With the increasing role of diagnostics in health care, the last three decades has witnessed rapid advances in use of technology to create sophisticated devices for use in detection of various ailments. Likewise, on the therapeutic side too, sophisticated devices are increasingly being used for treatment and surgery. At the core of this revolution is the application of electronics and computer technology. There are about 5-6 large players worldwide who have been innovative in introducing medical electronic equipment.

General Electric (GE) is the market leader, followed by Siemens, Philips and Hitachi who are neck to neck in the race. As per the Medical Engineering Division of Siemens (Germany), the current world medical equipment market is estimated at around DM 27 billion ($46.17 billion assuming the $/DM rate at 1.71) which is expected to grow to DM 33 billion ($56.43 billion) by 2000 AD. Siemens Medical had a turnover of $ 4.7 billion for 1994-95.

Besides these big five, there are players concentrating in niche areas like Carl Ziess, Germany, and Humphery, US, in opthamology. The Indian market is similarly dominated by four players -- Siemens, Wipro-GE Medical Systems, Philips Medical Systems and Blue Star in that order. Of these four, the first three are committed to local manufacturing while Blue Star is sustaining on its selling and servicing arrangements with Hitachi Medical for CT/MRI, Varian Oncology Systems, Switzerland, for oncology systems etc. There is no reliable data on the exact size of the market due to differences in classification of equipment. However, the size of the Indian medical electronic equipment market is estimated to be about Rs 500 crore. Besides there are about 25-30 small players who represent overseas suppliers for smaller equipment.

Technology Determines Leadership: Technology is important for success in this business. The big five spend heavily on R&D which is the reason for their success in this business. These players are cash rich with strong reserves and are well diversified companies which enables to make investment in developing technology. The fast changes in technology, increase in development costs and capital expenditure is bringing these players together to develop new products. A recent example—Siemens Medical Engineering Group (Germany), Philips Medical Systems (Netherlands) and Thomson Tubes Electroniqus (France) together are proposing to create a new joint venture for making new types of X-ray detectors. These players will in turn use the developed technology for their own systems and products—be it radiology or imaging systems used for scientific, industrial or medical applications.

Purchasing Decision of Buyers: How does a prospective buyer (a hospital or a nursing home) choose an equipment supplier in case there are three four suppliers? According to T.L. Varadaraj Kumar, Managing Director, Philips Medical Systems, " the equipment supplier is chosen on the basis of product quality, service infrastructure, price, terms of funding and finally the reputation of the supplier." He further adds that price is a key factor but a buyer is willing to pay a premium if he is convinced that the premium paid is less than the hidden costs (service expenses and spare parts costs) involved.

V. Anand, GM, Medical Equipment Division, Blue Star, emphasises on service. He says "hi-tech medical equipment need to be supported with proper service infrastructure. This consists of trained personnel, communication facilities, spare parts, inventory and instrument testing and calibration facilities." Thus, service income contributes a significant portion of a medical equipment supplier's total income. Although Blue Star has no manufacturing base, it has managed to remain an important player mainly due to its strong customer support network.

Poor Health Infrastructure: The growth of medical equipment is directly dependent of the financial health of hospitals. About 65% of the treatment in the country is done by private hospitals—largely nursing homes. However, big hospitals having speciality equipment are largely run by Government bodies or charitable institutions. The concept of corporate hospitals came into being only in the last decade after some hesitation by the Government.

The main problem facing the country is shortage of health infrastructure. Unlike roads or power projects, health infrastructure (hospitals, basic sanitation, safe drinking water etc.) does not enjoy infrastructure status. India has just one bed for every 1,400 persons against one bed for 90 persons in Japan or one for 250 persons in the West. During the Eighth Plan (1992-97), medical and public health accounted for just 1.7% of the total outlay and for 1996-97 it accounted for just 0.9% of the total outlay.

Pratap C Reddy, Chairman, Apollo Hospitals Group, says that even if India is to get to a level of one bed for 700 persons, we need to set up 6 lakh beds which would require an investment of Rs 1,60,000 crore! The dire shortage of funds with the Government and charitable institutions does not make it possible to meet this demand. The rate of obsolescence of medical equipment used for specialised services is high and these institutions are in no position to acquire new systems. Financial resources are so scarce that some of these institutions are unable to pay even for the spare parts for specialised equipment resulting in these equipment lying idle.

Hurdles for Corporate Investments: Government policies on corporate investments in hospitals are not conducive for investment. Hospitals do not get any tax holidays or subsidies for land; neither do they enjoy concessions for power, water etc. Added to this are disincentives like provision of 10-30% of services/beds for free treatment. Kumar says, "Corporates like Reliance are guided by Return on Investments (ROI) and thus prefer to set up refineries rather than hospitals".

He says that a proper policy framework is the need of the day. The Government needs to understand that like power and roads, health infrastructure cannot be created overnight and there are no "quick-fix" solutions available for solving this shortage.

India also holds the high potential for earning foreign exchange through health care services on account of cost competitiveness. As Reddy points out, " Worldwide, health care is a $3 trillion industry and if India with its strengths in human skills can attract even 0.1% of this business, it will be able to earn $ 3 billion of precious foreign exchange''.

High Incidence of Delayed Payments: The poor funding capabilities of hospitals and nursing homes affects the offtake of medical equipment. Kumar says," FIs are unable to estimate properly the cashflows of doctors at the time of sanctioning loans or equipment financing."

The incidence of delayed payments is as high as 25%-50% in this industry. There are two reasons for this. One, the obsolescence rate for a high-tech medical equipment like cardiac cathlab is normally five years, though it can be used even after that period. Hence, the economics can work out only if the payback is within 3 years. However, that may not always happen.

Secondly, private hospitals in India are run by a team of doctors with little understanding of financial management. Most of the equipment is imported and the poor coverage of risk (i.e. inability to hedge currency risk) is another reason for high default rates.

Hospitals currently buy their medical equipment through suppliers' credit (which can extend up to 3 years), rupee term loans and consortium lending by banks, lease financing or equipment financing. Both GE-Wipro and Siemens offer financing facilities with the support of their parent's financial wing. Philips Medical is tying up with its Singapore-based group company for offering similar finance schemes to its customers from next year.

Future Funding Areas: The liquidity crunch, poor state of the primary markets and long gestation period of hospitals before they make profits are some of the reasons for funds not flowing into this sector. The introduction of the HMO (health maintenance organisation) concept in India would go a long way in helping the establishment of healthcare network in the country. HMO is basically preventive healthcare with periodic health checkups as against treatment.

Reddy says that, "surgeries are expensive in US too, but thanks to managed health care sold by HMOs, Americans are able to afford it". About 60% of the US population is covered under HMO. There are about 48 medical insurance and as many as 900 medical care companies in the US. He says that HMO is different from medical insurance. Apollo Hospitals has recently tied-up with Jardine, UK, for introducing the HMO concept in India. The current Budget has proposed allowing the private sector into health insurance, which has kindled hopes of setting up of basic health infrastructure.

Industry's Strengths: (i) Low surgery costs in India: Thanks to the availability of good doctors and setting up of superspeciality hospitals, those going abroad for surgeries has reduced. Consider the surgery costs in India—an open heart surgery in India costs $3,000 against $30,000 in the US, neurosurgery here costs Rs 90,000 against $40,000 in the US. This has resulted in foreign patients from South Asia and Middle East coming to India.

(ii) Huge Medical Pool: India has amongst the world's highest number of doctors. With the right kind of policies and inflow of investments and finance, the country can set up a number of hospitals equipped with basic diagnostic and clinical equipment.

(iii) Changing Lifestyles: The sedentary lifestyles of people, smoking, change in food habits and increase in stress has resulted in change in diseases from communicable diseases like malaria, typhoid to cardiac arrests, cancer etc. The treatment and detection of these new diseases at early stages requires high-tech equipment.

(iv) The annual health check-up (HMO concept discussed earlier) being sponsored by most corporates for their employees is resulting in the growth in demand for diagnostic services. However, this phenomenon is still limited to the metros.

(v) A growing middle class of 150-200 million.

Weakness: Medical equipment do not enjoy depreciation benefits like investments made in wind power mills and other non-renewable energy sources. The Government can extend the 100% depreciation benefits to medical equipment to make investments in the health care sector investment worthy for corporates. The improvement in health care facilities is only an urban phenomenon. The health care industry, of which medical equipment is a part, can only grow if the rural areas and small towns are able to access these facilities. And for that a favourable Government policy, which commits higher expenditure on health services (both central and state levels), is the key. In India, villagers continue to throng urban centres for treatment of specific ailments like cancer etc.

Technological Barriers: Wipro-GE has set up a production base for low end ultrasound scanners which it also exports. Similarly, Siemens' new factory at Goa plans to make computer tomographs (CTs), ultrasound and X-ray machines while Philips Medical is setting up a CT ultrasound scanners manufacturing facility next year. However, all companies go in for 100% import of hi-tech medical equipment from their principals overseas.

V Anand, says "high interest costs, low volumes of the domestic market, low differential duty (of about 10%) between part import and full import and low capacity utilisation do not make India a potential full-fledged manufacturing base."

Outlook: Opinion on the short-term outlook for the industry is varied. Many players expect a slow growth of 5-7 per cent per annum based on the liquidity crunch and economic slowdown while others feel that a double digit growth rate is likely as the geographical penetration is increasing. The latter opinion does not appear over optimistic as the concept of using these equipment for diagnostics is rapidly spreading to smaller cities and mofussils. In recent times such installations have been made by private investors in smaller cities like Meerut, Nasik etc. confirming the geographical penetration of this business.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.