The medtech opportunity for Japanese companies

May 05, 2023

In Japan, moving the economy back to growth after two decades of stagnation has been a headache for policy makers and the private sector alike. In addition to reigniting growth, Japan has to prepare for a future shaped by shifting demographic headwinds, rapid technological change, and amplified global competition. Improving productivity is fundamental to addressing these challenges.

Abenomics1 1.Abenomics refers to the collection of economic policies advocated by the prime minister of Japan, Shinzō Abe, following his election to a second term of office in December 2012. The policy is based on the "three arrows" of monetary easing, fiscal stimulus, and structural reforms. has focused on "three arrows" of monetary easing, fiscal stimulus, and structural reforms. For the "fourth arrow" of private-sector initiatives, in our research, The future of Japan: Reigniting productivity and growth,2 2.To download the full report, see "How a private-sector transformation could revive Japan," McKinsey Global Institute, March 2015. we identified several sectors that are particularly well suited to helping Japanese companies build new globally competitive positions. One that could be critical to Japan's future is advanced life sciences and, in particular, medical technology, or medtech.

Medtech could help the Japanese economy grow, regain an innovative and competitive edge, and drive productivity. Over the years, several Japanese healthcare companies have dropped out of the global top rankings with a lower number of truly innovative new products launched. At the same time, some healthcare reforms have been slower compared with those in Europe and the United States, presenting a still fragmented care-delivery model. Medtech, including medical devices and equipment for diagnostics and care, could be one of the sectors to help lead Japan back to competitiveness for a number of significant reasons:

To lead Japan back to competitiveness in medtech, more success cases will be needed that build on the preceding factors. Take, for example, regenerative medicine, where Japan is pulling ahead in a still-fragmented but promising new sector thanks to a combination of advanced academic research (including a Nobel Prize winner), a supportive regulatory environment, and investments and acquisitions abroad. There are now several Japanese companies leading in regenerative medicine globally. Over the past three years alone, at least 15 of the largest pharmaceutical and medtech companies have started to invest in this field, with nontraditional players also entering (see sidebar, "Japan's advanced industries are broadening their exposure to medtech").

Japanese companies have the capabilities, strategic need, and cash to lead a renaissance in medical technologies. Several players in Japan, such as Olympus, Hitachi, and Terumo are already globally competitive and, in some cases, true leaders in their field. Other companies lead in the domestic market but do not yet have a significant overseas presence—for example, Arkray in diabetes diagnostics and Fukuda Denshi in patient monitoring and diagnostics.

Further potential lies in two other segments of the industry. First, a large number of companies have smaller medtech businesses, of varying types and maturity, within their broader conglomerates. Asahi Kasei and Mitsubishi Chemical are examples. Second, several innovative companies exist with relevant technologies and a stated commitment to grow their medical-technologies platform—for instance, Nikon and JSR. Both types of companies could take advantage of a positive convergence and commit to grow in this field.

The traditional "core" business of these companies (such as advanced electronics, optics, precision instruments, chemicals, and imaging) is often under competitive or disruptive threat, due in part to a tendency toward an inward-looking focus that has led some Japanese companies to refine and enhance existing technology yet overlook some emerging trends. This gap with respect to innovation and globalization has in turn led to a technology gap (for instance, in digital and software) and also limited commercial capabilities, including access to global markets—hence the need to reinvest in fields with more attractive profitability profiles where Japan can find and sustain an edge.

Whereas operating profit margins for major Japanese industrial companies outside of medtech have typically been measured in single digits, operating profit margins in large global medtech players range from 10 to 25 percent.

At the same time, these companies have capabilities and intellectual property that are highly relevant in the medical-technologies field—from material sciences to electronics, precision engineering to microfluidics, and process integration to miniaturization. However, these capabilities are not sufficient on their own to lead in medical devices—companies need to build understanding and expertise within the healthcare landscape and market environment—but they represent a sound platform from which to pursue organic and inorganic growth.

Finally, Japanese companies hold an estimated $2.4 trillion in cash on their balance sheets. Furthermore, current monetary policy makes additional borrowing cheap, and the current yen exchange rate, as compared to five years ago, makes exports competitive.

Recent moves by Japanese players to move into or focus further on medtech are promising. The drive toward medtech by well-known Japanese companies continues; in fact, out of the 20 largest Japanese companies today, over three-quarters of them are already involved in this business segment. Canon's takeover of Toshiba Medical Systems, the fourth-largest diagnostic-imaging player worldwide, is a prime example of a company expanding in this space in a big way.

Additionally, there are players moving organically into this field, leveraging their own distinctive capabilities in other sectors to transform healthcare. What all these activities have in common are a long-term, bullish view on the medtech sector as well as a strong belief that manufacturing, innovation, and product-design capabilities in other sectors—such as advanced industries, electronics, and even gaming—can be used to win in new markets.

Japanese companies could pursue different strategies to grow a sustainable market position depending on their starting point. A variety of archetypal business models exist in this industry, allowing for different companies and capabilities to create value for patients, physicians, and shareholders.

In light of this, and based on various starting positions of different companies, we envision several strategic options for Japanese companies to grow a sustainable platform in medical technologies:

Companies with an interest in growing a medtech business need to commit to innovate not only their products but also their operating model. In light of the observations expressed in this paper, as we think about what it takes to succeed, we have identified five key success factors for companies with an interest to grow in medtech. These apply to both organic and inorganic growth strategies:

There is a need for Japanese companies to move rapidly. As the global medical-device market has tripled in size over the past 20 years, many new innovative players have entered and business models have changed and evolved. However, over that same period, the top global players have also consolidated and now generate over half of the worldwide medtech revenue. Growth remains the central value-creation lever in medtech, with a great deal of white space available, but the window of opportunity to grow the Japanese economy may close soon.

Michele Raviscioni and Katsuhiro Sato are partners in McKinsey's Tokyo office, where Kyoko Sato is a knowledge specialist, Jan van Overbeeke is an associate partner, and Hiroko Yanagisawa is a consultant.