Finding Where You Fit in China

Recently I wrote on the topic of how market entry strategies for senior care operators in China continues to adjust to lessons learned.  Specifically, I argued that timing was critical because Chinese competitors were closely watching the space, saw the opportunity very clearly, and were developing their own solutions.  If this is correct, then it brings the conversation back to how to identify competent partners in China, and how to complete the due diligence process.  I published a lengthy column on due diligence, but wanted to return to the question of what western senior care investors and operators should be looking for when they seek out Chinese partners.

With this question in mind, I had the pleasure of speaking on two occasions in the last month with David Faulkner, who heads the real estate advisory section for Colliers International in Hong Kong.  I say “two occasions” deliberately as the first was prior to my vacation in Peru, where my laptop with all my notes was stolen!  David was gracious enough to let me reach out a second time and refresh my memory, for which I remain very much thankful and in his debt.

In response to my question of what western operators should be looking for when they select a Chinese partner, David had this to offer:  “the key is to identify people who generally want to be in the space.  I am a little cautious about residential developers.  I see them as someone who want to rebrand existing properties for senior housing in order to increase sales.  I am not convinced most developers in China have a genuine interest in producing a project for seniors versus selling something they are already building.”  Given the enormous pressure both municipal governments and developers are under to keep China’s construction boom going, it should come as no surprise that many developers are focused on new market segments like senior housing.  But, as we all know, senior housing and senior care is a more involved business that requires a more complex financial model and longer term commitment than most Chinese developers have experience managing through.  Because of this, and since the senior care industry does not really exist yet in China, finding partners with the right motivations requires a lengthy and sometimes maddeningly intangible due diligence and relationship building process.  Your objective is to get to whether your potential partner’s interest is purely short-term and opportunistic versus long-term and strategic.  The more the latter, the likelier you will be to have found someone you can successfully partner with.

I wanted to explore David’s thoughts on where western operators might be misunderstanding what their Chinese partners expect from them.  David and I share the opinion that there is an unresolved tension between the expectations of large western senior care operators and their Chinese partners.  In David’s words, “The issue is that a lot of operators see themselves coming into China to operate these facilities.  They want to build a large portfolio in China and have a large presence; however, the guys on the Chinese side of things see expertise they don’t have, and once they learn it, they will do it on their own.”  Does all of this mean there is no role for western operators in China?  Of course not, and David was quick to point that out.  However, he cautioned, “a foreign operator has to understand that this is a partnership in China and they are not going to be free to go off and do whatever they want [once they have selected a Chinese real estate partner].  The Chinese developers are going to be looking for knowledge transfer.  This doesn’t mean you can’t build a brand, but you are not going to push them out of the partnership down the road.”

In other words, once you build the partnership in China, plan for one of three outcomes:  as the entity grows and proliferates across the country you will either grow together with your Chinese partner, they will push you out of the partnership, or you will elect to exit yourself and go out on your own.  None of these three things are necessarily bad provided you plan for them and can exert some control on which of the three your organization executes against.  Keep in mind that many other industries ranging from consumer products, to high technology, to services that have expanded successfully in China have started with partnerships that have ultimately dissolved either leaving the western partner with ownership and the Chinese ex-partner going their own way, or vice versa.  The trick is anticipating this and perhaps even taking it into account when framing how your company intends to enter the country.  As David offered, “They want the hands on experience in terms of how you actually run one of these things … The Chinese side wants you to bring your expertise, share this, but they want to built it up themselves.”

If this is right, then David is correct when he stated, “the senior care industry will be dominated by the Chinese, just like every other industry in China.  They way you win in China is you go in with something they want where you have a very specific value add.  You enhance what they have and help them get a little bit better.”  Reflecting on our conversation, I continue to believe that successful operators who find partners in China are going to be those who take a highly disciplined approach to extracting a core set of skills they do better than anyone in their domestic industry and exporting that limited body of know-how to China.  Such a strategy is a big equalizer in the senior care industry:  if being narrowly focused is essential to success in China’s senior care industry, then might mid-sized operators with specialized skills in high acuity care actually out-perform their larger, more all encompassing competitors?  Regardless of whether you think this is possible, the emphasis on what Chinese partners expect from you, and how to best focus your resources, are good lessons to take from David’s experience and insights.

By:  Benjamin Shobert, ,