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Eternal Flames and Roman Candles
Investment Strategy | 1 Comments | Thu 06 Jun 2013
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In a detailed study of the dental implant industry, the author strives for a conclusion on whether the market leaders possess a sustainable competitive advantage.

" Business history is filled with ‘Roman Candles', companies whose moats proved illusory and were soon crossed."

Warren Buffett, 2007 letter to shareholders

 


Eternal Flames and Roman Candles (PDF)



Comments

1.
On 17/06/2013 22:05:13, Michael Brady wrote:
The article was very well written from a point of view of an open discussion and I do not think that the author had fully made up their mind by the end of it on the dental implant industry.

I have to say that I did after reading it! My opinion was that the moats around the leaders of this industry were ones that could be penetrated by low cost competitors. I remember a quote from Roger Lowenstein’s fantastic book on Warren Buffet. Basically, he was telling his son why Berkshire Hathaway (the textile business that was first taken over by Buffet) was such a low margin business. It went something like “Nobody goes into their tailors and asks if the lining of the suit is made by Berkshire Hathaway”.

I feel that the same is true of the dental implant industry. People trust their dentist or at least they are a pillar in western society that is not questioned similar to doctors, lawyer, judges etc. They believe that they will care for them and never check the manufacture of their braces, implant or fillings. Could this change in the future? It seems unlikely unless there is a major product recall by a low cost manufacturer (highlighted by a Panorama) or scare mongering stories about the quality of those products.

With dentists being in the position of power, will they change the complexion of the industry or what would their motivation for doing so be? Older age dentist are most likely to be loyal to brands that they have used for years but I think that everyone else is up for grabs. Margins are under review in every industry across the West (this is the New Normal according to Mohamed El-Erian). If a company offers you the same product as a lower cost which you can either keep or pass to your customer then over time I can think that those products will eventually win. Cost is critical.

There is the chance that Straumann and Nobel Biocare could embrace low cost manufacturing in South East Asian but the risk of the loss of intellectual property are high. It is also a very established industry which are generally more reluctant to embrace these new shifts.

Time will tell but thanks for an interesting read!

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