Pandemic Prompts Supply Chain Exodus From China — What's Best For Your Business?

Western medical technology companies have focused on the China market for 15 years, driven by that nation’s rapid economic growth and its evolving healthcare system.

At the same time, these companies have allied with Chinese manufacturers to buy materials, components, disposables, electronics, and more. In March, the U.S. Congressional Research Office released a report — informed by the U.S. International Trade Commission — stating that, in 2019, China supplied the U.S. with 30 percent of its personal protective equipment (ppe) supply, as well as 8.6 percent of its medical devices.

Shock Therapy

The Covid-19 pandemic has created a sharp reversal as global companies “look at ring-fencing risks and [localize] their supply chains,” former KPMG executive Alex Capri told CNBC.

Calls to embrace this dramatic shift are everywhere. In line with the Trump administration’s isolationist policies, Director of the U.S. National Economic Council Larry Kudlow and Trump economic advisor Peter Navarro have sworn the U.S. will move away from reliance on other nations for its medical supplies.

Japan — home to medtechs like Hitachi, Nipro, Terumo, and Toshiba — just announced a $2.2 billion loan fund to help its companies find locations outside China. Taiwan’s electronics companies led the charge into mainland China early on, but Bloomberg reports “it’s clear that electronics makers are past the point of no return in their gradual migration from China.”

CEOs and product development executives across the medtech ecosystem are leaning hard on their heads of supply chain to rapidly find alternative suppliers or to nurture in-house solutions. However, decisions born of panic can hurt a company and its customers; global markets are the norm now and global sourcing is not going away because of the pandemic.

What is a Sensible Strategy?

In lieu of abandoning China completely, take a measured approach by developing a “China Plus One” or “China Plus Two” strategy for global sourcing; choose one or two additional countries to which your company can shift substantial chunks of its manufacturing. These decisions require analysis and expertise from specialists, either third-party or in-house, who have prior experience in moving supply chains.

There are many viable candidate countries for this endeavor, but there’s not enough space in this article for a full discussion. Thus, I will focus on two candidates: Mexico and India. For U.S. and Canadian companies, Mexico has both proximity and a free trade agreement going for it. Further, many U.S. companies are familiar with, or they already are working with, “maquiladoras” on the Mexican border, as well as factories deeper in Mexico. 

Many Western companies are unaware of the true potential of today’s India, though. India already has a vibrant global pharma business and U.S. FDA inspectors are stationed in-country. Medtech leaders including GE Healthcare, Philips, Siemens, and Terumo have utilized factories across India for years. I’ve personally helped many Western companies use Indian engineering talent to design and improve high-end devices and disposables for over ten years; these companies like to play their Indian competitive advantage close to the vest.

India recently launched a Medicaid-like program to insure 500 million of its poorest citizens, this creating a huge need for high volume, low cost devices and therapies. Some Western companies have seized this opportunity to design new devices for India, in India (a scenario not happening on a large scale in any other country). This dynamic has driven up demand for in-country manufacturing (which, in turn, has bolstered India’s medtech manufacturing expertise).

As a result, many Indian device companies initially focused on expansion to Eastern Europe, Africa, and nearby regions — such as the Middle East and ASEAN countries — now boast the technical capability, scale, and quality necessary to enter Western markets. These factors, along with the urgency created by COVID-19, have driven nimble companies to evaluate India more closely.

Parallel to the “China Plus One” or “China Plus Two” strategy, three additional steps can be considered to secure supply chain:

First, avoid “fake shifting” entities completely. For example, a Chinese supplier may simply route its goods through a third country, such as Vietnam, to obscure the actual source of the goods. This should be a non-starter; Western companies cannot turn a blind eye to such a practice anymore.

Second, recognize that — unless you are buying a fungible commodity, such as steel, titanium, or oil — changing suppliers takes a long time.

Third, look at some of the available opportunities where your company could or should bring manufacturing back to its home country.

Whether India and Mexico will emerge as winners in this shift remains to be seen. There exist significant challenges in each country, be they actual or perceived. Manufacturing in Mexico, OEMs may be wary of violent crime or rousing the ire of the White House; manufacturing in India, the greatest concern likely is distance (shipping back to the U.S. takes time).

Still, there were bigger challenges in China 20 years ago, and forging ahead worked out well for medtechs who recognized its potential.

About The Author

Based in Los Angeles, Gunjan Bagla is managing director of Amritt, Inc., a consulting firm focused on helping American companies succeed in India. His clients include Covidien (now Medtronic), Roche Diagnostics, BD, Lifenet Health, Johnson & Johnson, Gojo, and more. For his India expertise, he has appeared in The New York Times, the Los Angeles Times, and the Washington Post, as well as on Bloomberg TV, BBC Television, and Fox Business News. He also writes about India for the Harvard Business Review. Gunjan has an MBA from Southern Illinois University and a mechanical engineering degree from the Indian Institute of Technology (IIT) Kanpur in India.