Offshore Competition: How It's Affecting Our Industry
Posted Apr 28, 2011 in Management
You can hardly pick up a newspaper or listen to a news report without reading or hearing some mention of outsourcing overseas. The globalization of our economy and the concept of reducing costs by moving production to wherever it's least expensive is on the minds of U.S. business owners and employees alike--and our industry is no exception.
Sending work offshore isn't a new concept for U.S. laboratories. We've had access to low-cost restorations from overseas laboratories for years. In fact, it was almost 20 years ago that LMT published The Philippine Connection, an article about Continental Dental Ceramics, a Torrance, California-based laboratory that has a sister facility in Manila and is considered a pioneer in the offshore market.
But what is changing is the prevalence of outsourcing. Some U.S. laboratories are sending almost 100% of their work to foreign countries; some are even building their own facilities in Mexico or Costa Rica, for example. "Ten percent of all U.S. laboratory work is now being fabricated offshore. That represents about 4 million units a year," said Jim McLees, Zone Technologies, Kent, Washington, during his presentation to the CAL-Lab Group in Chicago in February.
What's also changing is the availability of offshore opportunities, given the growing number of laboratories in developing countries such as China, India and Mexico. Solicitations to be clearinghouses for offshore laboratories have become an almost daily occurrence for many U.S. owners. But now, offshore labs are taking it one step further and marketing their services directly to U.S. dentists and laboratories alike. For instance, DentUSA, a Shanghai, China-based laboratory, began sending a CD promoting its services to labs throughout the U.S. at the end of last year. "This is just our first stage of marketing; we plan to further develop our marketing effort," explains Steve Li, general manager of the 300-plus technician laboratory (click here for Offshore Competition: a Shanghai Laboratory's Perspective).
Spurred by the tight economy, chronic shortage of technicians, an ever-increasing need to stay competitive in a price-driven market and the communication ease of the Internet, more and more laboratory owners are considering offshore outsourcing as an alternative business strategy. "Twenty years ago, the quality of work coming from overseas was terrible and the turnaround time was about five weeks. It wasn't a viable option," says Vinni Abate, partner, York Dental/Cerama Laboratory in New Haven, Connecticut. "Now, the quality of the work seems to be improving and shipping is much more efficient, which might make outsourcing more appealing to some laboratory owners."
Another motivating factor for United States operators is the extremely competitive price structure that offshore laboratories can offer because their labor costs are so much lower. The average cost of a precious PFM being exported from China, for example, is $30; full dentures average $18. "With our cost of labor increasing faster than the value of our products, outsourcing is becoming enticing from a profitability point of view," says Abate. "If a laboratory that's operating on a 10% net profit can outsource work and make a 30% profit instead, that's pretty attractive. On one million dollars, you're making $300,000 instead of $100,000."
The employee debate
There are 130 million jobs in the U.S. today and more than 3.3 million of them are projected to be transferred overseas by 2015, according to a recent report by Forrester Research. The short- and long-term effects of this potential job loss is the subject of much emotional debate, and one of the main reasons that laboratory owners are so conflicted about the concept of offshore competition.
Proponents argue that outsourcing is a good way to combat our industry's ongoing labor crunch and minimize the headaches associated with finding and training technicians that are in such short supply. They also feel that globalization is inevitable and those who don't take advantage of outsourcing will lose out in the end. In their minds, employers who reject outsourcing out of a sense of loyalty to their employees will lose their competitive edge. If they ultimately lose their businesses, how will they be helping their employees in the long run?
Laboratory owner Bruce Bonafiglia, CDT, Bonadent Dental Laboratories, Seneca Falls, New York, disagrees--wholeheartedly. "I employ 85 technicians. There's no way I can look them in the eye and tell them that we're going to start sending 10% of our work offshore and that it will be a good thing for them," he says. "Sure, outsourcing puts money in the owner's pocket and improves his bottom line, but what about our employees? As business owners, we have a responsibility to our technicians to find alternatives."
Bonafiglia feels so strongly about this issue that he placed a full-page advertisement in the February issue of Dentistry Today with the headline "Since When Does a Laboratory Prescription Require a Customs Declaration?". The ad explains the growing outsourcing trend, urges dentists to ask their labs if they provide 100% American-made restorations and implores them not to work with labs that don't. As he explains in his ad, Bonafiglia's position is that, "Dental laboratories that use offshore facilities hurt all of us by undermining the American labor force, jeopardizing our nation's economy and deceiving doctors and patients about the origin of their dental work."
In addition to concern for his employees, Bonafiglia's goal is to create awareness and bring the issue out in the open. Because of the controversy surrounding outsourcing, there's a sense that it should be kept under wraps. As one lab owner who prefers to remain anonymous explains, "Even if I decide to outsource, I won't admit it, and neither will anyone else. I don't want my doctors or my competitors to know because they could use it against me."
It's this air of secrecy that Bonafiglia and others feel is so wrong. "I thought it was time that someone stepped forward and started a dialogue," he says. "I'm not trying to stop outsourcing because I can't. I'm trying to make patients and dentists aware of the situation. You can't buy a pair of sneakers without knowing where they are made. Shouldn't the same rule apply to restorations that are put in the mouth?"
The health and safety regulations--or lack thereof--in foreign countries are also a concern. "In many parts of Asia, for example, you can't drink the tap water. Is it possible that diseases can be transmitted through water used in the stone? As a safety precaution, shouldn't the dentist and the patient know what they're dealing with?" questions Gerry Mariacher, vice president of technical services at National Dentex, headquartered in Wayland, Massachusetts.
In addition, outsourcing opponents are concerned about the level of work provided by offshore laboratories. Even though quality is subjective, there's a perception that you can't possibly get an "acceptable" level of quality at these prices. They're worried that the work will be appealing to cost-conscious dentists and laboratories that are more concerned with their bottom lines than with what's best for the patient.
What will you do?
The question of whether or not to outsource stirs up emotions about ethics, fairness and patriotism and raises questions about how we do business and the future of our industry. Although it's the subject of intense debate, there is one thing that most laboratory owners agree upon: offshore competition is here to stay and everyone needs to deal with it one way or another.
Those who see it as part of our industry's future look at it as just a different way of doing business, an opportunity to offer new services without investing in new technology, a solution to the personnel crisis and a way to enhance their bottom line. "Our world is becoming a very small place. With the global economy comes new opportunities and advantages," says Tina Doviack, vice president, Continental Dental Ceramics, Torrance, California which also has a division, Interdent, Inc., in Manila, Philippines.
On the other hand, those who oppose outsourcing are making a conscious effort to differentiate themselves to maintain their competitive edge. "The only way to combat offshore competition is to be the best that we can be," says Valerie Penrod, owner, Creative Arts Dental Laboratory, Sacramento, California. "We can't be price competitive with a $30 crown. Instead, we need to be more service oriented, focus on our role as technical educators and provide the type of face-to-face contact that offshore labs can't provide. We need to use our knowledge and innovation to compete and outshine our overseas competitors. It's no different than competing with any price cutter. We have to continue to prove that we are worth more than the low-cost leader, whether they are next door or across the world."
Editor's note: Whether you fear it, embrace it, hate it or use it, outsourcing is a reality and one for which you should be prepared. We understand that this is a controversial issue and would love to hear your thoughts. [Please e-mail them to Kelly Carr.]
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