Originally Published MPMN April 2006

ELECTRONICS OUTSOURCING

Getting Down to the Wires

Corporate changes and regulations on hazardous materials affect how EMS firms do business

Corinne Litchfield

Medical OEMs are still feeling their way through the process of outsourcing product design and development projects to electronics manufacturing service (EMS) companies. Recent figures from industry experts suggest that anywhere from 13 to 25% of all medical electronics are outsourced. This article talks about how product content regulations affect EMS providers and the OEMs they serve, as well as the impact of corporate buyouts and changes in business models on medical electronics manufacturing.

Getting the Lead (and Other Harmful Materials) Out

The hot topic for many EMS firms is how to comply with regulations aimed at eliminating hazardous waste. On July 1, 2006, the European Union’s directive, Restriction of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS), will take effect. RoHS bans the sale of electronic-based products containing more than 0.01% of specific hazardous materials, including cadmium, mercury, lead, hexavalent chromium, polybrominated biphenyls (PBBs), and polybrominated diphenyl ether (PBDE). The Waste Electrical and Electronic Equipment (WEEE) directive took effect in August 2005 and is intended to ensure that electronic products are properly disposed of or recycled after use.

Similar laws are being adopted in California. The state’s Electronic Waste Recycling Act is already in effect and affects anyone who sells covered electronic devices. “If a company sells a product containing an LCD panel, monitor, plasma display, or CRT that’s greater than four inches diagonal, the firm has to pay a fee,” says Mike Kirschner, president of Design Chain Associates (San Francisco; www. designchainassociates.com). In addition, six states have enacted or are considering legislation barring the use of hazardous materials in electronic products. California’s RoHS law is leading the pack, as it goes into effect on January 1, 2007. It specifically references the EU’s directive, which currently exempts medical devices. “And since medical devices are excluded from the EU, they are excluded from California as well,” explains Kirschner.

By looking to the EU to chart the course for medical devices and RoHS compliance, California has set an unusual precedent. According to the EU commission, a 10- to 12-month study needs to be performed on medical devices to see if RoHS regulations are applicable. “This could push the decision to include medical devices well into late 2006, with deadlines extending to 2008 or longer,” says Geoffrey Bock, engineer and RoHS program manager at TUV Rheinland of North America Inc. (Plymouth, MI; www.us.tuv.com). Medical electronics manufacturers and other medical OEMs are lobbying to keep the exemption, as the potential impact of the RoHS directive could be costly and time-consuming. There is also room for debate over which—and where—medical products are exempt. “Since the EU’s directives on medical devices have yet to be tested, there’s the potential for EU member states to define the scope differently,” Kirschner warns.

While materials such as PBB or PBDE are rarely seen in electronics anymore, lead-bearing solder is still used to bond components onto PCBs. This poses a challenge for many suppliers to the medical electronics industry. “Right now we’re still in the experimentation phase,” says Eric Hodges, marketing manager for Maxtek Components Corp. (Beaverton, OR; www.maxtek.com). “We’re identifying parts that are on the leading edge of being converted to lead- or cadmium-free. Then we build up components with alternative, compliant materials and begin testing them.”

Even though medical devices are still exempt, EMS providers are encouraging their medical OEM customers to conform to RoHS. One key reason is availability of materials. As the consumer industry moves toward compliance, demand for noncompliant materials may drop dramatically. As a result, leaded solder and other materials may become unavailable. “Whatever happens on the consumer side will affect the entire market,” says Hodges. “The medical device industry needs to think about how the directives will impact the overall electronics market and sourcing of materials.”

As a result, many EMS firms are working with their own suppliers to determine what types of materials are being used. CTS EMS Inc. (Moorpark, CA; www.ctscorp.com/ems) offers product evaluations to its customers. “We look through the materials that are documented to see if any of the hazardous substances are already incorporated,” says David Prunier, director of North American business development. “If there are substances that need to be changed in order to be compliant, we give OEMs information on pricing, lead time, and availability of replacement materials.”

As the deadlines loom, more OEMs are becoming concerned about the time frame. “It’s not a question of cost,” explains Prunier. “It’s a question of being able to implement the regulations and adhere to timelines. Companies also have to consider what they will do with any excess inventory of noncompliant materials,” he adds. “We’re working to get those supplies down. We’re seeing more activity the closer we get to the deadlines.” Larger firms, both OEMs and EMS providers, may not have as many challenges in creating RoHS-ready components. Kirschner suggests that it has to do with what’s at the company’s disposal. “It’s the vertically integrated companies that will find it the easiest to comply,” says Kirschner.

In the end, though, it’s up to the customers as to how much energy they want to expend on meeting the requirements. “We’re telling our customers about the regulations and making RoHS-compliant versions if the customers say they want it,” says Mike Wilkinson, CEO, Paragon Innovations (Plano, TX; www. paragoninnovations.com). Prunier agrees. “We can’t force our customers to change. As we get closer to the date, it’s interesting to see how people will adapt to the regulations.”

Mergers and Acquisitions: Business as Usual?

Recent headlines about Boston Scientific’s bid to acquire Guidant have put acquisitions and mergers at the forefront of conversations about the medical device industry. While there may not be motivation or money to buy an entire EMS firm, the purchase of another firm’s product line can add to a company’s overall value. Larger companies with electronics divisions may benefit the most from continuing on a path of vertical integration. A recent example of this is 3M Electronics (Austin, TX; www.mmm.com) and its purchase of Siemens Ultrasound Division’s flexible circuit manufacturing line. “Adding Siemens’s flexible circuits expands 3M’s business in the ultrasound and medical imaging markets,” says Frank R. Little, division vice president at 3M Electronics.

One trend that has been taking place seems rather Darwinian in nature: small, specialized EMS firms purchased by midsized EMS companies. This strategy is often used to either expand the customer base or add technical expertise. “Lately there have been cases where a tier-two niche player gets bought by another microelectronics packaging provider,” says Hodges. “Such a move enables them to access new market segments or applications, purchase technology instead of internally developing it, or add complementary services.”

For EMS firms, acquisitions can mean a loss of business...or business as usual. “It really depends on the OEM,” says Wilkinson. He mentions one medical OEM that stopped out-sourcing once it pur-chased an EMS firm that had design capabilities. However, EMS companies shouldn’t despair, he says. “For every company that stops outsourcing, a new one starts.”

While being part of a larger EMS firm has its benefits, much experience can be gained by being autonomous. Maxtek’s history illustrates the point well. In 1970, Tektronix, a manufacturer of testing and measurement products, created the Hybrid Components Organization (HCO) to supply high-performance components for its high-speed test equipment. More than 20 years later, the captive organization was spun out as a joint venture with an electronics firm and renamed Maxtek. “All of the skills HCO had developed to serve Tektronix fit very well with other applications, including medical,” says Hodges. As a separate entity, Maxtek worked with medical OEMs that needed its expertise with signal integrity and thermal management. Reacquired by Tektronix in 2000, the firm now serves its parent company in addition to external customers. Hodges says it’s a win-win situation. “Because of our external customer base, we’re a source of growth and revenue for Tektronix,” he explains. “And since our capabilities can be applied to markets such as medical, we’re also able to support the next-generation needs of our customers by working on technologies that have the greatest impact for both our internal and external clients.”

ODMs: Manufacturing with a Twist

With proven success in the computer and consumer electronics industry, original design manufacturers (ODMs) could well stand poised to take over the medical electronics market. Medical devices designed for end-users, such as blood glucose meters and digital thermometers, are ripe for ODM involvement. However, more complex medical devices may never make the transition, suggests Prunier. “When it comes to Class 3 devices—life-critical or life-sustaining devices—there will be a lot of aversion to buying off-the-shelf,” he says. Wilkinson agrees. “There are two types of medical devices: consumer-based, where there’s a lot of competition but not much margin; and high-tech, research-intensive products,” he says. “ODMs can play in the first category, but not in the second.”

Many EMS firms will modify proven platforms in order to come up with innovative electronic solutions. Zevex (Salt Lake City; www.zevex.com), a maker of surgical ultrasound devices, fluid management systems, and sensors, teams up with medical OEMs to create products such as surgical ultrasound handpieces. “We use our proprietary technology to develop products for our customers,” says Phil Eggers, vice president of research and development. “Based on what the customer needs, we’ll either create a new system or customize an existing device.”

The resulting medical devices are the deciding factor as to whether the ODM model works for the industry. “It all comes down to execution,” says Hodges. “Whether a company relies on various outside suppliers, internal production, or an ODM to provide key components, it really is a matter of execution.”

They’ve Got the Power

Despite any challenges that come from new laws or shifts in business practices, EMS firms are available to offer their expertise to the medical OEMs that need them. The goal remains the same: to communicate effectively with customers in order to build high- quality medical devices. As Eggers puts it, “The real power of electronic outsourcing is when an OEM’s market knowledge is combined with a supplier’s capabilities to create technology that builds excellent products."

Copyright ©2006 Medical Product Manufacturing News