Reflecting on Market Entry Strategies for China’s Senior Care Industry

Because the purpose of this particular column is to explore market entry strategies for western senior care operators along with some of the difficulties they are experiencing thus far in China, it is important to preface what follows with this:  I remain very bullish on this sector, and on the role western senior care companies are going to play as the industry evolves.  Many of the challenges presenting themselves are similar ones other industries that have been extremely successful in China have encountered and successfully met.  The gradual process of revising market entry strategies is common as China opens a new sector to foreign investment.  Healthcare in general will embody this, as will senior care specifically.

However, among the ways the senior care industry might be different is this:  the speed with which domestic Chinese players will learn this industry is going to surprise Western competitors.  Given the heavy emphasis senior care puts on navigating the intangibles of a culture and the enormous significance of keeping competent local help, domestic Chinese companies have a mid-term advantage over western operators.  None of this is to say compelling market opportunities will not remain for properly positioned western companies, simply that the need to get started and refine your model quickly cannot be over-stated.

We can look at the market entry strategies that have been taken thus far by western operators and see both how they have adjusted to reflect lessons learned the hard way, as well as attempts to find the best market niche to target early.  Consequently, the industry initially emphasized the role high-end luxury housing with similar amenities was going to play.  This still remains an important part of the market opportunity in China, but we are beginning to hear more operators talk openly about the need to identify a clear path to get solutions for the middle class into the pipeline sooner rather than later.  Many have always seen the middle-income segment as the most compelling market in the mid-to-long term, but felt most comfortable first developing a model in the less price sensitive upper income market before migrating into the more cost-sensitive middle-income section.  Chinese developers and operators are not sitting on the sidelines watching this all happen, and their ability to adapt high-end business models for both the same market niche as well as for their middle class cannot be overlooked.

If a pure luxury play is coming out of favor, what is coming into favor?  Earlier this year, the ALFA summarized how the Chinese market was coming into focus for western senior care providers and touched on the emphasis some entrants were making on particular types of medical care as a market access strategy now coming into favor.  Consequently, western operators are wrestling with how to target specific higher acuity niches where existing care in China does not exist, or if it does, not to western standards.  If this market access strategy holds, the next 12-18 months could see western providers of specialized senior care expand in China, offering everything from memory care to hospice.  In hindsight, this adjustment away from luxury housing to higher acuity care seems obvious and logical; but for many of the industry executives who have been thinking through how to get into China, choosing one or the other is not a simple choice.  Could the role for western companies in China be less as housing operators and more as operators of clinics and rehabilitation centers?

I have referenced this before, but central to the success of any healthcare or senior care business model in China is going to be whether it embraces or fights the heavy rationalization of healthcare expenditures by Chinese families.  Even with the expansion of China’s healthcare insurance, families bear the burden for much of their day-to-day care, and all of their long-term care obligations.  Business models that argue for the upsell of western care without centering their marketing strategy around the idea of how highly rationalized healthcare spending in China is will continue to struggle.  Off the top of my head I can think of one senior care provider now in China who is very successful, but who began by attempting to deliver healthcare services for the elderly that were extremely elective in nature.  It was a great idea, one that has worked in Singapore, Japan and South Korea, which crashed and burned when deployed in China.  Why?  It met a need, but not one so acute that Chinese families were willing to spend money on the service long-term.

Operators have reflected on what to make of how the hotel industry expanded into China, specifically on what to take away from the experiences of Marriott, Hilton and Sheraton, and whether these companies might offer insights into successful market entry strategies in China.  What do the experiences of these companies have to offer the senior care industry in terms of the role for Chinese partners?  In the last two weeks, I have spoken with three very highly placed executives in the senior care and real estate industry in China, each of which reiterated several themes, the most surprising to me was that each person (all of whom were participating in separate discussions) spoke forcefully on how the hospitality industry’s experiences in China are not the right ones to reference for senior care.  These executives had a range of reasons, which I believe can be fairly distilled down to one theme:  the market entry strategies by western hotel companies leveraged their brand, HR practices, international reservation systems, and most importantly, the enormous influx of western travelers who presented these companies with all of the demand the hotel companies would need to justify their investment.  Localization for western hotels like Marriott and Hilton has begun, but they continue to thrive based on providing a launching pad for western business travelers who want the comforts of home while in a foreign land.

For each of the executives I spoke with, this is a critical difference in senior care in China:  operators need to localize for Chinese needs, wants and expectations within a market where the pool of domestic talent does not yet exist.  Cumulatively, this group of executives acknowledged that in the short-term this suggested opportunities for western brands, but that in the mid-term, these localization needs bent the trajectory of how the market would develop into the favor of Chinese developers and operators.  Again, please keep in mind these are opinions based on a highly dynamic industry where a lot is in flux and will remain so for the foreseeable future.  None of these executives were necessarily bearish on western involvement, but they did offer three pieces of advice.  First, don’t sit on the sidelines.  If you want to be in China, pull the trigger and get resources deployed over here building your business model and local team.  If you wait, the market is going to pass you by.  This is not likely to be an industry where foreign operators are going to have a second pass at several years down the road.  Second, get as local as possible as soon as possible.  Third, understand the value you do – and do not – bring to your Chinese partner.  Structure the relationship with this value clearly in mind, in a way that gives your Chinese partner something tangible to get his teeth into.  I am being intentionally vague on this as part of what my firm is doing is advising on how to do package the western intangibles into something Chinese developers will actually buy.

Recently, one Chinese developer I spoke with commented that western firms need to keep in mind timing is becoming critical:  in 5 years worst case, in 10 years best case, the Chinese may not need western expertise to take care of their market’s needs.  Whether that is the exact time frame or not is beyond my ability to estimate, but here is the take-away:  western expertise has a shelf life.  Chinese businesses are eager to figure out how to make money providing senior care and building senior housing.  As said at the Retirement Living World Conference in Shanghai:  “in China, when social need and a profit motive intersect, industries go vertical.”  Few industries present these sorts of twin paths like senior care, a realization driving Chinese senior care companies.  While the potential is exciting, the market will not stay open and responsive to western expertise forever.

By:  Benjamin Shobert, , .