KPMG Switzerland’s Thomas Linder, head of global location and expansion services, and André Guedel, head of international market development, discuss the three site-selection criteria that med-tech companies from emerging economies and the US have to consider before deciding where to locate key parts of their business within Europe.
Access to new technologies, products, talents and markets is critical for med-tech companies in order to maintain competiveness and generate growth in an environment characterised by price pressures, fast technological changes and increasingly sophisticated consumers.
In this regard, Europe is particularly interesting for those med-tech companies from emerging economies and the US. With its technological leadership and manufacturing know-how, the continent offers interesting opportunities for the acquisition or development of intellectual property (IP) as well as the production of sophisticated products. The vocational training systems in place in many countries and/or top academic educational systems guarantee a large qualified workforce, while the mandatory health-insurance system in most European countries, plus aging populations, ensures a strong and steady demand. Finally, products that are accepted by the region’s consumers or even manufactured in Europe, can benefit from a ‘Europe bonus’ in emerging markets.
The activities that overseas med-tech companies usually locate in Europe are R&D, manufacturing, and regional headquarters/shared-service operations. To find the ideal location for these activities, the following key factors have to be taken into consideration:
- size and specialisation of the med-tech clusters in shortlisted countries
- opportunities for business and
- tax-model optimisation
- other business-relevant factors.
KPMG Switzerland and start-up assessment specialist Venture Valuation have analysed six countries in Europe with substantial life sciences clusters – France, Germany, the Netherlands, the Republic of Ireland, Switzerland and the UK – based on three key site-selection factors.
Regarding the first key factor – the existence of med-tech clusters – analysis shows that two thirds of all med-tech firms in Europe are located in the six countries mentioned above. Unsurprisingly, the largest number can be found in Germany, the continent’s largest economy (the country hosts 582 companies, which employ about 87,000 people). Second is Switzerland, which has less than a tenth of Germany’s active population, but is home to 340 med-tech companies and 40,000 employees in this industry.
The main activities of the companies in these clusters are also important. For example, only 26% of Germany’s med-tech companies conduct R&D, while 79% have manufacturing activities, whereas in the UK, 51% conduct R&D and only 43% have manufacturing facilities. France is strong in both sectors, probably due to incentives for both types of activities. In relative terms, the Republic of Ireland, the Netherlands and Switzerland have more activities in manufacturing than in R&D.
It is interesting to compare the number of global headquarters maintained by domestic med-tech companies with international footprints versus regional headquarters of foreign multinational med-tech businesses. Switzerland hosts more than 50% of all EMEA headquarters of non-European multinational med-tech companies . The other typical headquarter locations – Ireland and the Netherlands – have similar global/regional ratios, but considerably smaller absolute numbers.
The second key site-selection factor concerns the growing need of med-tech companies to maintain and increase competiveness through business and tax-model optimisation. Multinationals are generally organised on the basis of a business model with some form of vertical integration that transcends national boundaries. Certain fundamental activities, such as R&D, are often performed in just a few countries, while manufacturing of finished products normally takes place in more countries. At the same time, the distribution of the products developed and produced must be carried out through local affiliates. Aspects such as applicable tax rates, R&D incentives, tax-efficient supply chain management (TESCM), double-tax treaty networks or transfer pricing regulations, become crucial. The same factors are also of importance for start-up companies. The selection of a ‘wrong’ location can result in the loss of R&D incentives or in effective tax rates above the optimal level, and the corrections of such a sub-optimal set-up might become expensive.
Strategic IP planning, built up centrally within the group in the form of patents, technology or trademarks, is essential. For companies owning IP in early development, R&D incentives and the possibility to offset cost with taxable profits might be of high priority, while a reasonable taxation of IP income and a beneficial double tax treaty network are more important for companies owning mature income-producing IP. Hence, the main considerations about where to invest and where to establish operations overseas must also include an analysis of transferring IP from one location to another in a tax-efficient manner.
Finally, other business-relevant factors need to be taken into consideration. The availability of talent is crucial. Special emphasis needs to be placed on the flexibility of the labour law, which varies significantly across Europe. Other key aspects are the regulatory environment, the ease of doing business, local financing, geographic location, and the political and financial stability of a country.
General macroeconomic and political observations such as the account balance deficits/surpluses or GDP/debt ratios of each country are important elements too, since they can be an indicator of changes in a country’s fiscal policy. Particularly in light of the current situation in Europe, it is important to also keep a close watch on monetary developments, which can significantly influence the economic environment in a country. The existence of free trade agreements (FTAs), such as the one between Switzerland and the EU, which guarantees the free movement of goods, services, capital and workforce, or between the EU and India, which is currently under negotiation, are also important in the decision-making process.
Peer companies that conduct the same type of activities that are intended to be brought to, or centralised in, Europe are crucial for med-tech companies looking to expand, relocate or restructure on the continent. The availability of talent, specialised service providers and suppliers as well as opportunities for collaboration are key advantages of such clusters, as are key business and tax-planning factors.
Finally, other factors such as labour regulations or the ease of doing business can help to complete the decision-making process.