Asia alarming EU medical device makers
manufacturing as European drug companies pursue outsourcing options
or relocate production to cut costs. This increasing Asian
competition is alarming for European medical device companies that
risk losing valuable market share, according to a recent Frost
& Sullivan report.
With pharma companies continually searching for cheaper manufacturing options for medical devices, the trend towards outsourcing this area of production to Asia is now on the rise, with China and India poised to take the lions share of new business.
Although there are few medical device contract manufacturers currently established in India and China, their numbers are expected to become significant in the next three to five years.
Until recently, medical devices made in Asia did not meet European standards, which require compliance with the Conformité Européene Mark (CE Mark), and most sales from Asian manufacturers to the European market were made to eastern European countries, who did not require the CE Mark.
However, Asian companies have realised the value of being able to export to the European market and have recently been taking steps towards improving their manufacturing standards to produce higher-quality products.
Meeting such standards is expected to help ease any concerns that healthcare providers in Europe may have about the products being inferior or second-rate merely because they are less expensive.
In particular, China's entry into the World Trade Organization (WTO), has spurred its State Food and Drug Administration (SFDA) to make sure its companies begin to follow manufacturing standards such as the International Organization for Standardization (ISO) and the good manufacturing practice (GMP).
In August 2004, the SFDA also implemented new registration requirements, simplifying the device application and review process and in January 2005 the government also reduced exporting tariffs on most medical devices to less than four per cent to attract foreign business.
"When assessing the attractiveness of China and India for manufacturing of medical devices, China has a much higher relative appeal as investment in infrastructure and global foreign direct investment are high," said >Frost & Sullivan analyst, Claire Staniforth.
"However, there is a greater availability of skilled labour in India, which could sway companies into investing in manufacture there instead," said Staniforth.
While the growing trend towards outsourcing to Asia poses a strong threat to European companies, some are instead viewing it as an opportunity to expand their business into this lucrative area. China's medical device market alone is currently worth approximately $3.5 bn.
"European medical device companies looking to capitalise on the advantages offered by the Asian manufacturing industry - such as lower cost and skilled labour - are considering outsourcing, partnering with or relocating manufacturing facilities to this region," said Staniforth.
Many European companies have already started setting up their own production facilities in Asia and are benefiting from reduction in operational costs, she said.
In addition, some European manufacturers are choosing to form partnerships with well-established Asian companies, which are likely to have good material supply relationships in place, giving them an edge in terms of negotiating power.
Although the cost of distributing finished products back into the European market are high, shifting the manufacturing locality is nevertheless a clever move for European medical devices companies as they will be well-placed to increase penetration of the massively under-served Asian market, said the report.
"However, Western companies will have to move fast to capitalise on early growth opportunities," said Staniforth.
The biggest challenge that European companies are likely to face in moving manufacturing to the Asian market is with regard to intellectual property (IP) protection, which is usually achieved through patenting.
There are no existing patents that have global coverage, however. This means that although a company might have a product protected by patent within Europe, this could cease to have effect once manufacturing moves to a region outside Europe.
The product then runs the risk of being copied, mass-produced at lower costs and then sold into the domestic market.
"European companies must therefore ensure that they conduct business only with manufacturing organisations that understand and appreciate the importance of IP protection," said Staniforth.
In addition, the massive differences in language and culture between Asia and Europe might also pose a major challenge to European companies.
English is the preferred language of business in Asia, especially in countries such as India and European companies might be required to conduct business in English.
Since effective communication is essential in business dealings, companies can overcome this language barrier by forming a management team from the particular Asian country, with representatives that speak both the native and the business language, said the report.
Nevertheless, with European healthcare providers constantly implementing cost-cutting measures, cheaper Asian medical devices that meet required quality requirements will increasingly prove an attractive option and European device manufacturers will need to find ways to stay a part of the action.
A copy of the Frost & Sullivan report titled "Impact of Low-cost Asian Manufacturing on the European Medical Devices Markets" can be requested on the company's >website.
