Market Discontinuities—Ice in Hot Water

Tuesday, April 30, 2013
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Recently I've had the chance to hear a thought-provoking lecture by Paul Yock, Professor of Medicine and Director of Biodesign at Stanford University, at the 10th anniversary of the founding of the Bio2Device Group. Dr. Yock spoke about the global evolution of medical device innovation, focusing in particular on the example of India as compared to the US. 


Fig. 1. Discontinuities in Mumbai.

India, like other emerging economies (like China, Brazil, and others), is experiencing a rapid growth of its middle class, and with it also rapid growth of factors and attributes associated with middle class lifestyles and their consequences. Most pertinent here are the increase in the prevalence of chronic diseases like coronary heart disease, diabetes, and obesity, and (on the other side of the ledger) the increased demand for quality of health care. So, while the current market for medical devices in India is about $5B (far below the US market), the annual growth rate is around 15%--and accelerating. The numbers for China tell a similar story, perhaps fast-forwarded by a decade or so. These markets are therefore of increasing commercial interest for US companies.

One of the most salient anecdotes Dr. Yock told was of the development, in the Stanford Biodesign program, of a low-cost, disposable limb splint for emergency responders in an Indian state. (See a summary of the talk in Darshana Nadkarni's blog, and a SlideShare on Stanford Biodesign.) The entire effort (needs assessment, design, prototyping, development, testing, AND clinical trials) cost an astoundingly minimal US $5,000. While there are likely hidden costs not folded into this figure (like the value of technical and strategic consulting from Dr. Yock and other university advisors to the design team), the contrast with what it would likely cost to carry out a comparable effort for a US market is nevertheless enormous. 

 
Fig. 2. The Stanford Biodesign $5 leg splint.

Such cost gaps, and their close relatives, the resource gaps, point to a global discontinuity: the sharp difference in the value of any quantity across some dimension--here, the quantity being the cost of medical device development and the dimension being geography. Discontinuities in (thermo)dynamic systems tend to get smoothed out: think an ice cube dropped in hot water. The discontinuity in temperature across the ice cube's surface diminishes as the ice warms and then melts, and as the surrounding water chills correspondingly. 

As long as the ice is kept in the freezer and the hot water on the stove (not in communication), the discontinuity will persist. But as soon as the two are allowed to communicate and exchange, the discontinuity tends to disappear. A similar mechanism can be seen at work in much more complex systems like economies and markets, as long as you squint enough to average out the details and pick out the main factors. Take China: As long as it was a closed system (that is, until the modernization policies initiated by Deng Xiao-Ping in the 1980s), it had very little communication and exchange with the rest of the world. Once trade and global relations became encouraged by the government, it became a system interacting dynamically with its surroundings. The discontinuity between prevailing manufacturing wages there and the rest of the world drove trillions of dollars of investment into the country. That transfer of manufacturing capacity, however, was like the ice cube melting: it was both the result of the discontinuity and the announcement of its impending disappearance. Wages in southern China have been rising very rapidly (see PDF here), causing US manufacturers to rethink their outsourcing strategies (this article from MIT Technology Review takes a nuanced look at various factors involved in this). 

What about the current discontinuity seen in India? It no doubt will also tend to disappear as trade, exchange, and development all foster rising wages and standards of living there. But for the time being, and likely for one or two decades, it will itself drive exchange, for example attracting entrepreneurs like those in Dr. Yock's classes to take advantage of it.


Image credits: Raj Dosh via SlideShare (Mumbai); Stanford Biodesign via SlideShare (splint)

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