Medical Device & Diagnostic Industry Magazine | MDDI Article Index
Originally published May 1996
BIG EMERGING MARKETS FUEL U.S. EXPORT OPPORTUNITIES
Victoria Kader, Paul Barry, and Mark Cooper
In 1993, under the leadership of the late commerce secretary Ronald H. Brown, the Clinton administration launched a national export strategy designed to streamline and focus U.S. government resources to help U.S. businesses export. In doing so, the administration selected for special emphasis 10 big emerging markets (BEMs), which are expected to account for the largest share of U.S. export growth and opportunities over the next 15 years.
The BEMs include the Association of Southeast Asian Nations (ASEAN) made up of Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam; the Chinese Economic Area (CEA; China, Hong Kong, and Taiwan); South Korea; India; South Africa; Poland; Turkey; Mexico; Brazil; and Argentina. These BEMs, which are all physically large, also share a number of other important attributes. They have significant populations and represent considerable markets for a wide range of products. Most have strong growth rates or clearly hold the promise of future economic expansion. Most are of major political importance within their regions; moreover, they are regional economic drivers--their growth will engender further expansion in neighboring markets. The BEM strategy for medical devices is a long-term approach to expanding U.S. exports that looks beyond short-term market fluctuations experienced by emerging economies.
The economic stakes for the United States in the BEMs are enormous. As a group, the 10 BEMs are importing about as much merchandise from the United States as Japan and the European Union (EU) combined. In fact, during the period 19902010, the BEMs could account for at least $1 trillion in incremental U.S. export growth. The Department of Commerce (DOC) expects the BEMs will double their share of world imports as well, increasing to 38% by 2010 from 19% in 1994. No other market category shows such dramatic growth potential.
BEMs AND THE DEVICE INDUSTRY
Health-care spending in BEMs is increasing two to three times faster than health-care spending in traditional markets such as Canada, Japan, or the EU. However, currently, the majority of U.S. medical product exports focus on Europe, Canada, and Japan. In 1994, U.S. exports to these three regions accounted for 65% of the total U.S. medical device exports. To continue to participate in the global growth, the U.S. medical device industry must shift its marketing efforts into the BEM regions, where demand for medical goods is growing rapidly.
The top consumers of U.S. medical equipment and supplies among the BEMs are South Korea, Taiwan, Hong Kong, Mexico, and Brazil. Between 1991 and 1994, with the exception of Mexico and South Africa, U.S. medical device exports to BEMs grew at significant rates (see Figure 1). Given recent trends and projected national population and income growth, U.S. medical equipment exports to BEMs can be expected to rise 20% a year through 2000 from 1994 levels, to nearly $1.6 billion in 1995 and to $4 billion by 2000. This article summarizes the opportunities available to device manufacturers and the issues they face in each region.
THE CHINESE ECONOMIC AREA
Only three decades ago, Asia accounted for just 8% of the world's gross domestic product (GDP). Today it accounts for 25% of the world's GDP and its share is projected to surpass that of Europe by 2020. By the middle of the next century, Asia is expected to represent half the world's economy.
The medical device markets in several Asian BEMs are growing at double-digit rates, ranging from 15 to 24% in China, Thailand, South Korea, and Taiwan. Growth rates for the United States, European Union, and Japan are much lower (57%), demonstrating the importance of shifting U.S. medical device exports to these Asian countries. The U.S. medical device industry has begun to take advantage of these markets. From 1991 to 1995, U.S. exports to the CEA grew by 69% while those to South Korea and India increased by 67 and 45%, respectively.
The CEA, which includes China, Taiwan, and Hong Kong, makes up one of the fastest growing markets for medical devices and supplies in the world. The CEA total market for medical equipment in 1995 reached more than $1.8 billion, of which imports comprised more than 60%. The United States remains the import market-share leader, totaling $388 million in sales in 1995. However, the United States faces increasing competition from local producers and serious competition from Japan and Western Europe.
The continued strong economic growth of China (nearly 10% GDP growth in 1994) is accompanied by an increasing standard of living, resulting in mounting pressure for improved health care. Such pressure will help ensure that China's market for medical equipment will remain strong at between 12 and 15% annual growth. Hong Kong and Taiwan are also placing increased emphasis on providing better health care and have maintained strong annual growth in their medical device markets (17 and 15%, respectively).
The CEA is increasingly emphasizing the development of its own medical equipment production industry in order to supply its own market and to become a major regional exporter. In particular, China's thrust for technology transfer means that joint-venture production is becoming increasingly common (about 2025% of the total Chinese market) whereas direct sales have been slipping. U.S. companies can expect pressure to form joint ventures, license technology, or invest in Chinese manufacturing ventures rather than focusing on direct sales or establishing wholly owned foreign enterprises.
The U.S. medical device industry in the CEA is most competitive in high-technology products, especially those that lack domestic equivalents. Second-hand equipment, with proper service and maintenance, and some types of disposable equipment and supplies should also find significant markets.
Electromedical equipment remained the strongest segment of exports to the CEA at $136 million in 1995. Other key imports include surgical and medical instruments as well as x-ray and irradiation equipment. Exports of dental equipment and supplies to the CEA are increasing rapidly as well, nearly tripling in the last four years to $20 million in 1995.
U.S. medical exports to China declined in 1994 (see Figure 2) and have leveled off in 1995 for a variety of reasons, including reduced public financing of hospitals and reorganization of health insurance. Also, China's recent adoption of more restrictive credit policies mean that financing of new medical equipment purchases is more difficult. The slowdown in exports is partially attributable to the five-year-plan cycle during which spending typically drops at the end of the period (in this case the 19911995 plan).
China's regulatory system for medical equipment is currently undergoing reform that should help alleviate much of the confusion and delay U.S. exporters often experience. For example, the State Pharmaceutical Administration of China (SPAC) is consolidating its role as the primary regulator of medical equipment, both domestically produced and imported. SPAC offers an updated version of its Guide to Product Registration and Advertisement Examination on Medical Devices to inform exporters of procedural requirements. The most important new development in regulation is SPAC's recent decision to adopt a standards-based, third-party notified-body review system similar to the one adopted by the EU. Although many positive changes are occurring at the central level in regulation and procedural requirements, inconsistencies in implementation and enforcement still remain among the central, provincial, and local levels.
In Taiwan, the National Health Insurance Bureau (NHIB) has implemented a national health insurance plan that has created concern among U.S. manufacturers. In an effort to reduce costs, NHIB has attempted to reduce by 2030% the amount it will reimburse U.S. companies for imported medical devices. This policy was scheduled to take effect late last year, but has been delayed due to protest from the United States that it discriminates against U.S. (and other foreign) products in favor of Taiwanese producers. The DOC and the Health Industry Manufacturers Association (HIMA) are working with Taiwanese authorities to reverse NHIB's recent policy decisions.
ASEAN
The newest designated BEM is the dynamic ASEAN region, consisting of Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. In 1994, this region represented more than 400 million people with a combined GDP of $470 billion. Over the next decade, the region's GDP is expected to more than double with the population exceeding 686 million by 2010. U.S. exports to the ASEAN region could easily equal or exceed exports to Japan or China by that time as well.
Dynamic growth has resulted in increased purchasing power and a demand for enhanced health care. An increased emphasis on services, falling barriers to trade, and urbanization are creating tremendous opportunities for equipment suppliers as each nation scrambles to modernize health-care facilities and services.
The ASEAN countries are not only an integrated trading market, but also a gateway to the northeast Asian economies of Japan and China. Many U.S. companies are establishing offices or representation in ASEAN countries, which readily and capably service the ASEAN region and northeast Asian countries.
ASEAN nations spent nearly $10 billion in 1991 on health-care equipment and services, and this is the fastest-growing market for U.S. exports of health-care technologies. The medical equipment market of that total has doubled in size since 1991 to an estimated $920 million in 1994. The total ASEAN market for medical devices and supplies is expected to grow about 18% this year alone. Singapore is the largest importer (53% of the total) followed by Thailand (28%) and Malaysia (15%). Singapore in particular is a popular reexport center to the rest of Asia for many U.S. companies.
As the region continues to expand and upgrade health-care facilities, significant opportunities exist for U.S. exporters in areas such as electromedical and electromagnetic diagnostic equipment as well as x-ray and other general hospital equipment and supplies. ASEAN countries are adept at low-technology, commodity-type products, but for the foreseeable future will continue to depend upon foreign imports for advanced devices and supplies.
ASEAN countries' expenditures on health-care facilities are expected to increase by 10% a year over the next five years, ensuring that tremendous market opportunities will continue to exist. Although ASEAN governments still play a major role in equipment procurement, an increased private sector role in the form of private hospitals and clinics will result in a demand for more sophisticated and specialized equipment.
Price, and often the lack of postsales service, preclude the United States from gaining a greater share of the ASEAN medical device market. The United States also faces serious competition from EU and Japanese producers who hold a respective 32 and 25% share of the ASEAN market, compared to 20% for the United States. In Indonesia, the gap is even more glaring because the United States holds only a fraction of the total market. Domestic producers are also expected to provide some competition in the ASEAN countries.
Reimbursement policy developments in several ASEAN nations have adversely affected profit margins for some U.S. companies. This profit drop is also partially attributed to increasing competition from lower-cost or domestic suppliers. Recent regulatory developments in some countries have also hindered the United States' ability to comply and compete in the country's market. The U.S. government and industry associations are participating in ongoing negotiations with ASEAN officials to address these developments.
HIMA recently opened a regional office in Singapore with the assistance of the DOC's Market Development Cooperator Program to help develop the entire Asian market. HIMA's Singapore office works with DOC's commercial service posts and with the U.S. device industry across Asia to help resolve regulatory issues, overcome trade policy barriers, and seek new opportunities for growth for the U.S. medical device industry.
SOUTH KOREA
The South Korean market for medical technology reached more than $700 million in 1993, making it the third-largest Asian market for most U.S. medical device and diagnostic manufacturers. In 1993, U.S. medical device companies accounted for more than 40% of South Korean medical imports and one-third of the country's overall medical market. Demand for sophisticated medical technology is on the rise in South Korea, and consumption of medical devices is expected to grow at an annual rate of more than 15% over the next few years.
The South Korean market for diagnostic imaging equipment, including ultrasonic diagnostic equipment, computed tomography scanners, and magnetic resonance imaging equipment reached $51 million in 1994. The market for patient monitoring systems was $10 million in 1994. Because this equipment has an average five-year life cycle, the demand for replacing and updating existing equipment is starting to grow. The medical laser market, growing at up to 20% annually, is another key sector. U.S. imports supply 98% of the total Korean demand, and the United States has 6080% of the market. Dental applications are the only area for which there is a domestic producer of lasers--Dong Yang Medical.
South Korea's regulatory climate has created barriers for U.S. medical device companies in the past. Under the country's previous regulatory scheme, 11 categories of medical devices needed testing for quality control for each import shipment. U.S. companies exporting to South Korea were also asked to divulge proprietary business information. The country is now in the process of making its regulatory structure conform with international standards. New health-care regulations are due to be published in May and are tentatively scheduled to be effective in July. South Korea's Ministry of Health has published draft guidelines that will bring the Korean regulatory regime into conformity with international standards, introduce a classification system for medical devices based on degree of risk, abolish mandatory testing, and introduce GMPs and a postmanagement system.
The upcoming changes in Korean regulations should provide even greater opportunities for U.S. device companies. The U.S. government is working working closely with HIMA and other associations to continue to improve access to this dynamic market.
LATIN AMERICA
Prospects for U.S. medical device sales in Latin America are also favorable. The expansion of health-care coverage to all citizens, increased access to health-care services, promotion of strategic alliances between private and public sectors to improve health-care systems, and modernization of hospitals have created a better climate. Continued economic growth in major Latin American nations will make this region one of the fastest growing markets for the U.S. medical device industry.
U.S. medical device exports to major markets in Latin America are growing nearly twice as fast as exports to Western Europe and Canada. In 1994, total U.S. medical device exports to Latin America were $981 million, an increase of 25% since 1991. U.S. exports to this region are estimated to exceed $1 billion for 1995 (see Figure 3).
U.S. exports to Brazil and Argentina are growing at double-digit rates. Between 1991 and 1994, exports grew at an annual rate of 11% to Brazil and 24% to Argentina. Surgical appliances and supplies and electromedical equipment are the best prospects for Latin America. These two sectors constitute 47% of the total U.S. medical device exports to this region. The total medical device market for these two countries reached $1.3 billion in 1993, about the size of China's. Risk factors for the area include currency fluctuations, payment terms and conditions, and securing technically qualified service support for high-technology equipment.
MEXICO
Mexico ranks as the seventh-largest consumer of U.S. medical device exports. From 1991 to 1993, U.S. medical device exports to Mexico grew an average of 15% annually. Although the devaluation of the peso and deceleration of economic growth slowed U.S. exports in 1994, the U.S. medical device industry will retain tariff preferences vis-a-vis its European and Japanese competitors as a result of the North American Free Trade Agreement (NAFTA). Exports to Mexico were growing at double-digit rates, but due to the peso crisis in 1994, U.S. exports were negatively affected. The government of Mexico's decentralization of its health-care system and its intended expansion of health-care coverage for all citizens should result over the long run in further opportunities for U.S. medical device and service industries. Total Mexican health-care expenditures are not available, but estimates of public sector expenditures were $15.4 billion for 1994, an 8% increase over 1993. Private expenditures were estimated at $3.8 billion for 1994.
The Mexican public health-care sector provides 80% of the medical services to the country's fast growing population of 84 million. The Mexican Social Security Institute (IMSS) owns about 20% of Mexico's 3000 health-care facilities providing services to more than 60 million Mexicans. Therefore, the Mexican government is an important buyer of health-care products and services.
In comparison, the private sector provides only 20% of the medical services, mainly to the wealthy population. In addition, many affluent Mexicans travel to the United States to obtain health-care services. In a given year, it is estimated that more than 435,000 Mexicans seek medical treatment in the United States.
In recent years, the Mexican health-care system has experienced a sharp decline in quality due mainly to lack of resources brought on by pressure to expand services to the poor in the rural and urban areas where demand has increased. However, the Mexican health-care system is transforming under the influence of NAFTA. In response to the decentralization of the system and the growing demand for health-care services, U.S. industry is investing heavily in health-care projects. Many U.S. health-care companies are engaged in hospital and HMO activities in Mexico. U.S.-based companies are targeting medium-sized cities in Mexico, which have few private hospitals.
Imports, which accounted for approximately 70% of the $620-million medical device market in 1993, continue to be the most important source of supply for medical products in Mexico. The United States is the leading supplier of medical devices to this market, accounting for more than 50% of total imports.
The best prospects for medical products in Mexico range from respiratory and electrocardiography equipment to surgical needles, intravenous catheters, and x-ray equipment. There is a great demand for ultrasound and incubation equipment for newborns as well as electrosurgery, resuscitation, and ophthalmological equipment and instruments. Medical disposable products are among the fastest growing market segments in Mexico. The best sales prospects in this segment include syringes, adhesive tapes, Band-Aids, gauze, and surgi- cal threads.
NAFTA facilitates cooperation among medical device regulatory agencies in all three NAFTA countries--Mexico, Canada, and the United States. A NAFTA standards provision significantly improves the transparency of Mexico's standards development process and allows industry representatives from the other two NAFTA countries to participate in the establishment of new medical device standards in Mexico. The new harmonization process will remove the differing product standard requirements that U.S. medical device companies are sometimes faced with in selling to the Mexican government's procurement market.
The U.S. share in the Mexican market has been declining largely because competitors from other major countries have been undercutting U.S. prices. For example, U.S. manufacturers have been losing Mexican medical device market share to competitors in Germany (18% market share), Japan (10% market share), and Switzerland (2% market share).
Slower overall economic growth in Mexico has adversely affected the double-digit export growth rate U.S. medical device manufacturers experienced from 1989 to 1993. Financing terms play an important role in securing sales in this market. Additionally, with the current economic conditions and increasing credit constraints, Mexico will favor exporters providing the most attractive payment terms.
Mexico has a shortage of technicians trained to service highly advanced medical devices. U.S. companies will have to provide improved postsales service and attractive financing terms to maintain or increase their currently declining medical device market share in Mexico.
INDIA
According to National Income Accounts, India's health sector accounts for approximately 6% of its GDP, which is extremely high for a developing country. The total medical devices market reached $500 million in 1993, with the market estimated at having reached $650 million in 1994. Assuming that the government of India continues its support for improving the Indian health-care system, the medical device market is forecasted to remain strong, growing at an average annual rate of 1520% for the next three years. Medical device imports from the United States are forecasted to reach $54 million in 1995, representing a 17% growth rate over 1994.
The primary responsibility for administering public health in India rests with the state governments while the central government sets goals and standards and provides some funding. The central government's "Health for All" plan calling for full medical care for the whole population by 2000 is an ambitious plan that will require the Ministry of Health and Family Welfare to boost spending in order to reach its goal of improving health-care facilities and services. The major market for high-end U.S. medical equipment is likely to be private sector hospitals and teaching hospitals in major cities like Bombay. Currently, hospitals are the largest end-users of medical device systems.
In the medical device sector, the products that should have the best long-term prospects in India are laboratory instruments and supplies, diagnostic equipment, imaging products and equipment, and electronic treatment devices. Quality consciousness is increasing among the Indian public and private sectors. U.S. firms producing high-quality goods in the medical technology sector will have good market potential in the Indian market.
For most goods sold to public hospitals, tariffs have been eliminated altogether. India imposes a customs duty of 40% on equipment not otherwise specified. In the past, tariffs on equipment sold in the private sector faced tariffs between 80 and 120%.
SOUTH AFRICA
The South African medical equipment market size is approximately $250 million per year with an annual growth rate of approximately 5%. The market is sophisticated and extensive with more than 500 (mostly foreign) trade names to choose from. In South Africa, U.S. exports declined slightly between 1992 and 1993 but performed better in 1994. New political stability and a focus on improving health programs for the black population should help U.S. exports to South Africa. The medical device sector in South Africa is strongly receptive to U.S. products, and barriers to U.S. market access are minimal.
Sectors that are rated as the best prospects include intensive-care equipment and diagnostic ultrasound equipment. South Africa imports almost all electromedical equipment, and the country has a special need for transportable products for some rural areas where electricity is unavailable. Private hospitals are one of the fastest growing health-care sectors, especially day clinics that require sophisticated diagnostic equipment. The government's efforts to increase health-care access to the black population in South Africa will help create demand for all types of medical device products.
A major obstacle in this market is the dichotomy in health-care provision. Although the country's 5 million affluent whites receive world-class medical technology and care, most of South Africa's 32 million blacks have had limited access to medical technology. Nearly 2.3 million citizens are classified as "nutritionally vulnerable" because previous governments have provided inadequate heath care. President Mandela has promised to improve access to medical technology as part of his reform efforts. The fundamental issue in the near term is determining how to finance universal health care in a time of fiscal stringency.
POLAND
Although the public health sector in Poland is burdened by severe budgetary restrictions, funds for purchasing medical equipment are available primarily through international financial institutions such as the World Bank and the European Bank for Reconstruction and Development.
The private medical sector is booming with small private clinics opening throughout the country at a rapid rate. Polish clinics are in need of modern, high-precision, top-quality diagnostic and operating equipment. A revised social security program may be introduced that would allow patients or clinics to be reimbursed for medical services. Poland is considered the largest market for laboratory and scientific equipment in central Europe, a sector that is anticipated to grow steadily by 10% per year. Equipment purchased for scientific purposes is exempt from customs duties and taxes.
TURKEY
The Turkish lira was significantly devalued vis-a-vis the U.S. dollar and the German mark in mid-January 1994. The Turkish government responded to this economic crisis with the imposition of an austerity package. Turkey's economic austerity measures imposed on April 5, 1994, prevented most U.S. medical equipment companies from exporting their products to Turkey in 1995. The largest end-user of medical equipment in Turkey continues to be the government. Turkish economic policies have precipitated a decline in medical equipment exports from the United States into Turkey. U.S. commercial officers in Turkey predict an easing of import restrictions in 1996.
CONCLUSION
The BEM economies present lucrative markets for the U.S. medical device industry. They have large territories and immense populations with massive future demands for health-care products and services. These economies have undergone significant changes in their economic policies that have already contributed to faster growth and expanding trade and investment with the rest of the world. These countries and regions also aspire to be major consumers of medical technologies. They are markets whose economic growth would likely spill over in their respective geographical regions. U.S. medical device manufacturers must look beyond the traditional markets of the EU, Canada, and Japan and focus on the BEM regions as essential to their global competitiveness and future export growth.
Victoria Kader, Paul Barry, and Mark Cooper are international trade specialists for the Office of Microelectronics, Medical Equipment, and Instrumentation, in the International Trade Administration, Department of Commerce. *
