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Industries New To China Need Grounding In The Lessons Of the Past Too
Senior and health care in China. The new thing for foreign companies doing business in China
Today’s post covers one of the more exciting sectors that has recently opened to foreign direct investment in China: senior care and healthcare. It is written by Ben Shobert, who I typically describe as the most knowledgeable person I know about China senior and healthcare issues. Ben has assisted countless companies in these industries get into China and I thought it would be helpful to our readers to have him talk about the issues his senior and healthcare clients are facing in China. This sort of analysis is critical for anyone in those industries, but also incredibly helpful for anyone looking to go into China, especially if they too are in an industry newly opening to foreigners.
The legal and business issues emerging as various western healthcare service providers expand into China will not be new. Questions over how to properly evaluate potential partners, licensing issues around WFOEs, and understanding how to protect your IP are as relevant for senior care and healthcare companies as they are for industries that have more experience working and getting to scale in China.
This article has been split into two parts. The first will introduce the broader context within which China’s relaxation of its FDI catalog for healthcare is taking place and the second will introduce some of the common challenges – especially around licensing – foreign operators are encountering.
When thinking about China there is always a temptation to tell yourself that your industry, your situation, your business is somehow different. Sure, you can see how an injection molding company having complex molds manufactured in China for a medical device customer needs a robust agreement between themselves and their China tool manufacturer, but you’re only manufacturing a specific type of hydraulic seal for a proprietary OEM hydraulic cylinder. Surely you don’t need to worry about having all the same agreements in place – until of course something bad happens: you can’t move your tool to another manufacturer, you find out your “proprietary” seal is – well – not so “proprietary” any more, or you can’t get product released from the manufacturer because your Chinese partner has all of a sudden decided to change terms on you. The point is this: the best-intentioned businesses that begin to work in China tend to make the same mistakes, regardless of industry.
Before I expand on this, let me provide a little bit of background. For the last several years, my firm has been helping American and European senior care, home healthcare, medical device and pharma companies expand into China. We have been particularly active in senior care and home healthcare, including successfully obtaining and project managing the very first WFOE license ever in Beijing for home healthcare, the second such license in all of China. Over a six month period that began in late 2014, we began working on the first comprehensive research project to profile the largest and what we believed to be the most important senior care and home healthcare providers in China. Most of these – but not all – are foreign invested and run.
In the projects profiled, we identified an estimated RMB 26 billion worth of investment and 1,052,630 square meters of senior living space. Our team in Beijing and the US then extracted and organized the information into a standard template that includes a summary analysis of how each particular project is viewed in the Chinese senior care space and what it may have to say about the current state of the market; a company overview that provides the background of the ownership group and, when available, the structure of the financing for each project and whether each project is profitable, losing money, or breaking even; and, a detailed summary of each project. Each detailed summary provides overview tables of key information that provides a quick-glance overview of project details, and long-form descriptions of each project, from phase build out plans and pricing details to lessons learned by management as well as insights on market positioning of the services in question.
As readers of China Law Blog already know, China’s Foreign Direct Investment (FDI) catalog has been opened to allow Wholly Foreign Owned Entities (WFOE) in both senior care and healthcare. These are significant changes to the FDI Catalog, and they reflect the government’s desire to see more FDI in these areas. However, even though 100% foreign ownership of senior care facilities is possible, many foreign entrants still find they need a local Chinese partner to access the best land, accelerate regulatory approvals, or attach themselves to a brand the Chinese consumer knows.
The evolution of China’s FDI Catalog is a well-understood process: the country realizes it has fallen behind relative to technology or capabilities, opens its economy to FDI through joint ventures (JVs), then later on opens further to allow 100% foreign ownership. But, what is in theory possible around 100% foreign ownership is many times practically impossible, as foreign companies find they still need JVs to navigate local regulations. This process of gradual opening to FDI tends to end in China when domestic and foreign companies find they no longer need or want to work together, at which time they exit the relationship. In practice, most industries that have seen this sort of process unfold have found that strategic partnerships with the Chinese will end in three to five years, simply because both parties want to build their own brands, and have gained from each other what initially made their partnership necessary.
In tomorrow’s post, we will begin to focus on how China’s regulatory scheme for senior care and healthcare businesses is changing, and the most common challenges western companies face when identifying potential partners and obtaining the proper licenses for their healthcare services.
As readers of China Law Blog might guess, China’s regulatory scheme for senior care is dynamically changing. This can make it difficult for both overseas investors and local government officials to keep constant track of the changes, leading to disconnects that impact investment and operating plans. Many parts of the legislation governing the senior care industry are unclear, leaving “gray” areas. An essential part of a foreign operator’s go-to-market strategy is an understanding of what parts within its planned services fall within the “gray” areas. Estimating and devising a way to manage the risks are essential to avoid jeopardizing the entire business in China, or breaking a contractual arrangement with a Chinese partner. Many western companies we talked to were in such a rush to get an initial MOU or LOI in place with a Chinese partner that they cut corners. Inevitably this created a problem as they ended up having to go back and start over, many times not only because they had been in too much of a rush in getting a license, but more importantly, because they had not taken the time to complete even the most basic due diligence on their Chinese partner.
The most painful lesson our research brought forward was what happens when this licensing process is not taken seriously. Licensing a new foreign owned and operated senior care or healthcare entity in China is more than a mere formality. In fact, the scope of services explicitly called out during the registration process is determinative to a number of core commercial issues. During the WFOE formation process, the most important variable a senior care operator will need to think through is the business scope of their license. In the case of home healthcare as just one example, most foreign operators want a business scope that will allow broad nurse-led interactions in the home. These interactions tend to reflect what a foreign home healthcare provider has found are most commercially and clinically valuable to both families and payers in developed markets. Examples of these higher acuity services include maintenance of IV-administered fluids and medications, enteral feeding, PICC lines, respiratory therapy, broad rehabilitation services, delivery of opiates as part of hospice care, and ventilator management,. The issue is how relevant Chinese authorities view and regulate new foreign businesses that aspire to deliver western, nurse-led care within Chinese homes.
If your company is forward thinking enough to be considering taking your senior care, home healthcare or healthcare business to China, you are likely the type of organization that is comfortable taking risks. That’s good and necessary to be successful in China. However, it isn’t enough. Taking the time, being patient and willing to spend money vetting potential partners, talking and building relationships with government stakeholders and thinking proactively about how you are going to find customers are all critical to being successful in China. The pressure to get “something” done in China can lead many healthcare organizations to under-estimate the amount of time they need to spend conducting due diligence and filling the pipeline with multiple potential suitors. In China, especially in sectors as hot as senior care and hospitals, the amount of interest from possible Chinese partners can make it difficult to maintain a disciplined strategy. Many organizations end up choosing a partner based on intangibles, things like the always thrown-about guanxi, and assume their Chinese partner can wave a magic wand and make all potential licensing, marketing and patient acquisition issues disappear. Our research over the last six months, and our in-country work over the last four years, shows these are dangerous assumptions to make. Western healthcare providers that are successful take a focused, patient approach to China, in particular around questions of how to license their healthcare business. This may slow things down in the short term, but it goes a long way to ensuring your business has longevity and is protected from China’s various ill-tempered moods towards FDI in sensitive parts of its economy, of which healthcare will remain one for the next several decades.
More information on our 200+ page report on China’s senior care and home healthcare industry is available here.
The post Industries New To China Need Grounding In The Lessons Of the Past Too appeared first on China Law Blog.
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.
Source: http://www.chinalawblog.com/2015/07/industries-new-to-china-need-grounding-in-the-lessons-of-the-past-too.html
