{audio:0:00:08} Tell us a little bit about your relationship with the hearing aids industry.

{audio:0:00:15} I’ve been working for roughly 15 years in the industry, starting as a salesperson in the hearing instrument wholesale business for one of the big players, namely Siemens Audiologische Technik. I made a career through various functions and left the industry after the sale of that business to a private equity investor when Siemens divested it. In the last few years, I’ve been working as Managing Director of Siemens Audiologische Technik.

{audio:0:00:54} Could you describe the journey of a unit of production of a hearing instrument, from the production floor to being fitted on a consumer?

{audio:0:01:18} Yes. Let me frame this by saying that a hearing instrument 100 years ago and today still basically, consists of the same contents. You need a microphone/s, a receiver, an amplifier – which is digital nowadays – and you need some energy, a battery or an accumulator. These are the basic ingredients of a hearing instrument. The way it is developed further and is also produced has changed a lot.

{audio:0:02:00} You have to understand that the parts of the hearing instrument are purchased from suppliers. The real know-how that’s inside of the hearing instrument is basically signal processing, the audio processing. So the hearing-impaired person gets the amplified tones, speech, whatever signal, in real time, in good quality and amplified in a way that is matching the individual hearing loss.

{audio:0:02:39} Having said this, hearing instruments are basically a technical audio device. They are produced in a kind of mass production. There are only very few spots still in Europe; most of the factories are in Asia. Starkey, for example, still produces in the US. The hearing instrument engine nowadays is still, to a certain extent, the same in a lot of hearing instruments and is then like a car, somehow fitted to the need. You can buy a unit with a full set of features or one with not so many features. But the engine in the hearing instrument is the same and is able to provide all required features.

{audio:0:03:49} That makes the production much easier than in former times and, nowadays, a big part of the production is automated. 10 to 15 years ago, many things had to be welded manually in the integrated circuits and the pieces that hearing instruments are made of.

{audio:0:04:16} I have a good insight, of course, into the value chain that we had in the company I worked for. Traditionally, from a quite central fabrication and logistics point, these goods are distributed into the world, normally into the local presence of a manufacturer who usually – especially in the past – fulfilled the wholesale function in that market and distributed the hearing instruments to the retailer.

{audio:0:05:02} In the past few years, the formation of this market has been consolidated so you find big retail chains that own an enormous number of points of sale. You also have small chains, which tend to be acousticians or small groups that maintain a couple of hearing aid points of sale or dispensers. But you still have a significant number of so-called mom-and-pop shops, which would be a single audiologist or acoustician that performs his business, has one shop, maybe owns the facility and works in the shop himself. With the consolidation, that part of the channel is shrinking and moving more and more towards big retail chains that buy these mom and pop shops in the market.

{audio:0:06:14} The hearing impaired – this is now the chain starting from the other side – suffer from hearing loss. The interesting part is that the person who suffers from hearing loss doesn’t really feel that he suffers because, in many cases, he doesn’t really have a problem with that. The opposite is the case; certain background or annoying noises are just not hearable, so at a certain point of time, in many cases, this person gets some pressure from family, from work colleagues, to get his hearing tested.
{audio:0:07:02} He goes to an audiologist or to an ENT doctor and normally gets a diagnosis that he has hearing loss which can be classified from mild to severe or profound. Then usually, with a prescription in his or her hand, the patient will go to the audiologist or hearing aid acoustician and both ends of the chain come together; the hearing aid acoustician then combines the device that is manufactured by the big OEMs, with the patient.

{audio:0:07:57} This process is a little bit complex. There needs to be a fitting of the hearing instrument to the individual hearing loss of the patient. We’ll come to that point later in the discussion, because there are some dynamics in the market. But I would say, this is the traditional way a hearing instrument goes from the production floor to the patient which means the hearing instrument itself has a few thousand kilometers journey behind it when it arrives on the ear of the patient.

{audio:0:08:46} Do the brands of the manufacturers mean anything to the individual customers?

{audio:0:08:57} As we talk about brand awareness and brand value, indeed the typical customer is still quite old and relies on the recommendation of either the ENT or the audiologist. So compared to young people who go to an electronic shop and ask for an iPhone or a Samsung, the hearing aid customer goes to an acoustician to get a hearing instrument and they normally don’t have a clue about any brands. In my personal experience, I can say the Siemens brand, especially in Germany and Europe, was quite present and known so this might have helped in a few cases, but this was not really a distinguishing factor.

{audio:0:09:55} Once you are a user of a hearing aid, I would say the brand value is an increasing, decisive factor. For example, if you suffer from hearing loss as a child, you get fitted with hearing instruments, you grow with the hearing instruments and when you have been fitted successfully with hearing instruments from a certain brand, there’s a high likelihood to stay with that brand, at least for quite a while. So when you get older and you change the hearing instruments, you are more likely to stick to that brand than change it, unless you are not satisfied with it.

{audio:0:10:47} What’s your sense of what customers really care about when selecting a device and selecting between manufacturers?

{audio:0:11:02} I don’t know whether it’s still the number one wish but what people often say is, they want a hearing instrument that is not visible; people are concerned how others might react when they see someone with a hearing instrument. Of course, it’s cosmetic and hearing instruments still suffer from a certain stigma. We always said we understand this desire, but there are certain advantages, depending on the hearing loss, as to whether you wear a behind-the-ear instrument or an in-the-ear instrument. In some developing countries, there are also reasons for pocket hearing instruments. They’re not quite state of the art any longer, but still, it is better people wear this than no hearing instrument. It’s more the cosmetic appeal that is interesting, at the very beginning, and not so much the acoustic performance.

{audio:0:12:21} To add to this point, many people have the impression that, if you have a hearing loss and you get a hearing instrument fitted, afterwards the hearing loss will be fine; that is wrong. I wear glasses. Glasses are a totally different story. You suffer from a certain loss, you don’t see certain things, you go to the optician, get glasses and immediately you see clearly.

{audio:0:13:01} When you get a hearing instrument, normally the patient has suffered for quite a while from a hearing loss, so the brain has started to retrain on other tones. When you get a hearing instrument, technically, you will hear everything again in real time, amplified in a way that it’s reflecting the real tone. This becomes an immense noise to your brain. People tend to say no, because it is so unusual and they feel annoyed by what they hear again.

{audio:0:14:00} In some cases, this fitting process lasts three to six, especially due to the fact that people need to retrain their hearing with instruments. This means the instrument cannot be adjusted to the settings according to the hearing loss straightaway, but it needs to be accommodated, step-by-step, to the hearing loss. In the first fitting session, the audiologist would just make a very mild amplification so that the patient gets used to it and starts to retrain again.

{audio:0:14:47} How did you look at the question of competitive differentiation in the product while you were at the Siemens business?

{audio:0:14:58} Of course, we always said, we have the most competitive hearing instruments. The problem is, you cannot really differentiate by optics. We had colorful hearing instruments, we had modern shapes and, by the way, all other manufacturers did the same. That is not something where you really can differentiate. A simple example is, if you buy a BMW 1 Series, 3 Series, 5 Series or 7 Series, you see a difference and, in a hearing instrument, in many cases, the housing of the instrument is the same. You differentiate by the features that the signal processing provides. This is very difficult to explain to customers or patients that the same instrument, what you have in your hand, costs €1,000 or €3,000. Therefore, you need some time, a lot of explanation and you need the hearing experience to differentiate.

{audio:0:16:23} Our biggest challenge was to get the patient to try out our hearing instruments. Depending on the market, in Germany for example, there’s a so-called comparable fitting where an acoustician needs to provide various options to the patient; that is not the case in all countries. What will encourage the audiologist to fit your hearing instrument to the customer, so he can wear it for a trial period and get a positive impression?

{audio:0:17:17} Given what you’ve described and these nice margins that exist in this industry, why aren’t there more competitors?

{audio:0:17:30} The margins are always relative. Of course, you want to earn money if you undertake certain activities. Putting this aside, the R&D is really costly in this field. I want to highlight some challenges. Firstly, you can easily provide the same features in much bigger housing. If you have a smartphone, that’s still a challenge, but not so much as a hearing instrument. A hearing instrument, basically has much more advanced signal processing, very low energy consumption, otherwise you would not fit in the very small battery. The biggest differentiator is that a patient wears it for therapeutic reasons, so at least today, it’s classified as a medical device.

{audio:0:18:42} This forms a certain market entry barrier as you need to have a certain degree of reliability for these instruments. If a hearing instrument were fitted in the wrong way, it could amplify too loud so you could easily get amplification of 130 to 140 decibels on the eardrum which could harm the hearing or the patient. That is the reason why it is classified as a product IIa, according to the medical device regulation.
{audio:0:19:27} To get certifications and to bring a medical device into the market, is not something everybody can do in a short timeframe; you need a certain period of time also to get the labels to do so.

{audio:0:19:53} Why is the industry structured in the way it is today? You described the chain, OEMs, the wholesale process to the retailers, retail being still reasonably fragmented. I think Amplifon has something like 17% of the global retail market, still a lot of independents in all of the major markets. If we look at this value chain and, especially on the OEM side, the way those businesses are structured and the way the OEM market is structured, could you maybe elaborate a little bit on why exactly it’s structured this way?

{audio:0:20:34} First of all, I would like to draw attention to the dynamics in the market in the last 15, 20 years. In the past, there was a clear line between manufacturers and customers and retail, Then, at a certain point in time, the first manufacturers stepped into retail. At that time, the reasons might have been opportunistic. Siemens was not the one to start this process I have to say, but in the development of these market dynamics, it was clear that, on the one hand, this was a tool to safeguard certain sales channels. Otherwise, the competitor would have acquired these retail chains or retail shops and then you would have lost your volume.

{audio:0:21:46} On the other hand, this is especially notable in the world today, where data is an extremely interesting asset. It is, of course, important for the manufacturers to have direct access to the customers and coming back to what I said before, there is a challenge to get your hearing instrument on the ear for the trial period. This could be managed by the process where the manufacturer-owned retail might promote hearing instruments from their own manufacturer, although I have to admit, this is probably not the pure strategy but definitely a point to consider.

{audio:0:22:44} On the retail side, it’s different from country to country, but let’s take, as an example, Europe or maybe Germany, which is one of the biggest single markets in this industry after the US and the UK. There is a certain generation of acousticians that started the business and developed the rules for the craftsmanship as acousticians and they have set up the shops. In many countries, the fitting and craftsmanship is still regulated as being on the medical side or, like in Germany, from a craftsman license; you need to be a master craftsman in hearing aid acoustics to be able to run your own shop.

{audio:0:23:47} The big retail chains have a couple of reasons, now, to consolidate in the market. First of all, when they buy in the shops where someone, in terms of a succession strategy, is selling its business to the Amplifons of this world. Secondly, the big retail chains are aggressive in this field, in order to get points of sale where they have this master. There are limited masters of this craftsmanship available, for example in Germany. It’s not only that you open another retail shop, you also have to provide this retail shop, at least with a part-time master craftsman in the hearing aid acoustics craftsmanship. This is at least one strategy to fill these points of sale.

{audio:0:25:08} How did you evaluate the debate? We’ve had a number of years of vertical integration, as you were saying. Has your perspective changed on the merits, strategically or economically, of vertical integration and of OEMs buying up retailers? Has that changed over time at all?

{audio:0:25:29} It has definitely changed. My personal opinion was that the manufacturers had quite a good margin. If you look into retail balance sheets, profit and loss statements, the margins have been much lower so at least when I was very active in the industry, we were always very careful to dilute our margins by adding retail.

{audio:0:26:07} From a retail perspective on a singular basis, if you grow towards a big retail chain, you don’t have many synergies in the field. Retail is detail. You have all these shops; you need to control them. You need to have certain hierarchies to lead this shop structure. That is quite intensive care in a certain way.

{audio:0:26:42} On the other side – and this is a big lever with consolidation forming a big retail chain – you have massive arguments in price negotiations. The purchase price of hearing instruments in bulk from manufacturers, of course, correlates with that and that makes it very interesting. You should remember that a hearing aid acoustician does not just sell hearing aids. They are other assistive listening devices, there are consumables, there are batteries. So, basically, it is a whole retail concept and once you have access to the patient or end customer, with certain creativity, you can make this a very profitable business. Not all single hearing aid acquisitions have done this in the past but as a big retail chain, you have certain tools in your hand to do so.

{audio:0:28:00} Anecdotally, I understand that the cost of goods sold for an independent audiologist can be around 30% to 35% of sales, whereas for Amplifon you’re talking as low as 15%.

{audio:0:28:18} I should not talk about too much in-depth knowledge but I would say, in general, you are in the right direction and it is quite natural. The quantities differ so much, you cannot compare. On the other hand, a big retail chain has a big, big cost to pay every month for this big structure. Taking the COVID issue, the most recent impact to the industry, with the lockdown you still have to pay for the thousands of points of sale and the rent. There’s another risk involved. I don’t want to defend this margin difference but, in general, you are correct in what you have said.
{audio:0:29:23} I just wanted to step back to this vertical integration. 20 years ago, we were quite firm in saying we are never going to touch the business of our customers, this will risk our market.

{audio:0:29:43} Could you elaborate on that and what the logic was at the time that was prevalent?

{audio:0:29:50} Yes. There was a peaceful coexistence of the manufacturers and retailers and at that moment where a manufacturer takes a point of sale or starts approaching the patient directly, you are in immediate competition with your valued customer. So from a 10,000 feet perspective, this does not fit together. We learnt, over the years, that there was not a major impact on the business. So for some competitors on the manufacturer level who stepped into the retail business, there was some noise about it, but the business impact was negligible and this led to a paradigm shift in the industry that now, basically, all big manufacturers have retail activities. It’s just 15 years ago that we had a totally different discussion, so things in the market can change fast.

{audio:0:31:13} Have the financial promises of vertical integration and a total shareholder return perspective delivered from what expectations were five or 10 years ago?

{audio:0:31:29} Financially, I would say the margins have decreased from a manufacturer perspective, definitely. On the other hand, today, when we look into the rear-view mirror, the situation of 20 years ago could not be sustained, I would have said. The margins, at that time, in the high two digits, couldn’t be reached today with the current structure of the market. But at that time, as I mentioned, it was a profitable business and a good co-existence. A manufacturer worked on his part, the acoustician or retailer worked on their part and, in response to certain market dynamics, there was a process starting of vertical integration.

{audio:0:32:46} Knowing what we know today, maybe certain players would have acted differently 15 or 20 years ago, but the margins have decreased and I think the expectations have been lowered too. But having this retail part offers other possibilities, especially in view of the data. Big data is an issue. You can use the data from fittings to improve the R&D activities for signal processing. You can do remote things technically today that you couldn’t think of 20 years ago, so I would say the expectations are lower and these expectations have been fulfilled. The margins I still know from my beginning times in that industry, they could not be reached anymore.

{audio:0:34:08} Looking specifically at the barriers to entry to this industry that we’ve talked about, on the level of technology and distribution infrastructure, has the barrier, in your view, increased or decreased over time, in terms of technology?

{audio:0:34:30} The big steps in technology have not taken place in recent years. The development was there. Hearing instruments get better every day, but the big development was at the end of the 90s, with the change from analogue to digital hearing instruments. Since then, of course, signal processing has been much better. Potentially, wireless communication can be seen as a similar step but that is still all only possible with the digital technology developments in hearing instruments.

{audio:0:35:23} By looking for all these new technology issues, the hearing instrument, to a certain extent, becomes electronic or an audio device which has similar functions compared to smartphones or very sophisticated audio equipment today. I think this is a development that we discussed years ago already, but this can be accelerated. That relates to the question as to whether a hearing instrument must be a medical device in future. That will come up and, for big players, like Apple AirPods or Jabra Elite, they are not very different from the functionality of a hearing instrument. Of course, the fitting part is a different story but from the signal processing and amplification and also the size, the step towards a hearing instrument gets closer, I would say.

{audio:0:36:56} I referenced to glasses before. Glasses are still a medical product but when you see the development there, today when you buy glasses, you don’t need to have a prescription any longer. You could also go to Specsavers or other retailers or buy them online. If you go to a site, they can still measure your eyes but the equipment is the same or sometimes better than with a doctor. Hearing instruments can also be bought without a prescription already today, but only at certain points of sale. Additionally, the online hearing instrument channels are still linked with professional fitting but with these remote fitting technologies and also I would say artificial intelligence, fuzzy logic, I could imagine so-called self-fitted hearing instruments might be an issue in the future.

{audio:0:38:19} They have a certain pre-setting, according to your hearing loss, and then the patient himself, in a certain defined framework, designed not to harm the remaining hearing ability, would just learn from the switches and do it themselves. Even if that only offers an 80% solution, this could contribute to the acceptance of hearing instruments on a broader scale. Hearing instruments, assistive listening devices or over the counter instruments only help if they are actually worn. In many cases, even amongst my family and friends, they are not worn consistently every day and then the benefit is not as good as it could be.

{audio:0:39:32} This takes us directly into this other question around barriers to entry which is control over distribution and the role of the audiologist in this process. That’s very interesting because what I hear you describing here is, potentially, a quite dramatic shift in the way these products can be purchased.

{audio:0:39:53} Sure. The demographics are definitely an important factor here. Still today, including the so-called baby boomers, we have a generation of 60+ I would say, some of which have a certain affinity to new technology. Even my father uses email and a computer, in his mid-70s, but that is not always the case.

{audio:0:40:30} Still the majority of the patients, they appreciate having a knowledgeable person to speak to that takes care of the. For quite a while, I would say, it is pretty guaranteed that we will have this retail structure where elderly people, especially, can go with an appointment and get treated.

{audio:0:40:59} The next generation, including myself, are very familiar with the internet and new technology or the digital natives, so for the generations to come, they will have a different attitude.  I doubt that they would prefer to go to a shop where they buy a hearing instrument, sit in a soundproof cabin and undertake the tests. They want to use an app or they want to have digital access or they want to shop online and I think this need needs to be taken seriously and, to a certain extent, I believe that these Apples and Samsungs already do. You find certain articles with a headline such as, Apple AirPods– is this a wearable or a hearing aid? What’s the difference?

{audio:0:42:06} There is not so much difference anymore and there’s something that’s interesting for me which is that hearing instruments have a stigma so they should not be visible at all, but if you think last time you walked through a high street, how many people do you see with something big in their ear, either a hands-free phone device or Apple AirPods? For them, it’s absolutely no problem to see that they have something in their ear. Modern hearing instruments, in the ear instruments, are not even visible, so why don’t they use these instruments? For them, the stigma might have to do with hearing instruments but not with having something in your ear as long as it is cool and fancy.

{audio:0:43:02} Yes, the AirPods are a fashion statement.

{audio:0:43:05} Absolutely. We worked, and I’m quite sure my former colleagues still work, on overcoming this stigma but it’s difficult and this also had to do with a medical device. You need a medical device if you’re injured, if you need some assistance and not many people want to be seen as such.

{audio:0:43:35} Coming back to your question on the entry barriers, I would say there is a bit more dynamics in the retail structure towards the entry barriers. Particularly in Germany, we repeatedly had the discussion on this obligatory mastership in this hearing aid acoustics craftsmanship. Until today, it is still the case and still applies but a lot of other countries show that it works in a different way and this cannot be ignored. Even if we say, okay, this might be developing countries, but the technology is there. The technology provides these opportunities already and I’m pretty sure, at a certain point in time, this relatively small market of hearing instruments will be interesting for the big players because they can combine technologies, business models and they can combine data with it.

{audio:0:45:02} That might also be a threat or risk for all our personal needs but I would say the attractiveness of these topics makes it interesting for big electronic players to at least have this in mind and on the radar screen.

{audio:0:45:31} If we find ourselves, in five years, having a conversation on this industry, what do you expect we will be talking about as regards average selling prices for hearing instruments as they’d evolved over the five years; and of the structure of distribution for these products?

{audio:0:45:56} I have to say this is a very personal opinion, but I am pretty sure that the prices will further erode. Prices will go down and this, in turn, makes it affordable to more people. For the manufacturers, this still can make sense and what will be interesting is the OTC discussion in the US. There have been changes to the regulations by the FDA for over-the-counter hearing instruments which target mild or entry level hearing losses especially.

{audio:0:46:42} As far as I know, this regulation should finally be in place, following the end of the discussion period, in August 2020. At the moment, I’m not aware of any real OTC product but players in the industry and also in the hearing instrument industry, they will fill this gap and we will see how this develops in the world’s single biggest market, the US and what share of the market these OTC instruments will form. And in view of such dynamics, five years is a long time, so I would say there should be an impact that will be able to see in 2025.

Hearing Aids Manufacturing: A Sustainable Oligopoly?

The pros and cons of vertical integration for OEMs

How barriers to entry to the hearing aids OEM market have evolved over the last 20 years

Reasons average selling prices for hearing aids would further erode in the coming years

Hearing Aids Manufacturing: A Sustainable Oligopoly?

Former Managing Director, Sivantos

inpractise.com/articles/hearing-aids-oligopoly

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Executive Bio

Robin Hees

Former Managing Director, Sivantos

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Hearing Aids Manufacturing: A Sustainable Oligopoly?(September 2, 2020)

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