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.