Trump's tariff threat troubles medtech industry

Medtech companies are bracing for massive tariffs that could drive up costs, temporarily stifle innovation and force them to rethink supply chain strategies that protect their bottom lines.

One of the first actions President-elect Donald Trump has said he plans to do upon taking office this month is impose a 25% tariff on goods from Canada and Mexico and a higher tariff on goods from China.

Related: What Biden’s tariffs on Chinese medical supplies mean for industry

Citing people familiar with the matter, The Washington Post reported Monday that his aides are considering a more targeted approach, focusing the tariffs only on the defense, medical supplies and energy sectors. In a subsequent social media post, Trump denied that his tariff policy would be “pared back.”

If Trump enacts tariffs on the healthcare industry, the impact would be dramatic: 75% of medical devices marketed in the U.S. are manufactured outside of the country, including 13.6% of them in China, according to data and analytic company GlobalData’s medsource database. That could result in a trickle-down effect across the industry, leading medtech companies to raise prices on everything from gloves to MRI machines and preventing healthcare facilities from purchasing equipment or replacing old devices.

Companies such as spine implant manufacturer L&K Biomed, which produces all its products overseas, will be the most affected. That compares with a company such as Becton Dickinson, which produces 12% of its products abroad. Both companies did not respond to requests for comment.

Among products, hospital supplies, diagnostic imaging and anesthesia and respiratory devices are expected to be the most affected because they are the most common medical devices imported.

Medtech companies are preparing for the potential impacts of the tariffs, but uncertainty around how they will be implemented is making it difficult, said Vikram Aggarwal, global sector leader for medical devices and technology at Boston Consulting Group.

“It's not just the nature of the tariffs, it's also the speed at which they're implemented, the degree to which they're implemented and if it's going to be across the board or if it's going to be much more selective,” he said.

Drawing on pandemic playbook

Asked about the proposed tariffs during a November event, GE HealthCare CEO Peter Arduini said the company was “in better shape than many other companies.”

GE HealthCare, a major manufacturer of diagnostic imaging equipment and anesthesia and ventilation systems, has production facilities in 20 countries including China. The experience of the pandemic changed how the company thought about its global footprint, which may benefit it in the event of tariffs.

At the start of the pandemic, the company was shipping MRI scanners out of one facility in Florence, South Carolina. Today it also has manufacturing capabilities in Southeast Asia. Originally, it was only manufacturing PET scanners in Europe, but in the last year it started making them in its Waukesha, Wisconsin, facility as well.

“You can’t cover all the bases, but a big part of our strategy is to be able to have that flexibility,” Arduini said. “We see what cards are dealt and we try to manage and adapt in the best way.”

GE HealthCare sources from approximately 150 countries, according to the company.

In a prepared statement, Siemens Healthineers urged the incoming Trump administration to consider “the critical and life-saving role played by the medical-technology sector” when contemplating tariffs.

The company has been working to "decouple" its supply chain so it is not too reliant on China, Bernd Montag, CEO of Siemens Healthineers, said in an interview with Bloomberg in September 2023.

Philips Healthcare declined to comment.

Mitigating the cost

Tariffs on medical devices and components manufactured or purchased from Chinese companies would likely raise production costs for U.S. medtech companies, said Dr. Bejoy Daniel, senior industry analyst of healthcare and life sciences at consultant Frost & Sullivan. Companies would have to decide whether to absorb the costs or pass them on to customers.

Mexico has become a large medtech hub, but that might change if the country is hit with high tariffs. Baja California is the leading producer of medical devices in North America, the eighth-largest exporter of medical devices worldwide and the biggest supplier to the U.S., according to the Institute of the Americas.

Global medical device contract manufacturer Forefront Medical Technology opened a plant in Juarez, Mexico, last January and medical device manufacturer UFP Technologies opened one in Tijuana, Mexico, in June 2022.

“It will also potentially have the impact of nearshoring production closer to more developed markets, whereas in the past I think there's been quite a bit of distribution of supply chains to lower-cost locales,” Aggarwal said. “That can then shift the balance in terms of which locations emerge as more favorable from a production perspective.”

Frost & Sullivan estimated prices could increase between 10% and 60% depending on the country of manufacture, demand, local availability, dependence on outsourcing, labor costs and import and custom duties.

Innovation at risk

Increased costs and tighter margins could mean medtech companies have less capital to invest in research and development, Daniel said.

“Innovation is the lifeblood of the industry, and it's how you deliver products that have better patient outcomes at a lower cost,” Aggarwal said. “But now, if organizations are forced to explore increases in supply chain costs, that will have to come at the expense of other areas, which could include innovation.”

Companies typically return to innovating once things settle down, he said.

While large companies may eventually recover, the immediate impact of tariffs could be far more severe for startups.

“Startups and small companies might struggle to absorb increased costs or adjust their supply chains, potentially oppressing their growth or forcing some out of the market,” Daniel said.