China’s Fledgling Dental Industry Faces Teething Pains
China’s private dental-care providers have been rapidly expanding their networks to capture a growing number of higher-end consumers, but industry insiders fear failure could be just around the corner for some companies.
The country’s dental industry is a relatively young one, and private dental chains started to establish a foothold in major Chinese cities only in the late 1990s. Now, due to a growing middle class and increased awareness of dental health, private providers account for at least half of all revenue generated by the dental-care industry in China, according to a recent KPMG report.
‘Someone’s going to crash’
Many dental chains have been raising funds lately in order to acquire or open large numbers of dental clinics and hospitals at once.
In June 2014, Bybo Dental Group received a 1 billion yuan ($145 million) investment from Legend Holdings Corp., which owns Chinese computer giant Lenovo Group Ltd. At the time, Bybo Dental Group had fewer than 70 facilities. Within two years of receiving this investment, Bybo Dental expanded to 180 branches, including 46 hospitals and 134 clinics, in 24 provincial-level areas.
“In the global dental industry, (expanding at) this kind of speed is a rare thing,” Bybo Group founder Li Changren told Caixin.
Other chains, homegrown and foreign, are eager to catch up. In August, Enjoy Dental completed its 350 million yuan “round A” of financing led by Huatai Medical Industry Fund, and has announced a goal of expanding to 100 branches.
Four months before this, Malo Clinic China, part of Portugal’s Malo Clinic Dental Care network, finished an 85 million yuan round of financing led by GGV Capital. Malo, which has dental care and denture manufacturing facilities in Beijing, Shanghai, and Guangzhou, aims to expand its presence to second-tier cities.
This latest wave of investment-fueled expansion isn’t the first in the short history of China’s private dental industry.
In September 2007, Jiamei Dental CEO Liu Jia secured $10 million in investments from British fund Martin Currie Investment Management Co. and U.S.-based SIG Asia Investments. In the year that followed, Liu went on an acquisition spree, and Jiamei had nearly 100 branches by late 2008.
But, by 2013 Jiamei was forced to close many poorly performing clinics. Liu described this decline as a “calamity,” and the company has spent the past four years recovering.
Jiamei’s roller-coaster ride from 2007 to 2013 has led some in the industry to fear that China’s dental chains are now growing too fast for their own good.
“This is a gamble,” a dental chain entrepreneur told Caixin. Opening branches is easy, but running them isn’t. Dental chains began large-scale financing and expansion in 2014. “It’s been three years. In 2017, someone’s going to crash.”
One of the many lessons Liu learned from his failed expansion 10 years ago was to avoid letting investors dictate his business strategy.
“At the time I was being pushed forward by investors. No entrepreneur wants to expand that quickly,” Liu said. He paid a hefty price for his lesson, but Jiamei eventually bounced back.
“If it had happened in today’s super-competitive market, I would never have been able to recover,” Liu said.
Now, Liu said, whatever happens, he wants to remain the controlling stakeholder in Jiamei. At the same time, he doesn’t want to repeat the mistake of depending entirely on Jiamei’s Beijing headquarters to manage operations in far-flung branches.
Clinics across the country encounter different regulations, and market conditions vary too much across regions for Jiamei’s previous expansion model to work, Liu believes.
Now, Jiamei Dental is starting a new expansion phase fueled by a round of financing in advance of an initial public offering (IPO). Liu brings local partners under the Jiamei brand by buying a 51% stake in the local clinic, while the original shareholders keep the remaining stakes. Jiamei provides management services, while the original stakeholders are responsible for operations.
While his methods have changed, Liu’s ambitions remain the same. He wants Jiamei to become the “McDonald’s of the dental world,” he told Caixin.
Unlike Liu, Arrail Dental President Zou Qifang prefers to go slow. “Dentistry isn’t as easy a business as you might imagine. It’s a long and difficult process, getting consumers aware and changing dentists’ service standards,” he told Caixin.
In 1999, the original Arrail dental clinic opened its doors in Beijing’s Central Business District as China’s first high-end, “skyscraper” dental facility. At the time, Zou hoped that Arrail would have 20 branches in both first- and second-tier cities within five years. It eventually took Arrail 15 years to reach 40 branches.
Zou tried initially to grow his high-end chain by relying mostly on the profit generated by existing branches. When dealing with investors, Zou said, he tried to make sure “they only talk about money, and don’t interfere with running the business.”
But it’s not easy for Zou to resist the pressure from competitors and investors. Around 2010, competition in the dental industry grew intense, with fights over locations, poaching of dentists, and marketing wars becoming commonplace.
Realizing he needed to pick up the pace and broaden Arrail’s customer base, Zou decided to create a new brand targeting midrange consumers. In 2012, the first branch of Rytime Dental opened in Beijing. It was followed over the next four years by branches in Chengdu, Ningbo, Chongqing, Xi’an, Changsha, and other cities. The chain now includes two hospitals and more than 40 clinics.
Rytime achieved in four years what it took Arrail 15 years to build. In April 2014, Arrail group, with its two brands targeting high-end and midrange consumers, completed its $70 million third round of financing, led by New Horizon Capital. Arrail Group announced its plans to grow from a total of 80 branches across two brands currently to over 200 branches. “Pressure from investors is an important factor” in Arrail Group’s recent speed-up in expansion, Zou said.
But still, Zou believes the company should proceed with some caution. “High-end Arrail will have to stick to profit-driven expansion, and midrange Skandia is trying to accelerate the rate of expansion through acquisitions, but the number of acquired stores will not exceed 10% of the total,” Zou said.
“The main issue (for expanding dental chains) is maintaining healthy development while following medical-industry regulations,” a dental industry investor told Caixin.
Opening a new dental facility can easily cost a chain more than 1 million yuan off the bat, and qualified dentists and managers are in short supply. There’s also the issue of customer numbers failing to increase fast enough to match the number of new branches popping up across the country.
For Beijing-based Aux Group, the crash has already come. Last year, Aux, which has its main business in electronics, said it aimed to develop a “first-class dental chain within five years.” But within a year, the company suffered a loss of 50 million yuan, and its Beijing dental hospital’s medical team has disbanded.
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