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The 2011-2016 Outlook for Electromedical Equipment in India

WHAT IS LATENT DEMAND AND THE P.I.E.? The concept of latent demand is rather subtle. The term latent typically refers to something that is dormant, not observable, or not yet realized. Demand is the notion of an economic quantity that a target population or market requires under different assumptions of price, quality, and distribution, among other factors. Latent demand, therefore, is commonly defined by economists as the industry earnings of a market when that market becomes accessible and attractive to serve by competing firms. It is a measure, therefore, of potential industry earnings (P.I.E.) or total revenues (not profit) if India is served in an efficient manner. It is typically expressed as the total revenues potentially extracted by firms. The “market” is defined at a given level in the value chain. There can be latent demand at the retail level, at the wholesale level, the manufacturing level, and the raw materials level (the P.I.E. of higher levels of the value chain being always smaller than the P.I.E. of levels at lower levels of the same value chain, assuming all levels maintain minimum profitability). The latent demand for electromedical equipment in India is not actual or historic sales. Nor is latent demand future sales. In fact, latent demand can be either lower or higher than actual sales if a market is inefficient (i.e., not representative of relatively competitive levels). Inefficiencies arise from a number of factors, including the lack of international openness, cultural barriers to consumption, regulations, and cartel-like behavior on the part of firms. In general, however, latent demand is typically larger than actual sales in a market. For reasons discussed later, this report does not consider the notion of “unit quantities”, only total latent revenues (i.e., a calculation of price times quantity is never made, though one is implied). The units used in this report are U.S. dollars not adjusted for inflation (i.e., the figures incorporate inflationary trends). If inflation rates vary in a substantial way compared to recent experience, actually sales can also exceed latent demand (not adjusted for inflation). On the other hand, latent demand can be typically higher than actual sales as there are often distribution inefficiencies that reduce actual sales below the level of latent demand. As mentioned in the introduction, this study is strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved. In fact, all the current products or services on the market can cease to exist in their present form (i.e., at a brand-, R&D specification, or corporate-image level) and all the players can be replaced by other firms (i.e., via exits, entries, mergers, bankruptcies, etc.), and there will still be latent demand for electromedical equipment at the aggregate level. Product and service offerings, and the actual identity of the players involved, while important for certain issues, are relatively unimportant for estimates of latent demand. THE METHODOLOGY In order to estimate the latent demand for electromedical equipment across the states or union territories and cites of India, I used a multi-stage approach. Before applying the approach, one needs a basic theory from which such estimates are created. In this case, I heavily rely on the use of certain basic economic assumptions. In particular, there is an assumption governing the shape and type of aggregate latent demand functions. Latent demand functions relate the income of a state or union territory, city, household, or individual to realized consumption. Latent demand (often realized as consumption when an industry is efficient), at any level of the value chain, takes place if an equilibrium is realized. For firms to serve a market, they must perceive a latent demand and be able to serve that demand at a minimal return. The single most important variable determining consumption, assuming latent demand exists, is income (or other financial resources at higher levels of the value chain). Other factors that can pivot or shape demand curves include external or exogenous shocks (i.e., business cycles), and or changes in utility for the product in question. Ignoring, for the moment, exogenous shocks and variations in utility across geographies, the aggregate relation between income and consumption has been a central theme in economics. The figure below concisely summarizes one aspect of problem. In the 1930s, John Meynard Keynes conjectured that as incomes rise, the average propensity to consume would fall. The average propensity to consume is the level of consumption divided by the level of income, or the slope of the line from the origin to the consumption function. He estimated this relationship empirically and found it to be true in the short-run (mostly based on cross-sectional data). The higher the income, the lower the average propensity to consume. This type of consumption function is labeled "A" in the figure below (note the rather flat slope of the curve). In the 1940s, another macroeconomist, Simon Kuznets, estimated long-run consumption functions which indicated that the marginal propensity to consume was rather constant (using time series data). This type of consumption function is shown as "B" in the figure below (note the higher slope and zero-zero intercept). The average propensity to consume is constant. Is it declining or is it constant? A number of other economists, notably Franco Modigliani and Milton Friedman, in the 1950s (and Irving Fisher earlier), explained why the two functions were different using various assumptions on intertemporal budget constraints, savings, and wealth. The shorter the time horizon, the more consumption can depend on wealth (earned in previous years) and business cycles. In the long-run, however, the propensity to consume is more constant. Similarly, in the long run, households with no income eventually have no consumption (wealth is depleted). While the debate surrounding beliefs about how income and consumption are related is interesting, in this study a very particular school of thought is adopted. In particular, we are considering the latent demand for electromedical equipment across the states or union territories and cities of India. The smallest cities have few inhabitants. I assume that all of these cities fall along a "long-run" aggregate consumption function. This long-run function applies despite some of these states or union territories having wealth; current income dominates the latent demand for electromedical equipment. So, latent demand in the long-run has a zero intercept. However, I allow different propensities to consume (including being on consumption functions with differing slopes, which can account for differences in industrial organization, and end-user preferences). Given this overriding philosophy, I will now describe the methodology used to create the latent demand estimates for electromedical equipment in India. Since ICON Group has asked me to apply this methodology to a large number of categories, the rather academic discussion below is general and can be applied to a wide variety of categories and geographic locations, not just electromedical equipment in India. Step 1. Product Definition and Data Collection Any study of latent demand requires that some standard be established to define “efficiently served”. Having implemented various alternatives and matched these with market outcomes, I have found that the optimal approach is to assume that certain key indicators are more likely to reflect efficiency than others. These indicators are given greater weight than others in the estimation of latent demand compared to others for which no known data are available. Of the many alternatives, I have found the assumption that the highest aggregate income and highest income-per-capita markets reflect the best standards for “efficiency”. High aggregate income alone is not sufficient (i.e. some cities have high aggregate income, but low income per capita and can not assumed to be efficient). Aggregate income can be operationalized in a number of ways, including gross domestic product (for industrial categories), or total disposable income (for household categories; population times average income per capita, or number of households times average household income). Latent demand is therefore estimated using data collected for relatively efficient markets from independent data sources (e.g. Official Chinese Agencies, the World Resources Institute, the Organization for Economic Cooperation and Development, various agencies from the United Nations, industry trade associations, the International Monetary Fund, Euromonitor, Mintel, Thomson Financial Services, the U.S. Industrial Outlook, and the World Bank). Depending on original data sources used, the definition of “electromedical equipment” is established. In the case of this report, the data were reported at the aggregate level, with no further breakdown or definition. In other words, any potential product or service that might be incorporated within electromedical equipment falls under this category. Public sources rarely report data at the disaggregated level in order to protect private information from individual firms that might dominate a specific product-market. These sources will therefore aggregate across components of a category and report only the aggregate to the public. While private data are certainly available, this report only relies on public data at the aggregate level without reliance on the summation of various category components. In other words, this report does not aggregate a number of components to arrive at the “whole”. Rather, it starts with the “whole”, and estimates the whole for all states or union territories and cities in India (without needing to know the specific parts that went into the whole in the first place). Given this caveat, this study covers “electromedical equipment” as defined by the NAICS coding system (pronounced “nakes”). electromedical equipment The NAICS code for electromedical equipment is 3345101. It is for this definition of electromedical equipment that the aggregate latent demand estimates are derived for the states or union territories and cities of India. “Electromedical equipment” is specifically defined as follows: 3345101 Electromedical equipment  33451010 Electromedical equipment (diagnostic, therapeutic, patient monitoring, etc.), excluding ionizing radiation equipment and hearing aids  3345101000 Electromedical equipment (diagnostic, therapeutic, patient monitoring, etc.), excluding ionizing radiation equipment and hearing aids  33451011 Medical diagnostic equipment  3345101100 Electromedical equipment, including diagnostic, therapeutic, and patient monitoring equipment (excluding ionizing radiation equipment)  3345101103 Magnetic resonance imaging equipment (MRI)  3345101106 Ultrasound scanning devices  3345101109 Electrocardiograph (EKG)  3345101112 Electroencephalograph (EEG) and electromyograph (EMG)  3345101115 Audiological equipment  3345101118 Endoscopic equipment (bronchoscope, cystoscope, proctosigmoidoscope, colonoscope, etc.)  3345101121 Respiratory analysis equipment  3345101124 All other medical diagnostic equipment  33451012 Medical therapy equipment  3345101227 Medical patient intensive care~coronary care units, including component modules such as temperature, blood pressure, and pulse monitoring equipment  3345101231 Medical prenatal monitoring equipment  3345101234 Medical patient respiratory monitoring equipment  3345101237 All other patient monitoring equipment  3345101241 Medical ultrasound therapy equipment  3345101244 Medical therapy pacemakers  3345101247 Medical therapy defibrillators  3345101251 Medical therapy dialyzers (includes machines and equipment)  3345101254 Medical therapy laser equipment  3345101257 All other medical therapy equipment  33451013 Other electromedical equipment  3345101361 Medical electrosurgical equipment  3345101364 Medical heart~lung machines (excluding iron lungs)  3345101367 Medical blood flow systems  3345101371 All other surgical support systems  3345101374 Other electromedical equipment, except diagnostic and therapeutic  33451014 Parts and accessories for electromedical equipment  3345101477 Electromedical parts and accessories, including diagnostic and therapeutic   Step 2. Filtering and Smoothing Based on the aggregate view of electromedical equipment as defined above, data were then collected for as many geographic locations as possible for that same definition, at the same level of the value chain. This generates a convenience sample of indicators from which comparable figures are available. If the series in question do not reflect the same accounting period, then adjustments are made. In order to eliminate short-term effects of business cycles, the series are smoothed using an 2 year moving average weighting scheme (longer weighting schemes do not substantially change the results). If data are available for a geographic region, but these reflect short-run aberrations due to exogenous shocks (such as would be the case of beef sales in a state or union territory or city stricken with foot and mouth disease), these observations were dropped or "filtered" from the analysis. Step 3. Filling in Missing Values In some cases, data are available on a sporadic basis. In other cases, data may be available for only one year. From a Bayesian perspective, these observations should be given greatest weight in estimating missing years. Assuming that other factors are held constant, the missing years are extrapolated using changes and growth in aggregate national, state or union territory and city-level income. Based on the overriding philosophy of a long-run consumption function (defined earlier), states or union territories and cities which have missing data for any given year, are estimated based on historical dynamics of aggregate income for that geographic entity. Step 4. Varying Parameter, Non-linear Estimation Given the data available from the first three steps, the latent demand is estimated using a “varying-parameter cross-sectionally pooled time series model”. Simply stated, the effect of income on latent demand is assumed to be constant unless there is empirical evidence to suggest that this effect varies (i.e., . the slope of the income effect is not necessarily same for all states or union territories or cities). This assumption applies along the aggregate consumption function, but also over time (i.e., not all states or union territories or cities in India are perceived to have the same income growth prospects over time). Another way of looking at this is to say that latent demand for electromedical equipment is more likely to be similar across states or union territories or cities that have similar characteristics in terms of economic development. This approach is useful across geographic regions for which some notion of non-linearity exists in the aggregate cross-region consumption function. For some categories, however, the reader must realize that the numbers will reflect a state’s, union territory’s or city’s contribution to latent demand in India and may never be realized in the form of local sales. Step 5. Fixed-Parameter Linear Estimation Nonlinearities are assumed in cases where filtered data exist along the aggregate consumption function. Because India has more than 5,000 cities, there will always be those cities, especially toward the bottom of the consumption function, where non-linear estimation is simply not possible. For these cities, equilibrium latent demand is assumed to be perfectly parametric and not a function of wealth (i.e., a city’s stock of income), but a function of current income (a city’s flow of income). In the long run, if a state or union territory has no current income, the latent demand for electromedical equipment is assumed to approach zero. The assumption is that wealth stocks fall rapidly to zero if flow income falls to zero (i.e., cities which earn low levels of income will not use their savings, in the long run, to demand electromedical equipment). In a graphical sense, for low income cities, latent demand approaches zero in a parametric linear fashion with a zero-zero intercept. In this stage of the estimation procedure, a low-income city is assumed to have a latent demand proportional to its income, based on the cities closest to it on the aggregate consumption function. Step 6. Aggregation and Benchmarking Based on the models described above, latent demand figures are estimated for all major cities in India. These are then aggregated to get state or union territory totals. This report considers a city as a part of the regional and national market. The purpose is to understand the density of demand within a state or union territory and the extent to which a city might be used as a point of distribution within its state or union territory. From an economic perspective, however, a city does not represent a population within rigid geographical boundaries. To an economist or strategic planner, a city represents an area of dominant influence over markets in adjacent areas. This influence varies from one industry to another, but also from one period of time to another. I allocate latent demand across areas of dominant influence based on the relative economic importance of cities within its state or union territory. Not all cities (e.g. the smaller towns) are estimated within each state or union territory as demand may be allocated to adjacent areas of influence. Since some cities have higher economic wealth than others within the same state or union territory, a city’s population is not generally used to allocate latent demand. Rather, the level of economic activity of the city vis-à-vis others is used. Figures are rounded, so minor inconsistencies may exist across tables.
1 INTRODUCTION 1.1 Overview 1.2 What is Latent Demand and the P.I.E.? 1.3 The Methodology 1.3.1 Step 1. Product Definition and Data Collection 1.3.2 Step 2. Filtering and Smoothing 1.3.3 Step 3. Filling in Missing Values 1.3.4 Step 4. Varying Parameter, Non-linear Estimation 1.3.5 Step 5. Fixed-Parameter Linear Estimation 1.3.6 Step 6. Aggregation and Benchmarking 2 SUMMARY OF FINDINGS 2.1 The Latent Demand in India 2.2 Top 100 Cities Sorted By Rank 2.3 Latent Demand by Year in India 3 ANDAMAN & NICOBAR ISLANDS 3.1 Latent Demand by Year - Andaman & Nicobar Islands 3.2 Cities Sorted by Rank - Andaman & Nicobar Islands 3.3 Cities Sorted By District - Andaman & Nicobar Islands 4 ANDHRA PRADESH 4.1 Latent Demand by Year - Andhra Pradesh 4.2 Cities Sorted by Rank - Andhra Pradesh 4.3 Cities Sorted By District - Andhra Pradesh 5 ARUNACHAL PRADESH 5.1 Latent Demand by Year - Arunachal Pradesh 5.2 Cities Sorted by Rank - Arunachal Pradesh 5.3 Cities Sorted By District - Arunachal Pradesh 6 ASSAM 6.1 Latent Demand by Year - Assam 6.2 Cities Sorted by Rank - Assam 6.3 Cities Sorted By District - Assam 7 BIHAR 7.1 Latent Demand by Year - Bihar 7.2 Cities Sorted by Rank - Bihar 7.3 Cities Sorted By District - Bihar 8 CHANDIGARH 8.1 Latent Demand by Year - Chandigarh 8.2 Cities Sorted by Rank - Chandigarh 8.3 Cities Sorted By District - Chandigarh 9 CHHATTISGARH 9.1 Latent Demand by Year - Chhattisgarh 9.2 Cities Sorted by Rank - Chhattisgarh 9.3 Cities Sorted By District - Chhattisgarh 10 DADRA & NAGAR HAVELI 10.1 Latent Demand by Year - Dadra & Nagar Haveli 10.2 Cities Sorted by Rank - Dadra & Nagar Haveli 10.3 Cities Sorted By District - Dadra & Nagar Haveli 11 DAMAN & DIU 11.1 Latent Demand by Year - Daman & Diu 11.2 Cities Sorted by Rank - Daman & Diu 11.3 Cities Sorted By District - Daman & Diu 12 DELHI 12.1 Latent Demand by Year - Delhi 12.2 Cities Sorted by Rank - Delhi 12.3 Cities Sorted By District - Delhi 13 GOA 13.1 Latent Demand by Year - Goa 13.2 Cities Sorted by Rank - Goa 13.3 Cities Sorted By District - Goa 14 GUJARAT 14.1 Latent Demand by Year - Gujarat 14.2 Cities Sorted by Rank - Gujarat 14.3 Cities Sorted By District - Gujarat 15 HARYANA 15.1 Latent Demand by Year - Haryana 15.2 Cities Sorted by Rank - Haryana 15.3 Cities Sorted By District - Haryana 16 HIMACHAL PRADESH 16.1 Latent Demand by Year - Himachal Pradesh 16.2 Cities Sorted by Rank - Himachal Pradesh 16.3 Cities Sorted By District - Himachal Pradesh 17 JAMMU & KASHMIR 17.1 Latent Demand by Year - Jammu & Kashmir 17.2 Cities Sorted by Rank - Jammu & Kashmir 17.3 Cities Sorted By District - Jammu & Kashmir 18 JHARKHAND 18.1 Latent Demand by Year - Jharkhand 18.2 Cities Sorted by Rank - Jharkhand 18.3 Cities Sorted By District - Jharkhand 19 KARNATAKA 19.1 Latent Demand by Year - Karnataka 19.2 Cities Sorted by Rank - Karnataka 19.3 Cities Sorted By District - Karnataka 20 KERALA 20.1 Latent Demand by Year - Kerala 20.2 Cities Sorted by Rank - Kerala 20.3 Cities Sorted By District - Kerala 21 LAKSHADWEEP 21.1 Latent Demand by Year - Lakshadweep 21.2 Cities Sorted by Rank - Lakshadweep 21.3 Cities Sorted By District - Lakshadweep 22 MADHYA PRADESH 22.1 Latent Demand by Year - Madhya Pradesh 22.2 Cities Sorted by Rank - Madhya Pradesh 22.3 Cities Sorted By District - Madhya Pradesh 23 MAHARASHTRA 23.1 Latent Demand by Year - Maharashtra 23.2 Cities Sorted by Rank - Maharashtra 23.3 Cities Sorted By District - Maharashtra 24 MANIPUR 24.1 Latent Demand by Year - Manipur 24.2 Cities Sorted by Rank - Manipur 24.3 Cities Sorted By District - Manipur 25 MEGHALAYA 25.1 Latent Demand by Year - Meghalaya 25.2 Cities Sorted by Rank - Meghalaya 25.3 Cities Sorted By District - Meghalaya 26 MIZORAM 26.1 Latent Demand by Year - Mizoram 26.2 Cities Sorted by Rank - Mizoram 26.3 Cities Sorted By District - Mizoram 27 NAGALAND 27.1 Latent Demand by Year - Nagaland 27.2 Cities Sorted by Rank - Nagaland 27.3 Cities Sorted By District - Nagaland 28 ORISSA 28.1 Latent Demand by Year - Orissa 28.2 Cities Sorted by Rank - Orissa 28.3 Cities Sorted By District - Orissa 29 PONDICHERRY 29.1 Latent Demand by Year - Pondicherry 29.2 Cities Sorted by Rank - Pondicherry 29.3 Cities Sorted By District - Pondicherry 30 PUNJAB 30.1 Latent Demand by Year - Punjab 30.2 Cities Sorted by Rank - Punjab 30.3 Cities Sorted By District - Punjab 31 RAJASTHAN 31.1 Latent Demand by Year - Rajasthan 31.2 Cities Sorted by Rank - Rajasthan 31.3 Cities Sorted By District - Rajasthan 32 SIKKIM 32.1 Latent Demand by Year - Sikkim 32.2 Cities Sorted by Rank - Sikkim 32.3 Cities Sorted By District - Sikkim 33 TAMIL NADU 33.1 Latent Demand by Year - Tamil Nadu 33.2 Cities Sorted by Rank - Tamil Nadu 33.3 Cities Sorted By District - Tamil Nadu 34 TRIPURA 34.1 Latent Demand by Year - Tripura 34.2 Cities Sorted by Rank - Tripura 34.3 Cities Sorted By District - Tripura 35 UTTAR PRADESH 35.1 Latent Demand by Year - Uttar Pradesh 35.2 Cities Sorted by Rank - Uttar Pradesh 35.3 Cities Sorted By District - Uttar Pradesh 36 UTTARANCHAL 36.1 Latent Demand by Year - Uttaranchal 36.2 Cities Sorted by Rank - Uttaranchal 36.3 Cities Sorted By District - Uttaranchal 37 WEST BENGAL 37.1 Latent Demand by Year - West Bengal 37.2 Cities Sorted by Rank - West Bengal 37.3 Cities Sorted By District - West Bengal 38 DISCLAIMERS, WARRANTEES, AND USER AGREEMENT PROVISIONS 38.1 Disclaimers & Safe Harbor 38.2 ICON Group International, Inc. 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