From cardiac pacemakers to artificial joints to scanners and radiotherapy machines, the United States is currently the world’s leader in medical device manufacturing and innovation. Medical device manufacturing in Mexico, however, may see an uptick once the ACA is fully implemented.
Responsible for approximately four hundred thousand direct jobs and nearly two million indirect jobs in the US, the medical devices industry is one of the few industries in the United States that not only creates significant employment opportunities, but also yields a net trade surplus. But many believe this is could change, thanks to the January 2013 implementation of a 2.3% excise tax mandated by the Affordable Care Act.
The tax was envisioned as a way to help raise $29 billion to help cover Americans’ healthcare. But while 2.3% may not sound like much, opponents point out that this is a tax on gross revenues, not net profits.
Placing the tax on gross revenues means a much higher impact on the bottom-line. In other words, a medical devices company that makes a $100,000 profit on total sales of $1 million would lose $23,000 of that profit, since the 2.3% was applied to the $1 million and not the $100,000. So in this example, the Affordable Care Act has cost them 23% of their profit, not 2.3%.
What this means for US companies is that only very large companies with large profit margins can sustain the change, and small or new companies with less impressive profit margins will be hit the hardest. This is particularly disturbing, as about 80% of all US medical device manufacturers are small organizations with less than 50 employees. To maintain profit margins, the only option for the world’s largest medical-devices economy is to cut costs to compensate for this potentially painful shift.
Many companies have found that the best way to do this is by pursuing a strategy of increasing medical device manufacturing in Mexico. In fact, many companies have already responded to the new tax by contacting shelter companies in Mexico, and making concrete plans to shift operations south of the border.
Enrique Esparza, President of a Mexico shelter company, Co-Production International (CPI), recently noted that, “We’ve seen a dramatic increase in online and personal inquiries from medical device manufacturers showing interest in Mexico since the tax went into effect in January.” Medical device manufacturing in Mexico may, indeed, proliferate.
As it turns out, Mexico is already the 11th largest medical devices exporter in the world and the leading exporter to the United States. And Mexican manufacturing of medical devices is expected to grow by 74% by 2020. According to a 2011 report by KPMG, the cost of manufacturing medical devices in Mexico was 23.3% lower than in the US – a number that many American companies are recognizing is the answer to the new 2.3% tax. As CPI’s president further noted:
“Mexico has always offered the better alternative to overseas production, beginning with unbeatable proximity to North American markets, our low-cost & highly technical labor force, to our pro-business environment and the no-tariff NAFTA provisions…It’s no surprise the ‘Mexico option’ has moved to the top of many international manufacturers’ business plans.”