China has been the subject of much debate throughout the manufacturing industry as more companies have considered it an option for reducing costs. However, quality concerns and increasing economic factors have caused some to rethink this outsourcing strategy. In this month's Perspectives feature, industry leaders share their thoughts on whether China remains a viable option for medical device manufacturers or if business will relocate elsewhere.
How will changing economic factors in China impact the trend to outsource there and will that mean a return of industry to the U.S. or growth elsewhere?

Vice President, Marketing & Global Product Manager, D-M-E Company

Attractive cost differentials that once lured many companies to outsource manufacturing and other operations to China are slowly, but steadily, shrinking. While China still provides cost advantages compared to the U.S. and other developed countries, rising energy costs, increasing wages, new labor laws, higher oil prices, and transportation costs are all aligning to reduce China’s outsourcing appeal.

These factors have already driven some work away from China, with potentially more to follow as astute managers are continually revisiting their analyses. What made sense three or four years ago may not make sense now.

Product safety is also emerging as a serious concern, and certainly a factor of paramount importance in the field of medical product manufacturing. Several recent incidents involving the industrial chemical melamine have led to widespread consumer product recalls by British chocolate maker Cadbury and Anglo-Dutch consumer products company Unilever, which makes Lipton brand milk tea.

Due to rising transportation costs, the weight and size of the products will be very important in the decision-making process. We recently saw a quote for a mold base that was to be built in China and shipped to the U.S. While the cost of the product was significantly lower for the mold built in China, most of those savings were lost in the freight costs to have it shipped to the U.S. When coupled with other concerns (quality, communication issues, potential re-work issues, etc.), the customer made the decision to go with a product made in the U.S.

China, like Mexico, can now look over its shoulder and see countries with lower labor costs starting to grow at their expense. It seems that every low cost region reaches a saturation point where it can no longer sustain its industrial base. Companies will always be pursuing the low cost utopia in order to gain the competitive edge. Recently, that has been China. History and economics tell us this will eventually change.

President, KMC Systems Inc.

In recent months, China has begun working to improve both environmental and labor conditions in many of its manufacturing facilities. But one cannot deny the issues regarding Chinese produced nutritional and medical products. The risk of medical products with a “Made in China” label is quickly rising as the lack of quality process controls becomes more and more evident.

Our experience has been that more and more companies are afraid to outsource to China due to quality control issues. The string of safety concerns over the past year has led companies, particularly those in the medical device and instrumentation markets, to question whether cutting costs by outsourcing to China is a worthwhile risk. With strict FDA regulations and the inability of the FDA to monitor Chinese companies due to resource restrictions, medical device and instrumentation companies are becoming leery of trusting Chinese manufacturers with their brand names.

We are confident that the economic, safety, and regulatory concerns in China will lead to a return of manufacturing to U.S. soil of anything but very simple componentry. Medical device and instrumentation companies must focus on providing quality products because the consequences of one mistake or non-compliance during manufacturing could be devastating.

In addition, those companies who market complex medical instruments with a high material cost content are finding that the small labor savings offered by China don’t make the risk/reward picture attractive. Add to that, the Chinese value proposition is really on high volume/low mix product portfolios when complex device manufactures are primarily offering low to moderate volume/high mix portfolios. This makes Chinese options even less attractive.

Managing Director, Kloehn Inc.

As the Chinese economy advances, it is facing the same realities as the rest of the industrialized world in terms of increasing costs. In fact, the Chinese are resorting to sourcing from countries such as Vietnam to manufacture goods for them at reduced costs. I believe companies are already making decisions not to outsource to China based on a decreasing benefit-to-cost ratio.

The U.S. will be able to maintain some specialized technology-driven manufacturing based on retaining critical intellectual property. Aside from that, countries like Brazil and others in South America are emerging to compete against China on cost for outsourced manufacturing.

I think this movement around the world reinforces the point that outsourcing just to lower component cost per unit will only give, at best, a temporary benefit. Tooling, training, logistics, and quality issues on the front end shave narrow margins thinner every time a move is made. Factors like those occurring in China—higher labor costs and higher material and transportation costs—will catch up with developing economies as well and eventually wipe out their low-cost advantage.

A more profitable approach is to co-develop components and sub-assemblies with a supplier who can help reduce total cost of ownership, shorten the design cycle, and help the OEM get to market (and a revenue stream) faster. A supplier who can design, test, and manufacture key components and modules adds value and protects profitability long-term. When working with a global supply partner, location is no longer a factor as they usually have facilities around the world so they can make the best allocation of resources to any problem.

While it may be true that the benefits of outsourcing to China are diminishing, I think this loss is more than offset by the long-term potential of an increasingly sophisticated market there for diagnostic equipment.

Director of Engineering, Astrodyne

Business in China has changed significantly in the past few years. The changes have forced manufacturers to consider their operations strategy due to increases in labor cost, material cost, and most recently, energy costs. Oversight of these facilities is a portion of the expense; however, best practices in manufacturing and quality control are incurred regardless of location.

For those companies with a significant percentage of product cost related to freight, analysis must be undertaken to determine the trade-off of production in China. For smaller electronics and subassemblies, Far East cost factors remain competitive. Changes in Chinese rates increases the focus on other low cost labor countries including Vietnam but does not eliminate the benefits of reduced direct labor rates in comparison to typical U.S. domestic labor rates.

Another advantage of having a Chinese presence is being close to the Asian vendor supply chain and end customers. Although inflationary pressures in China have been significant, many of the end product integration occurs in the Far East and therefore, support is a differentiating factor for many vendors. In the end, global support is the key to providing for customers worldwide.