----
(1-ENICON: A Surgical Strike
Into Emerging
By Allen. H. Kupetz, Adam Tin.daLL,
an.d Gary HaberLan.d
In January 2010, Gary Haberland, president and
founder of GENICON, a U.S.-based firm that
manufactured and distributed medical devices used
in laparoscopic surgery, sat at his desk poring
through rather encouraging fourth quarter finan-
cial statements. Impressed with GENICON's recent
performance, he reflected on how he had arrived at
this point and what the future might hold for the
young company. It was not long ago that GENICON
was near bankruptcy, as' had been the case with
, many small companies in this industry. GENICON,
unlike most of the startup companies that had suc-
cumbed to the pressures of the medical device
industry, was not only able to remain open but
actually thrived: it did this by focusing on its inter-
national distribution strategy since the early stages
of its launch. This strategy not only saved GENICON
Copyright @ 2010, Ivey Management Services
Markets
from the vast and often fickle barriers of the u.s.
-
market, but also came to define the company.
Haberland knew that in order for GENICON to
grow and diversify, new markets would have to be
identified, evaluated, and developed. Although the
minimally invasivesurgery (MIS) device market in the
United States had long been the largest in the world,
international markets were expected to grow at a
much faster rate than the five percent growth fore-
casted for the U.S. market for the foreseeable future.
Accordingto the 2009GENICON businessplan, growth
for the Pacific Rim was estimated to be 14 percent, -
with 11 percent for the Middle East, nine percent for
Europe and six percent for Latin America; addition-
ally,it was extremely difficult to gain market share in
the United States. Since the early 1990s, distribution
of MIS devices had been controlled by companies
Version: (A) 2010--06-30
 GENICON: A Surgical Strike Into Emerging Markets
receivingcontracts through group purchasing orga-
nizations (GPOs). The GPOs' financial structure had
longfavoredpurchasing products from only the larg-
est companies, some of which included Ethicon and
Covidien,subsidiariesof Johnson & Johnson and Tyco
respectively:this factor presented nearly insurmount-
ablebarriers to many start-up MIS device companies.
Survivalfor GENICON depended on its ability to sell
products abroad.
Early international success did not change the
fact that GENICON needed to constantly identify
what market it should enter next. The capital invest-
ment and risk associated with entering a new market
washigh for a firm the size of GENICON. Although
the costvaried depending on the market and the local
regulatory process, it would cost approximately
$50,0001per market up front, with another $20,000 in
costs for distributor assessment, market samplingand
channel contracting. There was also an opportunity
cost, as Haberland did virtually all the new business
development and thus he was often out of the office
attending tradeshows and meeting potential new dis-
tributors; furthermore, the time between initial invest-
ment and the point at which the first revenues were
realized had been as much as three years. As was the
case with many start-up companies, capital resources
were difficult to come by and entering various markets
simultaneously was simply not feasible.
A Look Inside the
Laparoscopic Industry
Laparoscopic surgery, a subset of MIS, allows phy-
sicians to examine, diagnose and treat problems
within the abdomen. These surgical interventions
can be performed through either traditional open
or minimally invasive techniques. During laparo-
scopic surgery, the abdomen remains closed while
specialized surgical instruments are inserted
through a number of small incisions. Compared to
open surgery, laparoscopy reduces trauma to the
skin and muscles and reduces post-operative pain:
this leads to shorter hospital stays and recovery
times, providing clear advantages for both patients
and hospitals.
15
The global market for MIS devices and instru-
ments was worth an estimated $12 billion in 2005
and was expected to reach $18.5 billion by 2011, an
average annual growth rate (AAGR) of 7.5 percent
between 2006 and 2011. The United States accounted
for approximately 60 percent of the world market, or
$7.2billionin 2005,and wasgrowingat an AAGR of
7.2 percent. The U.S. market for all MIS procedures
was approximately $7.7 billion in 2006 and was
expected to reach $11 billion by 2011;2 thus, there
was a market outside the United States of more than
$7 billion for GENICON to pursue.
While strong future sales growth was expected,
this growth rate was forecasted to decline year-over-
year (YOY).This declining growth rate was indicative
of several market forces. The laparoscopic device
market was limited by hospitals aiming to contain
laparoscopic surgery costs by purchasil1g less expen-
sive reusable and/or reprocessed devices instead of
premium-priced disposables. With the market
becoming very competitive and reaching a period of
slower growth, coupled .with the recent downturn in
the worldwide financial condition, hospitals did not
want to invest large sums of money in instrumenta-
tion. Many hospitals argued over the value of owning
the assets they used and whether disposable or reus-
able instruments were appropriate in their business
models; additionally, in some developing interna-
tional markets, issues involving the re- use of dispos-
able instruments put downward pressure on sales in
those markets. GENICON was certain, however,that
the ease-of-use and innovation of the disposable
device markets would continue to guarantee their
use and market share. When taking all factors into
account, the outlook for the entire laparoscopic
device industry was deemed very promising by
Haberland and many industry observers.
The Genesis of GENICON
In 1996,while working for a large medicaldevice
company,Haberlandand a smalldevelopmentteam
weretaskedto perform an analysisas to whetherthe
company should mature its soft goods line to
include laparoscopic medical devices. The firm
r"
16 CHAPTER 2: MARKET ANALYSIS

was hesitant, considering it was primarily involved

in orthopaedics and this would represent a signifi- l!III?ampf: of GE.N1~2N'S
Pr~~uJ;tS
~

cant deviation from their current operations; addi-

tionally, maturing their line to include laparoscopic
devices would require a large investment of capital
resources. After several months of research and
negotiations with the development team, upper
Hr
management decided to forgo entry into this field,
citing high barriers to entry and compatibility with
the company's current operational structure as
factors in their decision. Haberland, baffled by
management's assessment, resigned and created
GENICON.
Being part of a large corporation lent Haberland
4.."-
~~
"

little knowledge or experience concerning how to
create a company of his own. Although it was clear
to Haberland that there was an enormous unmet
need in the endoscopic industry, he was unaware of
how to go about meeting this need; for example, he
knew nothing of the process to gain approval from
the Food and Drug Administration (FDA) to
manufacture and market medical products. Haber-
land learned that in order to file with the FDA he
needed a company, and in order to have a company
he needed his first product. After vetting the vari-
ous devices used in laparoscopic surgery, he
decided to start with a trocar, a device used in every
laparoscopic procedure to provide the initial means
of access into the abdominal cavity (see Exhibit 1).
Considering his limited resources for develop-
ment, the trocar was the most logical option. Being
a one-man company meant that Haberland had to
oufsource any research and development requiring
specific technical skills. The knowledge base for
these instruments was well established and readily
available, reducing the capital investment needed
to produce a prototype; more importantly, several
of the patents on these devices had expired since
many had been on the market for more than a
decade. Taking this approach was much less costly
than developing a completely new product, which
was extremely important considering Haberland's
limited financial resources.
In 1998, GENICON achieved its first sale to an
Atlanta-based distributor for $20,000. This was a
monumental achievement for the company at the
~
Source:Companyrecords.
time, but further sales had to be obtained quickly
as expenses rapidly began to pile up. Haberland
initially targeted u.s. customers. Considering that
approximately half of the world's laparoscopic
procedures were performed in the United States,
and given GENICON's location, this market
seemed to be the logical choice. Expecting brisk
sales within the first year, GENICON would then
use that capital to sustain operations and grow the
company.
Though there was a large and increasing
demand for laparoscopic surgicaldevices,unfore-
seenbarriers to obtaining these salesloomed large.
The U.S. health care market heavily favored pur-
chasing through GPOs,which then sold to hospi-
tals and other primary care facilities.While larger
medicaldevicefirmshad fewproblems sellingtheir
products under this arrangement, smaller compa-
nies faceda daunting challengeto obtain contracts
r
I from GPOs. This industry structure led to
GENICON: A Surgical Strike Into Emerging Markets
GENICON's inability to sell any significant
amountof product during its initial year of opera-
tion. To further compound the young company's
problems,it wasquickly running out of capital. If
theseissuespersisted,the company would almost
certainlyfail within a year.
GENICONGoes International
In 1998, Haberland learned that the American
Collegeof Surgeonswould be holding their annual
meetingat the Orlando Convention Center, just
minutes from his home. Although it was not a
tradeshow,Haberland figured it would be a good
placeto network and gain input from sergeons.
It was not inside the convention, however,
whereHaberlandreceivedadvicethat would dras-
tically change GENICON's market focus. While
walking to the convention center,he ran into an
employeeof British StandardsInstitution (BSI), an
organizationinvolved in licensing products for the
Europeanmarket. The pair briefly discussedtheir
respectivebusinessesand their motives for being at
the conference. Upon learning of GENICON's
troublesdoing businessin the United States,the
gentlemanaskedif Haberland had everthought of
takinghis businessto the Europeanmarket. Haber-
landhadenvisionedone daybeing an international
company,but to this point had never given it any
seriousconsideration.As the two spokeand Haber-
land dwelled on his recent experiencestrying to
penetratethe U.S.market, he expressedinterest in
the proposal. Following the discussion and some
additionalresearch,Haberland found that a poten-
tial opportunity existedin Europe, and that it was
in his company'sbestinterestto exploit this oppor-
tunity. With BSI's assistance,GENICON became
the smallestcompanyeverto receivethe regulatory
authority allowing its products to be sold through-
out the EuropeanUnion (EU).
While gaining this approval, GENICON's
domestic business continued to remain sluggish.
Realizingthat it wasgoing to be impossibleto con-
duct business in the United States until GPO
contracts were obtained, Haberland decided to
17
focus his efforts on the newly opened European
market. Though this strategyposed its own set of
risks,there wasno other option. Learning of GENI-
CON's recent European approval, a shareholder
recommended that Haberland attend MEDICA in
Germany,one of the largesttradeshowsfor medical
devicesin the world: this would provide an oppor-
tunity to meet distributors from every country in
the EU and negotiatecontractswith medicaldevice
suppliers. .
There were severalcrucial factorstaking place
around the time of the MEDICA exhibition in 2000.
The European market for medical devices,once
composedof many suppliers-none of which had
significant market share-was in transition. Prior to
the late 1990s,relatively small to medium-sized
manufacturers would use an array of, distributors
throughout the EU to get their products into hospi-
tals. By using the distributor network, thesecom-
panies were able to reach beyond their national
borders into nearby foreign markets.This changed,
however, when Tyco Healthcare (now Covidien)
entered Europe in the 1990s:a seriesof strategic
acquisitions by Tyco Healthcare consolidated the
once-fragmentedmarket.Beingamuch largercom-
pany, Tyco Healthcare used its size to negotiate
favorable contracts with only a few regional dis-
tributors. Shortening the distribution channel
provided significant costsavingsfor Tyco,but dev-
astatedmany distribution companiesthat now had
no products to sell.
It was in this environment that Haberland
enteredthe market, having no ties in Europeat the
time. The local distributors, desperatefor products
to sell,were more than willing to take GENICON's
products into the Europeanmarket. The MEDICA
tradeshow wasa huge successand marked a turn-
ing point for the small company. The local dis-
tributors would provide a steadystream of salesfor
GENICON, allowing it to remain a viable com-
pany without having significant revenuesin the
United States.
After obtaining several,contracts in Europe,
the future for GENICON seemedbright: however,
Haberland found that this new market presented
r 18 CHAPTER 2: MARKET ANALYSIS

its own challenges, and that the company was

againfacinginternal issuesof its own.The EU was
.Genicon'slnternation<ll Matl<ets
primarily composed of socializedhealth care sys-
tems, which provided medical care much differ-
ently than in the United States. Salesof medical
devices would be directly correlated with the
number of tenders won. A tender alloweda com-
pany to sell its products to a given health care
systemfor a certain length of time. Winning ten-
ders did not guarantee immediate sales, as these
were contracts to sell to selected hospitals and
health care facilitiesat some point in the future,
usually one to three years. Though distributors
typicallybought some stock to build their inven-
tories, this was not a substantial amount. Outside Peru
the EU,many developedcountries provided health
care to their citizens in a similar manner. Under
these conditions, Haberland was able to establish
business in almost 30 countries around the globe
(seeExhibit 2 and Exhibit 3). Source:Companyrecords.

~"

--ToP fo M!!ff<ets1fer(j~Ic:tOJH~~~)

Top 10Markets($) Sales Cost GrossMargin

Ireland

Source:Companyrecords.
 GENICON: A Surgical Strike Into Emerging Markets
International Market Selection
Consideringthat approximately 80 percent of
GENICON'sbusiness was derived outside the
United States, a critical factor in its success
hadbeenchoosingthe right international markets.
= Therewereusually moderate fees associatedwith
[~ obtainingthe proper regulatoryapproval,averaging
around$20,000per market,but there were also
recurringfeesin the UnitedStates:GENICONspent
approximately$55,000per yearfor U.S.federaland
f state regulatory issues associated with exporting,
certifications,and inspections.Furthermore, other
elementssuch as taxes and tariffs, government
regulations,exchange rates, and even corruption
affectedthe abilityand profitability of doing busi-
nessin a givencountry.Due to GENCION'slimited
human and capital resources, it was critical that
only countries with great market potential were
chosen.
Deciding to invest in a country that was
unsuited for GENICON'sproducts would lead to
minimal sales, wasted manpower and lost reve-
nues. On the other hand, not choosing to enter
_SeJect~d
India
Medical device 66.82 70.76
Source:Associationof Medical Devicesand suppiers of India (AMDsl), The AssociatedChambersof Commerceand Industry of India
(Assocham).CentralDrugsStandardControlOrganization(CDsCO),BM!.
Note:f = forecast.
.9
suitable markets would have equally negative
effects in terms of lost opportunity. Haberland
narroweddownthe listto four ofthe mostpromising
countries for GENICON to enter: India, China,
Brazil,and Russia.Eachhad its own set of benefits
and shortcomings,and Haberland-not h~vingthe
human or capital resources to go into all markets
at once-was conflicted as to which market pre-
sented the best opportunity for GENICON
(see Exhibit 4).
India
According to some reports, India would overtake
China in terms of population by 2050. Despite rapid
economic growth, India remained a very poor coun-
try. According to the International Monetary Fund
(IMF) estimates, India's gross domestic product
(GDP) per capita was $1,016 in 2008, compared
with $'2,969in China.3 India's emerging middle class
would continue to drive demand for new goods and
services. A wealthier society, combined with tax
reforms, would serve to boost revenue receipts and
relieve some of India's fiscal pressures.
(Continued)
r
20 CHAPTER 2: MARKET ANALYSIS I
~..
e:
E
=,
~~"
China =:
E:
~'
E):
16,12 E'
E
§
E,
Medical device market 57.15 64.50 12.01 79.09 85.12 87.87 97.65 108.35 §
(CNYbn)
6.61 M6
~,

Source:ChinaAssociationof MedicalDevicesIndustry(CAMDI), StateFoodand DrugAssociation(SFDA).ChinaCustoms,BM!.

Note:f = forecast.

Brazil

..1BIE:II1ml1mDI_1mII
'-','" - .~ -"~' - .,' ~"-
F 2.t 2.5 2.:,0-. 2.5 2.83:7 4.8'
." Medical device market (BRlbn) 4.6
'" 4.9 5.5 6.1 6.9 7.7 8.6

--------
Source:BMI, ABIMED,WHO, USCommercialService.
Note:f = forecast.

Russia

..' '-"-' "-' - ,.~, , " '~

, .'- r,~.2 1.98 2.04~itL! 2.3b":~.,:2~5~ ii2;:83 i
Medical device market (RUBbn) 45.37 61.57 67.05 69.5\ 69.94 74.76

Diagnostic equipment
0.43

Medical aids 0.16 0.17 0.18

Other 0.29 0.32 0.34

Source:BM!. RMBC.WHO, US InternationalTradeAdministration. Coalitionfor US-RussiaTrade.

Note:f = forecast.

f GENICON: A Surgical Strike Into Emerging Markets
India would continue to struggle to provide
adequate health care services to its rapidly growing
population. Publicly funded health (are would be
the main provider for the bulk of the poor popula-
tion, although people were increasingly turning to
private providers offering better facilities and
shorter waiting lists. Public facilities would continue
to sufferpersonnel shortages, which the government
had been unprepared to address in recent times.
Private health care boasted superior quality and
facilities:it accounted for more than 65 percent of
primary care and more than 40 percent of hospitals,
resulting in so~e personnel shortages in the public
sector. India's vast population generally paid for
health care out of pocket. According to the World
Health Organization (WHO), the private sector
accounted for nearly three-quarters of total health
carespendingin 2007.4
Regulations improved significantly after 2000,
and India was on the brink of forming the Medical
Device Regulatory Authority (MDRA). The agency
would ensure the quality, safety, efficacy, and avail-
ability of health care equipment used in the coun-
try. India's intellectual property (IP) laws left a
lot to be desired, but were improving; likewise,
approval times were shortening, with some innova-
tive products being introduced in a relatively short
period after mature market launch. Despite these
improvements, India was held back by an
entrenched bureaucracy. On a positive note, the
country scored high for policy continuity, which
was backed up by the longest and most exhaustive
constitution in the world.
Through 2013, Business Monitor Interna-
tional (BMI) forecasted 11.3 percent y~y growth
for India's $2.35 billion medical device market,
which was higher than both the pharmaceutical
and overall health care industries: this demon-
strated the buoyancy of the sector.s Imported,
high-end goods would continue to account for
the majority of sales, but domestic production
would increase its share through 2013. Other key
trends included more transparent regulations, a
reduction in levies and an influx of foreign
firms. In 2005-2006, imports of medical devices
rose by 23 percent to top $365 million, and
21
similar growth was expected for the following
years.6
China
As early 2010, China had the fastest-growing major
economy in the world, lifting hundreds of millions of
people out of poverty over the past generation. A
massive trade surplus and almost $2 trillion of for-
eign reserves served as a cushion against external
economic volatility. China's policy makers appeared
to be committed to continuing gradual economic
reform. Caveats to its success included a heavy reli-
ance on imports of energy and food, and a large seg-
ment of the population still living in poverty. China's
dependency on exports to sustain growth made it
vulnerable to the global recession. Private consump-
tion was weak, at less than 40 percent of GDP.The
first quarter of 2009 saw the Chinese economy grow
at its slowest pace since quarterly records began in
1992,as collapsing exports and retreating consumers
resulted in real GDP growth slowing to 6.1 percent
YOY.The deceleration was felt across all sectors of the
economy, including health care. Despite the eco-
nomic slowdown in the face of a global recession,
China fared extremely well and was poised for con-
tinued economic expansion into the future.
China's health care system was highly central-
ized. It came under close scrutiny following the
2003 outbreak of severe acute respiratory syn-
drome (SARS). The event highlighted the inade-
quacies of China's central planning in terms of
efficient health care delivery across such a large
country. As a result, the private sector made further
inroads in the following years, especially as China
opened up to outside suggestions and continued
with its health care system reform, encouraging
hospitals and clinics to turn a profit. Health care
facilities in China suffered regional disparities.
Approximately 40 percent of the Chinese popula-
tion lived in cities that boasted considerably supe-
rior health care services, although the accelerating
rate of urbanization threaten'ed to worsen access to
services as cities struggled to meet rising demand
and villages lost qualified medical personnel. Fur-
ther improvements to the sector were required,
r 22 CHAPTER 2: MARKET ANALYSIS
althoughthe risingrelianceon market forceswould,
stimulatefaster changes.
The regulatory framework was also improv-
ing, but it still hindered the path toward more
efficient operations, particularly those used to
dealing with defined and transparent roadmaps
to commercialization because it was so difficult
for companies to predict when, if ever,regulatory
approval would be granted. Companies could not
prepare reliable sales funnels or forecasts. The
State Food and Drug Administration (SFDA)-
China's premier food, drug, and medical device
watchdog-completed a draft version of the
revised regulations for the Supervision and
Administration of Medical Devicesin September
2009, giving a clear signal that quality was
becoming increasingly important: this was good
newsfor non-Chinese firms. The approval system
for medicaldeviceswasdecentralized.Input from
the local governments was needed for registra-
tion of new devices,leaving firms facing signifi-
cant bureaucratic pressures to roll out products
swiftly.Typically,it took 12 months to approve a
new pieceof equipment, but this time period was
expectedto shorten. Unfortunately,as of February
2010, th,e reuse of data and analyses previously
given to other regulatory agencies was not per-
mitted: this lengthened the process. The SFDA
sent some encouraging signals: in January 2009,
a senior official at the agency said that the
improvement of the medical device registration
systemwould be the agency'stop priority in 2009.
China's$12.6billionmedicaldevicesectorwas
expectedto post double-digitgroWthbetween2008
and 2013, driven by a booming economy and an
ageingpopulation. Domestic firms were expected
to move up the valuechain, while foreign players
would continue to increase their presence. Chal-
lenges included inconsistent IP enforcement and
relentless downward pricing pressures. Cutting-
edge medical equipment was expected to experi-
encethe greatestdemand. By2012,the valueof the
medical device industry was expected to reach
$20.6 billion, an impressive 8.2 percent share of the
overall health care market. A key driver of the,
medical equipment market was the increase of
private insurance and the privatization of state-
owned health care facilities. The growing commod-
itization of health care in China would likely result
in increased demand.
Brazil
The Brazilian economy was one of the largest in the
world: it benefited from a rich abundance of agri-
cultural and mineral resources. Onshore and off-
shore oil discoveries catapulted Brazil toward the
status of global oil giant almost overnight. This
would help the country attract a wide range of
investors and businesses over the long term. The
Brazilian economy was highly reliant on strong
consumer spending levels, which were driven by a
credit boom. Tighter credit and liquidity condi-
tions amid the global financial crisis of 2009 insti-
gated signs of consumer retrenchment, casting
growing uncertainty over Brazil's potential for a
prompt economic recovery down the road. Long-
term growth prospects were generally positive, with
nominal GDP growth rate expected to average 6.6
percent annually through 2013.7 '
Brazil's rapidly growing population and the
government's commitment to expanding access to
essential health care were key drivers of future
growth in the market. Despite many changes
between the 1980s and the 2000s, the country made
significant inroads on public health. In May 2008,
the government passed a law obligating the country
to increase health care spending to a minimum of
10 percent of GDP, compared to the seven percent
spent on health care in previous years.s Total health
expenditures were forecasted to rise steadily well
into the future, assuming stable economic condi-
tions prevailed and that population growth contin-
ued at a steady rate.
Medical device registration was controlled
by The National Health Surveillance Agency
(ANVISA), which required companies to establish
a local office or manufacturing unit, or appoint a
local distributor in order to access the market.
Although ANVISA has its own regulatory stan-
dards, international certification was generally
accepted. Approval of medical devices in Brazil
 GENICON: A Surgical Strike Into Emerging Markets
could become subject to greater risk-based differ-
entials, following two proposals from ANVISA.
The adoption of a four-tier system was being con-
sidered, similar to the system used in the EU in
which low-risk health products were allowed easier
access to the market, while higher-risk products
required suitable Good Manufacturing Practice
(GMP) certification. Industry observers welcomed
this move, noting cost benefits for certain manu-
facturers, safety benefits for patients and greater
efficiencies for health regulation. The registration
process was relatively swift, taking an average of 10
months, and product registrations were valid for
five years. The cost of device registration varied
according to the annual revenue of the company
and was generally in the range $1,200 to $11,900.9
Brazil's medical device market, valued at $3.0
billion in 2008, was the largest in Latin America.
The strong growth experienced since economic
liberalization in the 1990s was expected to continue
well into the future. A compound annual growth
rate (CAGR) of 13.8 percent was anticipated
through 2013, fuelled by increases in health care
expenditures: a large part of this spending would
be channelled towards the modernization of health
care services. Brazil remained overwhelmingly
dependent on imports of medical equipment and
supplies, with official statisfics showing a $1.9 bil-
lion deficit in these products in 2007. The public
sector, which accounted for 44 percent of domestic
demand for medical devices, offered strong poten-
tial for firms able to win government tenders.
The Ministry of Health's budget increased by
21 percent in 2006, and strong public sector fund-
ing was expected to continue, offering strong
growth potential for domestic manufacturers. 10
The medical device distribution sector was
highly fragmented, creating the biggest challenge
for foreignfirms lookingto bring their products to
the Brazilian market. There were approximately
3,000 importers and distributors, of which rnost
were small companies that operated regionally or
in niche markets; for this reason, many multina-
tionals chose to tie up with local device makers to
gain accessto the market.Asthe market continued
to grow, it was anticipated that there would be
23
consolidation in the inefficient distribution sector,
which would boost market access.
With few large-scale domestic manufacturers
and a large rapidly growing market, Brazil's medi-
cal device sector offered strong [iotential for for-
eign device makers to exploit imports. rndeed, the
medical device market suffered from a major trade
deficit that grew by an estimated 20 percent
between 2006 and 2007 to reach $1.8 billion. The
United States accounted for approximately 50 percent
of the import market. The widening trade gap was
not helped by low import tariffs: there were no
import duties or value-added taxes on 42 medical
devices. This was in contrast to many other emerg-
ing markets, where only high-tech products that
could not be manufactured locally were import
duty exempt. .
Russia
The p,ost-1998 rebound from the economic crisis,
combined with significant reductions in personal
and corporate income tax rates, made Russia a
much more attractive place to do business than in
the decade following the Soviet Union's collapse.
Stability increased dramatically as the economy
rebounded on the back of high commodity prices
and the currency's 1998-1999 devaluation. Despite
these improvements, the Russian economy was still
in a state of transition, with large account and fiscal
surpluses being eroded significantly and challeng-
ing the country's macroeconomic stability. Russia's
dependence on the oil sector made it particularly
vulnerable to a sustained decline in energy prices;
additionally, many foreign investors were put off by
poor legal safeguards, high levels of bureaucracy,
and corruption.
The ongoing modernization of the health
care system was the key driver of the medical
device market's growth, though this was often
pursued in an inconsistent and piecemeal manner.
Positive factors fueling a growth in healthcare
expenditures included vastly improved govern-
ment finances, a commitment to health care
improvement, and the rise of private health insur-
ance, as many large companies routinely provided
r
24 CHAPTER 2: MARKET ANALYSIS
supplementary insurance for employees. Signifi-
cant structural challenges remained, including
antiquated and poorly funded hospitals, a lack of
primary care networks and physicians, a poor
logistics infrastructure, and a wide variability in
terms of the quality and availability of health care
across regions. The state of medical facilities was
expected to improve substantially over the long-
term, but conditions were problematic. Encourag-
ing to many in the medical manufacturing indus-
try was the general trend toward greater health-
care expenditure levels, and forecasts were that
total private and public health care spending
would reach $97.4 billion by 2013, equivalent to
3.8 percent of GDP.
The potential of the Russian market was bal-
anced by significant political risk. Roszdravnad-
lOr, the main government health regulator, lacked
enforcement teeth and had seen significant dis-
ruption from changes in leadership since late
2006. Registration of foreign-made medical
devices was handled by this department. All
imports had to go through either a Russia-based
subsidiary or an authorized local distributor; in
addition, there was the risk that future changes to
legislation could actually make the situation worse
for foreign producers, as the government sought
methods (short of punitive tariffs) to increase the
share of local producers in the overall market-
place. This scenario was expected to benefit from
the reduction in tariffs for medical devices to an
average of five percent for these products, as a
result of Russia's likely future accession to the
World Trade Organization (WIO).
Russia's $1.98 billion medical device sector
displayed robust long-term growth potential,
driven predominantly by an expanding economy
and improving health investment by both the state
and private sector. Though the economic crisis of
1998 served as a stimulus for the domestic medical
devices market-as the price of imported equip-
ment rose sharply-local players failed to consoli-
date their position and imports still made up
approximately 75 percent of the market.11 The
medical device sector was expected to suffer some
short-term setbacks due to the economic slow-
down in 2009, but demand from increased state
investment should mitigate a substantial amount
of this negativeimpact. By 2013, the total market
valuation should reach $2.88 billion after growing
at a CAGRof 7.74percent.12
The sheer size of the Russian healthcare net-
work, comprising almost 10,000hospitals, meant
that there was great opportunity for this sector,
even if the majority of financing came from the
government. Healthcare expenditures were grow-
ing at a reasonable pace as well: it was estimated
that healthcare expenditures stood at a total of
$39.4 billion in 2007.13Spending was forecasted
to fall slightly to 3.8 percent of GDP by 2012,
which was low by European standards. Neverthe-
less, as Russia'smiddle class grew,the number of
private clinics and hospitals was expected to
increaseaccordingly,which would help fuel sector
growth.
Where to Go Next?
Haberland's review of GENICON's 2009 perfor-
mance made him feel confident about the future.
The company had 21 employees: six in opera-
tions, six in sales,five in administration, three in
research and development, and him. Annual rev-
enues were above $5 million, which had been
achievedwith a marketing/business development
budget of under $225,000.
With more than 10 years of experience and
some real international success, Haberland was
readyto enter one or more of these emergingmar-
kets: but where should GENICONgo next?Was it
possiblethat none of these four emerging markets
wereright for GENICON?Shouldit skip these four
for now and focus on growing its business in
its existinginternational markets, or large,wealthy
countries, such as Germany,that were adjacent to
one of its existing markets? Taking GENICON's
current situation into account,Haberland took the
data and used it, alongwith his instincts, to decide
where to go to next.
 HyundaiCard's Marketing Strategy 25

(A$E QUESTIONS

L Thefljarketf.orminimallyinvasivesurgicalinstrumentsin.the UnitedStateswasgrowingbut ata sl.ower

ratethan in .otherc.ountries.
Did GaryHaberlandmakethe bestdecisi.on t.osimplyshift all the c.ompany's
eff.ortst.ointernational
markets,.orsh.ouldhe havefirsttried hardert.oexpandsalesin the UnitedStates?

2. A m.arket analysis.ofeachof the p.otentialcountriesdesignatedf.orexpansi.onwouldindude

a quantitative
anda qualitativeevaluati.on. Based.onthe inf.ormationinthe case,whichquantitativefigureswouldbe
mostimportantforthe marketanalysis? Haww.ouIdthe conceptsof marketpatentiaI andmarketdemand
applyto the analysis?Makea casefor the countryGaryI-I.aberland shouldchoosebasedsolelyonaquan-
titativelybasedrnarketanalysis.

3. The.marketanalysis.of each.ofthe p.otentialc.ountries

designatedf.orexpansi.on c.ouldalsobec.onducted
using"gut-reacti.on".orqualitative-decisi.on
variables,suchasculturalsimilarity,ease.ofconductingbusiness,
andperceptions .ofc.orrupti.on,
Based.onthe informati.onin the case,whichqualitativevariablesw.ouldbe
the m.ostimp.ortant far the marketanalysis?Makea casefar the c.ountryGaryHaberlandsh.ouldch.oose
baseds.olely.ona qualitativelybasedmarketanalysis.

4. Usingbathquantitativeandqualitativevariables,whichc.ountryshouldGaryHaberlandcho.ose?

5. Whatc.omplicati.ons
emergefromconductingamarketanalysisin a foreigncountryascomparedwith the
UnitedStates?