China's elderly offer opening for West's healthcare companies
By Benjamin A Shobert
Providing care for China's aging population has long been one of the most
promising market opportunities the country has to offer. For over a decade,
Western operators of eldercare facilities have looked at the China market as a
key growth opportunity for their industry.
Last week's announcement by Seattle-based Cascade Healthcare that it was
opening a new eldercare facility in Shanghai is the first major investment by a
North American eldercare operator, but is anticipated to be only the first wave
of such investments.
According to a recent statement by Li Jianguo, vice chairman and general
secretary of the Standing Committee of the National People's Congress (NPC),
"3.4 million beds will have to be added
in five years" and this is the very front end of a demographic tsunami that
will by 2050 leave more people in China older than 65 than younger. For a
country with an incomplete social safety net, this is both a compelling
business opportunity as well as a potential source of social instability.
While the promise of foreign investment in this sector is likely to address
some of this need, it will initially be the upper-end of the market that first
benefits as Western eldercare operators expand into China. The faster Beijing
can encourage foreign investment into this sector the swifter a proven business
model becomes clear and solutions for the mid-market emerge.
The lessons of other Western industries that have expanded into China - both
those whose investments were successful as well as those who failed - have
reinforced a simple lesson: you need to localize your product for Chinese
tastes. While Western operators bring best practices to the Chinese market in
terms of how to best care for the elderly, they will need assistance
customizing their business model for the Chinese market.
As a consequence of this, some Western eldercare operators are proceeding with
Chinese joint venture (JV) partners. One such example is the April 2011 JV
agreement US-based CRSA has signed with Guangdong Oursjia Retirement
Communities Services Company.
According to Joseph Christian, one of the leading experts on China's eldercare
market and a real-estate lawyer at DLA Piper in Hong Kong, JV agreements
present a bit of a dilemma for American eldercare operators, "They have the
concern that they will venture with a Chinese company and once the Chinese
company learns the business from them, they will be sent packing back to the
US."
However, given that American operators are unsure of exactly how to best make
their models acceptable to the Chinese palate and Chinese operators are unsure
of exactly what constitutes a world-class eldercare facility, JV agreements are
likely to make sense in the early stages of the market's evolution.
As Christian has seen, "Private, for-profit senior housing is a brand new
business in China, and I think that there is a great deal of uncertainty among
Chinese investors and developers over exactly how to approach the market." As a
consequence of this, no proven model has emerged at the hands of either a
Chinese operator or a Western early-entrant.
Consequently, in Christian's experience, "For a few years now, Chinese
insurance companies and developers have been looking for help from experienced
operators, preferably from the US, where the industry is quite mature and
large, to help them understand this complicated business."
Beyond the more general question of how - and whether - a JV with a Chinese
company makes sense, American eldercare operators will have to confront what
some believe remains the Achilles heel of building a successful eldercare
business model in China: making the decision to put your elderly parents into a
home a choice that is commendable, respectable and desirable instead of an
abdication of your filial duties. The more this act is perceived as one of
honor and even status, the more likely it is that it will become palatable to
Chinese families.
In China, one of the most sacred duties is that of a child to his parents. For
millennia, the Confucian ideal of filial piety has required Chinese to open
their homes to their elderly parents when they can no longer take care of
themselves. Christopher Vallace, a Hong Kong based partner at M3 Capital
Partners, is deeply involved in evaluating potential eldercare opportunities in
China.
To him, this remains one of the key challenges: "The number one risk in the
model is how the elder parents and adult children respond." But, as he is quick
to point out, "other cultures have that same concern, and over time their
traditions have evolved."
According to Vallace, what is essential is that "the eldercare operator
provides a very high quality, first-class experience so that the decision is
really one of respect and honor. The challenge is to make it a decision where
the parents feel honored effectively by being able to have the opportunity to
live in the community in question." He goes on to reiterate that, "It is very
important that the product has the right image and perception."
While the cultural challenges are likely to be daunting, developing a model
that has a return on investment which is acceptable to foreign investors is
likely to be another major hurdle. Two questions remain most salient: how to
deal with the cost of real estate in Tier 1 cities, and how to get the Chinese
to pay for services.
As Vallace sees it, "This is a growing social issue in China. Therefore, the
government may consider providing some incentives due to the inherent
challenges facing the investment community including, (1) the high cost of
land, and (2) an unproven business model. Inducements from the local
governments will be needed to accommodate these unique challenges and risks of
the Chinese real estate market."
Beyond the concern investors have over the cost of real estate, it will be
necessary for these new eldercare operations to convince Chinese to pay not
only for the real estate asset they are purchasing, but some sort of ongoing
fee for the services their elderly parents will need.
While initially these costs can be bundled into the cost of the purchased
housing, as their parents age it is likely their costs of care will increase
and need to be addressed through secondary billing. In a culture notoriously
unfriendly towards paying for services, this is not a minor challenge.
Those Western operators who strike first are likely to have one additional
challenge that, if managed properly, could become an opportunity key to their
success: the regulatory framework within which China will monitor and manage
eldercare operators. Currently regulations in this area are sparse, and are
managed by the Ministry of Civil Affairs (MCA).
From his perspective, Christian says "… the MCA's regulations are quite general
in scope, and are often administered on a local level, so you would likely get
a different answer in Wuxi than you might in Chengdu, for example."
The opportunity for Western operators as Christian sees it is that "… the lack
of regulations gives the early movers an advantage, in that if they do it right
and work closely with the government, they will be able, in effect, to help
write the rules." While it is possible that Western businesses early into China
can give purely lip service to China's nascent eldercare regulatory
obligations, smart Western operators will view this as an opportunity to begin
framing regulations in ways that make expanding into the more sizeable
mid-market consistent with the Western model.
Western companies have looked at the Chinese eldercare market before and failed
to succeed. The most well known example of this, Holiday Retirement
Communities, attempted to enter China in the late 90s, only to announce their
exit soon after the facilities were built.
Christian believes that in general, early entrants may have been unsuccessful
largely due to timing. As he sees it, "… early entrants failed because they
probably did not scope out very well what the market was ready for, and the
market may not have been ready for anything at the time the early entrants put
their toes in the market."
Vallace agrees that while there are significant challenges and risks, the
timing is right for select Western operators to seriously evaluate China, "… as
we put it through the funnel of demographics, culture, relative affluence and
existing supply, it is very difficult not to consider the potential the China
market affords."
Going on he shared that "... if you specifically look at China, for us it is
the combination of economic growth, an aging society, and large pockets of
concentrated affluence that pulls us into evaluating how we can draw on our
senior housing experience, and by working with local partners, create value in
that market."
Analysts, investors and operators all agree on two things: demographics point
towards a compelling business opportunity, and China's increasing affluence
makes a high-end eldercare model the right beachhead. But questions over
whether China is ready may not be determined purely on the basis of either. As
experts in this field acknowledge, the cultural challenges remain central to
whether a Western operator can become successful in China.
Benjamin A Shobert is the managing director of Teleos Inc
(www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses
bring innovative technologies into the North American market.
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