Restructuring steals U.S. market thunder

December 29, 1993

U.S. market conditions for medical imaging systems will remaindim as customers sort out structural change in the national health-caresystem. Restructuring will take place regardless of health-carereform mandates from Washington, said John M. Trani, GE

U.S. market conditions for medical imaging systems will remaindim as customers sort out structural change in the national health-caresystem. Restructuring will take place regardless of health-carereform mandates from Washington, said John M. Trani, GE MedicalSystems senior vice president and group executive.

Health-care providers in the U.S. are being served up whatis fairly standard fare in other industries: a combination ofindustry overcapacity and competitive market pressures that hasput the heat on suppliers.

In the past, hospitals could adjust to tight economic conditionsby raising prices. Now this option is being restricted, and theresult will be consolidation, Trani said.

"The current system encourages cost shifting. But thepeople who have had costs shifted to them--that is, corporateAmerica--have said `enough,'" he said. "Hospitals areat 50% occupancy rates. If this was the hotel and motel business,you would have people going out of business left and right."

Large purchasers of medical services insist on obtaining competitivebids for their business, he said. They have determined that thereis waste and overcapacity in the system that can be wrung out.

Unfortunately for medical imaging equipment suppliers and users,health-care reformers have had difficulty believing that high-costequipment can ultimately result in a lower cost of care. Outcomesresearch will be needed to prove the cost advantage of diagnosticequipment, Trani said.

Application of outcomes research will take a long time, perhapsas long as 10 years, he said. Vendors cannot become directly involvedin outcomes work because of the risk of prejudicing the results.

"We need to create outcomes studies that are funded andperformed by independent bodies," Trani said.

Until proof of diagnostic cost-effectiveness is on the table,however, premium scanners will take a market hit. MRI was hithardest over the past year. The U.S. market for imaging systemsmay have declined by as much as 40% in revenue terms during 1993,he told SCAN.

"It has become socially unacceptable to buy an MR,"Trani said. "MR has become a lightning rod in the press foreverything that is wrong in U.S. health care. It's a very difficulttime, but for people who have the wherewithal, it's an opportunetime."

OPPORTUNITIES WILL ARISE for MRI vendors when competitors proveunwilling or unable to continue upgrading their systems, he said.Given equivalent prices, purchasers will opt for the most up-to-dateequipment.

GE Medical Systems continues to cut back U.S. staff in reactionto the depressed market. These cutbacks come despite the firm'ssubstantial investments in new product development in two of themost depressed market segments, MRI and ultrasound (SCAN 11/17/93and 12/15/93).

More positions were cut at Milwaukee headquarters this year.GE was scheduled to eliminate 120 full-time and 65 contract andtemporary jobs in Milwaukee by year's end, according to a reportlast month in the Milwaukee Sentinel. There is room for furthertrimming in the U.S., although international operations will growwhere market demand is strong, Trani said.

"I've never seen an organization downsized into oblivion.I have seen them upsized into oblivion," he said.

Future R&D expenditures will be geared tightly to the goalof producing commercial products, Trani said.

"We are shifting R&D. There will be more D and lessR," he said.

GE also seeks to boost outsourcing of component technologyin those instances when it has little value to add. GE adds productvalue primarily through the provision of equipment architecture,software, specialized manufacturing and systems integration, hesaid.

"We want proven companies to ally with and develop subsystemsand parts of our product line. We are the systems integrator.We put it all together, sell it, service it, and finance it,"Trani said.

AS SALES SLOW IN THE U.S., GE will shift more of its focus tointernational markets and off-shore manufacturing.

"The company's view is very simple," Trani said."Fifty-three percent of the world's people are in Asia. Only31% of the world's GNP is in Asia. It (Asia's economy) is growingat two to three times the rate of the rest of the world. Thisnot a question of whether (the Asian market will dominate) butonly of when."

GE Medical Systems has a joint venture with the Chinese governmentand is building a factory to manufacture CT in that market, hesaid. Components will eventually be sourced from within the country.

"We will grow like a weed in China," Trani said.

Investments in developing countries are more a matter of buildinginfrastructure and staff than physical plants, he said. GE ispouring millions of dollars into China, India and other developingmarkets. Ultimately, it will reap rewards from its presence inthese countries.

"Being there, knowing the way the market operates, havingthe service infrastructure, and being able to deliver parts whereyou need them: These (factors) all make up a more important partof the market than in the developed countries," Trani said.