Originally published January 1996
The global success of the U.S. medical device industry is well recognized. In 1993, U.S.-based manufacturers supplied 52% of the $88-billion worldwide market for medical devices. This position has been achieved in part through decades of steady investment in R&D, which has made U.S. device manufacturers world leaders in innovation.
This achievement has been tempered, however, by a recent drop in the global market share held collectively by these companies. And at the same time that overseas competition has increased, U.S. manufacturers have been presented at home with a growing series of regulatory and legal obstacles, including heightened regulation, increased liability exposure, and greater export restrictions.
In response to these challenges, U.S. device manufacturers have restructured their businesses in a variety of ways. One common result has been a reduction in the budgets and personnel allocated to R&D. Moreover, the R&D that is being performed is increasingly aimed at generating short-term gains while incurring as little risk as possible. This is evident even at small companies and start-ups, the traditional sources of radical innovations in the device industry. Acquisitions are being emphasized over new product development, and small niche markets are being abandoned.
The most dramatic result, however--as documented in a study carried out by the Wilkerson Group for the Health Industry Manufacturers Association--is that U.S. companies are moving R&D and manufacturing offshore en masse.1 Among other benefits, the allure of moving R&D overseas is improved productivity, increased capacity, and increased involvement in international markets through more interaction with patients and clinicians. Larger U.S. companies have already begun this exodus, with Europe as the primary destination. Medtronic, Inc. (Minneapolis), for example, now has two R&D sites there, one in the Netherlands and another in Switzerland. The company has also moved the headquarters of its New Ventures Division to Europe.
Now, even smaller device manufacturers, which constitute the majority of the industry, have begun to follow suit. And companies of all sizes are beginning to look at locations other than Europe. One particularly promising alternative is India, a rapidly developing nation with a well-educated workforce, an increasingly liberalized economy, and outstanding growth prospects.
INDIA OPENS UP
India boasts the fifth-largest economy in the world. Up until 1991, however, the Indian government had resisted integration with the global economy. It exerted a powerful influence over the domestic economy--even the private sector--through myr-iad regulations, including restrictions on production and exporting.
Faced with a fiscal and monetary crisis in 1991, the Indian government was compelled to open up this previously closed economy. Since the reforms of that year were implemented, progress has been slow but steady: annual growth in gross domestic product has averaged 5.5%, and industrial production has risen 7.5% per year. Most important, India's major political parties are now committed to reform.
Most of India's economic reforms have been aimed at attracting exports and manufacturing capacity from other countries. These reforms have included reducing barriers for entry of foreign companies into India, allowing foreign ownership of India-based companies and repatriation of profits, eliminating income taxes on exporters for up to eight years, slashing bureaucracy, and permitting components to be imported duty-free.
These reforms have had the desired effect: on an average annual basis, trade has increased 9%, foreign-funds inflows have increased 98%, and approvals of projects that involve foreign investment have leaped 209%. Much of this increase in economic activity has involved the United States, India's leading trading partner and its largest foreign investor. The $1.1 billion invested in India by U.S. companies in 1993 represented 42% of all foreign investment in India that year. It also surpassed the combined previous U.S. investment in India since the latter gained its independence in 1947.
U.S. COMPANIES ENTER
Until recently, the emphasis of U.S.-owned operations in India was on manufacturing, sales, and distribution for the local market. Increasingly, however, companies such as GE Medical Systems (Waukesha, WI) have begun performing R&D and product development in India. A few smaller U.S. device manufacturers have also entered the fray. Start-up Bio-Ved (San Francisco), for example, performs clinical trials for its medical products in India, primarily because the number of patients seen by Indian doctors--following FDA protocols--allows the company to complete its clinical trials in a third of the time it takes in the United States. Precision Sourcing International (New York City) recently opened an injection mold making shop in India to make products for export around the world.
India's increasingly skilled workers are one attraction for these companies. According to a recent report, the country's workforce ranks sixth in the world in entrepreneurship and innovation, fourth in the availability of competent senior managers, and first in the availability of skilled, qualified engineers.2 Trained in all technological disciplines, India's approximately 3 million scientists and engineers form the second largest pool of technical personnel in the world. Many have been educated and employed abroad, are computer literate, and speak and write English fluently. Many are also underutilized and underpaid. The typical midlevel executive in the high- technology sector earns between $150 and $300 per month.
Much of this brainpower is being used by the Indian government in the R&D institutions (national labs, universities, and institutes) that it funds. As a result, most of India's technological accomplishments have come in aerospace, communications, computers, defense, and energy. Government funding of medical device R&D comes primarily from four agencies: the Department of Science and Technology, the Department of Biotechnology, the Indian Council for Medical Research, and the Council for Scientific and Industrial Research.
Because economic reforms have squeezed R&D budgets, government-supported institutions are now actively seeking industry contracts and placing greater emphasis on product development and innovation. Similar changes are occurring in the 1300 or so corporate R&D laboratories in India. Because the companies traditionally have manufactured goods designed elsewhere, these labs have in the past focused on troubleshooting and process development.
The new export emphasis is awakening a competitive awareness throughout Indian industry that it previously lacked, which has led to an increase in the number of companies obtaining ISO 9000 certification, for example. A nationwide system of technology parks is also being set up, and many of the buildings within them allow resident companies to communicate globally via satellite hookups and dedicated high-speed phone and data networks.
Another reason for the growing interest in India can be found in improvements in the country's previously substandard intellectual property laws. India has signed the General Agreement on Tariffs and Trade, which requires signatories to harmonize their patent, trademark, and copyright systems with international standards. The Indian government also now realizes that homegrown innovations need legal protection from industrial predators in other countries.
INDIA'S MEDICAL DEVICE COMMUNITY
India's emerging device community comprises domestic and foreign manufacturers, clinics, and academic institutes. Major hospital chains, such as Apollo Hospitals, and clinical centers, such as the Escorts Heart Institute, are flourishing. Important R&D organizations include the Shree Chitra Tirumal Institute for Medical Science and Technology, the Indian Institutes of Technology, the Central Leather Research Institute, and various universities.
India's scientists and engineers have also benefited from recent international conferences held in their country by such organizations as the Institute of Electrical and Electronics Engineers. The Society for BioMaterials and Artificial Organs of India, the Biomedical Engineering Society of India, India's Institution of Engineers, and other medical and surgical societies provide a national forum for communication among medical device R&D professionals and clinicians.
A number of medical devices developed by domestic R&D organizations are now clinically available in India, including heart valves, hydrocephalus shunts, bubble oxygenators, prosthetics, drug-delivery systems, and vascular grafts. The Chitra TTK heart valve, for example, was developed by the Shree Chitra Tirumal Institute according to International Organization for Standardization guidelines and has passed trials in six different Indian clinical centers. These valves sell for $342 apiece in India, and are made of ultra-high-density polyethylene disks that swivel on struts made of a cobalt-based alloy used in rocket nozzles.
ESTABLISHING A PRESENCE
An R&D facility placed in India by a U.S. company can serve a range of functions, from basic research and product development to technical support. The nature of the R&D to be performed and the time frame within which it needs to be completed will go a long way toward determining the role Indian institutions can play. Possibilities include sponsoring a research project or hiring a contract laboratory.
Another alternative is for a company to establish its own R&D site. If a U.S. company chooses this option, it should proceed in phases to reduce risk. Another way to limit risk is to use an intermediary to help identify potential partners and sites within India, and perhaps to manage projects once they are under way. The larger the U.S. organization, the more beneficial it might be to establish a captive R&D site in India.
Establishing relationships with Indian partners can provide U.S. device manufacturers with both short-term and long-term competitive advantages. The R&D groups in both countries can talk to each other using available computer-based communications and development technologies such as E-mail, computer-aided design, computer-aided manufacturing, and computer-aided engineering. Because India and the United States are on opposite sides of the globe, R&D work can proceed around the clock. India also offers the advantage of lower labor costs, although the wage gap between the United States and India should narrow considerably over the next decade.
An opportunity now exists for U.S. medical device manufacturers to perform at least some of their R&D in India, which offers a well-trained workforce, significantly lower costs, and an increasingly open economy. Manufacturers in search of efficient, lower-cost R&D and market development opportunities should consider sourcing at least some of their R&D from this rapidly emerging market.
1. Forces Reshaping the Performance and Contribution of the U.S. Medical Device Industry, Washington, DC, Health Industry Manufacturers Association and the Wilkerson Group, Inc., 1995.
2. World Competitiveness Report: 1995, Geneva, Switzerland, World Economic Forum and the International Institute for Management Development, 1995.
Pratap Khanwilkar is president of MedQuest Products, Inc. (Salt Lake City), which performs contract medical device R&D.