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.
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.
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.
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.
Is a good article on how the country’s senior care industry is developing. What I like about it is that it manages to balance between coverage on housing-centric solutions and home healthcare, something that not every media story does a good job. The housing product set is much more lucrative from the point of view of institutional investors, but home healthcare is probably a more scalable and sustainable solution. Worth the time to read in full at the China Daily site here.
In today’s Forbes Magazine in China, I have a column asking the question will Americans come to envy China’s healthcare? This is designed to be a thought experiment in how China might ultimately, in time, have a better designed, more cost effective healthcare delivery model than what is currently enjoyed in the US. I welcome your thoughts and feedback on the question here, or at the Forbes site. Mandarin version available here.
Over at CNBC, my contribution on whether the existing reforms set in motion by China’s Ministry of Health will be enough to incentivize private investment in the country’s public hospital space. A snippet from the piece:
Among the aggressive goals China has set as part of the country’s revamping of its healthcare system, is the expansion of the role for private hospitals in delivering care. The Ministry of Health has publicly stated it wants to see inpatient and outpatient visits at private, for-profit hospitals increase nationwide from 8 percent in 2012 to 20 percent by 2015.
In order to achieve this goal, China’s central government is attempting to get out of its own way: the January 2012 updated Foreign Investment Catalog moved private investment in public hospitals into the “encouraged” category, a big green light to potential investors that the country was now serious about allowing hospital management companies and private equity firms into this formerly closed segment of China’s economy.
Below is a cross-post from my column at today’s AsiaHealthcareBlog:
In past analysis of the senior care industry (here, here, here, here and here as just a handful of examples) we have discussed the unique challenges related to finding, training, and retaining personnel in China. Of all the strategic challenges the senior care industry faces as it expands inside of China, navigating the human resource challenges is – I want to propose – the number one priority. It can also be one of the easiest challenges to overlook and badly mismanage. We already know that cultural standards relative to filial piety can change to accommodate western care models. We already know the demographic burden in China is irreversible. We know the Chinese government understands the problem and is working to make it easy for public/private partnerships to flourish around the country. Here is what we do not know: where are all the necessary “boots on the ground” going to come from? In a country already struggling with shortfalls of doctors and nurses for its primary care system, not to mention the little clinical geriatric care that exists, where is the necessary staff going to be found?
Let me take this question one step further. Assume that you have answered the last question and you know where your staff is going to come from. Perhaps you have a proprietary relationship with a feeder institution like a state-run hospital or medical school. Or, perhaps you have elected to start with people who have the most basic of skill sets and train them to your western standards. Fine. Great. All good ideas. But here is where it gets tricky: China’s human resource (HR) market has a couple of characteristics that overlap industries. One you need to be thinking about is what happens in an infant industry where trained staff are hard to find, but easily identifiable to your competition. The likely outcome? The staff you worked so hard to find and train becomes difficult to retain and, the cost of retention can quickly and very negatively impact your financial model. In an industry with few established sustainable practices, buttoning down your HR strategy has to be a priority. The question is, what goes into a solid HR strategy that allows you to keep the talent you have trained?
With this challenge in mind, I reached out to a number of people both inside China’s healthcare industry and others outside who have first-hand experience in HR within China. Some asked to speak on background, which is why not everyone’s name is identified. The latter include ex-pats who have managed operations in China for the better part of a decade, during the explosion of their industries when many of the same HR challenges the senior care industry is now facing presented themselves. The net of these discussions has been six lessons for senior care operators, developers and investors as they build their Chinese businesses.
HR Lesson #1: Limit the Role of the Expat
During my research of existing facilities in China that have struggled, the role of expat help brought into the Chinese senior housing development has always been front and center. Some times, the expat help was overwhelmed early into their first overseas assignment; other times, the expats were disengaged out of the gates, many besieged by cultural differences that they felt were insurmountable; in many, finding good expat help was impossible and local expertise was brought into the facility instead. Even with these difficulties, I have yet to speak with a player in the senior care field who does not wish they could find a local Chinese senior executive or facility manager who “knew the business.” Absent this option (given the industry does not yet exist in China), the next hope is to find a good expat who knows China and can navigate the cultural challenges of building an organization up from scratch. I doubt it will be possible for the senior care industry to evolve in China without poaching senior management talent from the US, Europe and Asiana to come in; however, the first lesson for new operators in this space is to intentionally limit the role of this expat.
There are a couple of reasons for this. One is financial: expat packages are very lucrative for the individual, and very expensive for the company. The sooner you can transition to domestic talent, the better. But another reason, and one we will discuss in more detail later on, is that when you set up the organization to have an expat leading it in perpetuity, it sends a message to your staff about their upward career mobility. The top levels of your Chinese organization are symbolically powerful, and it is in your interests to have a strategy intentionally designed to move western expats out of the top back home once your operations have stabilized. Susie Bates, a UK HR practitioner who has been operating in China for the past 30 years, has worked with the United Healthcare group and has seen first-hand the HR challenges specific to healthcare businesses in China. On the point of limiting the role of expats, she offered this thought, “My recommendation for companies entering this newly blooming sector is that each key role is assessed against an ‘import’ scenario, and where the skillset is undeniably unavailable in China, overseas hires need to be made with the proviso that anything up to 50% of the role be set against identifying, training and developing the next generation in that role.” In other words, if expat help is necessary, make sure everyone knows it is short-term, and that an explicit deliverable of the assignment is to find a local replacement.
HR Lesson #2: Where to Find the Talent
Once you have landed in China, the question becomes where to find the necessary talent. Many early entrants, in particular those that want to offer themselves up as five star, luxury brands, are going to rush to get the best doctors and nurses they can find. Inevitably, they will find themselves knocking on the doors at the prestigious John Hopkins-Peking Union Medical College trying to find doctors and nurses coming out of this superb institution. This is certainly a great idea, but it also comes with a lot of costs, both immediate and when considering the replacement value in a HR environment characterized by high labor mobility. One expat in another industry (he recruited mostly chemical and mechanical engineers) offered this insight to me: “Recruit from GOOD universities, not the BEST universities. My favorite university in China from which to recruit really smart, hard-working and stable people? Zhejiang University in Hangzhou.” The temptation for an early industry, especially one looking to build a luxury brand, is to recruit from the best in class. In his industry, that would have been less Zhejiang and more Tsinghua. His point? Recruit from several different schools, not all of which are where the best students go. Find out which ones are most adaptable to your model and culture.
HR Lesson #3: A Balanced Compensation System
The first HR lesson people want to focus on is compensation. Let’s get the obvious out of the way first: compensation is going to be very important. How important? Well, that’s difficult to say. One expat said, “Money is important – you need to be competitive – but it doesn’t always keep top talent.” Another “firmly believes that money and perks still talk in China.” What seemed to be a consistent theme was to pay well, but not to try and pay the most in your industry. One expat stated, “Pay well, but not the highest in the industry. Give yourself room to provide token raises during the year (every six months).”
Susie offered a couple of very practical insights into compensation schemes that I found useful: “Incentivize employees via active and visual motivational programs – tying daily operations and learning successes directly to business outcomes allows employees to realize the role they play and the outcomes (both financial and in terms of acknowledgement) mean something. This ties into setting corporate culture early on.” Anyone who has toured manufacturing facilities across China – especially well run ones – has seen the ways team production boards are used to visualize how the assembly line or work team is producing in relation to the company’s goals.
In addition, Susie believes bonus plans have a place in China. She shared, “Bonus schemes that are set in place encompassing both individual and facility-wide achievement – this loops two incentives into one whereby the employees become accountable both for their own individual success, and for the success of the organization.” Beyond bonuses, my expat sources noted offering “perks like health club memberships, a transportation allowance … and going big on Chinese New Year … do not underestimate the importance of the annual staff party.”
HR Lesson #4: A Clear Ladder to Climb
If compensation alone is not enough, then what else matters to Chinese employees? Everyone I spoke with consistently emphasized having a clear ladder to climb as they advanced in their career with you. This was referenced earlier when talking about the limited role for expats in your China facility. One friend offered that you need to “Make certain employees understand their upward career path, and always dangle the next carrot in front of them.” Susie expanded on this, stating that in her experience, “trends show that Chinese employees no longer focus only on financial reward; today, it has become more about development, career opportunities, clear articulation of company goals and acknowledgment of (realistic) individual achievements that need to be tied directly to day-to-day operations.” This lesson may seem so obvious that it does not need to be offered, but in my experience, this has been one of the more common frustrations Chinese employees offer as the cause for their exit. I attribute this mistake to the tendency by western companies to assume that the large numbers of potential workers in China insulates them from having to put in place best practices like having a clear career ladder for their domestic employees. While having a big population to draw from is accurate, the pool gets much smaller when you talk about qualified staff. The more you want and need to hold onto existing talent in China, the more important having a clear career path available to them, against which they are being measured and managed for becomes.
HR Lesson #5: The Training Quid pro Quo
This fifth lesson, what I call the “Training Quid pro Quo” is entirely from Susie, and I think it is genius: “Training and development need to be provided with a documented cost both in terms of time and money; a Training Agreement, tied to the Employment Agreement, is a legally acceptable way to tie employees to fulfilling their commitment to the company against costs of education or learning fees incurred by the company to develop them. A standard model is a ratio-tied pay-back if the employee leaves early – e.g. within 3 months of completion 90% paid back; 6 months 75%; etc. etc.” If this is of interest, let me advise you reach out to someone like Dan Harris at ChinaLawBlog who has written extensively on Chinese employment law.
In a past blog post on the topic, Dan offered the following: “As you will see, the Chinese employment system is based on Asian socialist and Northern European models. China’s employment law system is quite different from the U.S system. The main difference is that the U.S. is an employment at will system, which means you can terminate employees at any time for pretty much any reason. China’s system is the opposite. The Chinese system is a contract employment system. This means all employees must be engaged pursuant to a written employment contract and during the term of that contract, it is very difficult to terminate an employee. An employee can only be terminated for cause and cause must be clearly proved. This means the employer must maintain a detailed set of rules and regulations and must maintain careful discipline records to be able to establish grounds for dismissal. This whole situation makes the employment relationship and the employment documents much more adversarial than is customary in the U.S.”
HR Lesson #6: Build the Facility as Much for Staff as Customers
Last up; build the facilities as much for your staff as your customers. I know, I know; this seems overkill. But just like you need to understand the needs and expectations of your potential customers – what sort of amenities, services and costs they want and are willing to bear, similar questions need to be asked relative to your staff’s needs.
Specifically, think about the location of your facility in terms of where your staff is going to be living. If your facility is hard to get to, that is going to present a major retention problem as the industry evolves. In a country like China where a hotel you can see from your hotel in Beijing, but that takes 45 minutes to drive to, you will want to think about transportation vouchers. And, be creative. What would you want if you were going to be stuck on mass transportation for up to 2 hours a day? I bet getting a new iPod or iShuffle upon completion of an employee’s training, along with gift cards for downloads to listen to on their commute would go a long way. Smart companies might even find a way to offer company training via podcasts with incentives for staff to listen and complete quizzes, adding further value to these incentives.
In addition, think about how to ensure the employee’s work environment is hospitable. As an operator in the west, you know how trying caring for elderly patients can be – both physically and mentally. Make sure this wear and tear on the individual is reflected in how you take care of the common employee spaces. Offer them ways to relax, unwind and socialize and to do so in an environment that is similar to the level of sophistication and finish you provide your customers.
None of these lessons are rocket science, but poorly constructed HR practices have governed the ability of other infant industries in China to expand. Some times this has meant Chinese competitors have been able to innovate and work within their culture after seeing the mistakes of their western counterparts. Other times it has simply resulted in industries that struggle to grow as quickly as they could if HR was not the sector’s primary bottleneck. I would imagine that as this industry continues to move forward, we will see many early entrants struggle to get and stay at scale primarily due to HR problems versus the market’s acceptance of the products or costs for the services rendered. Of all the problems the senior care industry would do well to put behind it, crafting strong and balanced HR practices may be the most important to resolve.
By: Benjamin Shobert, bshobert (at) rubiconstrategygroup.com, +206-652-3572