Reflecting on 2012’s Senior Care Developments in China, Anticipating 2013

Early in 2012, I published a summary of what the senior care industry in China was most closely monitoring, and what most people expected to see proven (or disproven as the case might be) during the year.  As 2013 begins, I think it is worthwhile to reflect on that past column, wrestle with where we are as an industry versus where we thought we would be, and think about what 2013 has in store for the senior living industry in China.

In the January 2012 column, noted that the year was going to be the “year of the pilot project.”  And, in many ways it certainly was.  The Cascade-Emeritus project in Shanghai that the industry has been on pins and needles to see open finally did, admittedly having taken longer than expected (more to follow on whether this expectation was realistic or if a different benchmark, namely that of what should be anticipated for early entrants into a market that does not yet exist, would have been more appropriate).  The early pilot efforts by home healthcare company Right at Home in Beijing validated their model, leading to an announcement this past summer of plans to expand into four new cities across China.  Noting the significance of senior living as both a critical issue China needs to address and an important investment opportunity for American businesses, in April Ambassador Locke led a trade mission on senior housing, drawing attention to the pilot projects Belmont, Cascade and Merrill Gardens have begun in China.

Among the fears our 2012 summary touched on was whether the market was in danger of over-heating.  Given the still infant status of the industry, it is difficult to quantitatively define whether the industry is in danger of creating excess capacity; however, judging by the number of existing senior housing developments in a city like Beijing that have been built ostensibly only to secure land rights and now stand largely vacant, some poorly planned capacity has certainly come on line.  How severe the problem is remains a pregnant question that may begin to become more obvious as 2013 draws to a close and facilities that have been finished allow occupancy rates to be more accurately gauged.  What we can say are that fears over access to trained workers and an opaque regulatory environment have proven to be even more critical to sites getting up to scale than was anticipated in 2012.

Where did the industry come up short of expectations in 2012?  That is a tricky question to answer, in part because it presupposes a level of development and ease of access to the Chinese market that may never have been accurate in the first place.  Let me back up one step and explain this:  if we look at healthcare reform in general within China, it is appropriate to categorize China as having newly opened this sector to more involvement and investment from foreign companies.  I have written about this in the context of the hospital space here, but the larger point holds for senior care as well:  China is both just now opening to foreign entrants in its healthcare space and is also trying to create the framework for certain industries, like senior care specifically, that have never before existed as for-profit vehicles.  How long should it take for this evolution to come to a point where industry can increase its build-out and bring more capacity on line faster?  Good question, and one that I can only answer by suggesting we think about when China last opened previously closed sectors of its economy to foreign investment in the mid-90s (I’ll have more on this question of expectations in the coming weeks with an interview from one of the people who had a first-hand seat watching China open and then close to foreign investment over the last 25 years – the lessons for healthcare in general and senior care specifically are compelling).

Based on various conversations I have had with people in the senior care industry over the last several months, there is a general sense of frustration over how long it is taking to get to scale in China.  While I share this frustration, I also submit that the industry is in the midst of a transitional phase where some players are going to exit prematurely, others are going to dig deep and re-commit, and a handful of surprises are going to present themselves in 2013 through companies that have decided to fly under the radar, focus on the brass tacks of building a team, and will successfully open later this year.  If you are an operator frustrated at where you are in China, now is a good time to re-think both your market entry strategy as well as how much of your organization’s resources you can let a China strategy absorb.  China might not be the right place for you to spend limited resources – or – it might not be the right place for the moment.  Those are two different conclusions that can easily get mushed together in a moment of frustration.  Based on my own research, most of the frustration that early entrants have communicated is nothing they could do much about when they first entered China.  There are always team issues that present themselves in what is essentially a start-up environment; however, problems with getting approvals and finding trained people are to be expected given the fundamental reality that no meaningful for-profit senior care industry exists in China!  More due diligence, better up-front market analysis, a more industry-wide lobbying endeavor, deeper ties between American and Chinese geriatric training institutions are all things we can say in hind sight would have helped, but many of these realizations are born of experience from the last 2-3 years.

None of this is to suggest that real problems do not exist in China’s senior care industry.  Going into 2013, if I were to rank my top five concerns about this market they would be (from highest to lowest):

• Access to, and retention of, trained staff;
• Lack of clear national regulations;
• What little policy framework does exist is for senior housing;
• Difficulty pairing international operators with Chinese developers;
• Unsatisfactory solution set emerging for China’s middle class.

All of this begs the question of what we should be looking for in 2013?  If the first wave of entrants are those like Cascade, China Senior Care, Cherish Yearn, General’s Garden, etc., etc., then the second wave are Belmont, Fortress, Vanke and Vcanland.  The second group usually benefits from those that went before, and I would expect to see several of these facilities get to speed faster than the earliest entrants, if only because the latter group was able to learn from the lessons provided by the pioneers.  In addition, I will be paying careful attention to the developments financed and operated by a variety of China’s life insurance companies.  Their investments matter for three reasons.  First, as Chinese owned and operated entities, they are likely to have access to the government and overall cultural sensitivity that foreign entrants do not.  Second, their solution sets are likely to migrate more naturally towards the middle class, where I believe the ultimate monetization of senior care in China regardless of domestic or foreign entrant is likely to be most successful.  Third, while China’s long term care (LTC) insurance market remains nascent, it is growing and I believe the harmony created between life insurance companies who invest in LTC facilities will inherently facilitate the development of LTC insurance products, a necessary step that will better the industry as a whole.  Overall, I would look for domestic senior care models to begin to dramatically diverge from foreign models as domestic companies focus more and more on the mid-market.  I would also anticipate that foreign entrants will begin to craft strategies that allow them to bridge their early five-star market-entry facilities with more approachable mid-market products.

In addition, look for the regulatory framework in China to continue to evolve with additional clarifications on what approvals are necessary for a housing versus healthcare-centric product. Chinese officials need to think more comprehensively about the industry’s evolution and lessons they can take from mistakes made in America in the early 80s.  Specifically, I would like to see local governments require developers to have three things completed prior to land being provided:  a detailed demographic analysis of the area where the new development will go, a financial model that reflects what the people in the area can afford to pay and illustrates how the facility will be financially sustainable, and (this is a long shot) a requirement that all senior living developments have an operating model / partner secured prior to the land being issued.

As 2013 advances, if some of the first wave of entrants successfully expand into other areas, and if the second wave opens and gets to scale more easily than the first did, then we might also see towards the end of the year some meaningful institutional capital deploy selectively across China.  The mark of approval that will come when institutional capital finally settled into China will be a meaningful step in the industry’s ongoing evolution.  None of this is certain; in fact, if 2012 was the year of the pilot project, then 2013 may be the year of the gut check, where early entrants recommit to their original goal, even if this means modifying the market entry strategy they initially felt would allow them to be successful in China.