Medical Manufacturing in Asia: An Update

Originally Published MDDI May 2003

Outsourcing/site selection

Asian nations continue to offer a wealth of opportunities and incentives for U.S. medical manufacturers.

by Ames Gross and Caroline Tran

Despite the economic uncertainties that have prevailed since the events of September 11, 2001, many Western medical companies still see the advantages of investing in Asia. In the past year, a number of companies have continued their plans to set up operations in the region. 

In general terms, costs for manufacturing in Asia are significantly lower than in the West. Although labor is often less expensive, the quality of Asia's workforce can be very high; many countries boast high literacy rates as well as English-language proficiency.

Besides these advantages, many governments in Asia also offer attractive incentives to foreign investors to establish their operations there. In some cases, companies involved in high-tech manufacturing or “pioneer” investment activities can obtain special tax breaks or exemptions. Some governments also develop special economic zones or industrial parks that not only allow special tax conditions, but also provide companies an environment for cooperation and synergies.

Companies interested in manufacturing in the region can also benefit from the efforts of many Asian countries to strengthen and improve their healthcare systems. Japan, Korea, and Taiwan have comprehensive healthcare plans for their citizens, covering the bulk of their medical expenses. With the government supporting medical expenditures, people are able to afford, and thus demand, better and more-sophisticated medical products and treatment. 

In China, the government is drafting new regulations to improve healthcare for its citizens. With great numbers of people flocking to China's major cities, the government is trying to find ways to increase the accessibility of medical care. The growing number of Western-trained doctors in Asia also creates a demand for more Western medical products and equipment. Western-trained doctors accustomed to prescribing certain medical devices and drugs will want to continue using these products in Asia.
For these and other reasons, Asia continues to be a viable and attractive region for investment by medical device manufacturers, whether it be those manufacturing for domestic consumers (in Asia) or for export.

China

Because of its entry into the World Trade Organization (WTO) in December 2001, China has become more accessible to foreign investors. By moving forward with regulatory changes to comply with WTO conditions for greater transparency and openness, the government is gradually leveling the economic playing field between foreign and local businesses. 

In 1979, five areas in China were designated special economic zones (SEZs). These five areas include several cities in the southern and coastal regions of China, including Guangdong and Hainan provinces. These areas have developed rapidly and are now considered the most advanced in China. Owing to the success of these SEZs, the Chinese government has established other areas designated for foreign investment.

Some of the advantages of these SEZs are the significant tax concessions made to companies during the early life of their projects. Normally, a new facility is exempt from income taxes during the first five years of its operations in China. This is calculated from the “start date,” which occurs once the company reaches a specified percentage of its production capacity. Incentives may vary from area to area; therefore, medical manufacturers must do their research and compare the different incentive packages each offers. It is also important to carefully examine the conditions placed on the incentives given. Often, the incentives are attractive; however, such conditions as export quotas or price ceilings may be too restrictive. 

Recently, many medical device companies have chosen to subcontract their manufacturing to local Chinese manufacturers. This too can be a cost-effective and profitable venture. Instead of building a manufacturing facility from scratch, a company can work together with a reputable local manufacturer to produce its products.

For example, Medrad, a U.S. affiliate of the German firm Schering AG, announced in mid-October that 5% of the company's syringes would be manufactured in Dong Guan in Guangdong, China. The syringes to be manufactured by Vincent Raya Electronics Co. (Dong Guan) are used in medical imaging procedures. Medrad, with headquarters in Indianola, PA, has spent more than 18 months working together with Vincent Raya to assist the subcontractor in designing and building a Class 100,000 cleanroom facility, training local Chinese employees, and implementing quality standards similar to those in place at Medrad's manufacturing facilities in the United States.

Medrad's president and CEO, John Friel, says, “We expect continued growth in both domestic and international manufacturing as Medrad develops new, innovative products to help physicians identify illness faster and more accurately.”

Another firm that is exploring China's possibilities is Varian Medical Systems Inc., an x-ray tube maker based in Palo Alto, CA, that announced on December 2 a cooperative agreement with Toshiba Medical Company and Sanko Medical Systems (Tokyo). Varian will authorize Sanko—a joint venture partner of Toshiba Medical—to operate a tube service center in China. 
The Varian x-ray tubes are designed specifically for Toshiba scanners and radiology equipment. The agreement will allow greater numbers of Chinese hospitals and clinics access to the tubes at a lower price. Previously, tubes were imported to China from Varian's manufacturing facility in Salt Lake City. Varian will support Sanko in operating the tube service center with materials and staff training.

Malaysia

In Malaysia, foreign medical companies can partake of a number of incentives for manufacturing there. The first of these incentives is called “pioneer status.” A company can be eligible for pioneer status if it meets a number of conditions. These include the project's level of value-added services, the type of technology used, and whether the industrial category is listed as one of the government's “promoted activities.”

The government's main objective in providing this incentive is to attract previously untried methods and technologies into the country. Investors that are granted pioneer status receive five years of partial exemption from payment of income tax. For investments in the western part of Malaysia, a company is liable to pay on only 30% of its statutory income. This figure is derived by deducting revenue expenditure and capital allowances from gross income. In the Eastern Corridor of Malaysia, which includes the states of Sabah, Sarawak, Kelantan, Terengganu, and Pahang, companies are liable for only 15% of their statutory income.
Another incentive provided by the Malaysian government for manufacturing companies is the investment tax allowance (ITA). The eligibility requirements for the ITA are similar to those for pioneer status. Companies granted an ITA receive an allowance equal to 60% of qualifying capital expenditure incurred in the first five years. This allowance can be used to offset 70% of their statutory income. For companies establishing their facilities in Sabah, Sarawak, or other parts of the Eastern Corridor, companies can obtain allowances of 80% of qualifying capital while also offsetting 85% of their statutory income.

Foreign medical companies that have already established their operations in Asia are also able to act as subcontractors and provide manufacturing services to other foreign companies. In March 2002, Agilent Technologies Inc. announced that it would provide Light Sciences Corp. with optoelectronic design and fabrication services through its manufacturing facilities in Penang, Malaysia. Light Sciences Corp., a privately owned company based in Seattle, is a pioneer of photodynamic therapy based on proprietary light infusion technology to treat cancer and eye and cardiovascular disease. Agilent Technologies will assist Light Sciences in developing and manufacturing new light-emitting diodes for use in the therapy.

Other foreign medical manufacturers choose to enter into Asian countries by cooperating with a local distributor. For example, Tyco Healthcare, headquartered in Boulder, CO, announced on November 26 that it had appointed Goodlabs Medical (M) Sdn. Bhd. the sole distributor of Valleylab medical equipment products and accessories in Malaysia. Valleylab is a division of Tyco Healthcare Group. Goodlabs Medical specializes in the distribution of medical products such as electrosurgical generators, ligature vessel-sealing systems, and cardiothoracic products.

Thailand

The Thai government regulates foreign investment through the Foreign Business Act of 1999. This act replaced the more restrictive Alien Business Law of 1972. Major differences from the Alien Business Law include the removal of restrictions for foreign shareholding and the allowance of foreign companies to enter into specific businesses that were previously not available to foreigners. 

The regulatory body in charge of granting special guarantees, tax exemptions, and other investment incentives in Thailand is the Board of Investment (BOI). Foreign companies interested in receiving investment promotion can apply by submitting the appropriate applications and documents to the Office of the BOI. The turnaround time, at least in theory, is approximately 120 days from the date of submission to the granting of permission for investment promotion.

Certain factors can increase a project's chance of receiving investment promotions. For example, if the project is deemed one that strengthens Thailand's industrial and technological capacity, utilizes domestic resources, creates employment opportunities, or earns foreign exchange, the Thai government would be more inclined to grant special promotions. Investment promotions can take the form of tax incentives, protective measures against government monopolies, or allowances from costs. These incentives are granted on a project-by-project basis contingent on the foreign company's meeting certain conditions.

In June 2002, Philips Electronics Ltd. (Bangkok) celebrated 50 years in Thailand. The company has been expanding its presence there since 1952 and has been producing medical systems, personal-care products, and consumer electronics for domestic and foreign consumers. Philips Electronics now employs more than 5000 employees in Thailand and continues to formulate plans for further expansion. The company's intentions, when it entered Thailand, were not only to enter the Thai economy, but also to totally integrate itself into Thai society. 

Philippines

The Philippines proclaims to have one of the most liberal foreign- investment policies and regulations in Southeast Asia. Restrictions on foreign investments, for the most part, are not based on the nationality of the foreign investor, but rather on the percentage of foreign ownership for a particular project. The Filipino Constitution provides basic guarantees for foreign investors including freedom from expropriation without just compensation, the right to remit profits, and the right to obtain foreign exchange. 
The incentives granted to companies can be obtained from the Board of Investments (BOI), the Philippine Economic Zone Authority (PEZA), the Subic Bay Metropolitan Authority (SBMA), and the Clark Development Corporation (CDC). Depending on the type of project, the planned geographical area for the investment, and the industry in which the investment will be made, foreign investors can apply to the appropriate authority.

The BOI may grant incentives to projects in particular industries or activities that have been prescribed in the annual Investment Priorities Plan, written by the BOI and approved by the president of the Philippines. These prescribed activities or projects are divided into pioneer and nonpioneer activities. Preferred pioneer activities are projects deemed important to national economic development and, at the same time, involved in the production of goods or services that are not yet available in the Philippines. Nonpioneer activities involve products and services already available in the Philippines that are also considered important to the national economy. Some of the incentives granted by the BOI include tax exemption for up to six years from the start of the project, tax credits for purchases of raw materials, and exemptions from wharfage duties.

PEZA grants incentives to companies interested in investing in the country's special economic zones, as do SBMA and CDC. There are a number of different types of economic zones, or ecozones. These include industrial estates, export-processing zones, and free-trade zones. Each of these ecozones is developed independently with minimal government interference. PEZA grants incentives to ecozone companies depending upon their activities and industry type.

An example of a foreign medical company that has maintained operations in the Philippines for many years is GE Medical Systems. GE's product lines include magnetic resonance imaging, computed tomography, mammography vascular x-ray, and ultrasound systems. GE Medical Systems Oceania, based in Makati City, Philippines, continues to be a leader in supplying local hospitals and clinics in Asia with diagnostic imaging equipment. 

ASEAN 

In the past decade, countries in Asia have been working together to improve their economic relations as well as to provide better access for investors from within the region. In 1992, the Association of Southeast Asian Nations (ASEAN) drafted a Framework for Agreement on Enhancing Economic Cooperation during its fourth summit in Singapore. The agreement was meant to increase the ASEAN region's competitive advantage by consolidating the countries into a single production unit. The agreement proposed a 15-year timeline to establish the ASEAN Free Trade Area (AFTA), which would promote greater economic efficiency, productivity, and competitiveness through the elimination of tariff and nontariff barriers.

However, owing to the rapidity of globalization movements around the world and the need for greater economic cooperation in Asia, the deadline for AFTA's establishment has been moved up to 2003. Now, there are many other AFTA Plus initiatives proposing the inclusion of China, Japan, and Korea into the AFTA bloc. These initiatives will create greater opportunities for foreign companies to move about the Asian economies after setting up shop in the region. Medical manufacturers in Asia can take advantage of AFTA by marketing their products with few tariff restrictions within the ASEAN region. 
As more countries join the free-trade area, the market for medical manufacturers' goods will also expand. Currently, tariffs on goods traded within the ASEAN region are determined through the Common Effective Preferential Tariff (CEPT). Goods are placed on either the “fast” or “normal” tracks to have their tariffs gradually reduced to zero. The CEPT is expected to reach zero on virtually all imports by 2010 for all original signatories and by 2015 for new ASEAN members.

Conclusion

Asia still holds many opportunities for foreign medical companies. For companies willing to manufacture or subcontract manufacturing in Asia, there are many attractions. However, it is necessary to thoroughly research each country and its respective investment promotion packages to fully determine which geographic area—and which special economic zone—is best suited to your medical operation. 

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