To get a feel for what’s at stake in the U.S. trade debate, run your tongue over your molars.
Implants, crowns and bridges made in places like China and Mexico compose as much as 40 percent of the $8.5 billion U.S. market for dental restorations. They sell for a fraction of U.S. prices and boost profits for group practices and the private-equity backed networks that now employ about 18 percent of American dentists. The voracious market for discount choppers, along with industry consolidation and technology advancements, has contributed during the past decade to the closing of about half of U.S. dental labs.
“Every time I had to tell someone, ‘I can’t afford to have you around any longer,’ it’s difficult,” said Doug Kilborn, whose Jackson, Michigan, lab once saw a steady stream of 75 orders a week and kept seven employees busy.
Kilborn can’t even afford himself anymore; last year he began working part-time at a hardware store. His single worker, who handles about 20 weekly orders, will soon buy the lab.
“That’s the face of American manufacturing nowadays,” Kilborn said.
President Donald Trump has threatened to erect barriers against foreign goods, disrupting an intricate economic network and creating winners and losers from Topeka to Tijuana. Politicians talk of trade in terms of cars, steel and technology. But the intimate question of whether Americans will chew with U.S.-made teeth instead of low-cost foreign ones is just one little-considered consequence of measures that could touch every corner of the nation’s $17 trillion economy.
Restorations, classified as medical devices by the U.S. Food and Drug Administration, have been manufactured overseas for decades along with prosthetic hips, plastic heart valves and defibrillators. Overall, imports account for 30 percent of the U.S. medical-device market, and reached nearly $44 billion in 2016, according to BMI Research, a division of the Fitch Group.
Countries like Vietnam, Mexico and the Philippines all have a piece of the U.S. restoration market, according to research firm iData Research, offering cheap labor and benefiting from advancements in technology.
The demand for foreign teeth has been driven, in part, by consolidation. About 40 percent of dentists now work in group practices or so-called dental support organizations. Private-equity companies invest in the organizations, purchasing practices and centralizing back-office duties like payroll and marketing. They often pay bonuses to dentists that give them incentives to buy cheaper restorations—and their size earns them influence in negotiating prices.
Aspen Dental Management Inc., which has about 600 offices, is controlled by New York-based private-equity firm American Securities. In 2015, Gryphon Investors in San Fransisco formed Smile Brands Group Inc., now with 350 offices, with two longtime dental executives. At least 25 private-equity firms significantly invested in dental organizations in the decade ending in 2015, according to the McGuireWoods law firm. The private equity firms declined to comment.
Investors like the businesses because they’re low risk and recoup acquisition prices quickly, said Kevin Cain, an assistant management professor at Augusta University in Georgia.
“Private equity is what’s fueling the industry right now,” he said. “They have scale.”
Plants in places like China, the leading exporter of dental restorations to the U.S., may operate 24 hours a day, employ hundreds of workers and churn out thousands of fake teeth daily. Meanwhile U.S labs dwindle, along with the technicians they employ. In 2008, there were about 12,250; today there are about 7,200.
Many began in garages or basements, sometimes with a single technician cobbling together fake teeth from porcelain, zirconia or polyurethane. Now, crowns that cost hundreds in the U.S. can be bought overseas for about $25. The workmanship is as good or better, according to companies, dentists and consultants.
Heartland Dental LLC, controlled by the Ontario Teachers’ Pension Plan, negotiates prices for both domestic and foreign parts for its 1,200 dentists, said Samson Liu, a St. Louis area dentist who is vice president of clinical affairs. The quality is identical, said Liu.
While the organizations don’t dictate what goes on in the chair, they “certainly have input” on the cost of doing business, and that includes imported restorations, said Gary Morgan, who consults for lab owners. “They tend to go offshore more,” he said.
Race to the Bottom
Glidewell Laboratories, the largest U.S.-based lab, has expanded into Colombia, Mexico and Costa Rica to compete with China. Dental support organizations create desperation for smaller competitors, said Chief Executive Officer Jim Glidewell.
“In any business where price is the deciding factor, the dumbest competitor will get the most business until he goes out of business,” he wrote in an email. Large dental groups “can use the lab until they go broke, then they move on to the next dumbest suitor!”
Trump has said he will trigger a renegotiation of Nafta, the 1994 deal that eased trade with Canada and Mexico, though the administration hasn’t said precisely what it will seek. House Speaker Paul Ryan is pushing a so-called border adjustment, in essence a levy on imports, which already has attracted substantial opposition from retailers. The outcome of the jockeying remains uncertain, but Trump has made clear that he wants to end the hunt for cheap labor and spur a revival of U.S. manufacturing.
“What you’d see is the local labs become more competitive,” said Fred Birner, co-founder and chief executive officer for Birner Dental Management Services Inc. , a publicly traded Denver dental support organization with 69 offices.
Gary Iocco, owner of Minnesota’s 10-lab Dimension Dental Design, said labor costs will hamper U.S. labs no matter what Trump does. Foreign restorations are so cheap that anything short of a 300 percent tax would still allow them to undercut home-grown products, he said.
“It’s a tough world to make money in the dental laboratory,” he said.
And, just as in heavy industry, computers and robots may replace U.S. workers no matter what. Dennis Lanier, general manager of Lab 2000 in Columbus, Georgia, said overseas competition prompted his business a decade ago to use more machines.
“We had to either go digital or go out of business,” he said. “We at one time had 49 employees and we did less work than we are doing now with 12.”