Tim Perry, the head of the China division at Miller & Martin, recently published a nice “How to” mini-guide for Chinese hospital investment. We previously talked to Mr. Perry in Benjamin Shobert’s January 23rd article on US Hospital expansion into the China healthcare market, “US Hospitals Continue to Explore Ways to Work With China.”
Mr. Perry and Miller & Martin Associate Lin Ye began their guide by explaining how on January 30, 2012, the 2011 Foreign Investment Industrial Guidance Catalogue came into effect. For the first time since 2007, “Medical Treatment Establishments” are off the list of industries “restricted” to foreign investment. This is a de facto green light to foreign investors.
Perry and Ye then recommend a Joint Venture with a SOE Investment Vehicle as the best mode of market entry. Although JVs are typically regarded as a high risk venture anywhere in the world and particularly so in China, the highly regulated nature of hospitals and specialized health care facilities in China make JVs a virtual requirement for investors wishing to tap into the true Chinese market:
I would not recommend a go it alone approach to opening a healthcare facility in China. Perhaps you could go it alone on a small high end specialty clinic for treating ex pats or the wealthy who do not care about the need for reimbursement.
Nevertheless, if you are going to be an owner of a larger hospital, the need for a well informed, well regarded local partner becomes obvious quickly. The landscape is too complex without a scout and guide to help with the path. And they will want to be equity owners as well.
The authors then enter into the main thrust of the guide, describing the specialized nature of a JV investment into a Chinese hospital. First, the JV has to create new jobs:
Second, the Chinese JV partner will most likely contribute assets, not capital, which will result in a certain valuation procedures:
And beyond this, hospital investment vehicles are State Owned Enterprises meaning that the specter of the Foreign Corrupt Practices Act is always near hand.
This fair and elaborate valuation process carries a great deal more significance than even the business terms would merit because of Chinese and U.S. anticorruption rules and in particular the Foreign Corrupt Practices Act (15 U.S.C. §§ 78dd-1, et seq.).
The more arms length the transaction, the fewer opportunities to find some imbalance in price or payment that could be misconstrued as an illegal payment. Remember, your entire deal is in the zone of government activity since you are doing business both with one or more SOE’s and the Municipal Government itself.
So, this is the way that foreign investment in China works. If you want more information on how to actually cultivate those contacts check out our work and more of Miller & Martin’s advice here. Or, if you’re really smart, you can contact Tim Perry or Lin Ye directly. Keep checking back at Asia Healthcare Blog in the meantime.
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Now this is a cool article. Damjan, you really found a great interesting topic. I would love to get my hands on more information like this. I am very interested. This is a must read article!
Kyle,
We’ll try to update you as the information comes in. Everyone has their eyes on this one, that’s for sure.