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Daily Archives: July 27, 2010

China’s healthcare boom

China is in economic restructuring. Building affordable healthcare and social security system are on the top of the reform agenda (this helps drive down China's savings rate so to avoid crisis in the future fueled by global imbalance). Foreign companies will have tremendous business opportunities in China.

The world's largest CT-scanner makers, including General Electric Co., Siemens AG and Royal Philips Electronics, are zooming in on China.

That nation plans to spend $125 billion to build tens of thousands of hospitals and clinics, extending health care to nearly all of its citizens. Its ambitious three-year plan, announced last year, has created a rare feeding frenzy in the lucrative field of diagnostic-imaging machines, an area in which Western manufacturers still face little Chinese competition.


Indeed, China's total medical device and equipment market is expected to roughly double between now and 2015 to $53.7 billion, according to market-research firm Frost & Sullivan. That figure includes products ranging from patient-monitoring devices to stents, but much of the growth will likely come from MRI and CT scanners, which are highly profitable and can cost up to $2 million apiece. And the likely sales come amid a protracted slump in the U.S. market for medical equipment and devices triggered by the economic slump.

"The efforts made by the Chinese government are unprecedented" in terms of investing in health-care infrastructure and spending on higher-tech equipment, says Ronald de Jong, chief executive of Philips Healthcare's emerging markets business.

GE and Philips project double-digit increases in their health-care operations in China over the next few years, while Siemens says it aims to increase medical-imaging sales there at a faster pace than the market's projected 10% annual growth. Last year, GE says, it generated $1 billion in Chinese health-care revenue, including equipment sales, parts sales and maintenance fees. It declined to disclose its U.S. sales figures, but the overall U.S. market for medical-imaging equipment and services fell by one third last year to $9.7 billion from $14.4 billion, according to market research firm Frost & Sullivan.

GE remains the top seller of medical-imaging devices globally and in China, but both Siemens and Philips are gunning to expand their Chinese market shares. To cater to smaller and more rural hospitals, all three companies have opened more sales and service offices across China's interior. They are also expanding less costly, lower-end lines of imaging gear.

GE, which plans to increase its 4,000-employee health-care work force in China by as much as 15% this year, has expanded its line of lower-priced Brivo imaging equipment beyond X-ray machines and into CT scanners that are roughly 30% less expensive than the company's costlier models. GE says it has sold 70 Brivo scanners in China since they were introduced in March.

America’s New Growth Strategy

Michael Spence, Nobel prize winner in economics, argues that in order to compete with developing countries, such as China, which concentrates on labor-intensive manufacturing, the US must instead create new capital-intensive jobs with higher labor productivity.  The exports from the US and exports from developing countries are not necessarily substitutes. (source: FT)

America needs a growth strategy

By Michael Spence

As the International Monetary Fund warned on Thursday, America’s economy shows worrying signs of weakness. Worse, and in common with other developed countries, it also lacks a credible strategy for longer-term growth. Without such a strategy, a strong global recovery is unlikely.

The structural evolution of the US economy over the past 15 years has been driven by excess consumption, enabled by debt-fuelled asset inflation. The crisis put a stop to this, but structural deficiencies remain. America’s export sector is too small and underdeveloped. The financial sector became outsized, and is down-sizing.

A pattern of underinvestment in infrastructure has left the economy less competitive than it should be. Energy pricing issues have been ignored, causing underinvestment in urban infrastructure and transport. The education system has widespread problems with efficiency and effectiveness. Elsewhere, state budgets are in distress as a result of insufficiently conservative budget policies.

Even with a fiscal strategy that balances short-term stimulus and longer- term stability, America must still address the composition and size of expenditures, investments and revenues. To finance growth-supporting long-term investments, domestic private consumption has to shrink. This means higher taxes. In addition, existing government expenditure must be shifted away from consumption and towards investment, meaning fewer government services. Restoring fiscal balance in a way that supports longer-term growth will therefore be painful.

But even that is not enough. The real issue is employment: not just stubbornly high unemployment, but a bigger problem described recently in a thoughtful article by Andy Grove, the long-time chief executive of Intel. He argued that manufacturing is vanishing in the US, a trend that must be reversed. The question is how.

There is little doubt that America’s social contract is starting to break. It had on one side an open, flexible economy, and on the other the promise of employment and rising incomes for the motivated and diligent. It is the second part that is unravelling.

Incomes in the middle-income range for most Americans have stagnated for more than 20 years. Manufacturing jobs are moving offshore. Globally the set of goods and services that is tradable is expanding, but the US and other advanced countries are not competing successfully for an adequate share of the tradable sector.

The employment effects of these trends over the past 15 years have been masked by excess consumption and the overdevelopment of sectors such as finance and real estate. The latter are now set to shrink, as multinational companies grow where they have access to high-growth emerging markets in Asia and Latin America. Such companies will locate their operations where market and supply chain opportunities lie. In the tradable sector, in manufacturing and in a growing group of services, that means outside advanced countries.

The availability of low-cost, disciplined labour forces in developing countries reduces the incentive for these companies to invest in technologies that enhance labour productivity in the tradable sectors of the advanced economies. As a result, the evolving composition of advanced economies is increasingly weighted towards the non-tradable sector, combined with a set of high-end tradable services where both human capital and proximity matter. The rest of the tradable sector is shrinking. 

The shrinkage creates problems. Over-specialisation could threaten independence and national security. Spillovers between R&D, product development and manufacturing will be lost if manufacturers leave. Employment will stagnate. Income distribution will move adversely and the social contract will erode further.

Solutions to these problems are not easy to find. The unequal distribution of income can be dealt with through the tax system, although this does not attack the underlying problem. Protectionism could alter the pattern of out-migration of manufacturing, but only by imposing costs on domestic consumers and risking the breakdown of the open global economy model.

To avoid an outbreak of protectionism, there has to be an alternative. President Barack Obama’s new export council, announced on Wednesday, is a step in the right direction. But a bolder move is needed: a broad public-private partnership to invest in the development of technology in parts of the tradable sector where there are opportunities to make advanced countries competitive. The goal must be to create capital-intensive jobs that have labour productivity levels consistent with advanced country incomes.

Would this damage developing countries? Clearly not. The US (or even developed economies combined) does not have hundreds of millions to employ. A targeted programme would leave the vast majority of labour-intensive manufacturing right where it is now: in the developing world. With new credible growth strategies in America (and other advanced countries) developing countries may even be willing to play an important complementary role in restoring global demand through, for example, the reduction of excess savings.

We are already on a lengthy and bumpy road to a new normal. That is unavoidable. The risk is that without a new direction in American economic policy, the new normal may be as unpleasant as the journey.

The writer received the 2001 Nobel memorial prize in economics and chairs the Commission on Growth and Development