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?

President, Reshamca LLC

Not too many years ago, if you were producing stampings in China they were low cost. Today, it is where in China you are manufacturing that determines whether it is low cost, and there are a number of factors that have contributed to this change. Some of these factors are obvious, but when you look at the dynamics of a stamping industry, some are not so obvious.

In stampings, the product being sold is basically “press hours.” For the global stamping industry, there are X number of hours and the factor that determines where the hours are utilized is based on a tried and true measure: “Who can best control their hourly cost?”

When China first developed a capability for producing stampings, it was geographically located in the Eastern coastal regions. At that time, the basis for costing stampings included more labor content and less tools. As real estate costs in those coastal regions have skyrocketed and the demands from labor have increased, the stamping industry, as a result, has migrated westward within China. The prevailing opinion today, within China’s manufacturing circles, is that the increased costs for moving a stamping operation inland in China can be offset by the infinite amount of low cost real estate that is available there.

However, this thinking may no longer be valid as costs for logistics and the time-to-market are eroding the perceived labor savings. As a result, in order to continue lowering their cost for press hours, the Chinese stamping producers are looking for more western world stamping technology. These Chinese stamping companies are making a concerted effort to revamp and upgrade their processes to reflect more of the progressive, transfer, and automated press-to-press tooling technology that is typical of what we do here in North America. China has realized that without improving their manufacturing technology, they risk losing business to other low cost Asian countries, like Vietnam.

What is now happening for some established stamping producers here in North America is that they have found new opportunities to globalize their operations as this industry is evolving. Many collaborative ventures and agreements with comparable stamping suppliers in China are now in place for a number of North American companies as they implement long range strategies to minimize press hour cost as global costs for commodities and logistics keep increasing. With this kind of business strategy, North American stamping producers can continue to control the allocation of global press hours, even as China becomes more proficient with their stamping processes.

The globalization of the stamping industry is here to stay and the logistics cost increases will continue to make the regional stamping supplier a necessity. Those companies that succeed will be those that recognize those facts and globalize their capabilities to meet their served markets.

President, Measurement Specialties Inc.

Measurement Specialties is a global designer/manufacturer of sensors and sensor-based systems for medical, industrial, transportation and test & measurement applications. The medical industry is one of the company’s largest and fastest growing segments, including embedded sensors and sensor devices in medical disposables (catheters, SpO2, temperature probes, immunoassay, drug delivery), medical devices (pacemaker activity monitors, vital signs and sleep disorder monitoring, electronic stethoscopes), and medical equipment (temperature, humidity, ultrasound probes, respirators, infusion pumps). MEAS has manufacturing facilities and engineering development centers throughout Europe, North America and Asia. The largest of our manufacturing operations is located in China.

MEAS is completing construction of its new 220,000 sq. foot Asian design and manufacturing facility in Shenzhen, China. MEAS began operating in China nearly 14 years ago and evaluated several alternatives before moving forward with this project. As leased costs continue to escalate, it was clear that MEAS would need to invest in their own facility; MEAS chose to expand in China for several reasons, including relative employee cost basis, attractive tax rate, access to qualified technicians and professionals and, importantly, the growth/potential of the local China market.

MEAS’ China manufacturing and engineering employment costs (including benefits), while not the lowest globally, are approximately 10% to 20% of that experienced in its U.S. and European operations. 2008 China contract labor law enactment has had minimal impact on its employment costs as MEAS’ wage/salary and benefits exceed requirements. Based on recent-history employment cost increases, MEAS’ expectation is that it will take a minimum 30+ years before parity is reached between Shenzhen employment costs and that of U.S./Europe.

Further, China tax structure and industry-specific incentives provide a 10 to 20 point post-tax advantage over U.S. and European operations. China government’s policy, laws, and actions (infrastructure development) actively promote and enable high-tech industry and is engineered to promote its mantra of “designed and manufactured in China, for China and export.”

China also offers an exceptionally large (1.3B and growing), well-educated (graduating 4× to 5× U.S. engineers annually), and motivated talent-pool; enabling MEAS to attract highly qualified engineering, manufacturing, and business systems personnel to support its growth. MEAS’ experience is that this talent is well attuned with the need to offset employment cost increases with productivity improvements.

Lastly, China represents a huge market opportunity for MEAS’ products. By having an in-country presence and China-national employee base, MEAS is well-positioned to address this accelerating market opportunity.

In summary, China positioning is an essential element in the MEAS global manufacturing facilities strategy. The economic benefits and the market potential remain compelling for the foreseeable future.

President, APEC, a division of Helix Medical

The changing economic factors will not impact us much. Our reason for opening a manufacturing operation in China was, and still is, to better serve our global customers in that part of the world. Economically, it makes sense for some of our customers to manufacture and distribute components and finished devices from China. Additionally, the luxury market for high end goods is growing very quickly in China and we plan to locally manufacture high-end medical technology products for Chinese hospitals.

Increased oversight is a non issue; our Shenzhen operation was just certified ISO 13485. It is not common for device manufacturers in mainland China to have this certification but we operate at a high level to meet and surpass our customer’s requirements. Increases in labor and material costs will of course increase pricing but it will still be an economically better choice to manufacture in China if the customer is distributing to that hemisphere.

Manufacturers that are shipping finished goods back to the U.S. will certainly look to different regions for growth. I don’t think it will lead to a return to the U.S. The U.S. market will continue to be home base for product development and R&D, as well as a growth market for high-end molders and mold makers who are adapting the latest technologies. We all see medical device as a growth market as the population ages and people live longer.

Senior Vice President, Foster-Miller

Overall, we are seeing many manufacturing operations return to the United States from China. There are several reasons for this trend, with the first, and possibly the most impactful, being economic factors. The exchange rate between the American dollar and the Chinese Yuan has become less favorable for U.S. companies. Although many material and labor costs in China are still far less expensive compared with those in America, the rising price of oil has narrowed the playing field. In addition, given the lengthy supply chain when manufacturing in China, speed to market has also become a concern. Field warranty costs and chargebacks can be a major cost, greatly reducing the apparent savings.

Economics aside, quality is a major issue for American brands, especially for medical device companies. With recent news of lead paint in toys, tainted pet food, and toxic baby formula, confidence in Chinese regulations has fallen. Consumers are increasingly aware of country of origin, and overwhelmingly trust that products made in America are of the highest standards. Medical products and devices, especially those that are inserted in the body, must be of the highest quality or companies fear sacrificing reputations built over many years. Even if a company uses strict FDA regulators to verify the quality of its Chinese manufacturing facilities, end-users might have a negative perception toward products with “Made in China” labels.

Protection of intellectual property also plays a huge role in the trend toward the shift of manufacturing from China to the U.S. While Chinese IP laws have grown stronger in recent years, they are not enforced nearly as stringently as they are in the United States. Over time this will change and progress has already been made in this area by the Chinese government.

Overall, as the U.S. dollar becomes less expensive relative to other countries and quality issues continue to plague China, certain (medium to low volume, high quality requirement) manufacturing operations have returned, and will continue to return to American soil.