T. Surendar, The Morning Context

25 March 2020

Standing on the porch of the Grand Hyatt Hotel in Mumbai suburbs, Diwakar Vaish, co-founder of Noida-based AgVa Healthcare, was trying to catch the attention of software industry executives. This is at the annual conference hosted by IT trade body Nasscom. Vaish’s stall was a side-show for startups to exhibit digital technologies in the healthcare sector.

On a cool, breezy February day, the atmosphere was nothing as grim you would expect in a hospital emergency ward. Vaish’s rig, comprising an iPad-like device on a short steel column mounted on wheels with dangling wires, was a cost-effective version of a ventilator used in critical care. There wasn’t much excitement about his solution, as few executives really understood the medical problem he aimed to solve.

Today, a robotic engineer by training, Vaish is super busy.

It is not easy to get him on the phone, as AgVa’s ventilator is suddenly in demand from all parts of the country. The company is running three shifts fulfilling orders, which have been pouring in since it became apparent that Indian hospitals did not have enough ventilators for patients rendered ill by the novel coronavirus.

Unwittingly, the need for ventilators has once again drawn attention to India’s medical devices industry or the lack of it. So much so that Anand Mahindra, chairman of the $17 billion Mahindra group, which has interests in automobiles, software and resorts, said that he was finding ways to manufacture ventilators in his factories. It isn’t easy putting together a ventilator, not when you are racing against time, but Mahindra is a hardy businessman with deep pockets, and maybe, just maybe, he will succeed.

In many ways, the Indian medical devices industry is an anomaly. India has a space programme, a nuclear programme, it is among the few countries that has developed patented medicines and a low cost version of anything from power turbines to trucks but when it comes to medical equipment, it fares poorly.

India is also the biggest supplier of FDA-approved drugs to the US, the biggest pharmaceutical market in the world. Even as the Indian market for medical equipment has grown at double-digit rates in the last five years to Rs 1 lakh crore, two-thirds of its needs are met by foreign companies such as Philips, GE Healthcare, Siemens and Abbott.

Import domination is all pervasive extending to even non-critical but common equipment like sonography machines, dentistry chairs and diagnostic equipment. Less than five Indian companies had revenue of more than Rs 500 crore a year and 90% were classified as small scale, with annual revenue less than Rs 10 crore. The biggest player in the domestic market is the Rs 1,300 crore Mumbai-based Transasia Bio-Medicals, which makes in vitro diagnostic solutions that are exported to Western markets too.

“For a long time, the government was the biggest buyer of medical equipment and they always preferred imported equipment. That meant that it was not lucrative for local entrepreneurs to invest their capital in the sector,” says G.S.K. Velu, managing director of Trivitron Healthcare, which makes and exports imaging equipment.

The proliferation of private hospitals in the last two decades also did not change things much. With well-entrenched foreign players and a liberal import duty structure to make available the best facilities in India, there were few local companies of scale who could invest big money to fend off competition. AgVa’s ventilators were priced at a fifth of the ones sold by the foreign competitors, yet it couldn’t make inroads into big hospitals. “It’s almost as if our cost was our barrier to sell. Being critical equipment, customers had a lot of inertia to even place test orders,” says Vaish.

Thanks to meagre domestic manufacturing. India also could not set standards of equipment specifications to suit the local needs. It had to tweak its own equipment standards to fall in line with those of foreign manufacturers. For example, in the US, defibrillators used to restore heartbeats by giving shock to patients had to last at least two shock cycles. But, in India, since access to hospitals and medical care was not as easy. patients arrive long after they have suffered heart attacks and Indian doctors use defibrillators for even 10 cycles at a time.

The local standards did not specify this need and as a result many imported defibrillators were not of much use in Indian conditions. “We still don’t have an act to regulate medical devices and it falls under the drugs category. Everything is still borrowed from the West,” says Aniruddha Atre, co-founder and director of Pune-based Jeevtronics Pvt. Ltd, which makes the world’s first hand-cranked defibrillator.

Trivitron’s Velu says that the share of locally produced medical equipment will increase within the next decade. This will be a combination of help from the government which will enforce more domestic manufacturing by overseas firms and increased entrepreneurship.

There is also a view that more global manufacturing will come to India, as firms de-risk their strategy of manufacturing everything in China. “In the past, when labour costs went up in the Chinese west coast, Indian garment companies were beneficiaries of increased orders even though other countries like Bangladesh and Vietnam too got a big share of it. The availability of labour and ability to scale up operations is something global players look for and to that extent India will always be an important outsourcing destination,” said Devangshu Dutta, managing partner at consultancy firm Third Eyesight.

The trend started even before the COVID-19 pandemic as companies in the US began to brace themselves for a trade war with China. For example, a US-based company has started sourcing Indian tyres at a 10-15% premium as it wants to diversify its risk from China. “India has witnessed a surge in mobile phone manufacturing. This is bound to increase the ecosystem in electronic manufacturing which in turn create ecosystems for industries like medical equipment,” says Sharad Verma, senior partner who oversees industrials at Boston Consulting Group.

The timing is also right for increase in local manufacturing, argues Verma. One of the important criteria for that is viable domestic consumption. It’s happened time and again in sectors like automobiles, mobile phones and more recently in manufacture of metro bogies after domestic consumption has reached a scale where it makes sense for companies to set up manufacturing facilities. “The industry is no longer small and the incidence of medical technology will only go up from here making it viable for even foreign companies to look at a manufacturing set up in India,” says Verma.

It will be interesting to see how it all plays out. The sector, so far, hasn’t seen much by way of private equity or venture investment. The most prominent one was an investment by a Morgan Stanley fund and Samara Capital in Surat-based Sahajanand Medical Technologies and Fidelity Growth Partners’s investment in Trivitron. But starting 2014, a government fund run by the Biotechnology Industry Research Assistance Council-incubated several companies who are slowly bringing their products to market. As some of these products hit home, especially in the wake of COVID-19, the action is definitely bound to pick up.

(published in The Morning Context)

I had the privilege of bringing the Prime Source Forum in Hong Kong (April 1-2, 2008) to a close.  As in the previous year, the Forum had senior executives from companies based in the Americas, Europe, and Asia, as well as government officials and highly respected academics. The discussions covered wide-ranging topics, and with the variety of people on the panels, there was also some amount of difference in opinion.

8 issues came to my mind as key themes for the global industry, as I was preparing my closing speech, and I thought that those who were not present at the event may also be interested in these. Some of these are views expressed in the panel discussions, others are just my musings. Hopefully thinking through these 8 things can improve the fortunes of the industry around the world (8 being a lucky number in China). 

1. Costs vs Prices – Rising costs were a big theme, running through the various panels.  Chinese labour costs, power costs, the increasing costs of fuel, new costs of doing business (compliance) – more cost heads were discussed than I can possibly remember.

Once upon a time prices used to go up when costs went up. But that has not been the case for at least the last couple of decades. Even as costs have climbed, retail prices and FOBs have remained steady or even declined. Clearly, the question is whether this is a sustainable situation – though consumers and retailers have been winners so far, how long can factories and labour be squeezed without impacting the very survival of the business?

The interesting contrast is luxury goods, where production costs have come down due to outsourcing and manufacturing in low labour cost countries. (So even in that area, prices and costs don’t show a correlation!)

2. Where next? – Dr. William Fung (Li & Fung) clearly struck a note with most of the audience in his opening keynote address, as he tackled the BIG question: with costs significantly rising in China, and the risks of a concentrated sourcing basket, which other countries could companies look to. According to him, “within the next 3 years, the follow-up country to China is…China”.

After all, which other country’s industry has poured billions of dollars in up-to-date manufacturing capacity and supply chain infrastructure? So even while the Chinese government’s move to push factories to the north and west of China may be producing results as quickly as they may have hoped, buyers clearly have limited options on the table.

Certainly, other countries such as India and its neighbours, as well as Indonesia, Vietnam etc. are an option, but a lot more needs to be pushed through.  According to Dr. Fung, India shows higher product differentiation and development skills that make it a logical place for buyers to invest time and energy.

I believe that what buyers did in China 15-20 years ago, is probably what is needed in South Asia and other supply bases now.  At that time, China had neither the production capacity nor the supply chain and other infrastructure that it has now. But intrepid buyers opened the Chinese frontier and created the demand pipeline which pulled the supply base up. Would retailers have a similar focus on the other supply bases today, to balance their exposure in China? This is not a new question – in fact, in the last few years it has come up several times when there has been a hurdle or barrier to cross with China (quotas, SARS etc.).  But now, with the Chinese government also wanting to turn the industry’s focus away from low-value products such as clothing and textiles, could this be the opportunity for buyers to push their initiatives in other countries ahead?

3. Fashion is about change…but are we prepared for change? – Speed to market is not just about producing quickly and shipping fast, it is about responding to change in the market. The very nature of the fashion business is “change”.

Though benchmarks of 2-week turnaround and even 2-day turnaround exist, by and large the industry works over a lead time of months rather than weeks. We know that it is humanly impossible for even the best buyer to predict with 100% accuracy as to what will sell 6-12 months in the future.

So the answer, especially in these uncertain market conditions, is to take product decisions closer to the sell-date, rather than try and forecast accurately. The only way to reduce the risk is to respond to market needs, rather than to try and predict what the market will need in the future.

4. Neither free nor fair! – There was enormous debate (although mostly in polite terms), about whether free trade and fair trade meant anything.  

What is very clear is that trade barriers continue to exist. Even as import tariffs fall, non-tariff barriers remain in place. While thousands and tens of thousands of people around the world are actively working to bring trade barriers down in all countries, within their own markets there are others who are actively lobbying to keep trade barriers up, or to erect new ones.  A very interesting perspective shared by one of the panelists was that to a protectionist, “protectionism” isn’t a dirty word! Such a person will have a clear justification for keeping or putting up trade barriers.

So while the vision is that of free trade between nations, we are probably some way off from that.

5. CSR & compliance pressures – “Compliance pressures” are here to stay. Yet, even after years of debate and discussion, it is evident that there are wide gaps between the perceptions of the various players.

Ever since the industrial revolution in the 1800s, talk of more humane conditions in factories has been prevalent. It took European and American companies decades (at the very least) to move up health & safety and labour standards. However, the industries in the current supply countries do not have that luxury any more, since the pressure on prominent brands and the risk to their image is too high – whether you like it or not, compliance standards are being and will be pushed through aggressively.

The key is to understand how to do it most efficiently, and a critical element in getting there would be to have a set of common standards and database of audits and certifications.

However, let’s not underestimate the challenge in getting diverse interests and competitors to agree to sign on to common standards, and to share information about their suppliers.

6. Consolidation (?) – Consolidation may be a model among mature retailers and mature suppliers, but there is enough organic growth in the market to attract and sustain smaller companies, especially in the case of the “emerging economies”.

Developing markets are breeding grounds for new businesses, each of which feels that they can be the next big thing, and in such an environment, being acquired by another company is the farthest thought from the management’s mind.

Another factor against consolidation on the supply end, comes from the inherent development-oriented nature of fashion products – excellent and innovative product development is not the privilege of large companies, and the cost of entry remains low. So we should question the logic of viewing consolidation as an unstoppable juggernaut.

7. Vertical Integration / Control (between suppliers, brands and retailers) – When companies sit across the negotiating table, they are clearly vying to gain the most margin. Retailers are closest to the consumer, and they have the most margin. The downside is that they also bear the most risk or markdown. So when manufacturers look at becoming brands, and brands look at becoming retailers, they need to keep in mind, there is a cost to moving downstream, even with the extra margin being available.

Over the last few decades retailers have also tried to grow their private label to gain extra margin (in effect, to replace some of their suppliers) – but there is a cost to doing that as well. It is not as simple as just stripping out an intermediary’s cost, since the product development and sourcing operation still needs to be managed.

Vertical integration is the holy grail – perfect vertical integration is what people wish for, but it’s impossible to achieve. The best one can hope for is as much vertical control as possible over the chain from raw material to consumer.

8. Victims of our own success – We treat globalisation as a new phenomenon – the fact is that many thousands of years ago, the Egyptian civilization was trading with the Indus Valley civilization, the Chinese and the Romans had discovered each other way before US department store buyers landed in Hong Kong and Korea.

As Nayan Chanda describes in his excellent book – Bound Together – traders, preachers, adventurers and warriors have created bridges across continents for tens of thousands of years. So retailers and importers in the west, are only following in the footsteps of those pioneers, albeit helped by the communications and travel revolution in the last 30 years.

However, lately, companies’ business models are victims of their own success.

Too much has been outsourced too far. Where earlier, buyer and supplier were next to each other, today there is a physical and cultural distances between them, that sometimes seems impossible to bridge. Where earlier, a buyer and designer could pop around the corner to the pattern room to check the fit, and discuss the quality with the factory, today they sit at opposite ends of the earth, and work in a phase difference of day and night.

The costs related to bringing the skills back certainly are prohibitively high. But clearly bridges do need to be built.

Recreating or transferring the skills that have been lost, or are being lost in the US and Europe is absolutely vital for the industry to survive profitably.

Through training & education, through more frequent travel, through internships and gaining work experience in each other’s environment, or through technology, buyers and suppliers need to invest in reaching something of the sort of understanding and close collaboration that used to exist when buyers and suppliers lived in the same city.

A lot to chew on, and many unanswered questions, which I am sure will bring hundreds of industry executives together again next April at Prime Source Forum 2009 in Hong Kong.