W12461

AFTER THE BRICS: CHOOSING FROM OTHER EMERGING MARKETS

Allen H. Kupetz and Gary Haberland wrote this case solely to provide material for class discussion. The authors do not intend to
illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.

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Copyright © 2013, Richard Ivey School of Business Foundation Version: 2014-12-02

Toward the end of 2014, Gary Haberland, president and founder of GENICON, a U.S.-based
manufacturer and distributor of medical devices for laparoscopic surgery, faced a happy dilemma:
deciding which international market to enter next. After the company’s success in Europe and other
developed markets, GENICON had tackled Brazil, Russia, India and China (the BRIC countries) and
China was now GENICON’s largest international market. He was now eagerly prepared to pursue other
emerging markets. Haberland had become knowledgeable about the challenges of attempting to conduct
business in markets where the rule of law was fluid. He had first-hand experience in markets that were
initially successful, but had withered away as a result of a change in government that led to a new set of
regulations and other barriers to entry. Unlike most start-up companies that had succumbed to the
pressures of the medical device industry, GENICON had established its presence and experienced
prosperity by focusing, since the early stages of its launch, on its international distribution strategy.

For GENICON to continue thriving, it would need to identify, evaluate and develop new markets that
offered geographic diversity. Although the United States had long been the world’s largest minimally
invasive surgical (MIS) market, for the foreseeable future, international markets were anticipated to grow
at an exceptional rate compared with the U.S. market (see Exhibit 1 for global growth projections by
region).

International success did not negate GENICON’s need to identify the market it should enter next. For a
firm the size of GENICON, entering a new market meant a high capital investment and high risk.
Furthermore, because the initial investment time and realization of revenues spanned up to three years,
entering many different markets simultaneously was simply not feasible.

THE GENESIS OF GENICON

In 1997, while working for a large medical devices company, Haberland and a small development team
were tasked to analyze whether the company should mature its soft goods line to include laparoscopic
instruments. The firm was hesitant because it was primarily involved in orthopedics and this new line
would represent a significant deviation from its current operations. Additionally, expanding the
company’s line to include laparoscopic devices would require a large investment of capital resources.

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After several months of research and negotiation with the development team, upper management decided
to forgo entry into this field, citing high barriers and incompatibility with the company’s current
operational structure. Haberland, baffled by management’s assessment, resigned and created GENICON
to specifically pursue laparoscopic surgery within the MIS market.

Laparoscopic surgery, a subset of MIS, allows physicians to examine, diagnose and treat problems within
the abdomen. Such surgeries can be performed through either traditional open-abdomen surgery or more
modern, minimally invasive techniques. During laparoscopic surgery, the abdomen remains closed while
specialized surgical instruments are inserted through a number of small incisions. Compared with open
surgery, laparoscopy reduces both trauma to the skin and muscles and post-operative pain, which directly
correlate to shorter hospital stays and recovery times, thereby providing a reciprocally advantageous
relationship.

These advantages led to a rapidly growing market for laparoscopic surgery, both at home and abroad. The
global market for MIS devices and instruments was worth an estimated $7.4 billion1 in 2011, and was
expected to reach $11 billion by 2015 (see Exhibit 2 for the global market for MIS devices and
instruments). In 2011, the United States accounted for about 36 per cent of the world market, or
$2.7 billion. Thus, GENICON could pursue the huge market for laparoscopic surgical devices that existed
outside the United States.

Despite this large and increasing demand for laparoscopic surgical devices, GENICON faced real and
severe barriers. For example, the U.S. healthcare market heavily favored purchasing through group
purchasing organizations (GPOs), which then sold products to hospitals and other primary-care facilities.
While this arrangement suited larger medical device firms, smaller companies faced a daunting challenge
to obtain contracts from GPOs. This industry structure led to GENICON’s inability to sell any significant
amount of product during its early years of operation.

GENICON JET SETS

Given the restrictive barriers in the U.S. market, GENICON decided to seek success internationally. In
1998, Haberland met an employee of the British Standards Institute (BSI), an organization involved in
licensing products for the European market; this employee encouraged Haberland to enter the BSI.
Following their discussion and additional research, Haberland confirmed that a potential opportunity
existed in Europe and that it was in his company’s best interest to exploit it. GENICON became the
smallest company ever to receive the regulatory authority allowing its products to be sold throughout the
European Union (EU).

GENICON’s domestic business, however, remained sluggish. Realizing that it would be impossible to
conduct business in the United States until GPO contracts were obtained, Haberland refocused his efforts
on the newly opened European market. Although this strategy posed its own set of risks, Haberland had
few options. Prior to the late 1990s, small- to medium-sized manufacturers had used an array of
distributors throughout the EU to get their products into hospitals. By using the distributor network, these
companies were able to reach beyond their national borders into nearby foreign markets. This
arrangement changed, however, when Tyco Healthcare (now Covidien) entered Europe in the 1990s.
Tyco consolidated the once fragmented market through a series of strategic acquisitions. It then used its
size to negotiate favorable contracts with few selective regional distributors. Shortening the distribution

1
All currencies are in US$ unless otherwise stated.

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channel provided significant cost savings for Tyco, but devastated many distribution companies who
consequentially had no product to sell.

The unintended result was that local EU distributors, desperate for products to sell, were eager to take
GENICON’s products to market. The local distributors provided a steady stream of sales for GENICON,
allowing the company to remain viable despite lacking significant U.S. revenue.

After obtaining several contracts in Europe, the future for GENICON seemed bright. Yet, Haberland
found that this new market presented its own challenges, and the company was again facing internal
issues of its own. The EU primarily comprised socialized healthcare systems, which differed significantly
from how U.S. medical care was provided. For example, EU medical devices sales were directly
correlated with the number of tenders won. A tender allowed a company to sell its products to a given
healthcare system for a set length of time. Furthermore, winning tenders did not guarantee immediate
sales; the tender was only a contract to sell to selected hospitals and healthcare facilities at an indistinct
point in the future (usually one to three years). Although distributors typically bought stock to build their
inventories, the amount purchased was not substantial. Outside the EU, many developed countries provide
healthcare to their citizens in a similar manner. Under these conditions, Haberland was able to establish
business in more than 60 markets around the globe (see Exhibit 3 for the list of GENICON’s international
markets as of fall 2014).

CHISELING THE BRIC WALL

A critical factor in GENICON’s success had been choosing the right international markets, considering
more than 80 per cent of its business was derived outside the United States. Moderate fees were
commonly associated with obtaining the proper regulatory approval. Other elements, such as taxes and
tariffs, government regulations, exchange rates and even corruption, affected the ability and profitability
of doing business in a given market.

Due to GENICON’s limited human and capital resources, it chose to enter only countries with great
market potential. Deciding to invest in a country that was unsuited for GENICON’s products would lead
to minimal sales, wasted labor and lost revenues. On the other hand, not choosing to enter suitable
markets would lead to equally negative effects in terms of lost opportunity. Like many other U.S.
companies, Haberland had looked to the so-called BRIC countries — Brazil, Russia, India and China —
as markets that likely had the critical factors necessary for GENICON to be successful. GENICON
entered three of the BRIC markets with mixed results.

Brazil

GENICON had early success in Brazil, but felt friction from such issues as changing regulations,
currency fluctuations, opposition to single-use product compliances, inflated product registration prices
and protectionism. The notion that the market size was 200 million people was an illusion because less
than 25 per cent could access modern healthcare. In 2011, GENICON had no sales in Brazil so it changed
its mode of entry. In 2014, GENICON used a reseller (after a two year registration cycle) and a different
firm that imported the components, completed assembly, and then sold them in Brazil. The long-term goal
of the firm was to take advantage of the lower tax rate for components and then compete for government
purchases with made-in-Brazil devices. After no sales in 2011, GENICON revenue in Brazil in 2014 was
approaching 1 per cent of GENICON’s total sales.

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Russia

The Russian registration process remained so convoluted that GENICON could not navigate through it
without violating the U.S. Foreign Corrupt Practices Act (FCPA). GENICON had no plans to enter the
Russian market in the foreseeable future.

India

GENICON entered India in 2006, aiming at the wealthier southern states, but was not successful.
Between 2010 and 2012, GENICON learned that India could not be treated like a single market because it
encompasses such extensive regions characterized by unique laws and health delivery systems. The
southern part of India was lucrative, but second to its well-funded military healthcare market. GENICON
learned how to target eclectic regions located within the same market umbrella, but eventually focused
more on the Indian military medicine market, as it had in Saudi Arabia. GENICON revenue in India in
2011 was less than 1 per cent of GENICON’s total sales and remained so in 2014.

China

The 14-month registration process for GENICON in China was completed in early 2012. Research
indicated that wealthy Chinese did not want Chinese-made surgical devices, which presented a great
opportunity for GENICON. GENICON learned the importance of assessing all factors, such as regulatory
components, intellectual property rights, single-use compliance and the acceptance of laparoscopic
techniques. China had the fastest growing middle-class in the world in real numbers, totaling more people
than in the entire United States. GENICON revenue in China in 2012 was about 1.25 per cent of
GENICON’s total sales; in 2014 it was more than 12 per cent of GENICON’s total sales.

WHERE IN THE WORLD SHOULD GENICON GO?

GENICON’s experiences in the BRIC countries had provided useful lessons for doing business in
emerging markets. It became apparent that the keys to choosing markets included the following:

 Single-use compliance on medical devices

 Intellectual Property Rights (IPR) protection
 Understanding the government’s role in healthcare acquisition decisions
 Preference for U.S.-made medical devices over locally produced products
 Ability to conduct business without violating the terms of the U.S. FCPA

With almost 17 years of experience and bona fide international success, Haberland knew that GENICON
was prepared to conquer more markets. Cautious from its varied experiences in the BRIC markets,
GENICON needed to be more discriminating in choosing the next emerging markets to enter. So, where
should GENICON go next? Which emerging markets seemed to provide the best fit for GENICON’s
products and business methods? Or, should it forgo new emerging markets all together and focus instead
on increasing market share in its existing markets? (See Exhibit 4 for GENICON’s largest international
markets for 2013 and 2014.) Should the current healthcare environment in the United States be re-
evaluated to measure new opportunities associated with the ongoing healthcare reform? China and India
seemed obvious in retrospect; the next decisions seemed more difficult.

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EXHIBIT 1: GLOBAL LAPAROSCOPIC PROCEDURES’ PROJECTED REVENUE GROWTH, BY

REGION

Source: “Global Laparoscopy Devices Market is Expected to Reach $13,152.9 Million in 2018,” Wall Street Journal,
September 12, 2012, http://tinyurl.com/c3cctgf, accessed December 16, 2012.

EXHIBIT 2: GLOBAL MARKET FOR MINIMALLY INVASIVE SURGICAL DEVICES AND

INSTRUMENTS 2012–2018

Source: “Global Laparoscopy Devices Market is Expected to Reach $13,152.9 Million in 2018,” (September 12, 2012), Wall
Street Journal, September 12, 2012, http://tinyurl.com/c3cctgf, accessed December 16, 2012.

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EXHIBIT 3: GENICON’S INTERNATIONAL MARKETS AS OF FALL 2014

Algeria India Panama

Australia Indonesia Peru
Austria Iran Poland
Bahrain Iraq Portugal
Belgium Ireland Qatar
Bolivia Israel Romania
Brazil Italy Saudi Arabia
Canada Jordan South Africa
China Kuwait South Korea
Colombia Lebanon Spain
Costa Rica Libya Sri Lanka
Cyprus Malaysia Switzerland
Denmark Malta Thailand
Dominican Republic Mexico Tunisia
Ecuador Morocco Turkey
Egypt Mozambique United Arab Emirates
El Salvador Nepal United Kingdom
Finland Netherlands Uruguay
France New Zealand Venezuela
Germany Nigeria Virgin Islands
Greece Oman Yemen
Guatemala Pakistan

Source: Company files.

EXHIBIT 4: GENICON’S LARGEST INTERNATIONAL MARKETS 2013 AND 2014

2013 2014
Spain China
UK South Africa
South Korea UK
China Spain
South Africa South Korea
Saudi Arabia Italy
Italy Ecuador
Ecuador Colombia

Source: Company files.

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