The first book I recommend to healthcare executives new to China is Jonathan Spence’s "To Change China." That is because Spence’s analysis makes a simple and profound point that every foreign company needs to understand about how China views their business: be useful when China has fallen behind western markets, and prepare to be relegated to the sidelines once China has caught up.
If you think this goes too far, it is helpful to listen to any number of foreign companies in a variety of economic sectors across China that are frustrated, seeing their market share declining, and re-evaluating their futures within the China market. Just this year we have seen a number of high profile announcements by seemingly well-established foreign brands in China that they are re-visiting their China businesses with eyes to spin offs, sales or geographically re-balancing their production capabilities. Using Spence’s historical analysis, it is possible to make sense of this by creating a Foreign Direct Investment (FDI) life cycle that helps healthcare executives understand what this all means.
Why China is opening itself up to western investment
China’s decision to open itself to western investment and expertise is not born of grand ideas about entering the global order or democratizing its markets; rather, when China decides to open its markets to FDI, it is because the country has fallen behind its regional and international peers. The decisions since 2009 to open the country’s FDI catalog for hospitals, healthcare service providers and senior care are born of a profound realization on the part of the central government to rapidly bring investment and expertise into each of these sectors.
Why now? Because problems in each of these areas are so pervasive and profound that the people could hold the government itself accountable if things do not rapidly improve.
This is good in the short-term because it creates opportunities for overseas companies with the financial and operational capability to scale in China. However, in the most sensitive parts of China’s political economy – of which healthcare is at or near the top – it is naïve to assume China’s long-term view of foreign involvement will always be this welcoming.
China in charge
Spence’s historical narrative paints a different picture. Specifically, Spence’s analysis suggests the FDI methodology China historically uses never loses sight of what China wants from foreign companies, and that once China’s goals have been achieved, the terms of engagement with China will change. When and how this happens will be set by China, based on very calculated political decisions that will be as opaque now as they were several hundred years ago.
Ten years ago the idea that China would represent a market where foreign companies were struggling with basic market access issues would have been seen as histrionic hand wringing; today it is the reality. Healthcare companies should not assume they are somehow above similar challenges.
As China opens its market to FDI, it does so initially by requiring foreign companies to have joint venture partners. Later on, 100% foreign owned assets (so-called Wholly Foreign Owned Enterprises or WFOEs) are allowed, but only after a period of time when local partners are required. What this means in practice for most healthcare platforms new to China is that their market entry strategy always begins by selecting a domestic partner to help them address regulatory unknowns, access domestic capital, or get the right piece of land for their particular project. As markets mature, and WFOEs become possible, it is common for the domestic and foreign companies to go their own way. It is also common for the domestic company to re-present itself as a direct competitor to the foreign player.
What should healthcare companies do?
None of this is new, and all of it is known. The question is what should healthcare companies who want to go to China do with these insights?
The most important insight that healthcare platforms should take away from this is that the easiest way to make money in China does not require you to actually own and operate the business.
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.
The right strategy
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.
Spence’s analysis of China suggests that when China has caught up to the West, as measured by relative technology gains and standard of living improvements, it begins to pull away and close off. While this modern era of globalization is different in many ways than previous periods of time, history has a way of asserting itself as familiar patterns of national insecurity leads to retrenchment of trade.
If Spence is correct, those healthcare companies who are likely to be most successful in China may be those who limit their exposure and carefully craft partnerships that have them brand, train and manage, but not own and operate. The difference may seem slight now, but as headwinds for FDI in China mount, striking the right balance for healthcare companies new to China is more important than ever.
