Medical OEM struggles with China manufacturing

 
Many molders and moldmakers are getting into the medical industry segment for a couple of reasons. One is the belief that it’s recession-proof: “People will always need medical products,” they say. Another one is the certainty that medical products don’t go offshore because of FDA regulations and the requirements for Good Manufacturing Practices (GMPs). However, neither of those reasons is entirely true.

Bill Kushmaul, president and CEO of Tech Mold Inc. (Tempe, AZ), manufacturer of precision, high-volume molds for the medical disposables market, believes that most in the medical industry haven’t learned that lesson. “Good, bad, or indifferent to China, they all say, ‘I need a China solution.’ They believe any good strategy requires a China solution,” Kushmaul states. “Even big medical companies are seeking a China solution. Years ago we used to say ‘Medical will never be done in China.’ We know today that’s not true.”

Still, it’s tough to control a medical manufacturing operation in China from a U.S. headquarters. Just ask Rick Admani Abulhaj, COO of Diagnostic Devices Inc. (Charlotte, NC). The company manufactures blood glucose monitoring systems called Prodigy, and at one time had 600 workers at its China facility. However, problems with quality control, rising costs, and concerns over its intellectual property prompted Abulhaj to bring manufacturing back to Charlotte, where the company will hire 200 employees at a new manufacturing facility.

“Using cutting-edge automation and robotic technology will give us greater control of our operations, reduce costs, and protect our intellectual property,” said Abulhaj in a telephone interview. “The primary benefit to taking manufacturing to China is for the labor, not for the technology. Robots, vision systems, other automation—even if you put all that in China there’s no one there who can fix the machines or service them. You go for cheap labor.”

Abulhaj says that he was instrumental in taking products from the United States to China in the early 1990s. “We once had 4000 employees and did all types of manufacturing, including injection molding, extrusion, and assembly for high-volume products, all related to the healthcare industry,” he says. “What drove us offshore was the startup of a new product—it is much cheaper offshore because the volumes are low. But if you have high-volume products, it makes more sense to manufacture them domestically, especially if you have automation. If you can automate the product here in the U.S., it’s foolish to take it to China. We can do it at home in our backyard for the same cost, and we have control over our intellectual property.”

The differences between here and there
IP theft continues to be a problem with offshoring, and many OEMs find that it’s difficult—if not impossible—to enforce patents, copyrights, and other laws that are meant to protect products from counterfeiters. “You don’t have laws in China that will protect you against IP theft,” states Abulhaj. “We have a lot of investment in our IP, and we have more control over it in the U.S.”

Quality control is one piece of the offshoring puzzle that no one talks about, notes Abulhaj. “You can specify a certain PMS color, but they run out of that color so they mix their own and give you something that looks close to the color you specified. Then they run out of the material you specify so they use another material that they believe is close to the material you need,” he says. “We have to adhere to FDA regulations. When you make products in the U.S., you make them to a higher standard, particularly in healthcare. The FDA is the law. If you don’t comply—if you do things wrong here—you get your products recalled. In China there are no ramifications.”

China, however, is in the process of implementing its own rules with respect to medical device manufacturing. Beginning early in 2006, the State Food & Drug Administration (SFDA) of the People’s Republic of China, the regulatory body in charge of the manufacturing, distribution, and use of medical devices, attempted to implement GMPs for medical device products nationwide, according to a Jan. 22, 2010 report in the Lexology of the Association of Corporate Counsel by law firm Squire Sanders & Dempsey LLP.

“By raising the standards for medical device manufacturing, the implementation of GMP was expected to benefit the health of the general public in China and increase the competitiveness of China-based medical device manufacturers in the global market,” said the report. “There was, however, no general GMP rule applicable to all kinds of medical devices until December 2009, when the SFDA issued a package of regulations addressing GMP for medical devices, including the Regulation on Medical Device GMP (GMP Rules) and the Regulation on Examination of Medical Device GMP (GMP Exam Rules). Both of these rules become effective on Jan. 1, 2011, leaving one year for medical device manufacturers to make improvements.

What do you have to offer?
Regardless of how good the GMPs in China become, Abulhaj believes the major benefit for Diagnostic Devices’ products is the assurance of the quality of a product made in the USA. “Everyone, even people offshore, understands the higher quality standard of U.S.-made products. A U.S. product is of a much higher quality, and the consumer is driving us toward more USA products,” he says. “We need to allow U.S. manufacturers to compete more effectively.”

That said, Abulhaj adds that he couldn’t afford to make a low-tech product here in the United States.

In 2011, the Chinese medical devices market is forecast to have a value of $23.2 billion, an increase of 69% since 2006, according to an Espscom Business Intelligence Report on the Chinese medical device market. The compound annual growth rate of the market in the period 2006-2011 is predicted to be 11.1%. Tech Mold’s Kushmaul has long been skeptical of China’s motives in working with U.S. companies, including mold manufacturers. “They don’t just want to build molds for us,” he says, “they want to own the medical device market.”

Molders and moldmakers have all heard the statement that “medical will be one of the last industries in the U.S. to be outsourced to offshore suppliers.” While that may be true, it’s happening and will continue unless these same processors educate medical OEMs in the values—the actual value, the perceived value, and the strategic value—of doing business with U.S. mold/molded parts suppliers. Kushmaul says, “Management whose mantra is ‘find a China solution/strategy’ needs to be educated about the pitfalls of that strategy.” —Clare Goldsberry