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Costa Rica
Staying Competitive
Congreso de Zonas Francas Azofras Costa Rica
10 de Julio 2014
Hotel Intercontinental
Don Ro...
Agenda
• Global View of Medical Device, Multi-National Corporation (MNC) Locations, Observations,
& Trends
• What has hist...
Brazil
Abbott
Baxter
St. Jude
Singapore
Baxter, Flextronics
Creganna / TacTX/ Abbott
Heraeus, Medtronic, S&N
Indonesia
Her...
4
Medical Device MNC’s Expanding Business Footprint….
but Cautious about adding Manufacturing Infrastructure Off Shore
4
•...
High Level Observations of those Serving the Med Device Industry
United States, Japan and Europe
• Continue to be the Glob...
Perspective of Early Off Shore Activity
Singapore
• Earliest low cost destination in 1970’s / strong government support/ t...
What did history teach us?
Attractive Cost structure deteriorates over time
•Inflation and govt. tax policies normalizing ...
Also remember Global Dynamics are Changing Quickly?
Regulatory normalization
•Emerging countries are advancing their regul...
MNC Perspectives
Looking from a company perspective
- Drivers for a Typical Manufacturing Investment
Quality & Compliance Excellence
• Manu...
MNC’s Growth Requires Staying Competitive
New Products “Speed to Market”
• Manufacturing ….. Marketing……R&D Partnership
Co...
Competition for MNC’s Outsourcing
Low Cost Country Contenders
Mexico
Sao Paulo, Brazil
Czech Republic
Indonesia
Singapore
Malaysia
Vietnam
Thailand
South Af...
So, Who are Costa Rica’s Competitors?
China
•Low, but rising costs, poor government support & govt. bureaucracy , inconsis...
What Direction are they heading?
China/ India:
• Previously, China WAS low cost for Fortune 500 companies, but the low cos...
Let’s look at the biggest competitor - China
Most Fortune 500 Companies are already in China…..is China the right
strategy...
India is low cost, but……..
Still not considered viable for manufacturing!
• Democracy, highly educated work force, but hig...
Ireland remains a strong location for doing business
Extremely strong base of manufacturing for high tech firms!
• Democra...
Vietnam & Thailand
Extremely strong base of manufacturing for high tech firms!
Favorable Conditions
• Low labor rates
• So...
Malaysia
Favorable Conditions
l Strong technology base of MNC’s and
support companies
l English speaking professionals
l A...
Philippines
Favorable Conditions
l English-speaking labor
l Adaptable to western practices
l Highly productive/creative
l ...
Costa Rica - Summary
Favorable Conditions
l Excellent English / professionals
l ~ U.S. time zones
l Educated/motivated wor...
Let’s look at the decision process
and
Quantify Competiveness
Country Selection Criteria – It’s not just about cost!
Business Environment (Politics, Competitors, Corruption)
Labor Clim...
Nation
· Political Stability
· Corruption
· Critical National Problems
· Socio-economic Issues
· Tax Structure - Corporate...
2
Cost vs. Skill Availability in Emerging Markets vs U.S.
LaborCost
Low
Low
Skill Availability for High Tech Mfg.
High
Hig...
Financial Modeling to Compare Countries
(using a cost perspective, modeling a zero based, financial investment in a generi...
Country Min. Wage Rate/hr (Intl Currency 2009 U.S.$)
Malaysia 4.00
Costa Rica 3.00
Thailand 2.00
Philippines 2.00
China N/...
Country LOH Rate
Costa Rica 9.15
Malaysia 6.91
Thailand 6.63
Indonesia 6.25
Philippines 5.85
India 4.78
China 4.76
Mexico ...
Product
A
Product
B
Product
C
Product
D
Product
E
Product
F
South China $ 3.34 $ 8.57 $ 10.03 $ 23.86 $ 2.51 $ 17.36
Costa...
So what is the key for countries to stay ahead of the curve?
The good news is….. Off-Shoring will Continue.
Financial ince...
Costa Rica
Becoming The Best Pro-Business
partner In The Industry!
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Benchmark de ventajas comparativas de los principales competidores de Costa Rica en la atracción de IED

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Benchmark de ventajas comparativas de los principales competidores de Costa Rica en la atracción de IED.
Don Robinson, Ex VP de Operaciones, Boston Scientific.

Published in: Economy & Finance
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Benchmark de ventajas comparativas de los principales competidores de Costa Rica en la atracción de IED

  1. 1. Costa Rica Staying Competitive Congreso de Zonas Francas Azofras Costa Rica 10 de Julio 2014 Hotel Intercontinental Don Robinson
  2. 2. Agenda • Global View of Medical Device, Multi-National Corporation (MNC) Locations, Observations, & Trends • What has history taught us and future changing Global dynamics • How do MNC’s look at the decision to move off-shore? • Who are Costa Rica’s competitive country rivals, observations, trends/ cost factors • The decision process to move Off-Shore • Model of Cost vs Country • How to compete in the future to attract MNC’s
  3. 3. Brazil Abbott Baxter St. Jude Singapore Baxter, Flextronics Creganna / TacTX/ Abbott Heraeus, Medtronic, S&N Indonesia Heraeus Caribbean/Central America Cluster Asia manufacturing cluster Mexico Baxter, Bard, Cordis, Heraeus, Plexus, S&N, Medtronic Puerto Rico BSC, Baxter Cordis, Heraeus Medtronic, St. Jude Biomet, S&N, Stryker Vietnam Asahi-Intech Terumo Malaysia Bard,Flextronics Plexus, S&N, St. Jude China Baxter, J&J, DuPuy, Medtronic Orbus-Neich, Flextronics, Heraeus Plexus, S&N, Stryker, Terumo, Coxon Costa Rica BSC, Abbott Baxter, Bard Covidien, St. Jude Stryker, Volcano Ireland/UK Cluster India Baxter Flextronics Heraeus S&N Terumo Sales offices; no manufacturing China new MicroPort MicroTech LePue Biosensors Ireland BSC Abbott Bard Baxter Covidien Creganna Flextronics DuPuy Stryker Zimmer Philippines Baxter Heraeus Terumo Thailand Baxter, St. Jude S&N Two major low cost “clusters” serve the Medical Device Industry Ireland and Puerto Rico also achieve reduced cost status through favorable tax incentives. Outsourcing – a business model for several decades…in all industries
  4. 4. 4 Medical Device MNC’s Expanding Business Footprint…. but Cautious about adding Manufacturing Infrastructure Off Shore 4 • United States • Puerto Rico • Costa Rica • Brazil (late 2020) • Sweden • Malaysia (late 2010) • Adding Mfg. capabilities in Malaysia, Puerto Rico • United States • Puerto Rico • Ireland • Switzerland • Germany • Netherlands • France • China • Singapore (2011) • Expanding in EM region w/ International H.Q. and CRM Mfg. capability • United States • Puerto Rico • Ireland • Switzerland • Germany • Growing Med. Device Bus. • No new facilities • United States • Puerto Rico • Mexico • Ireland • Belgium • Netherlands • Italy • Israel • China • No new Med. Dev. Mfg. capacity being added • United States • Puerto Rico • Malaysia • No new mfg. capacity being added • Japan • United States • Puerto Rico • Great Britain • China • India • Vietnam • Philippines No new mfg. capacity being added, however strong mfg. in EM region • United States • Puerto Rico • Ireland • Switzerland • Germany • Rapidly Growing Med. Device • No new facilities • Mindray – China • Microport – China • OrbusNeich – Hong Kong • Volcano – U.S. (IVUS) • Rapidly growing firms, expanding pipelines, competitive threats both in region and future globally Other CORDIS • United States • No new mfg. capacity being added +
  5. 5. High Level Observations of those Serving the Med Device Industry United States, Japan and Europe • Continue to be the Global Design Centers and source of fundamental IP Costa Rica and Malaysia • Provide low cost, favorable tax policy, reasonable infrastructure and have low IP risk Puerto Rico and Ireland • Offer tax incentives and medium cost structure. • Ireland maintaining pro-business support and tax policies/ P.R. uncertain tax policies of concern Mexico • Declining low cost attractiveness due to lack of govt. support, crime, instability / reforms underway but slow Asia/ S.E. Asia • Singapore offers progressive government policies, strong technical resources, favorable grant/tax policy and a medium cost structure • Vietnam, Thailand, Philippines offer low wages but variable business climates (policies, taxes, inflation rate, talent). • Some MNC’s testing waters but infrastructure and educational base are weak…but improving • Population and GDP growth make China & India attractive growth opportunities for MNCs….aggressive mfg. expansion still questionable due to poor infrastructure (India), instability of govt. policies, IP risks, etc.
  6. 6. Perspective of Early Off Shore Activity Singapore • Earliest low cost destination in 1970’s / strong government support/ tax/ grants/ low wages/ Malaysia support • Rising cost required altering strategy / focus on high tech, R&D, strong professional engagement / strong regional influence w/ low cost industrial park complexes Ireland • Next low cost destination in 1970’s and 1980’s with strong government support/ tax/ grants / low wages/Singapore model • Again, rising costs and internal financial difficulties forced change in strategy away from grants towards R&D investment model/ maintained strong stable government support Costa Rica • Low cost, favorable tax structure, minimal government support programs / stable government • Strong educational system, growing technical base of companies / Desire to grow and stay competitive Mexico • Pure low cost play with minimal government support/ infrastructure issues, crime, corruption continuing over decades Puerto Rico • Low cost & favorable tax policies initially / rising costs and changing government policies concerning to industry Malaysia • Low to Moderate cost but strong professional base with government some support / Continuing to grow in influence
  7. 7. What did history teach us? Attractive Cost structure deteriorates over time •Inflation and govt. tax policies normalizing Off Shore competitiveness Government Support a strong influencer • Long term stability of financial support and financial structure critical to long term investment decisions by MNC’s Well educated work force vital to attracting large players • Competencies, Work Ethic, Training, Quality Focused, infrastructure of support industries vital + capable of working with U.S. operations Multinationals looking for more than just low cost • Want strong off shore operations to support growth, innovation, and professional equality to U.S. operations •Being close to growing markets also a key factor/ but must be balanced against cost, risk, time to market dynamics
  8. 8. Also remember Global Dynamics are Changing Quickly? Regulatory normalization •Emerging countries are advancing their regulatory infrastructure rapidly with a trend towards normalization and more rigor Tax Normalization • Strong public outcry of unfair business practices putting pressure on countries to establish globally consistent business practices Growing educated middle class and work forces • Driving inflation and demand rapidly / local sourcing •Cost/ Quality will always remain a driving forcse for demand and competitiveness Communications/ openness of conditions • No secrets….openness about product pricing, cost structures, tax structures, etc. driving desire to be like the others •Drives doing business easily on a global basis for all MNC’s Off-Shoring will Continue • Corporate financial pressure will continue to drive MNC’s towards regions with strong capabilities to support growth and financial objectives.
  9. 9. MNC Perspectives
  10. 10. Looking from a company perspective - Drivers for a Typical Manufacturing Investment Quality & Compliance Excellence • Manufacture high Quality & Affordable products • Quality is, and will always be a ‘Competitive Advantage’ Technical Excellence • Manufacture of high tech Class II & III Products • Produced from Well Engineered Processes • Strong Engineering drives lower cost in any environment • Strong IT & business systems to seamlessly connect with company systems Strong Employee Capabilities • Competencies, Work Ethic, Training, Quality Focused • Professionals ability to communicate with base operations/ globally
  11. 11. MNC’s Growth Requires Staying Competitive New Products “Speed to Market” • Manufacturing ….. Marketing……R&D Partnership Cost Competitive • Engineering to reduce Scrap/Waste & Improve Labor Efficiency • Optimal Plant Network Configuration/ leverage technologies Boston Scientific Johnson & Johnson Cook Medtronic St. Jude Bard Less Invasive Medicine
  12. 12. Competition for MNC’s Outsourcing
  13. 13. Low Cost Country Contenders Mexico Sao Paulo, Brazil Czech Republic Indonesia Singapore Malaysia Vietnam Thailand South Africa Morocco Tunis, Tunisia Buenos Aires, Argentina Bogota, Columbia Costa Rica Dominican Republic Portugal Nicaragua Santiago, Chile Botswana Philippines Shanghai, China Guangdong, China Hungary India Viable Countries with Low Cost structures …… but, variable
  14. 14. So, Who are Costa Rica’s Competitors? China •Low, but rising costs, poor government support & govt. bureaucracy , inconsistent and bureaucratic policies, strong professional base, difficult communications India • Well educated, low cost, but very poor infrastructure, lack of govt. support, inconsistent and changing policies Mexico • Low cost but poor infrastructure, crime, poor education Vietnam/ Thailand • Emerging, but with infrastructure issues, copying China policies/ significant lag to develop Malaysia • Strong education, government support, and large technical base/ reasonable cost structure Ireland • Strong technical base, cost much higher, strong infrastructure, stable govt. pro-business policies Puerto Rico • Strong technical base, cost much higher, poor infrastructure, policy changes of concern
  15. 15. What Direction are they heading? China/ India: • Previously, China WAS low cost for Fortune 500 companies, but the low cost advantage is now disappearing due to changes in China society and economics • Little new manufacturing activity (particularly for medical devices) noted in India or China up to this point in time Latin and South America; Africa, Caribbean • Most other truly low cost future options entail significant risk in severely under- developed countries South Asia (Vietnam, Malaysia, Philippines, Singapore) • Particularly strong areas for future high tech and Med. Device support industries Costa Rica • Strong competitor, growing capability, but needs improved infrastructure Ireland • Strong competitor with pro-govt. policies, inflation moderated, but still needs some infrastructure improvements
  16. 16. Let’s look at the biggest competitor - China Most Fortune 500 Companies are already in China…..is China the right strategy going forward for MNC’s Probably not! • Financial incentives not economically comparable w/ Ireland and Costa Rica • Uncertainty about future government regulatory and financial policies of concern • Costs are rising quickly/ double digit wage inflation, single digits in other locations • Competitive advantage compromised due to IP theft and lack of IP enforcement • Perception of ‘Made in China’ associated with substandard quality, potentially a competitive disadvantage in some export markets • Not all products can benefit from low labor rates (ie low volume + low labor content + high material cost) • Tech transfer costs for low volume products are unattractive due to negative NPVs • Regulatory hurdles are high and long driving poor NPV’s • Communications complex and difficult
  17. 17. India is low cost, but…….. Still not considered viable for manufacturing! • Democracy, highly educated work force, but highly complex business practices • Government complexity, poor infrastructure, and inconsistent policies • Financial incentives are not economically comparable with Ireland and Costa Rica • Cost low, but similar to China, double digit wage inflation is forecasted • Uncertainty about future government regulatory and financial policies of concern • Communications complex and difficult
  18. 18. Ireland remains a strong location for doing business Extremely strong base of manufacturing for high tech firms! • Democracy, pro- business practices, ease of doing business with government • Reasonable infrastructure, and very consistent policies • Costs are relatively high, but strong engineering and high volume operations moderate costs, plus ….. • government financial policies make it quite attractive. • Wage inflation is forecasted to be low because of countries financial difficulties • Highly educated work force • Communications very easy
  19. 19. Vietnam & Thailand Extremely strong base of manufacturing for high tech firms! Favorable Conditions • Low labor rates • Some Management Resources • Some experienced Engineers • Good work ethic / quality Unfavorable Conditions • Poor infrastructure • Low unemployment • Copying China regulatory and business practices • Some/ Minimal financial incentives • Gov’t instability and corruption • Language barriers
  20. 20. Malaysia Favorable Conditions l Strong technology base of MNC’s and support companies l English speaking professionals l Adaptable to western practices l Highly productive/creative l Some financial incentives for large corporations l Decent infrastructure l Pro-business government Unfavorable Conditions l Distance from U.S. l Inflation l Over saturated w/ High Tech l Some employee movement
  21. 21. Philippines Favorable Conditions l English-speaking labor l Adaptable to western practices l Highly productive/creative l Some financial incentives/ minimal l Decent infrastructure l New FEDEX hub @ Subic Unfavorable Conditions l Gov’t corruption prevalent l Severe Traffic Problems in Manila l Minimal support industries
  22. 22. Costa Rica - Summary Favorable Conditions l Excellent English / professionals l ~ U.S. time zones l Educated/motivated work force l Good work ethic / quality attitude l Good financial incentives l Under-employment – low wages l Working to become an Outsourcing leader in the region l Adequate infrastructure in cities Unfavorable Conditions l Adjacent to Honduras & Panama (drugs) l Poverty in rural areas l Inadequate infrastructure out of cities
  23. 23. Let’s look at the decision process and Quantify Competiveness
  24. 24. Country Selection Criteria – It’s not just about cost! Business Environment (Politics, Competitors, Corruption) Labor Climate (Availability, Skills, Literacy, Unions, Wages) Local Suppliers/Services (EtO Sterilization, Aux. Services) Logistics (Airports, Roads, Customs) Site-Specifics (Special Zones, Building/Land Costs, local taxes) Taxes and Incentives (Grants, Taxes, Transfer pricing) Duties / Tariffs (Cost, relations with govt. agencies) Utilities (Quality, availability, disposal costs) Start-up Issues (Time differences, transport. costs, perception) Long Term (Modeling of costs, direction of country policies) It’s Not Just about Cost! There are Many Factors to be Considered
  25. 25. Nation · Political Stability · Corruption · Critical National Problems · Socio-economic Issues · Tax Structure - Corporate & Local taxes · IP Protection Labor Climate · Availability of IL & DL · General Literacy · Unionism or sympathy · Wage & Salary rates Local Services · Primary supplier availability · Secondary suppliers · EtO Sterilization · Competition Logistics · Airports – Seaports · Distance from Natick (miles) · Time difference from Natick · Access / Egress issues Site Specifics / Infrastructure · Tax advantages · Free Trade Zones · Colleges/Universities · Environmental Risks International Relations · Relations with BRIC nations · Relations with USA · Trade agreements favorable to USA business Language · Native language · Likelihood of English Utilities · Reliability Perception of “Made In …” · In USA · By others Long Range Low Cost Assessment - Soft Issues There is no simple formula or quantitative answer to how MNC’s make decision Very complex financial laws require strong legal/financial support
  26. 26. 2 Cost vs. Skill Availability in Emerging Markets vs U.S. LaborCost Low Low Skill Availability for High Tech Mfg. High High Ireland India Costa Rica Singapore Shanghai South China U.S. Low Cost Costa Rica remains cost competitive and is strengthening it’s reputation to support high tech MNC’s Key Observations: • Costa Rica is building strong, capable work force/ must maintain low cost & financial incentives • Singapore & Ireland are expensive, however have highly qualified professionals & strong govt. incentives • Shanghai’s costs rapidly inflating, lower in engineering experience, but strong market opportunity driver • S. China is low cost but lack adequate engineering capabilities for some high tech companies • India is the lowest cost country for candidate countries but poor mfg. base Candidate Country + Trend U.S. High Cost Malaysia Vietnam/T hailand Mexico Puerto Rico
  27. 27. Financial Modeling to Compare Countries (using a cost perspective, modeling a zero based, financial investment in a generic, high tech manufacturing facility) Products • Phase-in over 5 years •Locally-sourced raw materials • Compare Offshore to Domestic Facility • Sq. Ft. Requirements • Capital Requirements • All operating costs Labor • Total structure • Headcount & DL/IL Ratios • LOH Rates Plant Size: ~300,000 Sq. Ft. Total Headcount: 2,500 D/L Headcount: 1,800 Capital Investment: $60 to $80M Theoretical Plant / Head Count Model Used to Compare Countries Generic Products being produced in a large scale manufacturing plant
  28. 28. Country Min. Wage Rate/hr (Intl Currency 2009 U.S.$) Malaysia 4.00 Costa Rica 3.00 Thailand 2.00 Philippines 2.00 China N/A (1.30 to 3.50) Mexico 1.00 Indonesia 1.00 Vietnam 1.00 India N/A (0.30 – 1.00) Singapore N/A U.S. 7.25 Ireland 11.10 ref. Min.Wage.org Country Labor Rates 2013 Costa Rica has reasonable labor rates which must remain competitive
  29. 29. Country LOH Rate Costa Rica 9.15 Malaysia 6.91 Thailand 6.63 Indonesia 6.25 Philippines 5.85 India 4.78 China 4.76 Mexico 10.49 Singapore 14.72 U.S. 31.13 Ireland Modeled Overhead Cost by Country w/ Full Mfg. Volume Cost Structure Using 2011 dollars Costa Rica has reasonable modeled overhead rates which must remain competitive But Note: Overall financial incentives may offer more significant value to MNC’s
  30. 30. Product A Product B Product C Product D Product E Product F South China $ 3.34 $ 8.57 $ 10.03 $ 23.86 $ 2.51 $ 17.36 Costa Rica $ 4.21 $ 9.66 $ 11.86 $ 26.58 $ 3.21 $ 18.10 Philippines $ 3.56 $ 8.86 $ 10.49 $ 24.53 $ 2.67 $ 17.54 Thailand & Vietnam $ 3.72 $ 9.04 $ 10.84 $ 25.03 $ 2.79 $ 17.60 India $3.55 $8.01 $9.89 $21.15 $2.30 $15.22 USA $ 8.45 $ 14.83 $ 22.58 $ 39.87 $ 6.98 $ 20.73 Product Cost Candidate Countries At Full Mfg. Volume There are plenty of low cost country options for MNC’s to consider. Costa Rica is cost competitive and must maintain it’s pro-business financial policies Low labor/high matl.High labor/low matl.
  31. 31. So what is the key for countries to stay ahead of the curve? The good news is….. Off-Shoring will Continue. Financial incentives will always play a key role in decision making. But, the Key to Competiveness is: •Fight to maintain favorable govt. economic policies into the future providing stable long term view for companies •Minimizing cost and government bureaucracy / Ease of doing business •Investing in a strong, educated work force….. •Maintain integrity of legal systems to protect IP •Stay close to and work with MNC’s, build relationships to understand their objectives and provide recommendations
  32. 32. Costa Rica Becoming The Best Pro-Business partner In The Industry!

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