Foreign Exchange

How does offshore manufacturing fit into the equation for laboratories stateside and abroad?

By Pam Johnson

Eager for training that will secure them a job and a future, thousands of young, ambitious workers on the other side of the globe are flocking from the remote countryside to big cities such as Shenzhen, Shanghai, and Zhuhai City. This scene has played out repeatedly in the past three decades, as businesses around the world in every market sector have looked to the Far East to take advantage of a seemingly inexhaustible resource—cheaper labor. The latest venues are the growing number of mega-laboratories exporting crowns, bridges, veneers, and dentures to the global dental market.

The offshore manufacturing of dental restorations has ignited much controversy and debate within the laboratory industry. However, the once sharp line that divided industry protectionists from global entrepreneurs has blurred. Some of those most adamantly opposed have quietly slipped to the other side just to survive. Others have moved aggressively to feed a domestic dental market that is hungry for lower-cost solutions to offset an uncertain economic climate, rising costs, and lower profit margins. Over the past 6 years, estimates of overseas production have grown steadily. In the last 3 years, they have doubled, and there does not appear to be an end in sight.

The dental laboratory industry stateside has a lot at stake. Namely, the single largest prosthetic market in the world—worth an estimated $10.7 billion in 2010 and projected to grow to $14.6 billion by 2016.¹ Challenged by a shrinking pool of qualified labor and comprised largely of aging, mom-and-pop operations, the domestic dental laboratory industry is facing the harsh reality that it may not be able to expand quickly enough to meet the current and future demands of dental care in the US.

“The offshore trend we have today will absolutely continue,” says Claus Dampmann, general manager of ProLab Solutions Inc. in York, Pennsylvania, a domestic broker for US laboratories seeking an overseas production solution. “We believe the business climate in the US will remain uncertain, which will drive the current 20% to 25% of work flowing overseas up to 30% to 40% in the next 2 to 3 years.” He expects that laboratories will be forced to explore alternative options because of lower profit margins caused by downward pricing pressures and the limited domestic production capacity.

Foreign Affairs

A significant portion of the estimated 14 million restorations shipped offshore are coming from large dental groups, according to Robert Woosley, CDT, who has many years of experience as a consultant to dental groups and laboratories seeking overseas partners. Unable to find a pricing structure that meets corporate objectives, all of the large dental groups now have some sort of outsourcing mechanism in place, he says. They are either sending cases to a large domestic offshoring laboratory, or they work directly with one of the big overseas laboratory operations.

As an increasing amount of dental work has migrated overseas, many parts of the world have seen new opportunities emerge. Countries where labor is plentiful and inexpensive are gearing up to take advantage of the production overflow from nations like the US, France, and Germany, where the cost of labor is high and the working population has decreased. However, this boost in business abroad has also presented a unique set of challenges for offshore entities catering to the global market. As more overseas laboratories open for business, competition for US market share, in particular, has stiffened. This reality, coupled with the challenge of meeting its own rising domestic dental care needs, is driving up the cost of labor in China, the largest supplier to the US. Laboratories there are struggling to train the number of technicians necessary to serve both markets, and thus, the competition for trained technicians among laboratories is increasing. “The laboratory technician environment here in China is very competitive among the large laboratories,” says Sophia Wu, deputy general manager of Veden Labs Inc., a major player in the laboratory-to-laboratory offshore production business. She says it is difficult to retain highly trained technicians, which is forcing laboratories like Veden to raise salaries and increase personal benefits each year.

All of these factors are making it more difficult for overseas operations to win the price war for indirect restorative products in the US. “Especially in this economy, we are seeing pressure from the patient, to the dentist, to the laboratory, and finally to us to maintain or even reduce our fees,” says Benjamin Li, president of DentUSA Laboratory, a satellite brokering office in Santa Ana, California, that services US laboratories. “To continue to be an asset to our customers in light of such competition, our focus is to proactively embrace the demands of the market.” Utilizing enhanced training and new technologies such as CAD/CAM systems, DentUSA focuses on providing restorations with the highest quality not just the cheapest price. They send cases to Li’s family-run Shanghai laboratory, which is FDA-registered and ISO 9001/13485-certified. “Our big advantage is labor. But the level of competition among laboratories in China is growing,” Li notes. “I don’t think China will be known forever as the place you go for an inexpensive crown.”

Godfrey Ngai, BEd, MMT (Melb), LCGI, FBIDST, director and chief executive officer of Modern Dental Laboratory agrees. He believes countries such as Mexico, Thailand, Vietnam, India, and Turkey will be in a better position to service the low-cost sector of the market in the future. With an FDA-registered, ISO 9001/13485-certified laboratory in Shenzhen, China, Modern Dental sells direct to dentists in the US. Headquartered in Seattle, Washington, the company also has service centers in Los Angeles and Chicago, with a fourth scheduled to open soon in Boston. “When you speak of offshoring, most laboratories and dentists think lower cost,” says Ngai, who has decades of experience as a dental technician and dental technology instructor at the University of Hong Kong. “But at Modern, we focus on delivering a consistent and quality product. If we want to continue our growth, we need to concentrate on quality not cutting costs.”

Behind the Scenes

Low cost and high quality are not synonymous in the minds of most US dentists and laboratory owners. Many associate low pricing with low quality, and concerns abound about the materials used to manufacture restorations produced offshore, the working conditions of the technicians, and the quality of the final product. US-based overseas brokers and offshore laboratories continue battling to overcome the “Made in China” stigma and establish a trust factor.

“We invite people to visit our laboratory in Shenzhen any time,” Ngai says. “They will see what we are doing and who we are. We have a nice facility and care about our employees and are highly aware of industrial safety.”

Any foreign company exporting products to the US for sale to the consumer is required by law to register annually with the FDA, list the devices being exported, and comply with the FDA’s good manufacturing practices and quality systems regulations. Some facilities have taken their commitment to quality a step further by attaining ISO 9001 and ISO 13485 quality management system certification for the design and manufacture of medical devices. And now a few overseas operations, such as Veden Dental Labs, are looking to take it up another notch. The FDA-registered, ISO 9001/13485-certified facility recently obtained DAMAS certification, a quality management system specifically designed for the dental technology field by the National Association of Dental Laboratories.

Many of these larger operations seek higher certification status to ensure they meet FDA regulations. This is particularly important now that the FDA has increased its scrutiny of overseas operations and expanded inspections in the past year, with three newly established FDA offices based in China. Those laboratories that cannot meet the FDA’s requirements and standards will not legally be able to sell products in the US.

“As an FDA-registered export laboratory, we are required to use 510(k)-approved materials,” Li explains. “We import all of our alloys and porcelains directly from ISO-certified manufacturers in the US or EU, and each material is strictly documented by batch and lot number for traceability.” For patient safety, Modern Dental stores computerized records for 6 years, detailing specifics of each restoration manufactured, including material brand name, batch number, and who touched the restoration during its manufacture.

Dampmann warns that some offshore laboratories claim they have registered with the FDA when all they really possess is an owner/operator number. “You need to check with the FDA on the registration status of your overseas provider,” he says. “And require that documentation on all materials used in the manufacture of that restoration accompany the case, including an Identalloy^® sticker.” The US lab should require the use of either FDA-approved products or EU products that have received the CE mark, which signifies that they have met the EU’s stringent safety, health, and environmental requirements. He also strongly suggests visiting the offshore facility to conduct an inspection and review the quality control measures in place to ensure that it meets FDA standards.

It can be difficult for US dental professionals to grasp the industrial size of many of these large offshore operations and the strict management system that they must have in place to produce a product that meets US and EU standards. Many of these mega-operations house and feed anywhere from 1,200 to 2,000 technicians a day, providing large living complexes with all the comforts of a small city—from cinemas and libraries to fully outfitted gyms, golf courses, and basketball courts. In addition, employees must be afforded healthcare benefits and a retirement program, in accordance with Chinese law. In order to keep a constant supply of qualified staff, some larger laboratories even have their own training schools and dental technology programs to prepare new technicians and provide advanced education for their existing staff.

The technicians work alternating 8-hour shifts to keep these operations running 24 hours a day, 7 days a week, producing upward of 50,000 cases a month for their global partners. Technicians at DentUSA earn anywhere from $300 to $1,800 a month, depending on their job function. It is this economy of scale that allows an offshore facility to sell the average semi-precious porcelain-fused-to-metal (PFM) restoration for $60, which is just one third of the average selling price of a comparable PFM produced and sold in the US.

Money-taker or Moneymaker?

Some offshoring critics in the domestic market argue that this model takes money out of the pockets of US laboratories. But those who have made the business decision to tap into the price-sensitive dental market tell quite a different story. For them, offshoring is actually putting more money into their pockets, as the lower prices enable them to capture a new market or re-engage a client who was shopping for a lower price tag. The reality is that the profits that US laboratories make through offshoring stay in the US, going directly into the coffers of those domestic businesses.

“One of our missions at Knight Dental Group is to participate in every significant trend that is out there in dentistry,” says Warren Rogers, president and chief executive officer of Knight Dental Group in Oldsmar, Florida. “We perceived the offshore trend as one that was here to stay so we formed our Vantage International brand about 4 years ago.” With prices that are 40% to 50% cheaper than Knight Dental’s other brand portfolios, this business segment has been growing at a rate of 50% each year. The quality of the offshore-produced restorations is on par with the average crown made in the US, Rogers says. “What we are seeing in our business is a sharp dividing line forming between our high-end esthetic lines and low-economy lines, with not much growth in the middle ground,” he explains. “There are different dynamics happening in the industry. We’ve had a lot of our clinics sell out to practice management groups, and as a result, they are forced to go into a value brand to meet corporate objectives.” And Knight Dental has managed to bring many of these clients back by offering the value-priced Vantage International restoration. Their key targets in growing the line include mid-sized practice groups and operations with multiple practices.

For smaller laboratories, the decision to tap into offshore resources may be more a matter of survival than capturing a market segment. For businesses unable to acquire the number of qualified technicians or equipment that would allow them to increase production capacity, sending cases to an overseas partner provides an unlimited workforce at no additional expense. “I’ve always been against the offshoring concept,” says one laboratory owner who wishes to remain anonymous. “But the way the industry is structured now, it’s impossible for small laboratories like mine to compete. By using a US broker with an offshore partner laboratory, I am able to get incredible quality and unlimited production volume. So it’s changed my view, and my business is thriving.” He still maintains his four-person local laboratory to service clients in his region and markets his economy product line under a separate laboratory name.

Woosley, who has personally toured all of the major offshoring laboratories in China, believes that utilizing these resources can make good business sense. “An overseas laboratory can be like an extra employee to increase production or take the pressure off a production overload,” he explains. “Or it can be a supplier of a particular restorative product, such as Captek or Empress, if these types of restorations are not part of your product line.” However, he does not advise laboratories to send all of their cases overseas because it is too risky.

Rogers agrees. “If you are only in that offshore arena, there are too many variables and too much risk,” he says. “You would be building a franchise on how someone else manufactures a product for you and their business model may change this year or next. So it’s important laboratories stay highly diversified within their product portfolio.”

Studying Abroad

Offshore manufacturing is not the business model for every laboratory or every client. “I think the issue that everybody needs to understand is that not all dentists are worried about price all the time,” Woosley says. “If a crown costs $50 and it takes 2 hours to seat, it’s not worth the savings.” This is still a service-and-relationship industry, and a turnaround time of 9 to 14 days versus 5 to 7 days may or may not be acceptable. And if there is something wrong with a restoration returned from an offshore facility, sending it back is rarely an option, leaving the laboratory to fix the problem.

Thus, it is crucial for domestic laboratories to find a partner that meets all of their expected quality and pricing standards. For smaller laboratories, a direct relationship with an overseas partner is not usually a realistic option. In order to reap the same economies of scale and competitive pricing as larger laboratories, they typically opt for a US-based, third-party broker with an overseas laboratory partner. The broker handles all the shipping, communication, and support functions, saving the lab money and manpower.

Finding the right partner requires doing due diligence—whether it is through a broker or a direct partnership. Knight Dental decided a direct relationship with an overseas partner laboratory was their best option to keep tighter control over the process. Rogers traveled to China with Knight’s Director of Professional Relations, Lonnie Lee, CDT, to meet with the owners of various laboratories and conduct quality inspections. Because Knight Dental is a DAMAS-certified laboratory, any vendor doing business with them must have a quality management system in place and adhere to the FDA’s good manufacturing practices.

“Our partner is ISO 9001- and 13485-certified and committed to quality. The bottom line for us is that we have defined quality objectives that we require,” Lee says. “Whether manufactured in our US facility or overseas, all restorations must fall within those defined quality parameters on a consistent 97% accuracy matrix.” If three out of 100 restorations are returned with short margins, then the quality standards are on the borderline of being unacceptable, using Knight Dental’s gauge. Lee suggests that sending multiple test cases to different providers is a great way to assess such quality standards. “Because we want to keep our feelers out there for alternative labs, we are continually sending test cases out to overseas operations that we come across,” he says. He travels regularly to China to audit his partner facilities and also to inspect potential partners in person, in case issues should arise with their current providers. On his last trip to China in November, Lee inspected six possible candidates, but only two came close to meeting Knight Dental’s needs and expectations. Most did not possess the proper FDA registration.

Their current offshore partner provides an English-speaking management team that understands what they are looking for and assigns technicians with the skill levels required to meet the necessary quality standard. Knight Dental and the management team also touch base monthly over the phone to review, discuss, and resolve any management or non-conformance issues that may have arisen. Currently, Knight Dental sends less than 10% of their total volume overseas for production. “We are nowhere near the reported national percentage of 20% to 35%,” Rogers says. “In that regard, we are underdeveloped in this business segment, but we project a 58% increase in growth over the next year.”

When it comes to the disclosure issue, Rogers says the offshore model becomes much more controversial. By law, the FDA requires importers or re-labelers who are selling offshore-manufactured products in the US to identify them as such on the packaging. Some laboratories utilizing the services of offshore providers are ignoring this legality. “It’s unfair competition, and unfair to clinicians not to give them the option to choose where their restorations are made,” Rogers says. He knows of laboratories in his state of Florida that, unbeknownst to their clients, have reduced staff from a dozen employees to one to two people handling the export and import of cases.

But do those clients really not know what their laboratory is doing? According to a 2008 survey of the American Dental Association’s membership, 20.7% say they do not. “They should know,” Rogers says. “These restorations take 14 days turnaround time and cost 50% less.” This quiet “don’t ask, don’t tell” policy between some dentists and laboratories leads clients to mistakenly assume they are relieved of the moral and ethical responsibility to tell patients where a restoration is made and absolved of liability if something should go wrong. It would make a difference to many of these clinicians if they were told that the restorations were made in China, Rogers contends. “Our offshore business segment would have grown much larger if we weren’t disclosing to our clients,” he adds. But Knight Dental not only tells clients that the Vantage International brand is produced overseas, they also visually differentiate the brand packaging so the client knows the value of each of their product lines.

In addition to federal law, four states currently require point-of-origin disclosure on packaging, with at least another 10 states considering legislation.

Future Challenges

There is no doubt that offshoring the manufacture of goods and services will remain a contentious issue in this country, all the more so as a result of government trade and monetary policies. But the reality is that global supply chains continue to radically change the way goods and services are produced. Parts made in one country are assembled in another and sold in a third. It is changing how companies think about and conduct business. And it is a fluid target, as rising wages and operating costs increasingly challenge leading offshore providers.

For small to medium-sized companies, in particular, offshoring is a relatively new business concept. “Who would have thought that dental laboratory owners would be taking our business to the other side of the world?” Rogers asks. But he concedes China may not be the global go-to forever. “The rising economy is a little unnerving. Some of the provinces have experienced wage increases of up to 20%, and inflation is currently at 5.5%.”

As the competitive landscape overseas becomes more crowded and operating costs rise, the favorable pricing that offshoring affords may slowly crumble. “The difference between China 6 years ago and now is dramatic,” Woosley notes. “Back then, any Chinese laboratory would jump through hoops to get your work because the US was like a new frontier. Now there is enough work and enough competition among suppliers that they are fighting among themselves for those same cases.”

The other factor impacting this rapidly growing nation is the increased demand for dental care from its own emerging middle class. Some of the larger laboratory operations are establishing dental clinics throughout the country to provide reasonable access to dental care and capture that market. Lee recently toured a brand-new dental clinic in Shanghai, a fee-for-service operation that is not government-subsidized and is geared toward the middle- to high-class patient. The clinic is bringing in big names from the US to help start it up and oversee operations from practice management to esthetic dental teams.

“They see the writing on the wall,” Lee says. “And, when there are 1.3 billion people who need dental care, the US market is going to become secondary.” For now, however, China would like to be considered a valuable resource, intent on helping US laboratories find new areas of financial growth by giving them the means to offer a quality, value-priced product.

Reference

1. iData Research. “U.S. Market for Dental Prosthetics and CAD/CAM Devices 2010.” October 2010.