EMS industry sees medical as the next frontier
The electronics manufacturing services (EMS) industry is expected to grow 12% per year through 2010, but some contract manufacturers will eclipse that growth by focusing on an underserved market segment: medical equipment.
By James Carbone -- Purchasing, 10/19/2006 2:00:00 AM
The electronics manufacturing services (EMS) industry is expected to grow 12% per year through 2010, but some EMS providers will eclipse that growth by focusing on an underserved market segment: medical equipment.
And that could be good news for medical OEM purchasing managers. With more EMS providers focusing on medical, it will give OEMs more choices when they outsource.
Historically, medical equipment has not been a major segment for most of the top 50 EMS providers. Computers and communications equipment have been the bread and butter of the EMS industry and that will continue over the next four years. Those two segments account for about 66% of all EMS revenue. But medical equipment will grow as a customer segment as more medical OEMs outsource manufacturing to lower their costs. In addition, many of the large EMS providers see medical as a profitable segment because margins are higher than with cell phones or computers.
“Medical is an exciting area for us,” says Greg White, vice president of sales and business development for EMS provider Solectron in San Jose, Calif. “It is a large available market and will represent a greater percentage of Solectron's overall sales.” He says Solectron derives little revenue from medical today, but has invested significantly in the last 18 months in facilities and people.
The medical equipment market, which includes everything from blood glucose meters to magnetic resonance imaging (MRI) machines, will grow from $60 billion in 2005 to $87.4 billion in 2010, according to researcher iSuppli. Currently, only about 4% of EMS revenue is derived from medical, but that percentage will grow, according to EMS providers and industry analysts.
Matt Chanoff, an analyst for EMS and market researcher Technology Forecasters in Alameda, Calif., says that medical will be the second fastest growth segment for the EMS industry over the next four years, with a growth rate of about 13%. Communications will grow the most with a 13.7% rate.
In the beginning
While medical is starting to gain momentum with EMS providers, efforts by the EMS industry to get more business from medical OEMs actually began five years ago.
“After the industry collapse in 2001, first-tier EMS companies made a strong push to medical,” says Chanoff. “But medical proved to be more challenging than they thought because of regulatory issues.” Medical device manufacturing is heavily regulated by the Food and Drug Administration (FDA).
Medical equipment manufacturers are audited by the FDA to make sure they have robust quality systems and documentation in place, says Gelston Howell, executive vice president of Sanmina-SCI's medical division. San Jose-based Sanmina-SCI has a strong presence in the medical industry. About 7% of its sales are derived from medical OEMs and it has eight facilities globally that handle medical manufacturing.
“If a medical manufacturer doesn't have the right quality management systems and processes, the FDA can shut down a manufacturer for a period of time,” says Howell.
He says FDA quality system regulations (QSR) serve as a “national standard for quality management systems for medical companies. It specifies requirements for documentation, process validation, and process controls. You have to prove you are operating under those regulations,” he says. Because of those strict regulations, medical OEMs have been late to outsource compared to other industries because they have been “fearful of entrusting FDA regulatory issues to a contract manufacturer,” he says.
“They have been nervous about having a contract manufacturer, who might make a set top box or a television or PC, also make medical devices in the same factory,” says Howell. He says contract manufacturers do a great job with quality, but they don't necessarily operate under the FDA standards. The OEMs did not think contract manufacturers would be able to implement and monitor the “right controls to make sure they wouldn't run afoul of the FDA.”
He notes that large medical OEMs have a huge staff of people to address FDA regulations. Howell says Sanmina-SCI has put in place an FDA quality and regulatory management organization similar to what medical OEMs have.
“I have a vice president of quality and regulatory affairs who has 25 years experience with medical OEMs and he has worked with the FDA on audits and product recalls,” says Howell. “He has implemented a quality and management system inside my division.”
What an opportunity
For EMS providers that are up to the challenge of meeting FDA standards, medical is a big opportunity because a lot of medical companies still insource most of their own manufacturing. “A lot of medical OEMs still do their own printed circuit board assemblies,” Howell says. A lot of that internal manufacturing will be outsourced.
Howell says while the U.S. is the biggest market for medical equipment, there is a big drive among medical OEMs to have more manufacturing in low-cost countries.
“The big medical OEMs are aware of growing demand for large medical systems in China and other emerging countries,” he says. “They are asking us to build large systems in China for China and in India for India.” Sanmina-SCI has medical manufacturing facilities in China.
“Two customers in India want us to make finished products. We are not yet doing so, but it is on our roadmap,” says Howell.
With medical equipment it makes sense to build equipment in the same market where the equipment is sold. “An X-ray system or a CAT scan system can weigh thousands of pounds so freight cost would be high to ship equipment from China to the U.S.,” says Howell.
“We'll make the lightweight parts like printed circuit board assemblies and cables in China, fly those parts to Mexico, assemble the equipment and truck the finished products to the U.S.,” he says. Of course some small consumer medical products like blood glucose meters can be made anywhere and shipped.
It is important for large medical systems to have global supply chains and global manufacturing because of all the taxes, tariffs and duties that various countries impose.
“If we import all the parts into China, build the equipment in China and export it, there is certain taxation and tariff structure,” says Howell. “If it is sold into China, there is a different tax scale than if all material is bought in China and sold in China.”
From a tax and tariff point of view, the country where the equipment is sold prefers that the raw materials be bought inside the country.
Guarding IP
Tariffs aren't the only concern for medical OEMs that decide to build in China. They are also concerned about the intellectual property (IP) of their equipment.
“Medical OEMs are fearful for their IP in China which has a bad rap for IP theft,” says White of Solectron, adding that Solectron has addressed the issue by having a low-cost manufacturing strategy that includes China and Singapore.
“We do board assembly for medical in China. IP is not so much a concern for boards,” says White. The boards are then shipped to Singapore where Solectron has its Medical Center of Excellence manufacturing facility. Modules are assembled in Singapore and shipped to the U.S. for final assembly.
Medical equipment is not the only equipment segment that will be an opportunity for EMS providers. Sanmina-SCI sees greater growth from semiconductor equipment manufacturers that are beginning to outsource more as well.
“Sanmina-SCI got into this about eight years ago,” says Vahid Ghassemian, general manager for the industrial and semiconductor division. “We had made boards for semiconductor equipment manufacturers and then we got into the module assembly making modules like power boxes that have 100 different parts in them,” he says.
Then Sanmina-SCI started doing design work for OEMs and began building more complex modules with 5,000-6,000 part numbers. It now builds assemblies that are used in vapor deposition, wafer metrology, water etching and ion implantation systems for equipment used in chip production.
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