Emeritus Moves Forward in China

This week, the announcement by Emeritus Senior Living that it had formed a joint venture with Shanghai Shengyuan Group and Shanghai Hongtian Construction & Engineering Co Ltd. has had everyone abuzz.  The Global Times noted that this was the “first foreign-invested nursing home in Shanghai”, and that it “is the first to take advantage of a policy that the district government instituted on June 7 to open senior care to private enterprises.”  What should the industry make of this announcement?

First, it is worth pointing out that Emeritus appears to have determined it needed a joint-venture partner.  For those new to China, a JV may seem the obvious choice, but JV partnerships have fallen out of favor in the last several years, largely because the Chinese government has made Wholly Foreign Owned Entities (WFOE) easier to establish, and because of difficulties American and European companies have had with their Chinese JV partners.  , a partner at Harris Moure and one of the more experienced US lawyers who has lived and worked in China for several decades, wrote about these difficulties in a past AmCham column as part of their China Brief magazine that, “A Chinese joint venture is formed as a limited liability corporation under PRC company law.  The fundamental issue in forming such an entity revolves around which party has ultimate control over company operations.  As most foreign investors wish to maintain control over the entity, this issue is paramount for them.  Yet foreign investors frequently make a fundamental mistake that effectively leaves them without control – a mistake so crucial that it accounts for most of the failed EJVs in China.”

Steve’s partner is , a good friend of mine, and someone many of you may know from his award winning blog ChinaLawBlog.  Dan wrote a post some time ago about when JVs versus WFOEs make sense.  He pointed to three situations:  “restricted industries … supply chain access … ready to go factories.”  Let’s go ahead and acknowledge that the last two aren’t relevant to the Emeritus situation, but the first more than likely is.  Why?  Senior care only recently moved into the “encouraged” category of the Chinese government’s FDI catalog, and that move was largely related to the Central Government’s elevation of senior care as part of the 12^th Five Year Plan.  This is usually how things work in China:  an industry moves from the restricted status to the encouraged status, but – and here is where it is relevant to Emeritus’ announcement this week – this transition still has many risks attached to it.  Specifically, while the formal structural issues that had previously prevented you from owning your own senior care facility have been removed, many non-promulgated and non-structural – but still highly influential, intangible but essential matters – remain.  Consequently, to deal with these unknowns, a joint venture makes more sense.  You are spreading the risk given the still evolving nature and structure of the industry.  The secret sauce is in knowing not only how to structure such a deal up-front, but how to leave yourself room to exit the JV down the road if the industry matures as it should, and the informal risks you are concerned about today become known risks that can be designed around, managed, or entirely eliminated.

There are times to go it alone in China, but infant industries where government regulations are still evolving are usually not good examples of this.  Consequently, Emeritus’ move seems to make sense:  they have brought to the table well-connected firms that mitigate not only their general operating risk, but the very specific risk factors unique to a nascent industry that will have some – but not yet entirely known – meaningful oversight by the Chinese government.  If you made note of the timing of this announcement – the Pudong New Government’s announcement on June 6th that it would allow private enterprises to participate in the senior care market – and the JV being made public on June 17^th, then you also get the subtle message that this deal had some very good guanxi.  And, on that point, it had very, very specific guanxi – Emeritus had it where it mattered – at the most local of levels not in a province, or a city, but a district government.

Earlier this year, I spoke with a number of industry watchers who all agreed that 2012 was the year of the “pilot facility.”  shared during Ambassador Locke’s senior housing trade mission that they had capital to scale up immediately to 30 similar facilities across the country once they were confident they had locked into their basic model.  I found it interesting to see that the ALFA made note that, “the company plans to invest in four to five high-end nursing homes in Shanghai and about 30 nationwide.”  I’m connecting the dots to think that this is a signal from Emeritus that they believe they – and the market – is ready for meaningful expansion.