Toshiba Medical Systems is a powerhouse among makers of diagnostic imaging equipment such as X-ray and ultrasound machines, claiming 20% of the world market.
But for 12 years it has been struggling to establish itself in the United States, investing millions of dollars in facilities and personnel and sustaining large losses. So far the U.S. operation, with headquarters in Tustin, has been able to capture only about 5% of America’s imaging business.
Over the last year, however, its sales have increased by 65%, far outstripping the growth of the industry as a whole. The company says that fiscal 1988, which ends March 31, will be its first profitable year in America.
In April, the U.S. branch of Toshiba Medical Systems will become an independent company called Toshiba America Medical Systems Inc., a move intended to make it more responsive to the needs of its American customers. No longer will diagnostic imaging be simply a business sector of Toshiba America, which is based in New York.
At the helm of the emerging new company is Takashi Hayashi, who has been president of Toshiba Medical Systems’ U.S. operation for a year. In his 26 years with Toshiba Corp., Hayashi has held numerous positions, including manager of general planning and marketing for the Medical Systems Division, senior manager of the Ultrasound Group and assistant to the general manager of the Medical Systems Division.
Holding the No. 2 job at Toshiba Medical Systems in the United States is Ronald B. Schilling, who since 1987 has been in charge of day-to-day operations as vice president and general manager. Next month Schilling will become executive vice president and general manager.
In an interview with Times staff writer Leslie Berkman, Hayashi and Schilling discussed the company’s efforts to penetrate the U.S. market and its plans for steady expansion.
Q. Why did Toshiba Medical Systems decide to enter the United States market?
A. Hayashi: We were interested in the United States because it represents 40% to 45% of the entire world market for diagnostic imaging. Before we came to the United States we were the biggest seller of X-ray equipment to diagnose stomach cancer, which is the No.1 killer in Japan. In Japan, we have almost half of the market for all diagnostic imaging.
Q. What is your market share in the United States?
A. Schilling: We are a small player in the United States with only 5% of the market. But we have grown significantly since 1987, when we had 3%.
Q. How did Toshiba Medical Systems start doing business in this country?
A. Hayashi: Sixteen years ago we were selling diagnostic equipment through Litton Industry’s medical division. Then about 12 years ago we developed an ultrasound imaging product in which sound signals sent through the body are recorded in images. It was our first product with broad potential application in America and so we decided to establish our own sales organization here.
Q. Did you have difficulty becoming known in the medical industry in this country?
A. Schilling: We entered the market with ultrasound, which was a very exciting new modality, and Toshiba very quickly gained a reputation. Also, Toshiba already was known in the area of consumer electronics.
Q. What were the initial problems you encountered?
A. Hayashi: We started out as a small part of the industrial appliance department at Toshiba International in San Francisco and so we soon lost leadership in ultrasound to American companies that were supported with lots of venture capital.
Schilling: Advanced Technology Laboratories in Seattle and Diasonics in San Francisco were both grown from venture capital. These companies had more advanced technology and grew very rapidly in the U.S. market.
Q. How did you respond?
A. Schilling: We decided to diversify. We introduced a CT (computerized tomography) scanner product to the United states and then angiography products (equipment used to make images of blood vessels). We also added computer capabilities to our ultrasound products.
Q. What did this new technology do for medicine?
A. Schilling: It provided better image quality and more and better information. It can give information in “real time,” meaning that you are looking at what is going on inside the body when it is happening instead of recorded information.
Q. Is Toshiba today a leader in ultrasound?
A. Schilling: We are No. 1 in the world. Right now, Toshiba has maybe 55,000 ultrasound systems worldwide. The next largest competitor, Advanced Technology Systems, may have close to 30,000 systems.
Q. Who are your customers for ultrasound?
A. Schilling: Cardiology departments of hospitals, cardiologists and stand-alone imaging centers if they have cardiologists. In addition, radiology departments recently have become major customers.
Q. Is there a difference between doing business in the United States and Japan?
A. Hayashi: The relationship between the customer and manufacturer is more firmly established in Japan. Here companies often get in and out of a market and leave their customers behind.
Schilling: Companies like Pfizer, Varian and Searle and Syntex came into the CT business and went out. I think it was because they didn’t realize this business requires a very long-term investment.
Q. Your company only became profitable in 1988. What was the accumulated loss for the previous 11 years?
A. Schilling: Tens of millions.
Q. Was it difficult for you to persuade your bosses in Japan to stay in the United States when you were losing money?
A. Hayashi: Yes. But we knew the capability of this company and that America was a very open market.
Q. How did Toshiba’s medical business in the United States manage to turn around and become profitable?
A. Schilling: Toshiba Medical Systems in the United States has become increasingly independent from the rest of the Toshiba corporation so it can better respond to the needs of the American marketplace.
The first major step taken in April, 1987, was the separation of Toshiba Medical Systems from the Industrial Electronics Business Sector, the group that makes laptop computers. The management there didn’t know the medical business, which is very different from their other businesses, in part because we are dealing with customers rather than dealers and jobbers. You have to worry a lot more about customer service and satisfaction.
Starting in 1987, the U.S. medical business began reporting directly to the Toshiba Medical Systems Group in Tokyo.
The next step will become effective April 1 of this year when Toshiba Medical Systems will become a separate company named Toshiba America Medical Systems Inc. As an independent company it will have its own production and marketing facilities. Also we will be able to make decisions more quickly, without getting prior approval from Toshiba America, which will become a holding company.
Q. Under what circumstances will you still need approval from Toshiba America?
A. When we want to make a big investment or want advice on some important issue.
Q. Do you borrow your own capital or does your money come from Toshiba America?
A. Hayashi: In some cases we borrow. But mainly it comes from Toshiba America headquarters in New York.
Q. Have you made any staff changes to improve the company’s effectiveness?
A. Schilling: Since 1987, Toshiba Medical Systems has replaced sales and business management personnel with more experienced people who have been recruited from other medical companies.
Q. Where does Toshiba Medical Systems do research and development of new products?
A. Schilling: Mainly in Nasu, Japan.
Q. Will that change so you can develop more products for the American market?
A. Schilling: We plan to establish an R&D; in Irvine within the next year. That is in addition to cooperative research programs we have had at the University of Arizona and the University of Chicago and (that) we are beginning at the University of Texas.
The best way to keep in touch with the American marketplace is to work with key luminaries, as we call them, at university hospitals. They are key doctors who are very well-known in the field. They don’t just use the equipment for clinical purposes. They come up with ideas for future improvements in the equipment. Our engineers work closely with them.
Q. So what will be going on at the Irvine research center that is different from university research?
A. Schilling: We will have groups of engineers at Irvine who can tailor-design products to do what individual customers want. By contrast, university research activities focus more on long-range product development.
Hayashi: Again on the subject of the differences involved in doing business in the United States and Japan, I also have noticed less of a commitment of American workers to their employers. In Japan, people come to a company to stay for their entire career. In the United States, employees frequently change jobs. So we have to do something to motivate them to stay.
Q. How do you do that? Do American employees have an opportunity to achieve leadership positions in your company?
A. Hayashi: We assign many of our key positions in Toshiba to Americans. Ron Schilling is in our No. 2 position.
Schilling: Three out of 10 of the chief executive staff are Japanese and the rest are Americans.
Hayashi: Also, in Japan it is getting tough to find fresh, young engineers. There are government restrictions in Japan that limit how many engineering graduates a company can hire based on its size, and we are growing so fast it is hard to find enough.
Q. So will you be hiring more engineering graduates from United States universities?
A. Hayashi: Yes. We have young American engineers working now in our factory in Japan for 2 or 3 or 4 years.
Schilling: They learn our systems and structures in Japan and come back to work with us in the United States. The challenge that Hayashi and I have is to create an environment in which an employee wants to stay for a long, long time. We have a lot of communications, training and educational programs for them.
Q. Are those programs different from your American competitors’ programs?
A. Schilling: I think there is more of a caring and making sure people are in the right positions and that their careers are successful. We spend a lot of time talking about individuals and their capabilities, much more time than I ever spent in an American company.
Q. There is so much competition in diagnostic imaging. There seem to be imaging centers sprouting up everywhere. Is there a danger that the market may become saturated?
A. Hayashi: I don’t think so.
Schilling: Look at the overall trends. The population is getting older and becoming larger. That drives the need for medical care for older people. There is also a trend to try to reduce medical costs, and we find that better imaging electronics lowers the cost of medicine overall. With our angiography equipment, for example, a doctor can use catheters to open up a blood vessel rather than operating and putting in bypasses. Our equipment can show the doctor where the catheter is so he can maneuver it in the right direction.
Q. Do you have difficulty convincing insurance companies that expensive imaging procedures are necessary?
A. Schilling: Insurance companies have a lot of questions about whether too many procedures are done in given studies. Our job is to provide excellent equipment so a minimum number of procedures are required. It is up to the doctor to determine how he wants to use that equipment.
Q. Have your sales been increasing despite cost-containment pressures?
A. Schilling: Well, in the last year our annual sales have grown 65% to about $150 million in the fiscal year that will end March 31. That is remarkable growth because the whole diagnostic imaging market right now is estimated to be growing by about 4.5% a year.
Hayashi: With our new reorganization, we will be positioned to achieve our plans of doubling our U.S. sales to $300 million by 1991.
Q. Where are you gaining market share?
A. I think from our competition in the areas of ultrasound and CT and angiography. Those were the three major growth areas for us in ’88. In the entire industry, the greatest growth was in magnetic resonance imaging. But Toshiba is just getting started in that area. We entered the Japanese market first with our MRI and waited to establish our position. We are now ready to go.
Q. Will you be doing more manufacturing in the United States?
A. Hayashi: Up to now we have made most of our products in Japan. But that is changing. In 1987 we began assembling the angiography systems in Irvine. We are also looking at the cheapest way to get parts. More often we are purchasing parts from the U.S.A.
Q. Do you have any other plans to expand your manufacturing operation here?
A. Schilling: In the next few years we plan to significantly increase the amount of basic manufacturing we are doing in the United States.
Q. Where will you be doing that?
A. Schilling: In Irvine.
Q. How many people will you be hiring for your manufacturing expansion here?
A. Schilling: We have 25 to 30 employees at our manufacturing facility in Irvine today, and I would envision a growth rate in people of 25% to 35% a year over the next few years.
Q. To a total of how many workers?
A. Schilling: It depends on how much our business grows. Companywide, we have been expanding our employment at a very rapid rate. We averaged 522 people in 1987 and in 1988 we probably will average close to 600. They are scattered around the United States in terms of sales, service, marketing, finance, manufacturing and administration.
Q. How many are in Orange County?
A. Schilling: In Orange County we now have about 235 people, including those in the Tustin corporate office and in sales and manufacturing divisions in Irvine.
Q. Are you going to buy more land to accommodate your business expansion?
A. Schilling: We are looking at that right now. We are shopping for space to consolidate and expand our Orange County operations. Currently we have about 50,000 square feet of office space in one location and 100,000 square feet in another.
Q. Could a downturn in the economy change your plans?
A. Historically, the medical business as a whole, including diagnostic imaging, has not been impacted very negatively by downturns in the economy. Fortunately or unfortunately, people keep getting sick. Equipment becomes old. Hospitals may wait a few years before purchasing an upgrade; but on the other hand, technology keeps changing rapidly and to keep up customers must keep purchasing new models.
Q. Who currently are your competitors?
A. Schilling: General Electric, Philips, Siemens. Siemens is from Germany and Philips is from the Netherlands. Only GE is an American company.
Q. Do American manufacturers of medical equipment have an edge over Japanese manufacturers in selling to American doctors and hospitals?
A. Schilling: Not today. GE gets a lot of its equipment from Yokagawa in Japan and Philips from Hitachi in Japan. Siemens also has just established a Japanese partner. The big picture is that we are seeing a big influx of Japanese equipment in the medical field just like the wave of equipment we saw coming in television sets, VCRs and automobiles.