This article is derived from a speech given at the Airport Cities Global Conference in Qingdao, China in 2016
Logistics clusters facilitate trade because of the multimodal connectivity they provide. Air transportation hubs and their aerotropolises attract companies whose products are time-sensitive, and if the aerotropolis offers seamless multimodal connectivity, economic development accelerates.
Aerotropolis development is like any international economic development task. The task is to create an operational platform that helps investors generate the required return on their investments in the aerotropolis. The companies targeted to invest in the aerotropolis seek a competitive advantage in their site selection process. The list of these advantages includes:
- Lower costs
- Higher productivity
- Faster operations responsiveness, such as the clearance of cargo
- Better operations predictability and safety in the handling of cargo transfers
- Regulatory transparency that allows companies to be certain about what is required to move goods
- Access to knowledge and technology through the promotion of networking among the cluster members, and
- An attractive market to be served from the site
Economic clusters have existed for many years. Economists’ recognition of the concept emerged in 1890 when the English economist, Alfred Marshal, referred to them as “industrial districts.” Today, Michael Porter’s work at the Harvard Business School’s Institute for Strategy and Competitiveness has generated the definition accepted most widely. He defined a cluster as:
Geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated in a particular field that compete but also
Most of the world’s clusters developed organically without interference from an overarching plan. Clusters form because they increase the productivity and competitiveness of their members, and the knowledge exchange that can occur between them increases their intellectual capital. The development of specialized local labor forces, the transfer of suppliers to the area (which reduces costs), the increased influence they exert in negotiations with local governments, and the development of new companies, contribute as well.
Today, communities that wish to attract companies to build biomedical clusters face significant barriers, including:
- A lack of management leadership and a coherent cluster strategy
- No pre-existing biomedical industry base
- Difficulty attracting talent
- Unnecessarily burdensome and costly federal regulations
- Lack of stakeholder alignment
- Incorrect investment models
- Inadequate infrastructure, including multimodal connectivity
The Biomedical Industry
Many countries around the world and multiple cities within those countries are trying to attract the biomedical industry. Some are building them around universities, while some are building from the ground up. Others are linking them to their logistics infrastructure. Whatever the strategy, biomedical clusters are important to economic development institutions and their emergence is increasing.
Locations of Biomedical Clusters
The biomedical industry is attractive because it brings stable, high paying jobs. It also brings technology, prestige, and a significant potential tax base. In response, communities are offering specialized infrastructures and tax breaks, and relaxing regulatory controls.
Clearly, the industry is a part of every country’s healthcare delivery system, which can be illustrated as below:
A Typical Healthcare Delivery System
The biomedical industry has global sales revenues of $2.2 trillion. In the pharmaceutical segment, there is a high concentration of sales in the top 10 companies (43%). However, these companies are facing slowing sales and intense cost pressure. Their profits are declining, and they are searching for relief in new products and technologies and in new markets. The top three companies in the wholesale distribution segment account for more than 50% of sales and hold 85% of the US market. By comparison, the three largest companies in China—Sinopharm, Shanghai Pharma, and China Resources—account for only 22% of the total market. According to the experts, there will be further consolidation.
The Pharmaceutical Industry Value Chain
The pharmaceutical industry includes traditional pharmaceutical companies, biotechnology companies, contract research and manufacturing organizations, active pharmaceutical ingredient suppliers, and academic and other research institutions.
Perhaps the most interesting is the emerging biotechnology segment, vaccines and biologics. These drugs demand special handling during distribution to protect them from temperature changes and packaging damage. These products are very difficult to develop and scale up in manufacturing, very expensive to produce, and very difficult to transport and administer.
The shipments of these products, which often are made to the patient directly, present extreme challenges because of their intrinsic value and risk of spoilage if not handled properly. In addition, there has been a significant increase in the number of clinical trials in the development stages of these products conducted in emerging markets, where transport and storage of medical products and patient samples can present a host of diverse obstacles.
The Biologics Sub-segment
The biologics sub-segment has myriad new drugs and many new companies. Today, it represents approximately 25% of total pharmaceutical sales and has the fastest growth rate. Not surprisingly, there is significant investment capital in this segment, and it is estimated that the total market capitalization of these companies is approaching $1 trillion.
The medical technology segment (devices; implants; capital-intensive machines; consumables; diagnostics, and tissue engineering) is significantly smaller than the pharmaceutical segment, with approximately $400 billion in revenue.
Medical technology companies present significant challenges for logistics service providers. The range of products is diverse and extensive and many require special handling.
In Memphis, Tennessee, a medical device cluster emerged at the FedEx hub because of the requirements to build and ship complex orthopedic surgical kits that had to be delivered at the time of the scheduled surgery.
There are innumerable spare parts for medical capital equipment that require stringent inventory control and delivery that coincides with the arrival of repair technicians. Some kits must be returned to a facility for cleaning and replacement after use. Finally, some inventory assigned to hospitals needs to be tracked by the suppliers and re-supplied as it is used.
Global Healthcare Wholesale and Distribution
The global healthcare wholesale and distribution market’s projected growth is strong because of technology advances, increased use of temperature-sensitive drugs that require specialized and expensive handling, and the growing demand for drug therapies in emerging markets. Further, it is a segment in which economies of scale are important and thus tends toward consolidation.
In the 1970s, DHL expanded globally by following its oil and gas and construction customers around the world, who in turn, followed the clusters. Today, these logistics companies are widespread. In most clusters today, you will find integrators, third party logistics providers (3PLs), all modes of transportation carriers, warehousing companies, and freight forwarders. An excellent example of a relatively new logistics cluster is located in Dubai.
There is a vibrant and growing cluster in Dubai’s Logistic City that handles 3.5 million tons of international airfreight, as well as 15.1 million TEUs of ocean container traffic at the Jebel Ali port. There are 1.5 million square meters of logistics facilities in its fully integrated, multimodal logistics hub in Dubai South, which is connected directly to the Jebel Ali port by a 10-kilometer, bonded, freight-only highway. Both of these are connected to Dubai Airport via a bonded “virtual corridor.”
Dubai’s Logistics Corridor
Dubai South hosts Emirates SkyCargo and its 4400 square meter SkyPharma, an EU Good Distribution Practice (GDP)-certified facility for the handling of biomedical products. Further, Dubai’s customs clearance system, Mirsal 2, is a modern, single window system that is consistent with the World Customs Organizations’ (WCO) SAFE guidelines and provides seamless, paperless clearance and cargo transfer.
Site Selection Decisions—the Development of Biomedical Clusters
Medical technology and pharmaceutical companies are not necessarily located in the same sites, but the drivers of their site selections are often very similar.
The genesis of the biomedical industry is in research and development. R&D produces the product that is sold to a drug company, which obtains regulatory approval, industrialization of the product occurs at multiple sites, and distribution of the products to hospitals, physicians, and pharmacies follows. Their producer service firms invest in their locations, as do the upstream participants in their supply chains.
A typical biomedical cluster might include components such as these:
As the footprints of these companies have expanded globally, this traditional site selection strategy has evolved to include the purchase of targeted companies in foreign markets. In some markets, communities have decided to build biomedical clusters from the ground up. The conclusion is that the development of biomedical clusters is evolving.
For example, foreign direct investment in the Chinese biomedical market is no longer limited to the final production and sales of the products. It is now conducting increasing R&D activities and establishing partnerships with domestic firms and research institutions. Foreign firms have recognized the market opportunity, the availability of the talent required, and the specialized infrastructure, including science parks and incubators of young companies.
These science parks in China are designed to create a favorable investment and operational environment with:
- A well-planned and functional infrastructure
- Tax incentives enjoyed by firms targeted by the government
- A new regulatory approach that is designed to reduce companies’ transaction costs and to facilitate their activities more efficiently
- A cluster structure that encourages closer interaction and cooperation among the different firms in these parks
In addition, the government is removing questionable firms from the market and is encouraging the consolidation of the thousands of firms in the distribution network.
Historically, some segments of the logistics industry have been slow to innovate. Today, the world of logistics is changing rapidly, and those companies that do not change will not survive. Customers see the revolution taking place in the world of technology, which involves the ubiquitous nature of mobile devices, cloud computing, and the Internet of Things, which allows sensors to be attached to cargo to measure temperature variations, conditions, and location. These advances allow shippers to obtain data on their shipments 24/7, and they are now demanding that their logistics service providers offer these technology capabilities in the handling of biomedical products.
The biomedical industry ships high value-to-weight ratio products that often require special handling. The world’s health organizations (China’s Food and Drug Administration and European Medicines Agency, for example) require responsible and traceable cool and cold chain management of pharmaceutical and some medical device products. Although this responsibility ultimately is that of the pharmaceutical and medical device companies, their logistics service providers and packaging companies must deliver what is required.
The greatest challenge for biomedical companies is to achieve predictability and consistency in transit times. These two factors allow the shippers to lower the inventory levels in the pipeline, to be confident that their supply chains can serve their customers safely and in a timely manner, and to lower their costs.
Customs clearance for international shipments must be fast and predictable. The infrastructure and business processes at the aerotropolis must handle transfers seamlessly with efficient ground operations, including temperature-controlled dollies, compliant refrigerated storage facilities, and regulatory transparency for international biomedical shipments.
If all of this ideal multimodal connectivity is present, will biomedical companies invest in your aerotropolis? The answer is a very strong, “Maybe.”
The biomedical industry is highly complex and requires significant investment in infrastructure, a continuous supply of PhD research scientists, extraordinary skill in moving from the laboratory to production, regulatory process management skills, and a network of suppliers and producer service industries.
Clearly, the agglomeration of this infrastructure, talent, and process knowledge does not occur overnight, or simply by government fiat.
However, if the aerotropolis has a long-term vision of what it wants to create, a coherent strategy to achieve that, and government support, then perhaps there is a chance for success.
Barriers to Building Biomedical Clusters
Multiple challenges exist with respect to people’s abilities, processes, technology, and most importantly, management paradigms and thinking about the concept of building and operating this biomedical logistics platform.
Logistics processes must be optimized. This means that multimodal connectivity must be seamless. To achieve this, all regulatory stakeholders must be consonant. The focus of their operations must be to protect national interests while facilitating trade.
The management of the aerotropolis must understand the importance of its culture as a critical dynamic variable in building the biomedical cluster. The culture must be one that is results-oriented, with a bias for action, and that does not lose its focus because of short-term setbacks. It must be adaptable and learn together with its customers ways in which to optimize the platform.
A lack of management vision, leadership, and its consequent management inertia hinder the aerotropolis from achieving its desired outcomes. In addition, if there is no pre-existing biomedical industry, or if the site has difficulty attracting and keeping talent, or if there are unnecessarily burdensome and costly regulations, then the task will be much more difficult.
Many sites forget about the importance of stakeholder alignment. Some insist on investment models that do not fit with the investors’ acceptable models and thus, those investors are driven away. Some do not address inadequate infrastructure, while others do not understand that their delays in resolving infrastructure problems will create an undesirable reputation.
The base of operations that the aerotropolis creates for its customers is part of the customers’ extended enterprise, and links the entire value chain, from suppliers to customers.
This biomedical logistics platform must keep pace with the digital transformation of supply chains. The aerotropolis must understand and anticipate what real-time data visibility means to the customer and the platform. Soon, there will be digitally transparent supply chains that connect hundreds, or even thousands, of suppliers, customers, and regulatory authorities around the world. The availability of real-time data that tracks and monitors supply chain performance globally will become a common characteristic of supply chain management. This is what shippers have always wanted, and now the capability is here. The key question is how managers and business processes will adapt to the availability of real-time data.
The significance of this for an aerotropolis is that the biomedical company will have full-and real-time visibility of the movement, location, and condition of its goods. With very expensive and time-sensitive shipments like those in the biomedical industry, management will focus its attention easily on exceptions in the performance of its supply chain. The data will show where the problem is, what occurred, which customers were affected, and how much it cost the company. The operational platform will be on trial, everyday. Therefore, the aerotropolis management team must understand the clusters’ value chains and their critical operational issues.
Conclusions and Recommendations
A cluster’s success is dependent upon the location of its assets, and how well its component parts function. The aerotropolis managements’ actions determine this. Talented labor, a government that is friendly to business, suppliers that cooperate with producers to innovate, and quality education, research, and technology bases all contribute to successful cluster development around the aerotropolis.
Finally, in the quest to develop a biomedical cluster that is driven, in part, by excellent logistics, there are a few central ideas:
Define the Value Proposition. The customers should drive this. As the aerotropolis infrastructure develops, biomedical companies invest, new technology is implemented, and airlines increase their service in response to increased demand, the value proposition must be refined.
Map the Biomedical Companies’ Supply Chains. It is essential to include the identity of their critical suppliers, producer service firms, and customers. Only by understanding the components of these customers’ supply chains will the aerotropolis management team truly understand the logistical challenges. This understanding will allow the aerotropolis to anticipate potential process, technology, or infrastructure problems, and allow the team to take prescriptive action.
Identify New Solutions for Stakeholder Priorities. This may encompass such factors as the special handling requirements of the biomedical products, the technology to measure performance, and the level of talent required to interpret the data produced.
Design and Implement Process Changes. This is where the dynamic outcome-oriented culture is important. Fast action is required. Do not forget the global challenges that affect the biomedical supply chain:
- WCO’s recommendations on clearance processes and data management (SAFE)
- The CFDA, FDA, and European Medicines Agency’s (EMA) Good Distribution Practices (GDP)
- Incorporate customs and other regulatory bodies’ interests in the changes
“Protect the country’s interests while facilitating cross-border trade” should be the mantra.
Manage Your Aerotropolis Aggressively. The aerotropolis management team must establish a vision, communicate it to all stakeholders, and reinforce it continuously.It must build a culture of adaptation, digital awareness and capability, and high-energy focus on outcomes.It cannot let the inertia of “This is the way it has always been done” dominate management action. Management should monitor the performance of other aerotropolises, improve their best ideas, and implement them. Copying others will not differentiate your operations.
Execute with speed, energy, and spirit.
Finally, remember, there is no end to this process.