Medtech companies with business ties in China are not panicking . . . yet

August 14, 2019

The stock market—and some consumers—breathed a collective sigh of relief when President Trump announced a delay in imposing additional 10% tariffs on some consumer goods from China until Dec. 15. Initially, the tariffs were supposed to go into effect on Sept. 1. Still, the reprieve doesn’t address the larger issue of a looming trade war with China that could spiral out of control. While there is widespread consensus that China must abandon its unfair trade practices and respect intellectual property rights, many U.S. industry groups have sounded the alarm about the administration’s approach, and that includes the medical technology industry.

drawing represents worsening trade relations between China and U.S.

Writing about the 10% tariff earlier this month, Business Insider acknowledged the difficulty in fully assessing how such a “tariff increase might trickle down to U.S. healthcare costs, but medical device lobbying group AdvaMed has expressed concerns. The medical device industry has already felt the sting of the trade war between the U.S. and China, contending with tariff rates of up to 25% on both $860 million in Chinese imports to the U.S. and nearly $5 billion in exports to China, per AdvaMed.” If China counterpunches with increased tariffs on U.S. imports, that could undermine the strength of medical device suppliers, adds Business Insider, noting that the United States “currently makes up more than 30% of China's med device and diagnostics imports.”

To get a medtech insider’s perspective, I spoke with Mark Bonifacio, founder and President of Bonifacio Consulting Services (Boston). He has a deep background in the medical technology industry and, through his consultancy, works closely with medical device OEMs and contract manufacturers in the United States, China and all points in between on the globe.

Bonifacio concurs that there is palpable uncertainty among medical device OEMs as they ponder how trade relations with China will play out, but, he stressed, “they are not making any rash decisions, and there are a couple of reasons for that. This is a very risk-averse industry,” said Bonifacio, and the impact of regulatory hurdles and the reality of resource management are core parts of any of those conversations. Simply packing up and parachuting operations to another country is not an easy option. “You also have to remember that many of these companies have been doing business in China for more than 15 years. They are comfortable doing business there and have long-established business ties,” said Bonifacio. Yes, the tariffs and trade tensions are on “everyone’s radar,” but “nobody is panicking yet.”

If the anxiety level among medtech OEMs doing business in or with China is not in the red zone—yet—it’s partly because there are some workarounds. “Look at what happened the other day—the yuan was devalued, negating the impact of the additional tariffs. You can look your customer in the eye and say, ‘you just got a 10% discount based on the currency devaluation alone.’”

Vietnam, Thailand and a handful of other countries are often floated as an alternative to China if things truly get out of hand, but having that conversation is a bit premature. “Those countries can’t compete with the scale and capacity of China,” said Bonifacio. “It’s early days in terms of infrastructure. There is one deep-water port in Vietnam, very few highways and, outside of the big cities, it’s still electric bikes and motor scooters. Think China 20 years ago,” said Bonifacio.

Moreover, the talent pool is not there in the numbers you see in China, he added. Vietnam may get there, but it won’t happen overnight. For new programs, all options across the board are being considered, “but the medical manufacturing supply chain is not taking China off the table, either. Companies that “get it” are there for the long term to access the China market, said Bonifacio, “which is still growing at twice the rate of the U.S. and EU economies.”

While the trade tensions with China have caused some manufacturing to return to the United States—the extent of it is hotly debated—Bonifacio does not see that happening on a meaningful level in the medical device space. “There may be some reshoring on the margins,” he said, but near-shoring to Mexico and the Dominican Republic is a more likely outcome. “The United States has removed much of its scale capacity over the years and the labor pool, unfortunately, is not there for most of these manufacturing jobs,” said Bonifacio.

Image: Freshidea/Adobe

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