Bill Ellerkamp became chief executive officer of thermoplastic tubing manufacturer ExtruMed LLC in November 2006. He's spent 25 years in the medical device industry in the U.S. and Europe, in senior positions for Teleflex Medical and MedSource Technologies Inc., and serves on the editorial advisory board of Medical Product Outsourcing magazine. He also has had a long-term interest in China, taking language training and studying the political economy in the country in 1980, and getting part of his college degree in Chinese studies.
Plastics News caught up with him by telephone from his Placentia, Calif., office recently, not long after he returned from a two-week trip to China scouting business opportunities. He talked about the growing technological sophistication of the country's medical manufacturers, but also about the quality and regulatory problems that must be tackled if China has ambitions to become one of the world's leading medical manufacturing centers.
Q: You minored in Chinese studies (majored in international relations/economics) at Colgate University in Hamilton, N.Y., and spent time in China in 1980 studying the political economy and Mandarin. What caught your interest about the country, and did you keep that interest as you've spent 25 years in the medical device industry?
Ellerkamp: Like many things, it's a little bit serendipitous. You take a class and find yourself visiting a country and you're intrigued and caught in it. That's what happened with me and China. What struck me was this was a huge country, which had a massive amount of political will capable of doing a lot, seeing what Mao accomplished in about 30 years at that point. I made a decision after studying in China that I wanted to make a career in international business. It was again serendipitous that I wound up in the medical device market. I took a job with Teleflex, which had a facility close to where I was living at that time. They were looking at doing a startup in Ireland. That's how I ended up in the medical device industry and ended up overseas.
Q: You spent several weeks in August meeting with Chinese medical device makers and local companies in the supply chain. What did you learn, and do you think that China's ready to tap into global medical markets as it has done in markets like electronics and toys?
Ellerkamp: It's interesting to compare and contrast the domestic Chinese companies that I saw with the implanted foreign companies that are manufacturing in China. The foreign companies are typically going into China to establish a low-cost export base in a place like Shenzhen. They have not historically focused on the domestic Chinese market. The Chinese manufacturers, on the other hand, are focused almost exclusively on serving the domestic market. From what I saw, the quality of the facilities and the relative level of sophistication [of the Chinese firms] for the products being made was higher than I anticipated. It was very good.
Generally, the domestic companies appear to be focusing on four device categories. The largest is general hospital supplies, such as catheters for intravenous administration and urine drainage. I see three other categories emerging: respiratory care, gastrointestinal and cardiology, which is a big killer everywhere.
Many of the Chinese companies interestingly are trying to head for the high ground, cardiology, because they perceive that market as being the key driver behind the leading Western companies. For Medtronic or Johnson & Johnson or Boston Scientific, it's the heart that really drives the revenue stream for those companies. The Chinese firms are thinking, ``How can I get into that market before those Western companies get into my market and capture the dominant market share?''
Q: You said the manufacturing technology was more sophisticated than you expected. Are there areas where the Chinese medical device supply chain needs to develop?
Ellerkamp: The big issue today in medical devices is risk. Almost all the medical device regulatory bodies, such as the [Food and Drug Administration] in the U.S. or individual bodies in Europe, are increasingly concerned with device risk assessment and mitigation. There are different types of risk, specifically design risk vs. manufacturing quality risk vs. control risk. Where the domestic Chinese manufacturing community is behind is in failing to understand and appreciate the significance of risk as it relates to device design, as well as build quality. If it's a build-to-print scenario, they can make sophisticated products to a very high quality level. But as we've seen over the last few months with lead paint in toys, the pharmaceutical issues and the toothpaste issue, there is a lack of control through regulation, which is going to raise huge red flags around risk in the minds of Western buyers when it comes to Chinese manufactured medical devices. And, generally, I would say there is a lack of appreciation for the device design issues associated with human factors, or device interface with the patient.
I don't see most of the Western medical device OEMs wanting to take on that risk of transferring the manufacturing of devices to a domestic contract manufacturer in China that will not fully appreciate and understand the risk factors and address them adequately and sufficiently. However, I think these are surmountable issues in the next five years or so. Where I see a longer wait is for the domestic Chinese manufacturers in penetrating Western markets with their own label products. My guess is they probably are a good 10-15 years off in terms of being able to address the global market's need for control of design risk and more sophisticated marketing.
Q: How do you see the medical device industry and its supply chain developing in China?
Ellerkamp: I believe there are two primary factors that caused China's medical device market to develop more slowly than, for example, in India. The government followed an industrial policy that favored heavy industries, such as iron, steel, and cars. Secondly, there's the prevalence of traditional medicine in China, and its relative sophistication. That, probably for many ailments, was meeting basic needs. Those two things probably contributed to a rather slow development of the medical device market and medical device manufacturing.
If I'm speculating as to how I see the industry developing, I would see two tracks developing. First, I see acceleration of U.S. and European and Japanese multinationals investing in their own manufacturing facilities in China for export to their own domestic markets.
This is analogous to what I saw when I first went overseas to Ireland. In the early 1980s, the U.S. companies implanted to take advantage of low labor and low tax factors, and then exported the product off that low-cost base. We clearly see that occurring now [in China].
Second, when multinationals implant in a new location for factor advantages, they encourage their vendors to follow them, creating a cluster effect. I believe we will begin to see this clustering effect increase significantly in China around the multinational medical device manufacturers over the next few years. That is the model that companies like Nypro [Inc.] typically follow.
As the vendors begin to stabilize in the host country and are meeting the supply line requirements for their main customers, they will begin to look for local growth opportunities. This often creates a multiplier effect for domestic companies which can take advantage of the higher quality and sophistication of these foreign vendors. This will result in additional expansion of the domestic medical device manufacturing community and a rise in the level of sophistication in the types of devices they are manufacturing.
Q: Will it be possible for China to develop its own version of a Johnson & Johnson or Medtronic Inc.?
Ellerkamp: I think that will take 20 years and I think it will be very difficult. A lot of it will depend on how quickly the domestic market develops and how much bias is exhibited toward the domestic suppliers. Will there be government controls on imports? Also, it will be a function of the domestic and export pricing strategies they choose to pursue.
Right now, many higher-tech Chinese companies are trying to follow the pricing leads of the Western companies. If they continue to do this, unless the government puts import controls on, it will be tough to compete domestically, because the multinationals have brand awareness and quality reputations. I think there is still uncertainty about what the Chinese government will do to foster the domestic market and domestic suppliers.
We are seeing some Chinese companies looking to export under their own brand names today. Typically these products are fairly low technology, mainly hospital supplies. Often, the market entry strategy is not to go after markets like the United States and Europe, but to go after markets like the Middle East, Africa and Turkey at lower prices and build up experience and volume. But, we are seeing some higher-technology Chinese companies attempting to export into Europe through product development, clinical, marketing and distribution partnerships. This will take some time to develop, as it did for the Japanese.
Q: Do you see China becoming another version of Ireland from a medical device standpoint?
Ellerkamp: Ireland is an interesting analogy. It was never big enough to have a domestic market, yet it's the second-highest concentration of medical device manufacturing in the world. In my opinion, China is too large a country and the government is not focused enough on fostering the medical technology industry to emerge as the next Ireland. I would potentially see countries like Singapore or Malaysia, because of how focused their industrial policies can be and how they are focused more on higher technology.