Siemens and Elscint agree to jointly develop and manufacture CT parts

September 11, 1996

Cost pressures push vendors into relationshipThe German pioneer of spiral CT scanning and the Israeli developerof innovative dual-slice CT systems have agreed in principle tocooperate on the future development of CT technology. The twocompanies,

Cost pressures push vendors into relationship

The German pioneer of spiral CT scanning and the Israeli developerof innovative dual-slice CT systems have agreed in principle tocooperate on the future development of CT technology. The twocompanies, Siemens of Erlangen and Elscint of Haifa, plan to combineefforts in the R&D and manufacturing of specific componentsto be used in products that will be marketed under their own names.

The agreement is an extraordinary example of how far the trendtoward vendor partnering has gone in medical imaging. Unlike manyother partnering relationships, the Siemens/Elscint deal unitestwo firms that have been aggressive head-to-head competitors ina major modality.

The desire to provide better technology at a lower price ultimatelysuperseded each company's natural instinct to keep its technologyproprietary. By exchanging technology and parts, the vendors hopeto save money by reducing R&D efforts in certain areas, accordingto Jonathan Adereth, Elscint president and chief executive.

"Each company will retain its own activities in its ownfacilities, but we will split the work between the two of us,"Adereth said. "We will each work on our own parts and thenwe will swap them."

The principle behind the deal is to combine resources to reducethe cost of the end product and thereby reduce the risk behinda new product introduction, according to Klaus Hambuchen, directorand head of the Siemens CT division.

"There are certain elements that are very common in allCT systems," Hambuchen said. "There are really no differencesamong these elements from the customer's point of view."

The terms and some of the details of the proposed agreementstill must be worked out. For example, exactly which componentswill be developed by whom has yet to be decided, Hambuchen said.But the two companies have reached agreement on certain majoraspects. A steering committee will coordinate the efforts by thetwo companies. Contact points for Siemens and Elscint have beenidentified, and a work schedule has been organized.

The agreement is directed toward the development of a premiumtechnology to be released in the future, Adereth said. The productscreated by this technology will bear different names, either Siemensor Elscint, but they will be very similar in that they will sharecommon components. The main differences will be the host computerand operating software, as well as the clinical applications andpostprocessing done on the images, he said. Ultimately, each vendor'sproduct will have a different feel, as defined by proprietaryuser interfaces.

As a result of the new relationship, end users will have accessto better products at more competitive prices, Adereth said.

"The technology that the two firms will be able to put togetherwill be superior to any other technology," he said. "Workingtogether will lead to faster time to market, so maybe we willsee these products earlier than we would have seen them otherwise."

Neither company expects the agreement to produce a high-endproduct based on jointly developed and manufactured componentsfor at least several years. Some components, however, might bedeveloped and marketed in the interim as upgrades for existingproducts.

"The agreement is based on an assumption that it will takethree to five years until there is a full implementation of somethinglike a new product with these components," Hambuchen said.

Cost pressures have made the deal attractive to the German andIsraeli companies.

"This agreement will allow us to maintain an innovativeapproach at the same time it allows us to (build new products)within a reasonable cost structure," Hambuchen said.

That sentiment is echoed by Adereth.

"Customers are demanding more sophisticated products, whichis why this deal addresses the premium end," Adereth said."But at the same time, prices are being pushed down and marginsare being trimmed. Here is a way to share some of the risk andto make a better product at less cost for each party, while differentiatingthe products and continuing to compete in the marketplace."

The agreement could be the forerunner of other such deals amongthe major vendors, according to Adereth.

"I believe this is going to be a model for the industry,"he said.

Hambuchen describes such agreements as economic necessities.

"We have to do things more intelligently but not make productsthat are commodities," he said.