Medical Device Link.

GUIDE TO OUTSOURCING: OFFSHORING

Photo by iStockphoto

Manufacturing operations in the medical device sector are more global than ever. Offshore operations for contractors and OEMs continue to have appeal because of the potentially lower costs and higher efficiencies. But there are many decisions to be made when choosing an appropriate offshore location. Currently, the top 10 medical device manufacturers have offshore divisions in Latin America or Puerto Rico. The ratification of the Central American Free Trade Agreement (CAFTA) in 2006 continues to be an attraction. For medical device companies, where to expand, how to approach it, and what should be asked of the foreign country all depend on the needs and culture of the organization.

Offshoring and near-shoring are preferred strategies because of the likely cost savings. The choice of location varies based on the particular company and its set of regulations, priorities, workforce needs, company culture, and internal or external communications. But every company has the shared goal of wanting and needing to be profitable. Improving the bottom line is almost always a factor when companies consider offshoring.

Look for Free Trade Locations

How open countries are to trade has an effect on their ability to attract investment. Therefore, whether a country has agreed to a U.S.–linked Free Trade Agreement is critical for understanding its ability to accommodate device manufacture. After the North American Free Trade Agreement (NAFTA), Mexico quickly became the near-shore option for manufacturing operations serving the U.S. market. Today, more than 10 years after NAFTA, Mexico has developed a strong manufacturing cluster in industries such as automotive, electronics, and aerospace.

Similarly, in June 2006, CAFTA was ratified. The possibility of manufacturing offshore and selling the goods duty free in the United States enables manufacturers to consider Central America as a near-shore location for export-oriented operations. Companies in the medical device industry are including Central American countries in their site selection process.

As global players, it is important for these manufacturers to seek locations where energy costs, labor cost, training, raw materials, taxes, etc. are more competitive than in U.S. locations. Call centers in India and Panama, apparel in China and Nicaragua, and flat screen TV assembly in Mexico are some examples of this global trend. Countries with competitive cost structures are becoming more aggressive in attracting foreign direct investment into their economy by granting tax benefits, and by investing in infrastructure and industrial developments. Keep in mind it is likely that if a company is successful in offshoring, the work could trigger relocation of many of the company’s suppliers.

A government interested in attracting foreign direct investment is more likely to be a strategic partner than an obstacle. Countries with defined investment policies let investors know the requirments beforehand, helping them understand what can be achieved and expected in and from the host country. Countries looking to attract foreign investments are usually more receptive to ad-hoc benefits including help in research and setup of facilities, and additional tax breaks. They may also provide a local mentor to help firms navigate the process.

Know the Local Story

Device companies such as Command Medical have chosen offshore locations based on cultural concerns, as well as on regulatory factors.

A country’s national leaders might be seeking foreign investment but OEMs should consider the level of interest of local government as well. A commitment from a local government can improve success because local authority often sets the stage for the ease of doing business.

If a country and its local governments are serious about establishing themselves as an offshore location, they will likely have an investment promotion agency. The existence of such an agency is a clear sign that local government is committed to attracting foreign investment and has the resources to support those investors. Furthermore, the investment agencies serve as a local partner during the research process.

When overall numbers (operational costs, location and logistics, and incentives) are nearly the same between countries, it may be best to choose an organization that can serve as a guide. Agencies should do research, arrange an agenda for a country visit, and then, once the investment decision is made, take part in advising the company’s setup process. An agency’s goal is to ensure a company’s success and protect the investment.

Ask the Right Questions

Whether led by a country’s investment agency or another advocate, asking the right questions and getting answers fully explained is critical. Request (or demand) that key government officials join your exploratory meetings. First, this will let you know whether the government is really open for foreign investment not just legally, but culturally. Second, it demonstrates the seriousness of the proposal and lets the government know that its thorough feedback is necessary. Have a checklist ready to investigate environmental requirements and laws, legal framework, special incentives, and labor laws in relation to age, hours, and seasons.

Sidebar: Foreign Direct Investment in Nicaragua

Ask to visit industrial parks, available warehouses, industrial developers, etc. Are the facilities for sale, lease, or rent? Will the government subsidize the first year? Sometimes, industrial parks give a price just for the shell, so see whether services are included. Offshoring can only help with a company’s profitability if offshore operations can produce efficiently at a cost savings—so it is important to get it right. Also, request interviews with other established companies in the region (especially if they have similar operations to the one being planned) and ask about their experiences. They are often the best source on how to do business there. Such companies have likely encountered common challenges such as hiring, training, setup, taxes, and exports. If a country is smart with its foreign investors, it will want to show those investors off.

Push the Envelope

For device manufacturing, the technical skills of a community are critical.

During these meetings, it is critical to not only ask what a government will provide but also to let them know what the company can bring to the table. In a word, jobs. Although it is important to know what to expect from a country and its various incentives, remember that the country is receiving equally valuable resources. Therefore, it is all right to push the envelope a bit. Growth is not limited to job creation in the final workplace. Early stages of preconstruction, telecommunications, and training give a company eligibility for increased incentives or programs. For example, the Nicaraguan government was so impressed by one company’s plans that it committed to road construction for an important textile investment.

In addition, if the company wants to host a corporate event, a research conference, or an educational program, ask about the country’s tourism budget. If the budget is too small to handle such programs insist that the country invest in those activities and meet with the people involved. If the business requires telecom equipment, demand both a review of the local carriers and the right to choose others if necessary.

Consider the Culture

People produce at a rate that is based on attitude and infrastructure. Profitable offshoring often relies on positive people. Even if a location reduces operational costs and the local supply chain supports relocation, these aspects might not be enough. The hidden costs of red tape, bureaucracy, or corruption might hinder an offshore operation’s efficiency. The target country should have stability and appropriate work ethics.

Location is critical, but the government must understand the need to ensure a positive business climate and take action to do so. Hand in hand with a good business climate, human capital is equally important.

Quality, efficiency, and productivity are givens. No company can compete without any of them. And the people a company employs are responsible to provide them. For this reason, education, technical and bilingual skills, and work ethic in the labor force can differentiate one offshore location from another.

Ensure that education, training, and hiring and firing laws make good business sense for the company. Ask to visit schools and training centers. Most important, ask to meet with the employees at other companies, from rank-and-file to managers (not just CEOs). Are they happy? Do they have a work and life balance that lends itself to high productivity on the job? Do they feel underpaid or overworked?

In addition, consider whether the country can accommodate visiting executives in terms of hotels, dining, and community living.

Conclusion

An aggressive cost structure and a productive labor force are critical for choosing a offshore location. It is also important to consider the political and economic stability of the country, its strategic location, and the ease of doing business there. Seeking the most appropriate offshore location for the company is key for a successful offshore strategy. Take advantage of resources provided by each country to research both the hard and soft factors.

Mario España is an investment promotion manager at ProNicaragua (Managua, Nicaragua), the public-private agency established to attract foreign investment and offshore opportunities to the region. He can be reached at mespana@pronicaragua.org.