Asia medical imaging equipment sales may meet forecasts despite turmoil

Sales to China and Korea offset weakness in other nations

The economic turmoil that has rocked the Pacific Rim over the past several months has raised fears that medical imaging equipment sales could fall precipitously in one of the world's most promising regions. A closer look at the situation, however, reveals that strength in some countries will probably offset weakness in others, with the end result being that equipment sales will most likely meet forecasts for the year.

The currency typhoon that swept across Southeast Asia earlier this summer shook the economies of the emerging Asian tiger nations and sent waves to Wall Street and other global stock markets. The sharp decline in exchange rates for Asian currencies relative to the dollar, mark, and yen has made it more difficult for healthcare providers in Asian countries to acquire imported medical imaging devices.

While most of Wall Street's reaction was tied to market turbulence in Hong Kong, it was also fueled by fear that the Asian tiger countries would substantially reduce their imports of U.S. products, impacting the bottom lines of U.S. multinational companies. Wall Street has since recovered most of its losses, but uneasy feelings remain concerning exports to developing Asian markets. Like all industries involved with exports to this region, medical imaging exporters are deeply concerned about the short- and long-term impact of recent economic turmoil.

Opinions vary among the medical imaging professionals in Asia, but the comment made by one Singapore-based manager seems to sum it up best: "Things could be better, but I have seen worse." The first part of the statement refers to the abrupt reduction in new orders from countries such as Thailand and Malaysia. The second part compares the current situation to the severe economic and currency problems in China in 1993 and 1994 that resulted in a sharp drop in sales. China is the largest market in the non-Japanese Asian region and is much larger than the combined markets of Thailand, Indonesia, Malaysia, and the Philippines.

Thanks to China's resilience in the face of the current crisis, sales in non-Japanese Asia will be close to original estimates. While Thailand, Indonesia, Malaysia, and the Philippines will see sharp drops in placements, sales in China and Korea will be equal to or greater than 1996. Sales in Vietnam, while small compared to China and India, have been up over 1996 and may cover the Indonesian sales shortfall.

While sales of all imaging modalities are being affected by the turmoil in Asia, it can be expected that MRI and vascular x-ray rooms will experience more of a drop in Southeast Asia than ultrasound and low-end CT scanners, which are less expensive modalities. Refurbished CT sales may increase, as may sales of accessories like MRI coils, as hospitals try to prolong the useful lives of their scanners. Medical film sales volumes will remain steady, and profit margins can be expected to erode due to the less favorable foreign exchange rates.

China

China has been isolated from the economic turmoil of Southeast Asia. The exchange rate of the nation's currency, the renminbi, relative to the U.S. dollar is at levels close to those at the beginning of the year. The stronger U.S. dollar has helped raise the renminbi against the German mark and Japanese yen. While the possibility exists that currency devaluation in the other Asian countries could lead China to devalue the renminbi to protect exports, most China watchers expect China to hold the present exchange rate steady. Medical imaging equipment sales are increasing 10% to 20% over last year, slightly ahead of most forecasts. China remains the largest market in non-Japanese Asia, and the third largest market in the world for CT and MRI.

India

The good news is that like China, India has been largely isolated from the currency crisis of Southeast Asia. The exchange rate for the Indian rupee relative to the U.S. dollar is close to that at the beginning of the year. Like China, declines of the yen and mark against the dollar have actually raised the rupee against those currencies. The bad news is that imaging sales are off forecast for other reasons. The diffusion of CT and MRI scanners into the rural areas of India is progressing at a slower rate than many companies anticipated. Nonetheless, India remains the second largest market in Asia.

South Korea

While isolated from the Southeast Asia economic turmoil, South Korea faces its own set of economic woes that has pushed the won down 12% against the dollar. The won has also declined against the yen and mark, 8% and 2% respectively. Despite this, medical imaging sales levels remain about the same as last year.

Thailand

Thailand was the first of the ASEAN (Association of Southeast Asian Nations) countries to experience currency devaluation in reaction to the country's overheated economy, and the Thai baht is down 34% against the U.S. dollar, 19% against the Japanese yen, and 14% against the German mark.

"Its terrible here," one medical imaging vendor with operations in Thailand said. "No one has any money, and if they did, the exchange rate is awful."

While contracts for medical imaging equipment are being signed and funded, very few new orders are expected this year or in 1998. Most sources believe it will be 18 to 30 months before medical imaging equipment sales return to the levels of 1995 and 1996. It is expected that the privately funded sector will show the first signs of recovery, with the government-funded sector lagging behind.

Indonesia

Indonesia followed Thailand into the economic quagmire, which has seen the Indonesian rupiah fall 27% against the dollar since the beginning of the year. The rupiah has also dropped 24% and 19% against the yen and the mark, respectively. Like Thailand, a number of orders have been canceled because of funding problems, and few new orders are expected this year. The recovery of medical imaging in Indonesia is expected to occur more rapidly than in Thailand.

Malaysia

The currency turmoil in Malaysia has not been as severe as in Thailand and Indonesia. The Malaysian ringgit is running 23% behind the U.S. dollar compared with the exchange rate at the beginning of the year. Many budgeted government projects have either been canceled or placed on hold. In the private sector, most customers are trying to renegotiate open contracts rather than cancel them. Most sources expect the private sector to recover more rapidly than the government sector, due largely to the large number of for-profit private healthcare groups.

Over the long haul, non-Japanese Asia as a region continues to be a major market for medical imaging equipment. While the economic typhoon of the summer of '97 has reduced opportunities in some countries, others have been left unscathed.

The typhoon metaphor, in fact, is a useful one for examining the current crisis. While there are many typhoons in a given year, not all Asian countries experience a direct hit. Economic typhoons are similar: A given economic typhoon will rarely strike every country.

Asia remains a great opportunity for medical imaging, but the region defies short-term strategies. The best advice for medical equipment vendors is to take short-term setbacks in stride, and plan for the long haul. Reliance on local country distributors or dealer organizations can help vendors avoid high-cost organizational infrastructures that are hard-hit when a country suffers a downturn.

Vendors should also be cautious about raising prices to reflect currency fluctuations. The Japanese are masters at maintaining price levels, and are perceived by many Asian customers as having a more long-term commitment to Asia than Western companies.

Finally, the flip side of managing business in Asia through crisis is to watch for recovery in order to maximize gains as the economy bounces back. Remember the old Asian saying, "The best time to invest is when there is blood on the streets."

This article was prepared by Richard Howell, principal of The Howell Group, a market research and development firm focusing on Asia. He can be reached at 408/848-6439.