By Andrew Wee, Research Analyst, Medical Devices - Asia Pacific Healthcare Practice

Highly regulated market environment poses a huge barrier

Indonesia, with a population of more than 220 million, is a medical device market that has a large potential. However, foreign manufacturers of medical devices have always been faced with numerous obstacles and challenges in entering this market. This is despite the fact that Indonesia relies mainly on imported medical devices, such as ECG, due to the lack of any established local manufacturer.

Penetrating this huge market for medical device market is difficult due to the wide and extensive geographical boundaries in the country. In addition the highly bureaucratic medical device import and trading regulations have made it more difficult for foreign manufacturers. Indonesia also imposes tariffs of up to 30% on imported medical devices depending on the type, use and cost of these devices.

Indonesia has a very centralized healthcare system, headed by the Ministry of Health (Departemen Kesehatan R.I.). The Ministry of Health purchases most of the medical disposables and hospital equipments for the 900 public hospitals around the country. Due to the highly rigid nature, there is limited budget for most of the hospitals in the country. Recent changes, however, have been encouraging in de-centralizing healthcare services in the country. This will spur the growth of the medical devices market in the country as individual regions collects and plans the healthcare budget on their own.

As the world’s largest archipelago, major cities in Indonesia are spread out across 5 major islands, namely Java (Jawa), Sumatra, Borneo (Kalimantan), Celebes (Sulawesi), and West New Guinea (Irian Jaya). Amongst these 5 major islands, the most populated are Java and Sumatra. The whole country is sub-divided into 30 provinces, 2 special autonomous regions and one special capitol district.

Most medical device distributors are located in the 2 main islands of Java and Sumatra at the major cities of Jakarta, Surabaya, Bandung, Yogyakarta, Palembang, Medan and Semarang. These large cities have on average up to 5 major hospitals and are home to more than 1 million residents each, with Jakarta and Surabaya being the most populated with 9 million and 4 million residents respectively.

The Indonesian government has disallowed foreign ownership of medical device distributors in Indonesia. This has resulted in all foreign medical device companies distributing their products in Indonesia via local distributors. It was estimated that in 2005, there are more than 2,100 Distribution Company dealing in healthcare products. The need to cover an extensive territory has resulted in some medical device companies to appoint more than one distributor for the whole of Indonesia. The continued influx of foreign medical devices, meanwhile, continues to support the large number of these independent third party distributors.

Amongst the numerous medical device distributors in Indonesia, there are several that stand out and some of these companies have their roots in the huge pharmaceutical industry in Indonesia. For example, PT. Kimia Farma and PT. Kalbe Farma, two of the largest pharmaceutical companies in Indonesia control two large medical device manufacturers in Indonesia. The financial strength and large network of branches of these companies across Indonesia are two factors that tip the balance in favor of these companies. For example, PT. Enseval Putra Megatrading, an associate of Kalbe Farma has a network of 40 branches and 2 warehouses across the country, serving all the major cities in 4 main islands.

Due to the geographical barriers in Indonesia, many established distributors have a network of independent sub-distributors that act to extend the market reach into rural and second tier cities. This is another one of the main reasons for the large number of distribution company in Indonesia.

Foreign medical device (ECG, Patient monitor, Ultrasound Scan) manufacturers should look forward to a long term partnership in Indonesia by seeking out well established distribution companies. Usually these large distribution companies are listed in the Jakarta stock exchange or a subsidiary of a much larger conglomerate. With the financial strength and the large network of branch offices, these companies will be better poised to help foreign manufacturers to maximize penetration in Indonesia. However, one drawback to these larger distribution companies is the wide range of products that they sell as many of them distributes pharmaceuticals, daily necessities and health nutrients alongside medical devices. This would likely limit the knowledge of their sales personnel as well as a lack in emphasis on sales of specialized products.

In figure 2 below are some of the most prominent medical device distributor in Indonesia and their extensive network have made them the representative of multinational medical device companies. These companies provide value added services such as maintenance of equipments, training of sales staff, warehousing and logistics as well as after-sales services. This will help to reduce operational costs of foreign medical device manufacturers that produce non-perishable equipments used in hospitals and laboratories.

Many foreign medical device companies that are active in Indonesia have gone beyond sales and distribution. In fact, several companies have set up manufacturing plants in Indonesia to supply medical devices to the domestic market. Two such companies are JMS and Paramount, and both of their parent companies are based in Japan. JMS is a major supplier of medical disposables and haemodialysis equipments and it has set up its manufacturing facility in Batam Island while Paramount is a major manufacturer of hospital beds, whose operations in Indonesia are based out of Bekasi.

Foreign medical device companies who produce medical supplies and disposables should seek to grow their market penetration via local manufacturing. These will help build up a local presence and expand the sales effectiveness of the products. In addition, the huge population and demand for medical disposables and hospital supplies makes it economically feasible for a manufacturing facility in the country. Foreign medical companies who expand operations in Indonesia could also take advantage of a low cost work-force and a possible opportunity of working extensively with government-run institutions.

Entering the medical devices market in Indonesia carries with it challenges and a certain degree of risk. However, these obstacles can be overcome with the help of local companies who understand the market dynamics. A successful penetration of the market in its developing stages will bring a potentially rewarding experience for the medical device company involved.