Medical Device Link.

Originally Published MX November/December 2001

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

On the Asian Front

For medtech manufacturers, the key to exploiting business opportunities in Asia is an understanding of cultural differences.

Ames Gross and Shawna Lepage

Asia offers U.S. medical device companies an attractive market that should not be ignored, for several reasons. First, Asia’s population of 3.5 billion people represents about 60% of the world total. In addition, Asia is becoming increasingly wealthy. Average economic growth rates through the 1970s, 1980s, and 1990s have been in the neighborhood of 10% for most Asian countries. Per capita incomes in Hong Kong and Singapore match those in the United States.

A Stryker Corp. session in Japan, at the company’s newly opened training center.

The Asian market is huge and growing. In contrast to the 3.5 billion in the East, only 310 million people live in North America; that amounts to 5% of the world’s population. The European markets are big but not, even cumulatively, in Asia’s league. Moreover, while they are fairly wealthy, they are also mature, with little room for significant growth. South America has a growing population, but with only 527 million people (8.6% of the global whole) and per capita incomes about one-half of Asia’s on average, that region has significantly less market potential than Asia.

Asia looks even more attractive with regard to the market for medical products. According to AdvaMed (Washington, DC), Japan was the world’s second-largest market for medical technology in 2000, behind only the United States, with expenditures of $24.8 billion.¹ Elsewhere in Asia that year, China spent $2.9 billion on medical technology, and Taiwan and South Korea $1.3 billion and $1.2 billion, respectively. The combined figures for just these three Asian markets—$5.4 billion—constitute an outlay larger than that of Italy ($5 billion) or the United Kingdom ($4.2 billion), which are strong, established markets.

Living standards in many Asian nations are high or rising. Concomitantly, demand for medical devices in these countries grows continuously. China’s medical device market is expected to increase by about 10% annually over the next three years. In India, the medical equipment market grew more than 18% between 1999 and 2000, and similar growth is projected for 2001. Japanese market growth has slowed in some device sectors, but remains steady in implantable devices and interventional cardiology devices such as stents. In Thailand, disposable devices, including basic testing devices, show particularly strong growth potential.

Globalization to a large extent means Asia. U.S. medical technology companies wishing to tap the vast potential of the Asian market have several options. These include using in-country distributors, arranging a joint venture, establishing subsidiary companies, acquiring existing local companies, and setting up facilities for manufacturing in the target countries.

Building an Effective Distribution Network

Both companies new to the Asian market and those already engaged in exporting often sell their products via a network of distributors. At least two things are important to remember when building a distribution network.

First, relationships are key in finding and qualifying distributors—and, ultimately, in successfully selling a product. The best way for a medtech company to find a new distributor is to investigate distributor groups to which company executives have been introduced by a trusted personal acquaintance, a business colleague, or a professional third party (that is, a consultant). Signing up distributor groups that were encountered at a trade show or through cold calling generally does not work. In some Asian countries, if a real relationship with the exporting company has not been established, the distributor groups can, by Western standards, lie, cheat, and steal without doing anything wrong by the custom of the home culture.

Besides showing its distributor that it will be a true partner and will be flexible on pricing and other business issues, the medical technology firm should keep in mind that face-to-face meetings are crucial. E-mail correspondence is not sufficient. In addition, gestures such as sending Christmas cards and acknowledging Asian holidays can serve to express regard of a more personal nature (see Table I).

Although these aspects of relationship building are general throughout the continent, the second important thing to remember is that Asia is not a single undifferentiated block. Each country has its own culture, business norms, regulations, and so on. Therefore, while it is helpful for a U.S. medical device company to develop a coherent Asia strategy, the company should be careful to understand and acknowledge the differences among the several nations. Two divergent examples are worth a closer look.

Finding a Distributor in China. Finding and qualifying a distributor in China can be a tricky undertaking. All medical device distribution in China until recently was conducted through state-owned companies that covered most of the country but were highly bureaucratic and not very market oriented. Six or seven years ago, however, private medical device importing companies began to form. The advantage offered by these groups is that they tend to be more cognizant of marketing issues and can act more quickly than state-owned entities. On the other hand, most are relatively small (under 75 people) and not well financed. Not uncommonly, such a group is unable to buy much of the exporter’s product.

Despite the negatives, using private medical device importing companies is often the best way to go. The medical technology exporter needs to check out both the reputation and the financial circumstances of the importing group very carefully and make sure that it has a business license to operate legally. Medtech companies should beware of groups with big talkers who claim, for example, to have 100 staff members when in fact 90% of the staff is drawn from other third-party distributor groups and not part of the distributing company’s payroll. Another dubious claim can be payment terms that will never actually be met.

Med-Can Hong Kong Ltd. is a reputable Chinese distributor with which Medwave Inc. (Arden Hills, MN), a maker of noninvasive blood-pressure products, signed an agreement in February 2001 for the distribution of its products in Hong Kong and China. Med-Can is headquartered in Hong Kong, but has 40 sales staffers in six offices in China. The distributor previously worked with several other U.S. medical device companies, including Zoll Medical (Burlington, MA), a producer of noninvasive cardiac equipment, and Quinton Instrument Co. (Bothell, WA), which manufactures diagnostic equip-ment for cardiac disease.

One company’s product distribution in China can be handled by multiple firms—either because the geographical extent of the country is so large or because the manufacturer has several lines of business. For example, CardioDynamics International Corp. (San Diego), a firm that makes noninvasive hemodynamic equipment, has two distributors in China. One, Chang Sheng Medical Equipment Co. Ltd. (Taiwan), has exclusive distribution rights for all but the five southeastern provinces of mainland China. The other, Massachusetts Medical, services those provinces and Hong Kong.

Finding a Distributor in Japan. The key factors that a medtech company should keep in mind when trying to find and work with a distributor in wealthy, business-oriented Japan are very different from the Chinese considerations. First, it may take from six to as much as 18 months to get a new distributor in Japan. Decisions are not made hastily there (see sidebar). The size of the Japanese medical device market—the second-largest in the world—and the difficulty involved in changing distributors make it imperative that the exporting company do its homework in order to contract with the best group, not just a decent group.

Second, Japanese distributors are most interested in working with large name-brand companies or with companies offering unique devices. It is tough to penetrate the Japanese market with me-too products.

The third factor involves the true identity of the distributor. U.S. companies must be careful of their Japanese product buyers. Large Japanese trading companies such as Itochu and Marubeni are normally not the ultimate distributors or buyers, even though arrangements are made for them to import the products. In Japan there are interlocking groups of companies called keiretsu. Oftentimes, a connected company in the keiretsu has fronted money to a trading company to purchase the U.S. device exporter’s products as an R&D investment.

Finally, the U.S. medtech firm should make certain that its distributor is selling the manufacturer’s company name along with its products, and not promoting the imported products under the distributor’s own name. In other words, does the distributor’s brochure prominently display that company’s name on the front cover and relegate the product manufacturer’s company name and logo to a small corner of the back cover? That situation is to be avoided. Always suspicious of foreigners, Japanese distributors sometimes position themselves this way so that they can easily obliterate the original exporter’s name from the back of the literature and replace it with the name of a competing company, while also substituting the competitor’s similar products if need be.

A number of U.S. medical device firms have entered the Japanese market using a distributor arrangement. In July 2001, ZymeTx Inc. (Oklahoma City, OK), a manufacturer of diagnostic and therapeutic products aimed at viral diseases, announced the sale of 100,000 of its influenza test kits to its distributor, Nichirei Corp. (Tokyo). Aspect Medical Systems Inc. (Newton, MA), a company that makes anesthesia monitoring systems, signed an exclusive distributor agreement with Nihon Kohden Corp. (Tokyo) in March 2000. Other companies have had distribution agreements in Japan for a much longer period. Kobayashi Pharmaceuticals (Osaka) has been Japan’s exclusive distributor for ArthroCare Corp. (Sunnyvale, CA) since 1997; that U.S. company’s products feature technology designed for soft-tissue surgery. Palomar Medical Technologies Inc. (Burlington, MA), a maker of laser products for cosmetic surgery, has had M&M Co. Ltd. (Tokyo) as its exclusive Japanese distributor since 1989.

Setting Up a Joint Venture or Subsidiary

In Asia as elsewhere, if a U.S. device manufacturer sees a good market for its products in a particular country, the best approach may be to set up a joint venture (JV) or subsidiary office there. Again, China is a complex special case.

Setting up a JV in China is not the same as setting one up in France. First of all, JV documents in China tend to be vague so that the Chinese can adapt the terms to suit their interests as needed. Also, sitting on the Chinese side of the table for JV negotiations may be multiple parties with diverse interests. These can include the factory manager, city officials, and sector officials such as those representing the State Drug Administration, among others. In addition, while standard capitalistic practices have become the rule in Shanghai, Guangzhou, and Beijing, capitalism with some communistic characteristics is prevalent in the second-tier cities. Simple Western concepts such as conflict of interest may be unfamiliar notions to prospective venture partners in the hinterlands (see sidebar).

JVs established in China 10 years ago were often 50-50 deals, but over the years the value of the Chinese side—its ability to grease the wheels, provide good labor, and so on—has dropped. Consequently, many deals today are 70-30, 80-20, or 90-10 propositions favoring the Western partner. And recently, many medical device companies that have not wanted involvement with a partner have set up their own subsidiaries in China from the start.

A Chinese JV or subsidiary strategy is especially popular with larger medical device companies. For example, in 1985 the Belgian subsidiary of Johnson & Johnson (J&J), Janssen Pharmaceutica (Beerse, Belgium), entered the Chinese market through a joint venture, China’s largest pharmaceutical JV at the time. Other J&J units soon followed suit, and in 1995, J&J Medical China Ltd. was established. This is a subsidiary company that produces and markets medical products, consumer products, and services in China. It has annual sales in excess of $170 million, and, along with the Janssen JV, J&J China Ltd. (a manufacturer of healthcare products for infants), and other J&J companies, has had good success in penetrating the growing Chinese medical market.

Smaller companies can also use joint ventures to gain a foothold in China. An example is Exactech Inc. (Gainesville, FL), an orthopedic joint implant manufacturer that in February 2001 signed a 50-50 JV agreement with InVigor Biotechnology Co. Ltd. (Taipei) to sell and market its products in mainland China and in Taiwan.

Gaining Access through M&A

U.S. medical device companies can also enter the Asian market through acquisition of a local company. Here, let’s look at how this works in Japan.

The practice of foreign companies acquiring local Japanese companies is becoming more common after being relatively unheard of in the 1980s and early 1990s. According to Daiwa Securities (Tokyo), there were 80 instances of foreign companies acquiring Japanese firms in 1997, compared with only 31 in 1993. Foreign direct investment in Japan, including foreign acquisitions of Japanese companies, has continued to rise substantially. According to Merrill Lynch (New York City), the value of mergers and acquisitions (M&A) completed in Japan rose from $17.5 billion in 1998 to $150 billion in 2000.² More than $20 billion of the year 2000 total came from foreign purchasers. The reasons for the recent growth in M&A activity in Japan include a strong dollar (and thus a weak yen); continuing tough economic times in Japan, compelling companies to sell assets in order to survive; deregulation, which has allowed more overseas investment; and a realization on the part of Japanese companies that globalization is essential for future business success.

However, a company contemplating building a market position in Japan through M&A must be careful. For one thing, it is difficult to value Japanese companies owing to idiosyncratic Japanese accounting systems. (Accounting systems that deviate from international norms are prevalent throughout Asia.) A second factor to consider is that Japan’s tax system punishes M&A in favor of initial public offerings, which are afforded lower capital gains tax rates. Debt forgiveness and debt write-downs associated with acquisitions are also penalized unfairly by Japan’s tax code. Finally, Japanese companies often form keiretsu alliances that are cemented through ownership of each other’s shares. Because company shares—and corporate assets—are often tied up with multiple partners in hard-to-break arrangements, this cross-shareholding system makes acquisitions difficult.

Despite the drawbacks, M&A can be a good strategy for some U.S. device companies operating in Japan. One company that has successfully exploited this approach is Stryker Corp. (Kalamazoo, MI), which has sold orthopedic and general surgery products in Japan for 32 years through its distributor, Matsumoto Medical Instruments Inc. (Osaka). Over the years, Stryker increased its ownership and control of Matsumoto, so that by 1997 Stryker owned 75% of the distribution firm. The acquisition was completed in 1999. This type of gradual acquisition is a particularly advantageous strategy in a country with such a conservative business culture.

Manufacturing in Asia

Discovering and grasping the market opportunities that are available in Asia may not be enough. Foreign companies are increasingly locating their plants on the continent. Those firms that do not have manufacturing facilities in situ—or that have competitors who do—are at a distinct disadvantage.

There are several good arguments for manufacturing in Asia. First, labor costs are low in the developing economies, such as those of Southeast Asia, India, and China. According to the World Bank (Washington, DC), expenses per worker per year in manufacturing are about $1200 in India, $2450 in the Philippines, $2700 in Thailand, and $3430 in Malaysia, as compared with $7600 in Mexico and $28,900 in the United States. Workforces in these Asian countries also are well educated and hardworking. Literacy rates are well over 80% throughout much of Southeast Asia (the Philippines, for example, reports 95% literacy), and schooling, at the primary level at least, is nearly universal. In addition, products made close to their ultimate market can be more easily tailored to the local market’s needs than those manufactured far away. And producing in-region significantly reduces the transportation costs of final products. The advantage is even greater for companies that source parts from elsewhere in Asia.

Of course, manufacturing in Asia can present difficulties as well. Each country has its own bureaucracy and its own legal system, and many of these systems are quite unlike those that Westerners are used to. Moreover, language and cultural differences can be sources of frustration, delay, and misunderstanding (see sidebar). And the absence of adequate infrastructure in some Asian countries can make manufacturing there less attractive than in the West.

A number of U.S. medical device manufacturers have set up production operations in Asia. C.R. Bard (Murray Hill, NJ), soon to be acquired by Tyco International Ltd. (Pembroke, Bermuda), has had a manufacturing facility in Malaysia for years, turning out products such as catheters and urological procedural kits for European, U.S., Japanese, and other Asian markets. Bard was in the process of drawing up plans to expand its Malaysian plant before the announcement of the takeover by Tyco. Another company, Medrad Inc. (Indianola, PA), a subsidiary of Schering AG whose products enhance the clarity of medical images, signed an agreement in January 2001 to egin manufacturing disposable syringes in China. In this effort, Medrad has partnered with Vincent Medical Manufacturing Co. Ltd. (Hong Kong), an OEM producer of medical devices. Production is targeted at China, Japan, and other countries in the region.

Conclusion

Asia is a huge, growing market for medical devices that U.S. medical technology companies should not dismiss. This market can be entered and penetrated by means of a distributor network, joint venture, or subsidiary arrangement, by acquiring an established local company, or by setting up manufacturing facilities in the region. The key to success, whatever the approach taken, is preparation for confronting the challenges discussed in this article.

The trend toward greater globalization of healthcare technology will continue at full speed into this new century. Asia beckons. That once-distant continent is now a near neighbor. But the region is not one undifferentiated mass. U.S. device manufacturers are well advised to always keep country-specific characteristics straight in their minds.

REFERENCES

1. Edward Rozynski, "Access and Outlook in Key Overseas Markets" [on-line] (Washington, DC: AdvaMed, 2001 [cited 17 October 2001]); available from Internet: http://www.advamed.org/publicdocs/deutschebanc1.ppt.

2. Gillian Tett, "Evolution Likely, Not Revolution," in Industry Briefs: Financial Times Survey: International Mergers & Acquisitions 2000/Asia [on-line] (Financial Times, 2000 [cited 18 October 2001]); available from Internet: http://specials.ft.com/ln/ftsurveys/industry/scd01a.htm.

Ames Gross is president and Shawna Lepage is vice president of Pacific Bridge Inc. (Washington, DC), a consulting firm that offers medical device companies assistance with business development in Asia.

Copyright ©2001 MX