West Meets East
Representatives from three dental laboratory publications were invited to visit China to see off-shoring operations firsthand.
By Pam Johnson
For more than three decades, the Chinese economic miracle has been built on cheap land, cheap capital, and on the backs of cheap labor. Now the second-largest economy in the world after overtaking Japan in 20101 and one of the fastest-growing, China’s Gross Domestic Product (GDP) in 2012 is again projected to come near to or equal its three-year average growth rate of 10% and overtake the United States as the world’s largest economy by the year 2019.2 But such rapid growth comes at a price and China is beginning to feel the growing pains.
In the last two decades, modern, densely urbanized and industrialized regions of the country such as the Pearl River Delta area have been transformed from a landscape of small farms and villages into expansive free-market economic zones dominated by a network of large capital cities (Hong Kong, Guangzhou, Zhuhai, and Shenzhen). With easy transportation access to the South China Sea, this completely modernized manufacturing region is one of the major hubs for China’s economic growth. The region sits in sharp contrast to many parts of the country where vast stretches of rural countryside lack clean drinking water, modern sanitation facilities, and a developed infrastructure. In many parts of the country the air is thick with smog from billowing coal-burning electrical facilities, manufacturing plants, and more than 65 million3 privately owned cars and commercial vehicles congesting the city roads and highways along China’s east coast. The industrial expansion in these economic zones has drawn in a melting pot of international investors, businessmen, and privateers—all anxious to tap into a cheap labor pool of millions of workers migrating from the countryside to take advantage of the region’s economic boom.
Nowhere is China’s push to modernize and expand its infrastructure more evident than in the new construction seen everywhere you go. Whether it is new or revamped airports, high-speed railways, new underused bridges and expressways, or glass-front high-rise apartment buildings standing unoccupied where old, fully occupied apartments once stood, construction is everywhere from the countryside to the cities. Even entire towns have been completely constructed with everything a city needs but standing vacant, waiting for occupants to come and settle. China is strongly encouraging its people to transform from a poor underdeveloped nation into a wealthy megapower with a middle class that can afford newly built high-rise housing and drive their cars on the newly constructed highways, bridges, and tunnels. To accomplish its goal, the government adopted a growth-at-all-costs strategy and keeps building to provide nearly a third of its 1.3 billion population with jobs and the wealth that comes from all their new development.
But the government has recognized that the current strategy is showing the strains of sustainability. In its March 2011 release of the 12th 5-Year Plan,4 the party showed that it wants to shift away from an export and building strategy to one that encourages the consumption of domestic goods and services. If China was able to engineer this shift in its economic model, the rest of the world may find itself gearing up to manufacture and provide the goods and services demanded by the world’s single largest population base. It is this consumer-based China that the rest of the world is awaiting to emerge and serve.
In the meantime, the world’s busiest workshop keeps churning out textiles, toys, electronic components, and dental restorations destined for export to a global market hungry for inexpensively manufactured goods. It is this massive manufacturing base that has raised so much concern and controversy here and abroad about loose manufacturing practices, material misuse, and labor safety. It is also a manufacturing base facing challenges that may diminish its competitive advantage in future years.
Overseas Challenges
The lure of inexpensive labor, cheap land, and tax incentives for exporters of goods and services has driven many manufacturers in the last decades to leave home base to set up shop in global locations where goods can be produced in larger quantities at a more competitive price point. But the incentive for manufacturers to remain is fluid as economic development matures and cheap labor shifts. That has certainly been evident in the offshore production of dental restorations. Jorge Breen, Asia Chief Representative of Ivoclar Vivadent, pointed out in our meeting at the Conrad hotel in Hong Kong that the primary global outsourcing market for crowns and bridges has shifted over the decades from Singapore, to Thailand, then to the Philippines, and now to China in search of the next competitive advantage, and it may shift again as the Chinese government institutes a policy of “inclusive growth” and continues its mission to lift millions more of its people out of poverty and close the wealth disparity gap to move closer to a consumer-based economy. Private consumption in China has increased from 8.5 trillion yen in 2006 to 10.3 trillion in 2010 and is projected to hit 16 trillion by 2015.5
To incentivize its people to spend, the government must put money in their pockets. In 2010 the average urban household per capita annual income in China was over 21,000 yen6 or approximately US$3,500. Rural workers fare far worse, and for this reason millions migrate to the large cities to seek work. The government pledged in its 2011 5-Year Plan to increase the minimum wage for all workers over the next 5 years. Some analysts speculate the wage increase could range anywhere from 13% to 20% per year per worker. China has also moved to protect workers by instituting a new labor law in 2008 that shifts power from the employer to the employee, making it difficult for companies to hire temporary workers and giving employees work contracts, better working conditions, vacation time, health insurance, and retirement plans. These government initiatives could begin to drive export manufacturers to relocate in order to maintain economic viability or shift from manufacturing for export to producing for the domestic market.
As a result of these and other reforms, today’s emboldened Chinese worker has become much more educated about worker’s rights and the competition among companies to lure skilled workers more aggressively.
This may be an oversimplified snapshot of a country in the throes of an industrial and technological transformation, but these issues were recurring themes in discussions with our hosts, Veden (an acronym for Value, Excellence, Dedication, Efficiency, and Nobility) Dental Laboratories located in Zhuhai and Modern Dental in Shenzhen.
From Here to There
Exporting dental restorations to the United States and other global destinations is big business for foreign laboratories servicing the dental technology and dental markets. According to the June/July 2011 issue of the Journal of Dental Technology, $1.32 billion of dental laboratory sales came from overseas operations in 2010, based on FDA data. That figure represents 20% of total sales and approximately 38% of total production of units in the United States.
Because it is such a lucrative market, the two laboratories we visited in China are very serious about obtaining the certification they need to conduct business with US customers and to meet US standards of production quality and regulation. Both Veden Dental and Modern Dental are ISO 9001:2000 and 13485 certified. In 2011, Veden was the first dental laboratory overseas to obtain the Dental Appliance Manufacturers Audit System (DAMAS) certification, which helped them with risk management and FDA compliance issues. Both use only FDA- and CE-certified materials in the production of the restorations they export.
Sophia Wu, vice president of Veden Dental Group, a laboratory-to-laboratory outsourcing center, explained that the 1,000 to 1,200 technicians employed by her operation are producing restorations primarily for the US (45%) and European (50%) markets. And although only 5% of the restorations they currently produce are for the Chinese domestic market, Wu and president and owner, George Chang, believe domestic demand will increase as the wealthy and a growing middle class create a need for “want-based” dental treatment. Only a reported 60,000 dentists currently serve China’s 1.3 billion populace, and a majority of them are working in government clinics rather than private practice. Serving those dentists for indirect services are a reported 750 to 800 dental laboratories employing approximately 30,000 technicians. To offset the shortage of dentists and laboratories and to meet the projected future demand for western “white smile” restorative dentistry, Veden is strategically building one to two dental clinics a year throughout the country. For the US market, their strategy is to acquire laboratories as satellite scan and design centers to eliminate shipping costs one way, thus offsetting rising labor and overhead costs, and keeping prices down.
Modern Dental, after a record 20% revenue growth in 2010, also is expanding its US operations by adding more regional laboratories to their existing three locations in Los Angeles, Seattle, and Chicago. Dealing directly to the dentist, the US-based Modern Dental operation with headquarters in Seattle recently opened a Boston service center this year to serve the East Coast.
From Training to High Quality and Customer Service
Both of these overseas operations are large, gated dental laboratory communities housing anywhere from 1,000 to 2,000 technicians. The laboratories operate six days a week, in two to three rotating shifts. By law employees can only work 40 hours per week in China without the employer incurring overtime and/or holiday pay of two and three times salary. Each employee is provided living quarters in modern dormitories, meals three times a day, as well as recreational facilities ranging from a par-three golf course and Internet café to a karaoke bar, library, and basketball courts. They are underpaid by US standards but earn a good working wage for an urban Chinese worker, starting from 4,000 to 5,000 RMB ($473/$630) per month for those on the bottom of the wage scale up to 50,000 RMB ($7,886) for department heads, explained Godfrey Ngai, director and CEO of Modern Dental International, lecturer at the Hong Kong Polytechnic, and instructor and dental technologist at the University of Hong Kong.
One is struck by the young age of the technicians, most of whom are between the ages of 18 and 25 with even younger technicians-to-be in training. Both Veden and Modern have extensive in-house training programs for new employees, who move from the classroom to apprenticeship before engaging in full production work. According to Wu, the training process at Veden takes seven to eight years to complete. One of the major challenges both laboratories face is the fierce competition among exporting laboratories for skilled workers. Average employee retention at Veden is 5 years before the employee accepts a position at another export laboratory or leaves to open a domestic laboratory operation. For Modern, approximately 50% of the 500 students trained each year move into apprenticeships then full production; 20% of those are still employed by the laboratory three years later.
Both operations stress customer service and high-quality output. At Veden, a quality control staff ensures the integrity of the restorations as they move through each phase of the production process. Some of Veden’s larger European customers place a dedicated technician at the laboratory to ensure restorations meet the preferences of their dental customers. Modern dedicates a large room filled with multilingual university-educated customer service representatives to communicate with dentist clients around the world and track individual case progress and customers’ case preferences through a sophisticated computer program.
And to lend a perspective on where these two operations see offshoring moving in the future, Veden and Modern have made significant investments in CAD/CAM technology. From milling and 3D printing units to scan/design stations, both laboratories have large areas of their facilities devoted to digital design and output. Although zirconia-based CAD/CAM restorations currently make up only a small percentage of the total numbers of units being shipped today, preparations have been made to receive digital data, digitize physical models, computer design, and digitally output even larger volumes of restorations in the future.
Global competition to capture even more market share from the United States, which is currently responsible for prescribing a reported 35%7 of the world’s total dental restorations, will likely not subside. Whether the market pressure continues to come from China or shifts to other global locations where business incentives are enticing and labor plentiful and inexpensive will have to be seen. In the end, the business decision to take advantage of offshore outlets that are meeting international manufacturing standards and producing customized quality products is a solution that tens, if not hundreds, of thousands of businesses make each year to line their coffers and remain competitive. As the production of dental restorations becomes further mechanized and industrialized, the offshore advantages will compress and the playing field will become more level. The question then becomes which laboratories are best equipped and operated to survive the transition?
References
1. China Mike: Facts about China: Economy and GDP 2010-2011. Available at: https://www.china-mike.com/facts-about-china/economy-investment-business-statistics/. Accessed December 21, 2011.
2. Goldman Sachs. Global Economic Outlook for 2011. Available at: https://www2.goldmansachs.com/our-thinking/global-economic-outlook/outlook-2011/index.html. Updated December 2010. Accessed November 23, 2011.
3. China Auto Web: A Guide to China’s Auto Industry. Available at: https://www.chinaautoweb.com. Updated December 2, 2011. Accessed November 26, 2011.
4. Casey, J, Koleski K. Backgrounder: China’s 12th Five-Year Plan. US-China Economic & Security Review Commission. June 24, 2011.
5. 2011 KPMG Advisory (China) Limited. KPMG International Cooperative. Available at: https://www.kpmg.com/cn/en/pages/default.aspx. Updated 2011. Accessed November 26, 2011.
6. 2010, urban household average income of 21,033 yuan, with total growth of 11.5%. China Financial Daily. Available at: https://www.chinafinancialdaily.com/financial/news/2011/01/
19/13656/2010-urban-household-average-income-of-21033-yuan-with-total-growth-of-11-5.html. Updated January 19, 2011. Accessed November 17, 2011.
7. 2008 iData Research. Available at: https://www.idataresearch.net/idata/index.php. Accessed December 21, 2011.
