To outsource or not to outsource?

24 October 2013



Some device manufacturers are cottoning on to the benefits that subcontracting to electronics manufacturing service providers can bring, but others are more reticent to take the plunge. Lavanya Rammohan, electronics and manufacturing research analyst at Frost & Sullivan, takes a look at the medical market’s outsourcing potential.


The increase in electronic content and expanding communication protocols have paved the way for electronics manufacturing service (EMS) providers to showcase their ability to be more than just contract manufacturers.

Medical original equipment manufacturers (OEMs) are now realising the benefits that an EMS partnership can bring - such as stronger global competitiveness and optimised business operations - and are becoming more receptive towards outsourcing models.

While the penetration of EMS providers into the medical device industry is still less than in the consumer electronics or computing and storage markets, the growth of EMS revenues from the medical industry is expected to remain healthy.

Ever-increasing cost pressures and the pursuit of affordable healthcare will continue to remain key drivers for EMS subcontracting. Higher demand for compact, cost-competitive medical devices, increased technical complexity and manufacturing challenges, eroding price margins, and, more recently, greater economic pressures have encouraged OEMs to embrace outsourcing.

This has paved the way for a plethora of opportunities for EMS providers.

The EMS medical market: an overview

Medical OEMs are focusing on creating new technologies, next-generation devices and megatrends that will further impact upon device manufacturing and functionality. Current outsourcing trends indicate that EMS providers will continue to benefit from increased outsourcing of added-value services by providing these more innovative products and solutions.

According to research recently published by Frost & Sullivan and entitled 'EMS Opportunities in the Medical Industry', the EMS medical market generated revenue of approximately $16.4 billion in 2012, and the market is expected to grow at a compound annual growth rate (CAGR) of 11.1% between 2012 and 2019. The EMS medical market is witnessing particularly rapid growth and demand in the remote diagnostics, patient monitoring, cardiovascular, neurology and consumer medical product categories, among others.

Outsourcing uptake

Despite the tremendous potential for growth in the medical industry, EMS providers remain limited in their participation. From the perspective of an EMS, participants have to contend with stringent vetting processes and approval levels before they can successfully penetrate the medical market. The medical industry is also characterised by high standards and regulatory governance. Incumbent and anticipating EMS providers seeking to make a profitable venture into the medical industry are required to meet rigorous standards set by the FDA and other regulatory boards. For some EMS providers, the long sales realisation cycle, along with high initial investment levels, deter participation. This, however, has not stopped some EMS providers from taking the plunge into a growing market.

"Ever-increasing cost pressures and the pursuit of affordable healthcare will continue to remain key drivers for EMS outsourcing."

EMS providers are benefitting from increasing OEM outsourcing uptake, but the relationship is highly regulated. As well as regulating bodies, EMS providers must also satisfy OEMs and win their trust by alleviating concerns, such as the advantages of OEMs relinquishing control of the outsourced process, quality and timelines.

While manufacturers have begun appreciating the competitive advantage and cost benefits EMS providers can offer, they still prefer to outsource more tactical operations such as basic manufacturing and some supply chain processes. Some OEMs still prefer to retain in-house capabilities, including high-end manufacturing, design and procurement. This is more prominent in high-risk products such as class III medical devices.

Additionally, OEMs are likely to retain all of their distribution operations in-house due to the complex and strategic nature of OEMs' relationships with hospitals; a physician is vital to their success and many will be hard-pressed to outsource this functionality. This is not expected to change during the next five to seven years.

The OEM-EMS relationship: give and take

OEMs that are more familiar with the outsourcing model are extending opportunities into full product realisation, as opposed to merely printed circuit board assembly. EMS providers must play their part by ramping up their service expertise to offer complete end-to-end solutions. Most successful EMS providers now provide such full product realisation services, including design, engineering and testing.

To be truly beneficial in this role, EMS providers must cultivate an in-depth understanding of the complex process and requirements of design and manufacturing in the medical industry. Many EMS providers are still in the building phase of capturing projects, ramping up services and generating significant revenue from these additional roles and responsibilities.

"The EMS medical market is witnessing particularly rapid growth in the remote diagnostics, patient monitoring, cardiovascular, neurology and consumer categories."

OEMs must also continuously focus on effective collaboration with their EMS partners to ensure that device design and services are relevant to customers' ever-changing demands. As a result, the definition of a true strategic partner is continuing to evolve, and the role of EMS providers in design is expected to gradually increase over the next five years.

As the OEM-EMS partnership evolves, the selection of an EMS provider will depend on the latter's ability to understand what it takes to participate in the medical environment and the challenges therein. OEMs are seeking EMS providers that can provide long-term partnership - and financial stability is a key factor. As the OEM-EMS relationship progresses, it will not be without hiccups. While mature OEMs do not expect EMS partners to develop competencies immediately, they do have high expectations. The evolving economic environment and ever-changing megatrends, however, should help strengthen long-term collaborations.

An OEM's ability to tap into the power of its global footprint - gaining access to new and emerging economies - will also be crucial. Creating added value by expanding in-house capabilities, such as streamlining manufacturing and supply chain operations, to provide innovative and resource-saving solutions will be the underlying foundation for a successful partnership.

The road to success

With the opportunities in traditional markets continuing to narrow, EMS providers are steadily diversifying into the medical industry, which offers a wealth of untapped potential for aspiring EMS providers. They are constantly ramping up and updating their quality control systems, supply chain efficiency, manufacturing processes and technological expertise in the hopes of benefitting from more challenging outsourcing roles and responsibilities.

When everything else has been taken into consideration, the success of EMS providers will depend on the ability to cultivate and sustain long-term collaboration with OEMs. The onus lies on EMS providers to rebrand themselves: the need to project an image beyond mere 'contract manufacturers' has never been stronger. OEMs require confidence in their EMS partners if they are to rely on them to handle more strategic processes such as design and engineering. Smart marketing strategies and the education of OEMs about the benefits of a strategic - rather than a tactical - EMS partnership are set to become key focus areas for EMS providers in the next three years.

Fig 1. Global EMS medical market 2012 by numbers.
Fig 2. CEO’s visionary perspective: the solutions.
A CEO’s prognosis.


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