This post is written with two audiences in mind. First, and most specifically, are operators and investors eager to expand into China’s senior care market. Second, and more generally, are businesses and investors interested in profiting from China’s massive healthcare reforms. The latter group is diverse and includes companies from pharma to diagnostics, from private equity interested in China’s public-to-private hospital transaction to healthcare IT companies.
What has happened since the central government’s massive 2009 investment is certainly a once in a lifetime opportunity. In general, China is very strategic in opening sectors of its economy to foreign investment; the reality that healthcare is the most recent to open should drive businesses and investors new to China to ask what they can learn from previous sectors the central government has opened. China is not only strategic in what sectors they open, they have a very specific set of goals and a mindset that characterizes their efforts early into a sector of the country’s economy that is opening. Understanding this all in a holistic sense is essential as companies establish boundaries on the investments and efforts they must be willing to pour into China in order to ultimately be successful.
With this idea in mind, I wanted to turn to someone whose work I have followed for years, and whose first-hand experience in China allows her to speak authoritatively on how China opens previously closed sectors of its economy to foreign investment, , the CEO of the China Business Network. , who we interviewed in a previous post, introduced me to Janet as part of his “Wealth Through Health” video on Janet’s site that can be seen here. Janet has thirty years of experience in China, going back to her first work in the country back in 1985. She is a contributor at Forbes, where two of her recent posts, most importantly the “Business in China: My Painkillers Aren’t Working Anymore” is required reading for anyone in the healthcare sector who is eager to deploy capital and sweat into the newly opening segment of China’s economy. In the article, Janet points out how doing business in China is getting more, not less complicated (at some level not only because of China, but also because of how the China offices of multinationals engage their corporate parent). One section in the column stopped me cold: “There was a time when the business landscape in China was nothing but regulatory gray area, and when business plans went well into execution phase before it became clear that they were based on massive misunderstandings. Someone had to figure out what went wrong; ask the questions no one asked before.” (emphasis mine) If that doesn’t describe healthcare investments, specifically senior housing and home healthcare, going on in China today, nothing does!
To Janet, understanding China’s behavior in healthcare requires going back to the beginning of China’s opening to the west: “China was a closed economy, and they proceeded to open their economy to the west in a very deliberate and piece-meal fashion … Every section has been opened gradually to participation with the west. First you saw agriculture in 1979 and rail in 1981 because the Chinese needed to have better productivity in grain and then to move products around the country.” Her point is that China does not open sectors to foreign investment absent a pressing need to do so. On this point she added, “Chinese economic planners have very consciously chosen to experiment … westerners tend to not be comfortable with the gradual ‘crossing the river by feeling the stones’ … we want to know what is the endgame, what are the rules … we are very strategic and linear – we want a business model and a transaction. The Chinese explore. They want to get their feet wet, figure out what is possible. They are completely comfortable with ambiguity, with now knowing how their first experiences with a western counterpart might work out.”
If that gradual approach, born in ambiguity and loosely regulated, doesn’t scare you off, the question becomes what precisely will your Chinese partners want from you? And, let’s be frank, even though WFOE structures are now allowed in the healthcare sector, many early entrants are finding JVs are practically necessary simply to get access to particular land rights, referral sources, or something along those lines. Janet noted, “If you look at other sectors that have opened to foreign investment, it quickly becomes a beauty pageant. The Chinese want to see who is going to write the most detailed proposal, guarantee the most capital, take the worst deal … it is a beauty pageant and no one knows what the final prize is going to be … This happened with Wal-Mart when China opened the retail sector. China wanted to see how much money Wal-Mart was willing to invest in retail and distribution before they were allowed to operate in more than one city. The Ministry of Health and Ministry of Finance have a long history of opening the door and watching how we behave … the Chinese wait to see what happens until they see how we respond to their initial opening.” If we look at other sectors such as automotive, Janet pointed out that how the industry first structures itself will likely change as the market matures: “what happened in other sectors in the mid-90s was that it started to become possible to have a WFOE and the foreign investors who had been in JVs said, ‘this is too hard because we cannot have a conversation with our Chinese partners where they see things how we do, or vice versa, so we are going to be a WFOE.’ That is really where this has to go with healthcare as well. The way it worked with earlier sectors were that foreign entrants figured out the ropes, made some relationships, built a brand with their industry partners, lost money, banged their heads against the wall, and after a period of time when the regulatory environment changed, went to a WFOE.” The process she describes fits a lot of the efforts early entrants into China’s senior care market have already experienced, which is why I have called 2013 the “year of the gut check.”
One of last items we discussed was the disconnect that can quickly evolve between corporate headquarters stateside and your China operation. Janet’s first article wrote, “We’re stating the fact that, while the board is identical visually, the Chinese are playing chess and we are playing checkers.” What does this mean? Simply put, if your people on the ground in China and back in your corporate office don’t equally understand how your Chinese counterpart is looking at, and navigating within, the boundaries of your JV and the newly evolving market opportunity, then the potential for major disconnects between your own people will grow and become a source of division. Janet pointed out that in many cases, what the China side of your business needs to be able to say is essentially “we are not entirely sure what the upside is now, but we are learning, we do think we should limit our losses in terms of dollars, resources and IP, and that we should draw the line in terms of what we are willing to put in, but I can’t tell you exactly when we are going to get a ROI. What I can say is that if we don’t, someone else will.”
What does this all suggest for healthcare investors? First, you need someone to help you walk your own people through a process that makes sure you can live with the ambiguities inherent in going to China. Not everyone has the management bandwidth or the cultural DNA to take their business into an economy that, yes, is growing at an amazing rate, but whose regulatory environment, market acceptance and almost every tactical operational detail necessary to execute your plan will change multiple times once you open. It takes a particular skill set, a uniquely entrepreneurial mind and management team, not to mention patient and entrepreneurial capital that is comfortable with these risks, in order to take advantage of the opportunity inherent in China’s healthcare sector opening. Second, while China’s healthcare economy is open to WFOEs, a sector where the state is so heavily involved is likely going to require strategic JVs for some time. During the early days when these structures are practically necessary, knowing how to learn what you need from your Chinese partner, and having a clear exit plan in mind with the knowledge your JV partner might well become your competitor down the road requires up-front discussion and strategizing. Third, set realistic mid-term expectations for your Chinese investments. If you can’t afford, or don’t have the patience, to let your management team in China learn the industry (keeping in mind an “industry” per-se doesn’t really exist), then wait and jump into China when the market’s structure is more evolved than it is today.
Nothing that I have written over the past six months or Janet’s voice of experience should be interpreted as reason to not go to China. Rather, what people who have walked the walk in China are trying to communicate is how to set the right expectations about your investments and efforts during the early, if heady, days when a sector in the Chinese economy first opens but when little if any regulatory environment or competitive landscape can be said to exist. Companies that have the fortitude to live with these challenges are certainly going to profit, even if during the early days their first efforts seem to be struggling.
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