One of the presentations from the recent Retirement Living Communities World Conference in Hong Kong that caught my attention was provided by , the Chief Investment Officer for Sunrise Senior Living. Greg’s presentation was titled the “Globalization of Senior Living” and offered Sunrise’s experience in Germany as a prism through which the senior living industry in China could be evaluated. As many readers know, Sunrise had what can charitably be called a disastrous experience in Germany where it exited the market after defaulting on its debt and subsequently selling its holdings in the country. There were a number of insights Greg offered in his presentation based on Sunrise’s difficulties in Germany that I believe are of interest to foreign operators and investors in China’s infant senior living industry.
The first fact Greg identified as why Sunrise was unsuccessful in Germany was that senior living was a “new concept … there was no previous existing supply of premium Assisted Living in Germany, only Independent Living and Skilled Nursing.” Can the same be said of China? Yes, only more so. Not only does the China market not have any previous existing supply of premium AL, it has even less of IL and only a small amount of Skilled Nursing. As is always the case, the absence of these is also what creates the opportunity, so the question is what can be done to foster the industry’s emergence and to create demand. At some level the latter is a marketing question, something that must both create awareness of the products and address cultural preconceptions (or, in some cases, misconceptions) about senior care.
On the latter point, Greg acknowledged that a major challenge for Sunrise in Germany was addressing “specific cultural norms” in Germany. He identified four cultural factors: “conservative spending attitude (war generation preference against spending on personal comforts” … limited home equity value as a source of private pay funding (home ownership rates are lower that US/UK; culture of renting limits equity accrual) … social and privacy preferences (less value attributed to common spaces) … and high government spending society (expectations of government support for elderly care hindered acceptance of private pay model).” Of these four factors, I would propose that two are common concerns in China (conservative spending attitude and limited home equity) and that the other two are definitely not concerns in China. Relative to limited home equity it should be kept in mind that much of China’s home ownership is a very new phenomenon and that selling homes remains a big unknown, not least of which because as economists like Patrick Chovanec have pointed out, home ownership in China has to be understood as an alternative to cash in a bank, not as an asset that can be liquidated upon retirement.
Here’s where I start to find Greg’s analysis of Sunrise’s struggles in Germany strikingly on point (and keep in mind, his presentation emphasized the high end of the market). Greg shared that they believe one of their struggles in Germany was because of the “perceived alternative product … [the] influx of low cost and skilled non-German care givers allowed potential residents [the] option to remain in their homes.” When you are talking about the high end of the market, this segment’s ability to stay put and their desire to do so cannot be overlooked in any market, but especially in a market like China where the product set does not yet exist in a mature form. When we, as an industry, talk about delivering a luxury product to the high end of the market we need to make sure we have carefully segmented out how big of a market niche this is, and that we are being realistic about how many within the segment in question will want a housing based solution. To the extent those moving into any sort of assisted living in the US and Europe are doing so older and with more healthcare needs than was originally anticipated, the same will likely hold true in China.
Unlike China, the German market presented regulatory challenges to Sunrise in the form of restrictions that put handcuffs on what Sunrise could and could not do to drive profitability. Greg added, “regulators [in Germany] required full staffing of homes while occupancy was low, limiting our ability to manage expenses.” Engaging this critically, it must be pointed out that this sort of issue should have been identified early into the market entry strategy and planning. Knowing precisely what the government in an export market is going to do relative to your cost drivers is something that cannot be tabled for future consideration, especially in a rules-based culture such as Germany. Could China pose a similar challenge, except because of regulations that do not yet exist? My two cents is that most foreign operators who enter China will offer services that likely go beyond what China’s regulatory agencies will require, given most foreign operators want to focus on the high end of the market. That having been said, the more healthcare centric your solution, the more likely it is that new regulatory barriers will be created that will drive unexpected costs.
Consistent with so much of what we have written recently, Sunrise also identified human resource issues as central to their difficulties in Germany. Specifically, Greg noted difficulties “sourcing and training qualified general managers and critical function leaders … sourcing, training and turnover in front line care worker staff.” Keep in mind this is Germany he is talking about, a country with a well-established healthcare infrastructure and educational system, at both the clinical and vocational levels. If it was hard in Germany, what will it be in China?
Towards the end of Greg’s presentation, he offered seven insights into what it takes as a senior care operator to successfully expand overseas. I want to offer these up as this column comes to a close with this anecdote. My first exposure to China was when a group of customers I was serving relocated their facilities in Suzhou. Very much the doe-eyed Midwesterner, I got on a plane and started learning about China hands on. The management team I was a part of was eager to build a facility and get boots on the ground, for a lot of very good reasons. But we were not ready to go to China. We did not have the management bandwidth, the cultural flexibility, and our operations were not stable enough to simply expand overseas, especially in an emerging market like China where we would encounter many basic infrastructure problems just like those the senior care industry today is going through. With the help of outside experts, we could have gotten ready; but in the rush to get into the tantalizing China market, we thought a lot of these issues would settle out once we got established. It was a painful lesson and one that frames much of what I do on a daily basis relative to crafting market access strategies for companies who want into China.
What Greg shared struck home with me, and I hope it will serve as a foundation that you will use to both gauge whether China is the right opportunity for your business to pursue, and also serve to set expectations on what expanding into China will require from you and your team. In order, Greg’s contribution to “what is necessary” follows (quoted from his slide deck):
- Long-term commitment to international expansion (Programmatic versus Ad Hoc)
- Senior Management depth and breadth
- Established large scale multi-country platform demonstrating operational know how
- World class critical support functions (legal/regulatory, IT, healthcare, real estate, accounting/tax, HR)
- Scalable Infrastructure
- Plug-in Technology
- Deep and flexible financial resources to capitalize and sustain expansion costs.
By all means go to China. But do not get lost in the revenue potential given the enormous size of the market. Do not assume the absence of competition means the market is ripe for your product. Anticipate what problems you can, make contingency plans to avoid them, but also ensure you have the operational and financial elasticity to absorb setbacks, delays and outright denials. If all this sounds like too much risk then give yourself the freedom to put a China strategy on the table and come back to it another day when both your business and the market is ready.
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