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A Diagnosis for Southeast Asia

Amarjit Sahota

The far-reaching economic and political turmoil that has rocked Asia for the past two-and-a-half years continues to have profound repercussions both in the countries of the region and throughout the rest of the world. Touched off by a devaluation of the Thai currency and expanding in a ripple effect that grew to tidal-wave proportions, the crisis roiled world financial markets, plunged national economies into recession, and threatened the existence of a new middle class created as a result of rapid economic growth.

For foreign companies, including medical device firms, that had looked to Asia both as a site for expanding manufacturing operations and as a market of enormous potential, the crisis was a rude awakening. As a snapshot of the larger reassessment of opportunities in Asia, this article examines the current state of the diagnostic (imaging) equipment market in the Southeast Asian countries of Singapore, Malaysia, and Indonesia.

Recognized as having the best healthcare system in Southeast Asia, Singapore attracts wealthy patients from the region, increasing the demand for sophisticated diagnostic equipment. Photo courtesy of Singapore Tourism Board.

The economic crisis in Southeast Asia has certainly taken a toll on the medical diagnostic equipment market. Prior to the currency turmoil, which began in July 1997, the market had experienced rapid growth since the early 1990s because of demand from both the public and private sectors. Robust economic growth was responsible for rising healthcare expenditures and increased consumer affluence. The latter resulted in a booming private healthcare sector, which was one of the fastest-growing industries in Southeast Asia.

The onset of the economic crisis has affected the market in a number of ways. First, weakened currencies have greatly diminished buyers' purchasing power. Medical diagnostic equipment is not manufactured in the region; therefore, buyers have witnessed prices escalate from the depreciation of domestic currencies. Second, the poor economic climate induced by the crisis led to a severe credit squeeze. The budgets of hospitals, clinics, and other medical facilities have all been eroded, and consequently medical diagnostic purchases have decreased. A third reason for the market slowdown is the fact that many healthcare providers do not consider medical diagnostic equipment to be among the most essential medical supplies.

The markets for magnetic resonance imaging (MRI) and computed tomography (CT) have been affected more than others by the crisis, as they represent the most expensive and technologically advanced equipment. The markets for ultrasound and x-ray equipment have also been affected, to a significant but lesser degree. In 1997, the market for ultrasound in Singapore, Indonesia, and Malaysia was worth $31.3 million; this figure is estimated to have dropped to less than $12.5 million in 1998, a decline of approximately 60%.

In some countries, purchases of high-end modalities have slowly ground to a halt, while purchases of low-end modalities continue to grow, albeit at a slower pace. As the market becomes increasingly price sensitive, buyers are scaling down their purchases of diagnostic imaging products. For example, typical buyers of color Doppler ultrasound scanners are opting for less-expensive systems with no enhanced features, or for black-and-white models. Furthermore, medical professionals now prefer to keep their old scanners rather than replace them with new ones, which has led to a significant drop in the replacement rate. The average life span of an ultrasound scanner in Singapore was less than four years prior to the crisis and has increased to as much as six years in 1998.

Japanese manufacturers account for more than 75% of the ultrasound markets in Malaysia and Indonesia, whereas European and American manufacturers are favored in Singapore. The appreciation in price of American and European products, however, has led to a relative decrease in the price of Japanese products, thereby allowing Japanese manufacturers to gain a price advantage. Medison Company Inc., a Korean manufacturer of ultrasound equipment, is expected to gain a share in the low-end market segment because of the increase in Western product prices.

SINGAPORE

Located at the tip of the Malay Peninsula, Singapore is one of the most industrialized nations in Asia. The country can also claim to have one of the most developed healthcare industries in the region, with medical services comparable to those in the West. Despite the country's small size, there is a strong demand for medical diagnostic equipment, particularly the more sophisticated and expensive models. The average life span of medical diagnostic equipment is quite short, with equipment being replaced more frequently than in any other Southeast Asian country.

There is a strong preference for high-end types of equipment within market segments. For instance, all purchases of MRI scanners up to 1998 had been of the superconductive-magnet type. Also, almost 60% of all ultrasound scanner revenues in 1997 were from the high-end segment (scanners priced above $100,000) (Table I). This preference for sophisticated, state-of-the-art medical diagnostic equipment is mainly caused by the island nation's ongoing effort to become known as a center of medical excellence. Singapore is already widely recognized as having the best healthcare facilities in Southeast Asia; as a result, affluent patients from the region travel to Singapore for medical treatment.

Prior to the crisis, the market in Singapore was the least price-conscious in the region, with the emphasis being placed on technology and service. In 1998, buyers were seeking product features like picture archiving and communication systems and teleradiology. Traditionally, European and American brands have been the most successful in Singapore, in part because many of the country's medical professionals receive their training in the West. GE Medical (Waukesha, WI) and Picker International Inc. (Cleveland) are leading companies in the MRI and CT scanner markets, respectively.

The economic crisis has caused a significant drop in MRI and CT scanner sales, primarily because of the liquidity squeeze. Although the currency has dropped as much as one-third against the U.S. dollar, prices have not inflated to the extent they have in nearby countries. The harsh economic climate has affected the private sector considerably, leading to a decrease in affluent patients from neighboring countries, and the resultant closing of a number of hospital wards. In addition, there is a shift occurring in buying behavior. Japanese brands are gaining popularity as their prices become more competitive, altering the traditional preferences for American and European products.

MALAYSIA

Malaysia experienced robust economic growth until mid-1997, making it one of the most industrialized economies in Southeast Asia. The government is determined to provide adequate medical services to the entire population, and healthcare has been a high priority on its agenda. The seventh Malaysian Plan in 1997 provided for an ambitious 2.6 billion Malaysian ringgit proposal (equivalent to $1.04 million at the time) to build 22 new hospitals. This project was expected to be a major incentive for the medical diagnostic industry; however,with the onset of the economic crisis and the drastic drop in healthcare expenditures, the plan has been postponed indefinitely.

Prior to the economic crisis, the demand for medical diagnostic equipment was high; in fact, the market was growing so quickly that the country experienced a shortage of radiologists and radiographers. Purchases of high-end scanners were also on the rise as a result of a burst in healthcare expenditures and the high expectations of wealthy Malaysian patients.

Figure 1. The Indonesian medical diagnostic market (MRI, CT, ultrasound).

The economic crisis caused a significant decrease in purchases of high-end equipment. The trend of scaling down purchases is most apparent in Malaysia, where demand is relatively strong and capital is available, although limited. The Malaysian ringgit dropped by as much as 40% against the U.S. dollar prior to the controls implemented by the government in October 1998. Buyers now have a fixed and stable price for purchases of medical diagnostic equipment. Japanese manufacturers continue to dominate the market, with Hitachi and Toshiba in the lead. Toshiba Medical has a strong presence in the markets for MRI, CT, and ultrasound scanners.

INDONESIA

Indonesia's healthcare industry is relatively poorly developed, as illustrated by the number of people per hospital bed and the number of people per doctor (Table II). Healthcare provisions vary widely throughout the country, with the most developed islands, like East Java and Sumatra, offering much better availability of services than the smaller, less-populated islands.

The Indonesian market for medical diagnostics is extremely price sensitive. Traditionally, government expenditure on healthcare has been minimal, thereby encouraging the growth of the private sector, from which arises most of the demand for medical diagnostics. Revenues from high-end medical markets are low, while low-end modalities and low-end technology within a particular market segment account for most purchases. For instance, most of the MRIs sold up to 1997 were of the permanent-magnet type, while high-end CT scanners accounted for the lowest proportion of revenues. The superconductive-magnet MRI and spiral-type CT scanners were initially expected to rapidly increase revenue share prior to the crisis; this projection has obviously been set back.

Japanese manufacturers dominate the medical diagnostic market in Indonesia because they provide high-value systems. Toshiba Medical in particular is strong in all three modalities of MRI, CT, and ultrasound scanners. European and American brands have minimal presence in Indonesia compared with their prevalence in Malaysia and Singapore.

Indonesia has been affected more than any other Southeast Asian country by the economic crisis. It has experienced social unrest, widespread mob violence, and the depreciation of the rupiah by as much as 95% against the U.S. dollar. Almost half of the country's population is currently below the poverty line, and the economy contracted by an estimated 16% in 1998, according to Asiaweek (January 8, 1999). Consequently, the healthcare industry has been severely affected by the economic hardships, and the demand for medical diagnostics has greatly diminished, with the market for MRI, CT, and ultrasound scanners dropping by more than 75% in 1998 alone (Figure 1). As a result of the currency depreciation, MRI scanners that sold at 1.3 million rupiah before the crisis sold for as much as 18.2 million rupiah in early 1998.

It is expected that there will be few purchases of MRI and CT scanners in 1999, and that those purchases that do occur will be financed by foreign companies through soft loans. Demand continues, albeit at a slower pace, for ultrasound and x-ray equipment. Unlike Singapore and Malaysia, Indonesia has a domestic assembler of these modalities, Rajawali Nusindo, that buys its components from France. The company is expected to fare slightly better than other suppliers because of the price advantage it has gained in the marketplace. Demand for medical diagnostics is not expected to show a significant upturn until the economy stabilizes, and this will depend to a large extent on political factors. Although the short-term outlook appears bleak, the market for medical diagnostic equipment in Indonesia holds enormous potential in the long run.

CONCLUSION

The market for medical diagnostic equipment in the region is not expected to recover until the Southeast Asian economy as a whole improves. Projected recovery dates depend on the individual countries, with Singapore expected to be the first to emerge, possibly in 2000. In the case of Malaysia and Indonesia, political stability is an important factor that must provide the backdrop for economic recovery. Once the economy improves, the market for medical diagnostics is forecast to show rapid growth. In particular, the markets for MRI and CT scanners are expected to experience high growth because of the decrease of these purchases in the current climate.

Amarjit Sahota is research manager at Frost & Sullivan Singapore.