN countries was 7.5% for 1998 before the crisis, the revised 1998 growth rate is still high at 5.9%.
Labor Costs. Labor costs will remain low in 1998. For example, the wage panel of Thailand's Employment Department has decided not to increase the minimum wage, leaving it at its current level of 130 baht per day ($3.23). The Philippines and Indonesia have also decided not to increase the minimum wage, with the Philippines freezing it at $500 per month for domestic workers. Malaysia's 1998 budget discourages firms from giving employees more than two months' bonus (in better times a four-month bonus was typical) and has cut the corporate tax rate from 10 to 8%, with a reinvestment allowance for automation.
Cost of Raw Materials. A drop in real estate prices offers bargains for foreign companies investing or setting up operations in an Asian country. As shown in Table II, companies will pay less for fixed assets like land. Raw materials prices have also dropped. South Korea and Thailand have cut the export prices of basic industrial materials, prompting similar reductions in the rest of the region. South Korean steel makers have lowered the price of SUS304 stainless steel to $1450 per ton, a drop of about $100 from December. Petrochemical product prices have also been falling rapidly.
|Monthly office rent per sq ft,
central business district (US$)
|Monthly rent, 3-bedroom condo
for expatriates (US$)
|Annual compensation, chief
accountant in a multinational
A Few Caveats. U.S. companies should be cautious when purchasing assets or setting up manufacturing operations in Asia. Each country has its own bureaucracy and legal system, which can be quite different from those of the United States. Language and cultural differences among the countries can be a source of frustration.
Manufacturers should also be aware of infrastructure issues. For example, many Asian companies tailor their balance sheets for different audiences. U.S. companies acquiring Asian companies or seeking local partners for new joint and cooperative ventures should examine local companies' reputations and financial statuses carefully.
EXPORTING TO ASIA
The United States currently exports $1 billion in medical technology annually to Asia (excluding Japan). In 1997, the top U.S. export markets for medical devices in the region were Korea ($330 million), Hong Kong ($220 million), Taiwan ($187 million), and China ($121 million). The Health Industry Manufacturers Association estimates that despite the crisis, demand for medical technology products in Asia (excluding Japan) will grow about 19% between 1997 and 1999.
China. China has the fastest-growing market in Asia for medical devices and is second in market size after Japan. Each year, China spends more than $1 billion on medical equipment, more than half of it imported. China's customs statistics show that since 1992, the United States has consistently supplied the most imported medical equipment to the country.
The Chinese currency is not freely traded like those of other Asian economies. As a result, it has not been the victim of speculative attacks, and China has been little affected by the currency crisis. Savings rates in China continue to be high, and per capita GDP is expected to grow at least 6% a year until 2025.
Hong Kong. Since 1995, Hong Kong's $554-million medical device market has grown by about 15% a year. It is dominated by foreign suppliers. In 1998, the market was expected to grow by 7%, making Hong Kong an attractive place for U.S. companies.
Taiwan. Taiwan's dollar has depreciated about 15% against the U.S. dollar, and the Taiwanese economy, composed primarily of small companies in many different industries, has shielded itself well from the debilitating effects of the currency crisis. The United States supplied 38.6% of Taiwan's medical device imports in 1995, and its share of the market is growing. In 1997, the United States exported $187 million worth of medical devices to the country. Healthcare costs in Taiwan are rising around 15% a year and will exceed $3 billion by the year 2000.
Singapore. Singapore's health-care system is the most state-of-the-art in Southeast Asia. The United States has about a 40% share in Singapore's $240-million medical equipment market, which grew 710% in 1997, and exports to Singapore are expected to continue expanding. The currency crisis has had a minimal effect on the country and Singapore's demand for better medical technologies is growing rapidly.
Japan. Japan has the single largest medical market outside the United States and one of the highest life expectancies in the world. The average Japanese man lives 76 years; the average woman, 82. Growing concern over the fate of the nation's elderly is causing demand to soar for high-technology medical equipment like artificial organs and sophisticated home treatments. The U.S. medical device industry had a sales growth of 24% in Japan in 1996 even though the overall market grew only 6%. The United States also maintained a $912-million medical technologies trade surplus with Japan in 1997. However, in the past Japan's overregulated and often inefficient healthcare system has restricted the import of U.S. medical technology. The country recently decided to deregulate its medical industry as part of a broader effort to deregulate its economy. In addition, in September 1997, the Japanese government decided to give hospitals more funding if they released patients in less than 20 days. This has created new demand for medical technology that reduces in-patient hospital stays and postoperative complications.
However, Japan's medical equipment is also the most expensive in the world. The price of a pacemaker, for example, is 1.7 to 6.9 times higher in Japan than in the United States or Europe. Foreign medical imports, therefore, offer an affordable option for the cost-conscious budgets of Japanese hospitals.
Asia's currency crisis has limited the purchasing power of some, but not all, of its countries. Over the long run, the structures for Asia's growth are still in place. China, Hong Kong, Taiwan, and Singapore have been relatively insulated from the crisis and are still attractive export markets. Countries that have fallen victim to the crisis, such as Thailand, Malaysia, Indonesia, and South Korea, are now excellent sites for U.S. companies that want to establish low-cost manufacturing bases in Asia.
Ames Gross is president and founder, and Gayatri B. Koolwal is an associate of the consulting firm Pacific Bridge, Inc. (Washington, DC). Mr. Gross is a frequent contributor to MD&DI.
Illustration by Thomas Cranmer/SIS