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Volume 27, Issue 14
October 31, 2018

Fall 2018 Business Climate Review: Positivity
Despite Uncertainties
For the fall installment of our Business Climate Review, IBO spoke with representatives fromanalytical instrument industry trade organizations around the world to learn from their general
impressions of the current state of the analytical testing industry and the trends affecting theindustry. Discussing issues such as Brexit, diagnostic markets and the M&A environment, therepresentatives provided a generally optimistic outlook for the industry for the coming year, despite
the many economic uncertainties and changes taking place around the world.
IBO spoke with Francis Pithon, vice chairman of EUROM II, the Optical and Laboratory Technology
division of the European Federation of Precision Mechanical and Optical Industries, and vicepresident of Fabrilabo, a French alliance between lab suppliers and purchasers; Mathis Kuchejda,
president of Analytical and Laboratory Technologies at SPECTARIS, a German industry association
representing medical, optical analytical, biological, laboratory, and ophthalmic technology companies
and of German instrument suppliers, and president of instrument provider Schmidt+Haensch; Mike
Bähren, head of Economics and Statistics at SPECTARIS; Takeshi Kawamoto, chairman of theInternational Affairs Committee at the Japan Analytical Instruments Manufacturers’© 2018 Strategic Directions International1

Association (JAIMA); Tim Collins, director of the Laboratory Technology Sector at GAMBICA, the UKtrade association for instrumentation, control, automation and laboratory technology; and Mike Duff,president of US scientific instrument trade group, the Analytical, Life Science and Diagnostics
Association (ALDA).

Brexit Looms

All representatives from the global group of instrument trade organizations cited Brexit as a major
issue in regards to analytical instrument and lab product sales growth in the coming year. Many
uncertainties about the way in which the Brexit deal will pan out, such as a lack of a soft exit andborder delays, remain. Speaking for UK-based companies, Mr. Collins indicated, “Some [companies]
are already seeing the beginnings of a slowdown/delay in expenditure, which is likely to continue toimpact next year, especially for larger-ticket items. The sales pipeline in most areas is good, but noone is committing to orders.”
Additionally, UK government funding initiatives regarding replacement money for EU research are“too vague,” said Mr. Collins. “This is affecting the scientific community with regards to future
expenditure, and some customers are saying that they are not being considered as participants byother EU organizations,” he explained. Discussing his views on the possible impact of Brexit on
French instrument and lab product companies, Mr. Pithon agreed. Free trade has simplified
importing products across Europe, he noted, but with Brexit, this will likely be made more difficult. “Ifthe UK leaves, afterwards, you will have to [complete] more paperwork concerning trade with theUK,” said Mr. Pithon. “Paperwork means time, money and price increases.”“[Post-Brexit], the impact of the UK on standardization will be much smaller.”
Compliance may also be a pressing issue for instrument companies operating in the UK post Brexit,
especially in regards to a specific product receiving internationally recognizable compliancedesignations. “Because of the big compromise made in order to introduce a European directive (forexample, the Pressure Equipment Directive), there is the possibility that we may not be able to CE
mark using the British equipment standard as some do now,” explained Mr. Collins. “Will UK
companies be able to use different countries’ standards without manufacturing in that country? Will
stating [British Standards’] standards internationally carry the weight that it did 20 or more years
ago? Unless there is some clarity over the very immediate future, this may prove to be a very difficultarea.”
Mr. Pithon echoed these sentiments. “A product sold in Europe must be CE marked for quality,
which is recognized worldwide, [and] as part of the EU, Britain had a big influence on any Europeanstandards, such as CEN [European Committee for Standardization] standards,” he noted. “But after© 2018 Strategic Directions International2

a ‘hard Brexit,’ Britain could perhaps leave the CEN organization and only attend ISO committees,
where its weight will be less, as bigger countries (USA, India, China) are involved,” he continued.
“The impact of the UK on standardization will be much smaller. This is true for many otherinternational organizations.”

Trade Turbulence and Economic Doubts
China was also mentioned by the trade organization representatives as having a potentiallyuncertain effect on analytical instrument and lab product sales growth in the coming year, primarily inregards to Chinese competition and the trade friction between China and the US. In regards to ALDA
members, Mr. Duff said, “Many companies are concerned how the trade dispute between the USand China will play out, the potential implications for the global markets and what internationalfocused companies can do to maintain their Chinese business in this environment.” Economic issues
growth is also of concern to US instrument makers. “The US economy is currently in its 9th year ofexpansion and many economists and CFOs expect a recession to occur within the next 2–3 years,”
he continued. “The US federal government’s debt is now in the $21 trillion range with a $780 billion
budget deficit estimated for FY 2018, 17% higher than last year.”“Nowadays, data management is about turning data into information.”On the other side of the globe, Japanese instrument suppliers are also concerned aboutmacroeconomic factors. Mr. Kawamoto echoed economic issues as a possible hindrance toinstrument and lab product sales in the coming year. “Economic recession [is a factor], not only
[between China and the US], but also in Asia, Europe and anywhere else that may be affected by
the protectionist movement taking place in the US,” he said. “In addition, given the rising trend inlong-term interest rates in the US, the future of developing economies, such as those in Asia andCentral and South America, are also a concern.”
Likewise, German analytical instrument and lab product companies are also concerned about USChinese tensions. “The US and the Chinese market are the most important sales areas, accountingfor 14% and 11%, respectively, of total German exports. The growing trade conflict between thesetwo countries could result in a declining demand and an unfavorable development of the globaleconomy,” explained Mr. Kuchejda and Mr. Bähren. The impact of trade issues has already been
experience by some German companies, according to them. “A first impression of the impact oftrade barriers on business we actually witness in Iran: in the first half year of 2018, German exports
collapsed by 41%. We anticipate a similar development for Russia.” Mr. Collins agreed about the© 2018 Strategic Directions International3

negative effects of US and China’s trade dispute. “Business in the US is also suffering fromuncertainty because of current US trade policy decisions. There is possibly an element of this inother parts of the world.”
In addition to the economic environment, regulatory compliance is also affecting lab instrument
suppliers. Mr. Kuchejda and Mr. Bähren cited the increasing number of regulatory requirements
around the world (such as RoHS, REACH, IVDD, California Proposition 65 [the Safe Drinking Water
and Toxic Enforcement Act], F-gas regulation [the EU’s regulation limiting use of fluorinatedgreenhouse gases], etc.) as a hindrance for small- and medium-sized companies, as proper
implementation requires “time, manpower and results in decreased productivity.” In the UK, Mr.
Collins stated that there are also some concerns for companies that need to implement the EU’s
new IVD Medical Device regulations and the related costs.

Digitization and AI: A Coming Revolution?
All trade industry group representatives cited AI as a major factor in the digital transformation of labs.
A key question, though, is finding the best ways to implement big data and AI into company
offerings. Companies in Japan are working to find the best methods to realize AI in the lab. “Some ofour member companies place great expectations on the new markets that will be created by thewidespread use of big data and AI,” said Mr. Kawamoto. “They are also working on AI analysis ofhighly diverse information obtained from analytical instruments to be used for such purposes as theevaluation of drug therapies, proposing of new medical treatments and the discovery of newscientific knowledge driven by big data-based visualization,” he continued. “Their stance is tocontinue making active investments and to search out and refine these technologies, while watching
how these technologies will structurally impact industries and markets over the mid-to-long term.”“The US and the Chinese market are the most important sales areas, accountingfor 14% and 11%, respectively, of total German exports.”
This sentiment is similar in the US, where companies are evaluating the potential future impact ofsuch developments on how customers and vendors each operate. “Like many companies in ourindustry, the members of ALDA are trying to understand how big data, AI/machine learning,
blockchain, IoT, etc. will be used by our customer markets in the future (especially the health caremarkets), the impact on their research/discovery activities, product development, manufacturing,clinical trials, etc., and the implications for our industry as suppliers of ‘tools’ and technologies,”© 2018 Strategic Directions International4

explained Mr. Duff. “Also, what will customers/users need from our members to facilitate their use ofAI, blockchain, etc.?”
Similarly, as Mr. Kuchejda and Mr. Bähren indicated, because AI is still in its beginning stages, many
companies are still studying its development. “AI is not used extensively in the laboratory yet. There
are initial projects and the German manufacturers are aware of the new possibilities and potential,
but still a lot of work has to be done,” they explained. “Therefore, companies are highly anticipating
the results of the AI strategy of the German government, which will be pronounced soon and which
could have positive effects on the local R&D activities. It is crucial that within this process, dataprotection and data security issues are considered.” SPECTARIS has established a working group
entitled “Connected Laboratory Devices,” in which the organization is working on a collaborative
communication standard based on OPC Unified Architecture, an industrial automation
communication protocol, developed by the OPC Foundation.
One reason why digitization is still in its burgeoning stages is the changing landscape of datacollection itself. “Nowadays, data management is about turning data into information,” said Mr.
Pithon. He noted that AI will change data processing, specifically in the IVD and environmental
markets, and that it can be extremely influential in application usage of analytical instruments.
“Software is very important,” he continued. As an example, he noted how MS had been mainly used
for inorganic analysis, but is now it used for organic analysis, and software was key element in thistransition.

“Over the past few years, many members of ALDA have expanded their presencein the diagnostics markets and prioritized investments in diagnostics
companies, and this trend is expected to continue.”
The possible effects of such changes may be especially evident in certain markets. As Mr. Collins
indicated, a major sector that will implement AI is the diagnostic market. “Health care markets aregoing to benefit the most from AI, big data and sensors,” he said. “Pharmaceutical companies will
still be a source of new drugs/supplements and ongoing business, but the services side of well-being
and online diagnostics by apps, computers, etc. will help customers take preventative action anddrive more health-related activities. This could provide growth in sectors addressing the consumer
health markets.”© 2018 Strategic Directions International5

Sights Set on Diagnostics Market
These consumer health markets are also providing opportunities for companies traditionallyassociated with research and preclinical applications for instruments. With new initiatives taking
place in the medical community, companies are moving towards the diagnostics arena to diversify
and address the age of personalized medicine. “Over the past few years, many members of ALDA
have expanded their presence in the diagnostics markets and prioritized investments in diagnostics
companies, and this trend is expected to continue,” explained Mr. Duff.

“From health care focused on treatment, inroads are being made worldwide inprevention, early diagnosis and treatment, and individualized medical care.”This is true worldwide. “We see great market potential in [diagnostics] because of the growing
demand for health care in general, the high speed of technological process which leads to new
diagnostic possibilities, and the need for fast and efficient clinical tests to lower health care costs,”
said Mr. Kuchejda and Mr. Bähren. “The more diagnostic tools focus on the stated market drivers,
the higher their market potential will be. As an example, [take] Raman spectroscopy, which changed
more and more to a point-of-care diagnostic tool,” they continued. “Another trend is the possibility ofimproved anamnesis through supported information systems like the electronic patient file and field
analysis.”
In Japan, opportunities abound across many segments within the diagnostics sector, including
genomics, pathology and pharmaceuticals. “Genomic panel testing markets are also experiencing aperiod of dramatic startup in Japan,” said Mr. Kawamoto, pointing to the 11 hub hospitals and 300
medical institutions in Japan that have begun genomic panel testing for early cancer detection.
Prevention is a key trend, with companies combining digital capabilities with more traditional
diagnostic technologies. “As pathology research markets undergo rapid change in response toadvances in digital technologies, diagnostic technologies have in particular become a growth market
due to the digital revolution,” explained Mr. Kawamoto. “From health care focused on treatment,inroads are being made worldwide in prevention, early diagnosis and treatment, and individualized
medical care.”
Mr. Kawamoto indicated these inroads are converging, such as the accelerated development ofbreakthrough drugs and diagnostic technologies, as well as the streamlining of pharmaceuticalsdevelopment. In addition, the effect of regulatory changes is ongoing. “Another trend with potential
impact is the regulatory revision of the Medical Care Act and other such laws,” he continued. “Withplans in place for legal revisions aimed at such issues as securing the accuracy of genomic testing
and chromosome analysis, the response of medical institutions to legal reform is in the spotlight.”© 2018 Strategic Directions International

6

Legal issues within the diagnostic sector were echoed by other members as well. Mr. Duff cited
regulatory and reimbursement issues as pressing factors for ALDA members, while Mr. Pithonemphasized the need for greater analysis capabilities with the emergence of personalized medicine.
Mr. Pithon also cited the rapid consolidation of IVD labs in France, due to more automated testing,as being a major trend in the diagnostics segment. “Twenty years ago, there were over 5,000 labs inFrance for IVD testing,” he said. “Now there are less than 1,500.”

The M&A Factor
A major opportunity for analytical instrument and lab product companies is M&A, and mostrepresentatives of the instrument trade organizations agree that M&A is likely to continue, driving
profitability and encouraging competitiveness. Newly formed companies are also a major factor inM&A, according to Mr. Kuchejda and Mr. Bähren. “One relatively new but important element in thebusiness strategy of our members is the cooperation with startups,” they said. “Our companies seek
the contact with startups in order to increase innovation, specifically regarding digital solutions.
Especially in the analytical and lab sector in Germany, this works out well and benefits both.”
SPECTARIS is also providing startup pitches and plans to build a startup network, they added.
Generally speaking, however, Mr. Kuchejda and Mr. Bähren emphasized that there are two sides toM&A that are equally important. “Many of our members are well positioned and often hidden
champions in their specific segments. Seen from this powerful position, we consider the M&A
activities as an opportunity which allows our companies to broaden and strengthen their enterprise,”
they explained. “On the other hand, we will have to observe what will happen in the mid-term, if
Chinese companies will intensify their efforts to enter the European market and start with strategicacquisitions.”“Against a background of ‘work-style reform’ currently underway in Japan,industries are seeking ways to improve work efficiency.”
According to Mr. Collins, Brexit is a major factor in delaying acquisition activity, but M&A is still
expected to continue, especially with certain small- and medium-enterprises that have healthy
revenues. “The market continues to consolidate leaving larger global players displacing smaller local
and national businesses,” he explained. “Some SMEs are also relatively rich and are looking forsuitable targets.”© 2018 Strategic Directions International7Issues on the Horizon
In regards to future opportunities and risks that the instrument trade organization members areconcerned about, Amazon was cited as a potential obstacle by both Mr. Collins and Mr. Pithon,specifically its effect on instrument and lab product distribution as well as larger distributors. Mr.
Pithon explained that Amazon could provide new opportunities for small- and medium-sizedcompanies looking for more efficient distribution as Amazon is well known for that. “They also master
AI—the question is how they will use it.”Separately, debates around the workplace are affecting companies in Germany and Japan. “InGermany, business is going well and we have full employment. Whereas this is a comfortablesituation for the employees, it is a growing problem for the manufacturers,” explained Mr. Kuchejda
and Mr. Bähren. “The national lack of skilled labor continues to increase and affects every kind ofcompany level. For a small- or medium-sized business which is located outside the main cities, it isnearly impossible to recruit well-qualified employees for an adequate salary. In combination withrising commodity prices, this can seriously limit or even harm the economic development.”

In Japan, securing a proper workforce is also on companies’ minds. “In the international expansionof business, developing and procuring human resources capable of working on globally valid
solutions to issues [is important],” noted Mr. Kawamoto. But he also commented on how a culturalshift in Japan in perspectives toward work is creating business opportunities. “Against a backgroundof ‘work-style reform’ currently underway in Japan, industries are seeking ways to improve workefficiency,” Mr. Kawamoto said. “Associated with this are trending needs for analytical instrument
labor saving and ease of maintenance.”
Efficiency, productivity and new applications continue to be key factors for life science companies,
as noted by representatives from analytical instrument and lab product organizations around theworld. The outlook for the coming year is positive on the part of these organizations, as they
continue to meet the challenges of a rapidly changing world.

© 2018 Strategic Directions International8