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Thursday, 12 January 2017

By Pete Mohan, Site Selection Consultant, Wadley Donovan Gutshaw Consulting

Introduction

Medical device manufacturing is a dynamic industry, holding the attention of nearly every economic development agency in the country. However, with only about 300,000 employed in the industry nationwide, there are certainly limited opportunities to secure such operations. To help understand the direction that business is heading, a closer look at the prevailing trends is necessary. As saturation in traditional MedTech markets begins to push activity to other parts of the U.S. and the globe, new growth opportunities emerge for the burgeoning industry. 

National Trends

Throughout the nation, manufacturing employment faces the growing headwinds of automation and process improvement. Despite a growing economy since the end of the Great Recession that has seen a 6.9 percent increase in overall employment since 2012, manufacturing employment growth was less than half that rate (3.3 percent). The highly-technical nature of most medical device manufacturing operations makes the industry even more susceptible to technological forces, resulting in decreased employment but increased efficiency and profitability. This is corroborated by a decrease in employment of a half percent over the same period, while simultaneously growing gross wages by 11.8 percent, a truly impressive increase in the face of employment loss. See Table A.

In addition to increased profitability through process automation, the nationwide shortage of skilled labor supports continued wage inflation pressure. A recent Wall Street Journal article titled “As Skill Requirements Increase, More Manufacturing Jobs Go Unfilled” discusses the increasing demand for educated workers in manufacturing roles: the share of manufacturing workers with no more than a high school diploma has dropped from 53 percent in 2000 to 42 percnt in 2016, while the share of those with a bachelor’s or higher degree increased eight percentage points over the same period. Additionally, unfilled manufacturing positions are at record levels – over 350,000 a month – despite the Bureau of Labor Statistics reporting two unemployed manufacturing workers for each of those openings. A national skills disparity in demand and supply of that scale will impact hiring in most markets, pressuring companies to ensure that their growth plans target areas where the risk of unsuccessful staffing is minimized.

Many of the traditional MedTech powerhouse metros, states, and regions have stagnated over the last few years, most likely the product of the aforementioned skill-shortages and resulting wage pressure. While Minnesota, California, and the Northeast Corridor remain home to most domestic medical manufacturing headquarters, the vast majority of new job announcements over the past few years have either been entry into new markets, or expansion of existing satellite manufacturing facilities. The importance of co-location with R&D centers seems to have diminished somewhat with the rise of rapid prototyping and 3D printing, allowing manufacturing operations to detach from the parent operation and seek opportunities in metros with deeper and more cost-effective labor pools; thus shifting away from high-cost areas that commonly house headquarter and R&D functions. In contrast, new large-scale R&D operations that require a mature market of engineers and medical specialists, will continue to seek larger metros (like the recently announced Johnson & Johnson Center for Device Innovation at Texas Medical Center in Houston). 

State Trends

While it is important to note the regulatory and tax implications presented by states, metropolitan areas are typically the unit of choice when screening for a site selection project. That said, many location decisions never reach a site selection consultant’s desk, and are eventually made by a company’s C-Suite whose preliminary search criteria often concentrate on comparing state-level data. Additionally, the majority of recent growth nationwide has come through retention and expansion, efforts commonly addressed by state entities and their incentive programs. Due to these factors, it is interesting to note some of the location trends happening at a state level, despite the relative unimportance of state boundaries on staffing initiatives. 

Despite the uneven nature of state size and geography, the data indicates that market saturation is impacting growth at the state level. Industry strongholds California, Connecticut, Indiana, Massachusetts, New York, North Carolina, Ohio, Pennsylvania, and Wisconsin combined to lose significant employment since 2012, totaling more than 8,000 lost medical device manufacturing jobs, and industry leader Minnesota charted only 0.8 percent growth. Additionally, the synergistic growth often associated with existing MedTech clusters appears to be more of a fallacy than a rule. The eleven states whose manufacturing employment is 35 percent or more concentrated than the national average (i.e., a location quotient of 1.35 or greater), saw a combined decrease of -5.5 percent in medical manufacturing employment. Clearly, the saturation in some of these legacy markets has reached a tipping point, causing growth to spill into new locations.

Where is the employment growth taking place? The short answer: Florida and Utah (see Table B). These two states were the only ones to add over 1,000 employees in medical device manufacturing since 2012, and by a wide margin. Florida added 1,900 jobs and Utah 1,730; the next closest were Delaware +970, and Arizona +900. A common thread among these areas is their lack of manufacturing saturation. In all, there are seven states (DE, UT, AL, MT, AZ, SD, and FL) which grew employment by 10 percent or more. All but Alabama have manufacturing concentrations of no more than 20 percent above the national average; the three states that do have a manufacturing concentration greater than the U.S. average have the advantage of offering at least 10 percent wage savings against the nation. In essence these jobs are diffusing into less-saturated, less-costly labor markets.

       

Pictured Above: Rendering of Avadim Technologies’ proposed new Headquarters and production operation in Black Mountain, NC. They have plans to expand headcount from 100 to 650 and invest $24.4 million in the new facility.

Metro and Local Trends

Analysis of medical device manufacturing on a metropolitan basis provides the clearest picture of where business is gravitating and what type of labor elements drive or inhibit growth. Despite the relatively stagnant employment trend for this industry nationwide – a decline of 1,400 jobs over three years – examining the movement on a county level shows a significant amount of employment shift. 

Since 2012, 302 counties reported losing a sum of 32,700 jobs, meanwhile 253 counties gained back 31,300. A spread equivalent to over 20 percent of all employment is a substantial amount, much of which can be attributed to organic company growth and downsizing due to process automation. However, real estate plays a role as well. Companies preparing to launch a new product may pursue a new building due to the need for FDA building certification, such as Dexcom who recently selected Mesa, AZ for a new glucose-monitor production facility. Legacy operations may consider moving within their current metro to find property to build a new facility, or to select a submarket that better captures labor in metros with shifted demographics.

Outside of individual businesses’ relocation rationale, examining shifts in medical manufacturing employment by metro generally reflect the need to access key talent pools and avoid restrictive hiring environments. To better digest these trends, the U.S. metros are divided into five “tiers” by population (see Table C). The three tiers below one million population each lost employment since 2012, while Tier 2 metros were the most successful in adding jobs, growing by 6.1 percent. What is most attractive about these medium-to-large-sized metro areas? Tier 2 areas boast the highest rate of annual engineering grads per capita, seven percent greater than Tier 1 metros, and at least 33 percent more than the smaller tiers. Additionally, the average annual salary in Tier 2 areas is 10 percent lower than that of the Tier 1 metros, offering both a greater engineering supply and significant cost savings. Despite the largest metros housing 69 percent of all R&D activity, this has not proven to be a major indication of future growth outcomes for production employment.

Relative to smaller metro and rural areas, the growth potential in Tier 1 and 2 areas remains the most significant due to larger labor pools. However, that is not to say that certain smaller population centers would not be viable for medical device manufacturing. The low-cost nature of smaller areas will always be an attractive opportunity for businesses looking to improve their bottom line. For projects that do not have a large headcount requirement – especially in the scarcer positions (e.g., skilled machine operators, maintenance techs, and engineers) – a rural or small metro option can be viable. When considering smaller locations, the focus should be on the market’s labor capacity, not only for the immediate headcount requirement, but to accommodate additional future growth. Of 25 separate announcements for new medical manufacturing jobs since the end of 2013, 56 percent of the positions were from existing site expansions. Companies considering a smaller greenfield opportunity for cost savings should be aware of the long-term capacity of the market, so that future growth phases can be accommodated without the need to construct a new facility elsewhere. For this reason, a lack of labor depth can be a disqualifying factor for smaller areas, even if initial headcount requirements are modest.

Opportunities

Without question, the medical device manufacturing industry is entering a phase where companies are more comfortable expanding operations outside of the historically most active MedTech markets. As the country attempts to meet growing demand for skilled production jobs, training initiatives and community colleges are advancing the workforce in areas that previously couldn’t support a medical manufacturing plant. While each company and facility has unique demands, both geographically and labor-wise, there are certain indicators that may reflect opportunities for future growth.

  • Low median wage in manufacturing jobs: Medical device manufacturing wages are 11 percent higher than average manufacturing wages. Entering a market with low cost production labor is an opportunity to be an employer-of-choice in that market. Regardless of the depth of the market, positioning as one of the area’s best will provide access to quality applicants. For example, Tampa’s machine operators make 13 percent below the national average, and grew medical device manufacturing employment by 500 since 2012.
  • Low employment in medical device manufacturing: Similar to the point above, companies should leverage their standing as a medical manufacturer. In markets where the blue-collar employment opportunities are more traditional, the cachet of working for a MedTech company will have clout in that market, even if median wage positioning is targeted. A good example is Richmond, VA which houses over 10,000 machine operators, yet employs less than 300 in medical device manufacturing. 
  • High concentration of annual graduates with relevant degrees: Engineering talent is at a premium, and locating in a market that has a university (or universities) that produce these graduates is an invaluable way to secure a coveted talent pipeline. For example, the Madison, WI area graduates over 200 per year with industry-appropriate degrees, yet has less than 1,000 employed in medical device manufacturing.
  • Existing training infrastructure in place: Some markets may house existing non-medical advanced manufacturing clusters that have partnered with local entities to develop training programs to feed their local manufacturing talent pool. Leveraging existing programs like this can accelerate access to production skills that otherwise would require years of cultivation in underdeveloped markets. An example of this is the BMW Scholars Program in Greenville, SC that allows students to attend tech school full-time while working in the BMW plant part-time for hands-on experience.

Conclusion

This high-altitude discussion of medical device manufacturing offers some insight into the overall dynamics at play in the U.S. However, there are exceptions to the rule, and metro areas and their suitability should be considered on their individual merits. The custom requirements of any new or expanding operation will require an equally custom solution, and even as site selectors direct clients toward a ‘preferred’ or ‘recommended’ market and/or submarket, there will always be some level of tradeoff or compromise as there is no perfect location.

For medical device manufacturing, however, it is critical to heed the trends discussed in this article. Scarcity of requisite skills, increased competition in traditional MedTech strongholds, and rapidly-climbing labor costs will shape the future location hot points. There are plenty of labor markets in the U.S. that are poised (and eager) to be a springboard for the industry’s future growth. It takes two to tango, and medical device manufacturers should act now to secure access to available talent pools. Those who don’t act quickly to pursue new skills pipelines will want to ready their checkbooks for the ensuing bidding war over skilled labor. 

BIO: Pete Mohan is a Site Selection Consultant for Wadley Donovan Gutshaw Consulting's Jacksonville office. In his four years as a consultant with WDGC he has helped locate projects totaling over 10,000 jobs across varying industries and client needs, including manufacturing, distribution, financial services, and headquarters relocation. Pete's previous experience includes environmental remediation, manufacturing, neighborhood management, and entrepreneurship. He studied Civil and Environmental Engineering at Marquette University as well as City and Regional Planning at Clemson University.

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