Please check out our new blog at www.HealthIntelAsia.com, where you will find some of the best and most cutting edge research and analysis on China’s healthcare market.
Over at CNBC, a column from Rubicon’s Managing Director Benjamin Shobert can be seen. It covers the idea that China’s evolution of a domestic consumer economy is inexorably linked to the expansion of the country’s social safety net, of which healthcare is the most important. From the piece:
Chinese households have one of the highest personal savings rates in the world, estimated at 38 percent of their disposable income in 2012. This high level of savings has stunted domestic consumption. When compared to other countries at similar gross domestic product (GDP) levels, China’s household consumption is markedly lower.
In September 2012, the IMF published a study which not only reinforced the point that China’s consumption continues to lag other developing economies, but also that China’s domestic consumption was noticeably less than other regional economies such as South Korea and Japan during what the IMF called their “miracle growth years.”
What explains the difficulty China is having developing a consumption-based economy? Simply put: fear. China’s personal savings reflect profound misgivings over the ability of the Chinese government to provide basic healthcare in the event of a healthcare crisis. The recent expansion of government sponsored healthcare insurance is specifically designed to address these fears.
A big “Thank You” to the team at the National Bureau of Asian Research who featured Rubicon Managing Director Benjamin Shobert in their recent Q&A session. Titled “China’s Healthcare Reforms: Addressing Discontent while Creating a Consumer Economy”, the NBR piece is worth a quick read. From the Q&A:
“Market-oriented reforms in China that opened many industries to foreign investment and fueled spectacular economic growth have only relatively recently been extended to the country’s healthcare sector. Increasingly concerned about widespread dissatisfaction over quality of life despite the country’s rising GDP, China’s leadership has taken a series of steps aimed at improving the accessibility, quality, and affordability of healthcare.
A 2009 announcement by China’s central government of a sizeable investment in the healthcare system was followed by commitments outlined in the twelfth five-year plan to boost the number of general practitioners and hospitals. More recently, an announced change to the country’s FDI catalog aims to further encourage foreign investment in China’s healthcare sector. In light of these developments, NBR asked Benjamin Shobert to provide background and perspective on what these new opportunities mean for foreign investors. Mr. Shobert is Founder and Managing Director of the Seattle-based Rubicon Strategy Group.”
Over at Modern Healthcare, they have profiled one of the most recent American entrants to China’s private hospital space. Among the experts they interviewed to discuss the opportunity in this market was Rubicon. Read the full article here. From the column:
Benjamin Shobert, founder of Rubicon Strategy Group, a consulting firm for companies looking at emerging markets, said that the return on investment may be as far as five or six years out.
A host of challenges face hospital operators such as how to handle underperforming employees in a country where doctors and nurses are considered public servants, as well as generating referral networks and competing with public hospitals that have VIP wings.
As a result, Shobert said, U.S. hospital chains are likely to wait at least another year or two before entering the market, though they might find other ways to participate. Opportunities exist for U.S. hospitals to run a specialty practice, such as cancer care, at an established Chinese facility. “Oncology’s going to be a core growth opportunity,” Shobert said.
Most of the new private hospitals will focus first on the upper middle class before trickling down to the middle class, Shobert said. “The expat market is pretty much gone,” he said, as companies such as publicly traded Chindex International have saturated the market for expatriate patients.
The full article can be found here.
Reposted from earlier this week at AsiaHealthcareBlog.com:
This marks the third column in a series focused on helping companies early into their decision to enter China. Our first two have emphasized the idea that even though what is happening in China’s healthcare space is compelling, it is most important to be sure your company is operationally ready and that the sector you want to enter is actually versus conceptually open and available to foreign entrants. The question this column seeks to answer assumes you have determined that your company – both the management team and the owners – have the bandwidth and the cultural DNA to export your business model to China’s emerging healthcare economy. This tends to be a conceptual gut-check; the subsequent question forces a more granular analysis of key resources with an eye on potential bottlenecks, weak points, and capabilities that may need to be augmented.
Done properly, the process of answering the first question will have drawn many concerns forward from team members; the objective next is to give these “known-unknowns” somewhere specific to go for resolution, an explicit connection between what troubles the team and an action item that will address, and seek to remedy, what bothers them. One of the easiest ways to facilitate this is to focus the conversation on key resources that will be taxed in order to expand your business into an emerging economy. For now, this analysis is essentially agnostic on which country you think is the right place to go. What you want to begin defining are resource boundaries. Which ones are most important? For a healthcare company, three areas need to have boundaries defined: financial, executive, and training.
The first resource boundary is one of the most obvious: how much capital can you afford to allocate to an international expansion? There are a couple of ways to think about this question. Do you plan on leveraging your existing business’ balance sheet in order to export your business, or do you want to create an independent company where your existing business will be an equity partner through the contribution of some capital and IP in the form of know-how and perhaps training materials? These are two very different strategies that obviously have different risk/reward potentials attached to them. The more you plan on leveraging your existing balance sheet, the more important having a very well defined amount you are willing to invest becomes. At the same time, your ability to execute an international expansion you are funding hinges on the ability of the home team to execute on their own KPIs and growth plans. It can be easy to lose sight of, but the most important thing that gives an international expansion the elasticity to absorb inevitable setbacks is knowing the home team has their P&L under control.
The second area that needs to have boundaries well established is how much your key executives and team members have to offer an international expansion. Unless your key team members have time to spare, developing a strategy and then executing a plan to export your business into another part of the world is going to tax the team. Again, what you cannot afford to let happen is their focus to drift and you lose sight of the financial performance of the domestic business. The right response is to augment the team where necessary, and to do so earlier rather than later. At this point in the process, it might not be perfectly clear what skill sets you need in order to do this; that is OK. The right approach is to make sure your existing team knows what you are doing this moment is defining constraints, of which personnel is certainly one. They need to know that as the strategy emerges, your first priority is rounding out the team with new faces who can take stewardship of these initiatives. There is no way around some short-term turbulence and stress related to a serious discussion about whether you should go overseas; the objective is to clearly and calmly steer through this period by reminding everyone that this process is designed to identify constraints, refine strategy, and then round out the team with the right complimentary skill sets.
The third resource limitation is training. Some might think of this as inherent within the previous discussion; let me suggest that for many – if not most – healthcare companies, thinking about training in the same way as a manufacturing company thinks about factories and equipment is appropriate. Training is where the ultimate value-add for healthcare will occur. It facilitates or destroys everything your business model will attempt to pursue relative to what you hope your customers will pay for. Done properly, viewed as a core competency and a key resource, your training capabilities allow you to get to profit and scale faster than your competition. Your objective is to stop and capture what it takes for a new person to come into your organization as a care provider, identify the process by which they get to speed, and then think about which parts of that process will and will not translate into an export economy. As an example, if a large part of your training capability boils down to job shadowing or if you assume easy access to a low-skill healthcare workforce, both are likely to be catastrophic assumptions in an emerging economy where neither may exist. Consequently, healthcare businesses that have too much of their training methods deployed in-field will have to develop training methodologies, manuals and quality checks that can easily be overlooked.
The final resource boundary question naturally transitions to the next set of questions that are all, at their core, process questions. This section, stopping to reflect on what you do better than your domestic competitors, is many times a value-affirming and extremely constructive outcome from this entire discussion (and many times, an unexpected one). As a first step, you want to stop and make sure there is broad agreement on what it is your business does that has allowed it to be successful in your home market. The more you can precisely define what your customers most value in terms of what you provide, the more explicitly you understand your message of uniqueness, the easier it is to ask the question whether this will translate to an export economy. What you want to be able to put your finger on is the economic transaction and the human value created when you deliver your service or product to a customer. The question then becomes does a potential healthcare consumer in an emerging economy share this value in the same way? How might their value system be different? Can you elevate their expectations without deviating from what you know you do well? If they were better educated on healthcare outcomes, could you sell them your services? If so, what are their key assumptions and your strategy to re-frame those? One of the most common mistakes healthcare service providers in emerging economies make is that their value-add is so obvious they don’t have to worry about a new group of consumers making the connection absent education. Indirectly, answering these questions will begin to add another layer of detail to the earlier financial resource analysis. The greater clarity on your message of uniqueness, what you have to do in order to execute your model in another economy, the easier it is to quantify the financial and operational resources necessary for doing so.
The last, and in my view one of the more important process questions raises the issue of opportunity costs. For mid-sized companies – especially in the senior care and home healthcare businesses – this is an important set of questions to wrestle with. First, what are the best opportunities for you to grow domestically? Do you have a sense of what it will take financially and operationally to capture these? What is the upside potential from a revenue and margin point of view? Obviously what we are trying to determine is the trade off inherent between incremental new business domestically that absorbs fixed overhead versus international expansion that creates non-linear new business while necessitating creation of entirely new fixed overhead. Not to say you cannot or should not do both, just make sure the team has identified any low hanging fruit domestically. The next logical question is where your best international opportunities are for expansion. Sometimes answering this question takes a bit of due diligence. You need to be comfortable looking for similarities in how healthcare is delivered today, with an eye on whether the possibility for disruptive innovation might be. As well, understanding disease states or demographics specific to your value-add may require some additional research. Once this question has been answered to your satisfaction, the next question becomes where China fits for your company? At this point, the analysis will have affirmed your company knows the key boundaries it will have to execute within, the executive team knows it will soon have new expertise being drawn in to ensure they do not lose sight of their KPIs, and the processes for identifying your essential message of uniqueness will have been completed. Next up becomes the specific act of due diligence in China, and where the next column in this series will cover.
Republished from an earlier post this week at AsiaHealthcareBlog:
In our first column in this series, we tried to walk the line between emphasizing the opportunity inherent in China’s healthcare reforms and the difficulties companies and investors need to be aware of prior to heading to China. Simply to make sure our analysis is not misunderstood, it is important to underscore a point we ended our last column on: we are very bullish on the healthcare sector in China, but being optimistic doesn’t mean overlooking dangers inherent to either the ways China’s healthcare sector remains undeveloped, or the ways companies underestimate what it will take to be successful in China.
I mentioned this last time, but much of my thought process about what it takes to go into China is grounded in my experience watching industrial companies over-eager to get to China burn out before their China strategy had the time to work. This isn’t a problem only for manufacturing businesses. Readers may remember the story of the much-anticipated Beijing International Heart Hospital that ran out of capital before they could finalize the necessary approvals. What happens when a company or group of investors head into China with all of the right ideas, what seems like a sound strategy, only to run out capital before they can execute? At the most basic level, answering this question is what our series is about. It can be easy to jump straight to the idea of resources as the reason a company fails in China. After all, cost over-runs are going to be the order of the day in an environment where almost every input (land, people, equipment, etc.) are under varying degrees of inflationary pressure. We will get the idea of resources in the next column, but for now let me propose that an emphasis on resources only is a mistake. Many companies that go off the rails in China do so because they did not start with an honest appraisal of their company culture and could not weigh the opportunity in China versus other opportunities to expand domestically or in other emerging economies.
Here is the right question to begin with: do we, as a company (both the management team and the ownership) have the bandwidth and the cultural DNA to export our business model to China? Most companies who trip and fall in China never stopped to ask whether what made them successful in their home country would be central to success in China. By this, I do not necessarily mean whether the problems you solved for your customers are problems Chinese consumers also share (we will get to that in a later column). Rather, if your company became successful in the US or Europe by acting as a market consolidator, through aggressive M&A activity given a highly fragmented healthcare delivery market in your home country that existed decades ago, does that skill set translate into China? Obviously China is a fragmented market, but in many ways, calling it a “market” is a misnomer. Given the sheer amount of capacity the country needs to build, actors who built their US businesses by consolidating market share could be too early to successfully leverage their M&A skill sets. Again, this is not to suggest there are no opportunities to act as a market consolidator in China. We have written on the idea of PE firms who might be able to do something similar in the hospital sector; although even here, doing so is not as simply as consolidating market share. Profound capability gaps exist in the hospitals that will need to be built out and require significant further investment. Contrast this skill set to a company whose success in their home country is entrepreneurial, defined by a management team that had to create a market, who understand what it means to sacrifice and struggle in the period before it is clear a market exists that can be successfully monetized. If you were choosing between a market consolidator and a market creator to go into China today, my money would be on the latter. Patient, entrepreneurial capital will be required in China’s healthcare sector. If that fits how your company or investment fund works, take the next step; if not, waiting might just be a virtue.
Perhaps you find this unconvincing. Another way to think about the idea of cultural DNA is to chew on what it is going to mean to live with regulatory uncertainty in China. Many American and European healthcare companies have extremely sophisticated and well defined compliance capabilities, ones that evolved over several decades of government regulations gradually reaching into more and more parts of your business. While regulatory issues may seem like handcuffs you are eager to be free of, your management team more than likely has a point of view that is attached to the need for certainty. If none exists in China, will your team be able to properly frame important decisions about risk? You may or may not see that as a problem, but to manage regulatory compliance you have created key positions, procedures, and operational guidelines designed to make sure compliance is not a problem. Without meaning to, could your corporate culture around regulatory compliance be something that causes a China strategy to struggle?
Even deeper cultural factors have to be considered. While management team members may view China as an opportunity, other parts of the company may not. Some may see China as a threat for reasons that you might roll your eyes at, but are real fears that need to be addressed, especially if at any point you will need these same team members to contribute towards the success of your China strategy. In cases where these team members either will directly train or indirectly support another member of the company whose role is central to success in China, helping everyone see China as an opportunity is essential.
Beyond these factors, one last issue has to be front and center to your internal discussion: management bandwidth. The decision to go to China is going to tax your existing system and team in ways that are easy to overlook. Early on, the decision is a heady one and will likely be greeted with great enthusiasm by those who get to jump on a plane and participate in the missionary activities of poking around the country. But as you move closer and closer to execution, you will be shocked at how much time and energy a China strategy will take. Underestimate this all at your own risk. As management team members split their focus, even the best will find it challenging not to lose track of initiatives and KPIs that are central to the success of your ongoing domestic business. Letting these bottlenecks reveal themselves naturally is not a good idea. For many individuals, having to let go of their role executing a China strategy is a profound career setback, and few are willing to do so. Better to honestly appraise your existing team’s capabilities and proactively determine where positions need to be duplicated, and which team members need to be freed to make China their central focus.
All of this analysis takes place against the broader question of opportunity cost. Yes, the potential of China is enormous. But so are the risks. Before you jump into a China strategy, find the time and spend the money looking at your domestic strategy. Find someone to evaluate your particular business model in China against other international economies, both developed and emerging. Think very carefully about whether you can get a better return on your investment by deploying capital elsewhere before you go to China. None of this is to say you will not end up pursuing a China strategy with great vigor. But if you take these questions seriously, you will likely find your team better prepared for setbacks, and better able to keep your existing business humming all while you build a scalable and successful business in China. In the next column for this series, we are going to begin drilling down into the operational issues revolving around identification of, and planning for the key functions you are going to have to export into China.
Derived from a recent speech I gave, here is an introductory presentation on the business opportunities in China as part of its healthcare reforms, with an eye to the internal means by which you determine if China is the right opportunity for you to pursue. You can read more on this topic over at AsiaHealthcareBlog here.
Re-Posted from my column today at AsiaHealthcareBlog.com:
Running in concert with this week’s JP Morgan Healthcare Conference is the OneMed China Forum III. You can find previous coverage of the 2012 event here, and a pre-amble to this year’s event here. Between last year and 2013, what changed was the emphasis on less top-level market analysis and more practical questions about how to go-to-market as a mid-sized medical device, pharmaceutical or diagnostic company in China. Where last year had a heavier emphasis on the Anhui Model, the early results of China’s healthcare reforms, and how these were all combining to alter the landscape (for the better, and for the worse), this year was focused on execution. At some level this is likely a change in focus for the OneMed organizers; at another, it also may reflect awareness by everyone that with the dynamic changes taking place in China’s healthcare market, policy analysis is interesting, but profiling companies who are successful executing is compelling.
A notable exception to this was the opening remarks offered by Dr. Bin Li, the Managing Director and Senior Research Analyst for China Healthcare at Morgan Stanley. While his analysis focused predominantly on the pharmaceutical sector and publicly listed domestic Chinese pharmaceutical companies, his market analysis reinforced the size and growing importance of the Chinese market: it remains the biggest emerging market for pharma, the 3rd biggest overall after the US and Japan, with an overall growth rate over the last five years between 25-30% a year. Pharma remains a challenging market in China. As Dr. Bin pointed out, “the pharmaceutical market is highly fragmented, there are tightened regulation and price controls, fierce competition in low-end generic market, and an over-reliance on hospital sales.” While transitioning from his pharma discussion, Dr. Bin made an interesting comment: “In my view, perhaps the most exciting sector in the next 10 years is the healthcare service industry.” What does this include? Private hospitals specifically, but also senior care, and home healthcare.
The device market is growing in importance, largely because the upside potential for device sales is so high. Dr. Bin pointed out that “drug versus device sales are 9:1 in China now versus 3:1 in the US today.” Devices may be where the pharma market was a decade ago: early into their broad adoption by healthcare providers and consumption by new healthcare consumers. This will change, and price pressures will mount, but for the time being, device manufacturers may benefit from bigger game being hunted (i.e. pharma). He added, “Devices also have lower regulatory and technical hurdles in China compared to drugs. Devices are likely to grow faster than pharma.”
One final point that Dr. Bin made which I found important: domestic Chinese drug pharma companies are moving up the value chain. This is the result of several factors, not least of which is China’s concerted efforts as part of their national economic planning to create technology transfer protocols that entice multinational pharma to develop technology for the Chinese market in the Chinese market. He noted that the “old view of Chinese domestic pharmaceutical companies was that they do not have innovation capabilities … they are on their way to becoming a R&D powerhouse.” Specifically, Dr. Bin pointed to 30 class 1 (novel) drugs brought to market between 2003 and 2010. He added, “furthermore, there are about 220 class 1 drugs currently in clinical trials … 40 are first in class, the balance are ‘me-too.’”
After Dr. Bin’s keynote, two panels were convened with a varied degree of industry practitioners. Each panel wrestled with a handful of different case studies that involved an American company who either was seeking to sell products into, develop technologies within, create partnerships for, or raise capital in the Chinese market. The products in question were devices, diagnostics and pharma. Reflecting on the case studies in general, several points are worth drawing out. First, the tension between strategic and opportunistic business deals in China. Westerners tend to think of Chinese as highly strategic, when the business dealings of most Chinese firms are enormously opportunistic. What that means is your Chinese counterpart is more comfortable, and in many cases may even negotiate for, relationships and obligations that are ambiguous and allow for enormous fluidity. I remember a comment a friend once made about doing business in China, something along the lines of “a Chinese businessman always wants to know what you are interested in before they give you a business card, just so they can decide which business card to give you.” Especially in a market like healthcare where so little structure exists and so many reforms are early in their development and implementation, being able to live with these gray areas is critical.
The other way the “opportunistic versus strategic” paradigm presents itself in China is when medical companies stumble across a potential partner, typically the by-product of a fortuitous trade show meeting, and mistake their new Chinese friend, a business whose success has likely been opportunistic versus strategic, for a strategic partner. Of course, these meetings do happen. Stars do align. Trade show hook-ups do matter. But the best way to be sure these relationships are the right ones is to head into the trade show with a strategy of your own. One of the panelists channeled Ronald Reagan and suggested that even in the most fortuitous relationship that presents itself, you want your contracts to be built around the idea of “trust but verify.”
One of the panelists pointed out that a common mistake companies make is they conduct what he saw as top-level only market research (how many potential consumers, potential distribution channels, profiles of existing entrants, competitors, etc.) and did not do enough actual one-on-one interviews and market research with actual Chinese doctors. In his mind this sort of market research is essential for a company to conduct early into their exploration efforts because the insights your actual customers may provide could well significantly adjust your product offering, pricing or other strategy element that would not be vetted if only top-level market analysis is conducted.
Another case study profiled a medium sized UK IVD company with very strong R&D, 8 million USD in revenue and only 13 employees. They had partnered with a small Chinese diagnostic company who was generating roughly 15 million in revenue. Distribution and sales channels between the two companies were well aligned and a relationship was in the process of being created. The question for the panelists was what sort of relationship this should be – exclusive versus non? Interestingly, opinions were divided. One panelist suggested you wanted to conduct a thorough due diligence of their sales, marketing, product support and distribution channels, and that if they aligned with yours, you should be willing to execute an exclusive agreement. The other panelists strongly disagreed with this, as do I. The primary push-back against an exclusive relationship is that almost any company – from the smallest to the largest – who want to go to market in China (and this is especially true for healthcare, but it would be appropriate for other non-healthcare products as well), do not want one distributor. China is simply too big a place, too many small regional markets exist, and it is too difficult to determine the actual efficacy of your Chinese distributor partner prior to actually executing a strategy. One panelist who did not approve of an exclusive agreement noted that the only conceivable way this might be worth entertaining (and here he was not suggesting this would be the prudent choice), was to set a very aggressive sales target for the first 3 years, after which you can mutually exit or during which you can also exit if goals are not achieved.
Let me end on what might be a surprising note given the topic of this forum: the one question that was not asked, that I believe needs to be in particular for SME enterprises eager to go to China, is whether they should do so in the first place. The decision to go to China is as much about financial resources as it is the ability to live with regulatory uncertainties, highly fragmented markets, and the inevitable period of time that elapses between when a company first enters China to when they begin to operate profitably in China. Not every healthcare company should go to China; certainly not now, and maybe not ever. Having someone you can work with who will explain the complexities of entering China and structures your internal decision making process to give space to your team to say “no” or “not yet” is as important as finding the right SFDA consultant, the best market research firm, or the ideal local partner.
Several weeks ago I had the pleasure of speaking at length with Marie Han Silloway, the Chief of Marketing for Starbucks’ China. The first part of our time together has been published today at contextChina. Look for this as the first in a four part series on Starbucks’ challenges in China, co-authored by myself and Robert O’Brien. The first column is available here.