Costa Rica Staying Competitive

Congreso de Zonas Francas Azofras Costa Rica

10 de Julio 2014

Hotel Intercontinental

Don Robinson

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

BrazilAbbottBaxter

St. Jude

SingaporeBaxter, Flextronics

Creganna / TacTX/ AbbottHeraeus, Medtronic, S&N

IndonesiaHeraeusCaribbean/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, StrykerVietnam

Asahi-Intech Terumo

MalaysiaBard,Flextronics

Plexus, S&N, St. Jude

ChinaBaxter, J&J, DuPuy, Medtronic

Orbus-Neich, Flextronics, HeraeusPlexus, S&N, Stryker, Terumo, Coxon

Costa Rica

BSC, Abbott

Baxter, Bard

Covidien, St. Jude

Stryker, Volcano

Ireland/UK Cluster

IndiaBaxter

Flextronics

Heraeus

S&N

Terumo

Sales offices; no manufacturing

China newMicroPort

MicroTech

LePue

Biosensors

IrelandBSC

AbbottBard

BaxterCovidienCreganna

FlextronicsDuPuyStrykerZimmer

PhilippinesBaxter

Heraeus

Terumo

ThailandBaxter, 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

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

+

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.

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

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

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.

MNC Perspectives

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

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

Competition for MNC’s Outsourcing

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 RepublicPortugal

Nicaragua

Santiago, Chile

Botswana

Philippines

Shanghai, ChinaGuangdong, China

Hungary

India

Viable Countries with Low Cost structures …… but, variable infrastructure, govt. policies, education, etc.

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 communicationsIndia

• 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

policiesPuerto Rico

• Strong technical base, cost much higher, poor infrastructure, policy changes of concern

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

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

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

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

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

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

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

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

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 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

Nation· PoliticalStability· Corruption

· CriticalNationalProblems

· Socio-economicIssues

· TaxStructure-Corporate&Localtaxes

· IPProtection

LaborClimate· AvailabilityofIL&DL· GeneralLiteracy

· Unionismorsympathy

· Wage&Salaryrates

LocalServices· Primarysupplieravailability· Secondarysuppliers

· EtOSterilization

· Competition

Logistics· Airports–Seaports

· DistancefromNatick(miles)

· TimedifferencefromNatick· Access/Egressissues

SiteSpecifics/Infrastructure· Taxadvantages

· FreeTradeZones

· Colleges/Universities· EnvironmentalRisks

InternationalRelations· RelationswithBRICnations

· RelationswithUSA

· TradeagreementsfavorabletoUSAbusiness

Language· Nativelanguage

· LikelihoodofEnglish

Utilities· Reliability

Perceptionof“MadeIn…”· InUSA

· Byothers

Long Range Low Cost Assessment - Soft Issues

There is no simple formula or quantitative answer to how MNC’s make decisionVery complex financial laws require strong legal/financial support

26

Cost vs. Skill Availability in Emerging Markets vs U.S.

Lab

or

Co

st

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 andis 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. baseCandidate Country + Trend

U.S. High Cost

Malaysia

Vietnam/Thailand

Mexico

Puerto Rico

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 CountriesGeneric Products being produced in a large scale manufacturing plant

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 Rates2013

Costa Rica has reasonable labor rates which must remain competitive

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 competitiveBut Note: Overall financial incentives may offer more significant value to MNC’s

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 CostCandidate 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.

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

Costa Rica

Becoming The Best Pro-Business

partner In The Industry!