Before the holiday break I published a column at Forbes on the topic of how healthcare service providers should think about China given how the country has historically welcomed, and then limited, the ability of foreign companies to access the domestic Chinese market. I recognize that this column was a bit of a cold shower relative to much of the “rah-rah!” that has surrounded discussions about the China opportunity for healthcare and senior care companies, but it is a much needed reminder given the short-term challenges likely to present themselves in US-China relations in general, and healthcare reforms in both countries specifically.
Heading into the Trump Administration, the status-quo for much that has constituted givens around how the US would relate to China are being questioned. Whether we agree or disagree with these are not the point – rather an honest acknowledgement that a lot is up in the air is the salient point. Prior to the holiday break, I spoke at the Greater Seattle Chinese Chamber of Commerce on the topic of how the US-China relationship is likely to change, and laid out several different scenarios which readers can see for themselves here. Specific to US healthcare and senior care companies, the Trump Administration also promises changes to the Affordable Care Act (ACA). These changes, which are known today only in roughly defined shapes, will occupy many healthcare service providers’ bandwidth over the next several years as the actual new policies come more into focus and in doing so, limit many of their abilities to plan and execute international expansion strategies.
Similarly as to what is happening in the US, heading into the 2017 Party Congress in China we could also see similar strains of nationalism and economic reprisals from China towards the US emerge (and, as with my comments about the Trump Administration, so too here my point is not to agree or disagree with how Xi is likely to view potential reforms and changes to the US-China relationship). If, as many have pointed out, China’s macro-economic situation continues to deteriorate, the tone and tenor of the upcoming Party Congress could be much different than what western observers have seen in the modern era of US-China relations. This economic uncertainty also further complicates the healthcare spend available to the Chinese government. The upside potential is that China is going to continue to need private-sector investment in the healthcare sector. Note, this does NOT mean China will need Foreign Direct Investment (FDI) in healthcare or senior care: China has a ton of domestic capital pushing its way into the country’s healthcare economy. What China is missing is not capital, rather it is expertise on how to profitably deliver clinically sound healthcare business models. Smart foreign operators are going to figure out how to let their domestic Chinese partner make most of the money, and the foreign player to get a percentage on what is going to be a huge upside. The downside potential in all of this is that China’s healthcare reforms – specifically those that are designed to address physicians and hospital administrators rent seeking behavior – could well run out of gas and leave the Chinese central government exposed in the eyes of its citizens during a time of economic anxiety. If that were to happen, it increases the probability of heavy handed “crack-downs” on private healthcare providers (in particular the infamous Putian hospitals) and the pharmaceutical sector.
With this all in mind, for those healthcare and senior care operators that view international expansion as an offsetting growth opportunity to what is happening in the US market, now is precisely the time to focus on what a disciplined and scalable strategy for expanding overseas requires. If your competitors are going to drop the ball, then by all means don’t make the same mistake; however,think about a couple of different ways to access China that might be different than how you originally structured your approach. What do I mean by this? As I wrote in Forbes,
“The list of foreign companies who own and operate their own branded business platforms in China is short, and will grow even shorter over the next several years as China’s FDI life cycle matures. For many healthcare and senior care companies who want to access China, the right strategy is not to own, open and operate a new hospital or senior care facility.
Rather, the right strategy for most healthcare companies has a trusted western brand licensing its name and know-how under a carefully crafted revenue sharing relationship that has limited operational responsibilities held by the foreign company. This approach has the added benefit that it lets foreign companies not sweat how the Chinese government is going to regulate their particular healthcare model. China’s healthcare regulators have two distinct tracks, one for foreign and one for domestic companies. The requirements and boundary conditions for each are different–and not in favor of the foreign company. Good examples of this can be found in the senior care sector, in particular through a number of training, brand licensing and operating examples the most recent of which would be that of Meridian Senior Living and their relationship with Sino-Ocean.
None of this is to suggest that no foreign players in China’s healthcare economy will be successful. There will be a healthcare equivalent to Starbucks’ experience in China, and industry watchers should pay close attention to Columbia Asia and Temasek, whose unique combination of operational know-how and deep capital reserves, makes for one very good example of someone positioned to win in China. But very few healthcare companies have the sort of unique brand equity, financial where-with-all, and deep operational expertise expanding into foreign markets as Starbucks does.”
I am intentionally being a bit vague in this, because the actual market access strategy openings we see for clients now are proprietary not only to the China market, but also reflect lessons from what we see as common struggles with our various clients and non-clients. Being able to get inside these businesses over the last six years has created a very high degree of certainty on our part as to what does – and does not – work when foreign healthcare and senior care companies try to operationally scale in China. However, the point bears repeating: there are a lot of ways to go to China that come short of you owning and operating a facility. You can make a lot of money and sleep a lot better at night with a more limited, and narrowly defined market access strategy for China. In a time of change in both the US and China, and with many of these changes taking place specifically in the two countries’ respective healthcare sectors, now is a terrible time to walk away. It is, however, a great time to make adjustments to what “being in China” means, and profiting from the hard lessons learned from other players in your space.