How Medical OEMs Can Overcome Impending Tariffs

As analysts continue to follow the trade tensions between the U.S. and China, particular emphasis has been placed on how the new tariffs will affect the medical device industry.

The Effect of Tariffs

In May 2019, the current U.S. administration announced new tariffs as high as 25 percent, which is a significant increase considering the weighted average on import tariff rates is only 2 percent — and even this only applies to roughly half of all industrial goods while the other half enter the U.S. duty free. Although a small number of medical devices have been exempted from the added costs (food allergen analyzers, tube suspensions, microwave ablation antennas, etc.), most have not. Imaging equipment, diagnostic reagents, and dental drills are just a few of the devices that fall under the new tariffs, as do many of the metal alloys such as aluminum and steel used to manufacture them.

The true cost, however, does not come from a single transaction, as would be seen for a medical device manufactured wholly in China. Many large-scale medical OEMs in recent years have adapted their supply chains to fit within a globalized business model, where products can move between multiple countries before assembly is completed. In this environment, the tariffs must be paid each and every time the product is shipped across border lines, so a medical device that moves from China to the U.S., then back to China, and then back to the U.S. again to be sold would be subject to a 25 percent tariff two times — three if you include the tariffs China has announced in response to the new U.S. policy.

In a 2018 letter to U.S. trade representative Robert Lighthizer, Medical Imaging & Technology Alliance (MITA) executive director Patrick Hope expressed how such policies are concerning for the medical industry. “It is quite common that products will be imported from a manufacturer in China to their manufacturing facility in the US, where they are substantially transformed by and re-exported – often to China,” he said. “Taxing these products on both ends of the supply chain [is] a disincentive to manufacture in the U.S.”

Should current trends hold steady, the industry as a whole might see a transition away from global, sprawling supply chains in favor of a more consolidated model with increased reliance on one or two “one-stop shops” for all phases of the manufacturing process. To accomplish this, however, medical supply chains will have to take advantage of some of the new technologies and services available in the electronics manufacturing industry. This will allow them to streamline their approach and make more informed decisions regarding component sourcing.

The Solution

Deepak Prakash, writing for MMDI, calls this transition the “pursuit for simplicity,” which calls for increased collaboration between OEMs and supply chain partners to reduce risks and ensure stability against current and future geopolitical economic conditions. “Device manufacturers and their supply chain partners are always looking for ways to leverage manufacturing strategies that are stable, scalable and efficient,” he writes. “Yet at the same time, device performance requirements can be quite complex. It may seem paradoxical, but sometimes simplifying the supply chain is the key to making even the most sophisticated devices more economical.”

Last time buy strategies, such as the Last Time Buy Solution provided through Partstat, is a key component in this equation. Historically looked upon as a reactionary measure against unexpected obsolescence, medical device manufacturers have begun incorporating large, singular transactions early in the production process, which mitigates impending risks including shortages, rising prices, and, in the current environment, future tariffs. Certain medical devices maintain a life cycle well over ten years, and acquiring all the necessary inventory direct from the component manufacturer to achieve that number positions the OEM to save thousands of dollars in expenses compared to competitors. Additionally, last time buy strategies have even been proven to enhance the relationships with OEMs and their respective contract manufacturers, who often do not have the financial bandwidth to purchase additional inventory on their customers’ behalf.

Tariffs are rightfully worthy of concern in the medical device industry, but they do not have to be as long as OEMs act swiftly. In an industry that is striving to find simplicity in a market that seems more uncertain by the day, Partstat and its unique, data-driven solutions are going to play a critical role in medical supply chains moving forward.