China's status as the most favored offshore spot for U.S. contract medical manufacturers to move production is being challenged as the country's domestic market matures and global shipping costs increase.
That's good news for other Asian countries and Latin America, according to several presenters at the recent Plastics in Medical Devices conference, held April 11-13 in Huron.
Scott Smith of Plas-Tech Engineering Inc. said more U.S. companies are getting wise to costs that they formerly ignored, such as the 4.2 percent tariff on Chinese-made tooling imported into the U.S. Smith is vice president of sales and marketing for the Lake Geneva, Wis.-based mold design and injection molding firm.
In addition, the price of oil has inflated shipping costs, he said, citing the 7,000-mile distance from China to Cleveland, the nearest large city to the conference venue in Huron.
Product contamination during shipping, intellectual property theft and overall quality are grave concerns in medical products; in those areas, U.S.-made devices shine, Smith said.
We're not making Frisbees; we're making things that affect people's lives, he said, noting that only 12 percent of Chinese factories undergo Food and Drug Administration audits.
Chinese non-farm labor costs rose 20 percent in 2010 and will increase 15-20 percent in 2011, Smith said.
In an April 13 session on outsourcing and offshoring, several U.S. firms with overseas presence shared other evidence that the trend for medical-device manufacturing for North American markets is moving closer to home.
The Chinese medical marketplace is becoming characterized by greater innovation and more focus on domestic customers, said Gaet Tyranski, health sciences business unit director for Jabil Circuit Inc. of St. Petersburg, Fla.
They don't want to be building toys anymore, he added.
New Chinese taxes on foreign-owned business enterprises, currency fluctuation and more-stringent health regulations have driven up costs, he said. Injection molder Jabil which operates 59 plants in 21 countries recently spent $150,000 getting its Shenzhen factory relicensed to manufacture medical components under the new requirements.
Over time, Jabil's two plants in Malaysia are becoming more cost-competitive with its China facility, Tyranski said.
Russell Dillon, a Dallas-based vice president at turnaround firm AlixPartners LLP, said a recent survey by his company of 80 executives from 68 global manufacturing-oriented companies ranked Mexico as the best location for manufacturing outside the U.S.
Of the respondents, 33 percent are likely to near-shore (set up manufacturing in the Americas) in the next three years; 63 percent prefer to have operations in Mexico despite concerns over drug trafficking-related violence there, Dillon said.
I'm not as surprised by the gap as I am by Mexico being the No. 1 choice. I thought Central America would have a higher response rate, he added.
He said only 21 percent of those firms surveyed had experienced supply-chain disruptions in Mexico because of drug-related violence; 50 percent expect the security situation to improve in the next five years.
While Brazil might appear to be an attractive choice for near-shore manufacturing because of its rapidly developing economy and access to natural resources, most of its production tends to stay localized due to sheer potential market size, he said.
Most U.S. firms view Central America more favorably, because of several benefits: low freight and inventory costs, improved speed-to-market times over Asia, similar time zones and more cultural compatibility, according to Dillon.
For those firms looking to outsource production, consultations with customers are absolutely necessary, Larry Bell, vice president of business development at GW Plastics Inc., said in his presentation.
The Bethel, Vt.-based injection molder has factories in the U.S., China, and Mexico.
Typically, we like to be [physically] close to our customer in the [product] development phase, and create a high level of very standardized processes that, later on, could be moved as the customer either decides that it needs to go to another part of the world, or from a cost or logistics point of view it needs to go to another part of the world, he said.