By: Damjan DeNoble

Dr. Adam Powell and Dr. Youfa Wang, two of several presenters at this past weekend’s US-China Intercollegiate Healthcare Conference held on Wharton’s campus, exhibited a shared awe of the rapid changes taking place in China’s healthcare profile. Among the many themes and viewpoints presented at the conference, the sense of awe emerged as the common meeting point for all attendees.

“Just look at what China has been able to do,” Dr. Powell gushed while pointing at a chart depicting the staggering rise of insurance coverage in China from 2000 to 2012. The rate of China insurance coverage has reached 95%, according to the latest numbers put forth in this months March 2nd issue of medical journal the Lancet [link no longer exits]. “In ten years [Chinese health planners] have managed to cover a billion people.”

“Every time I visit China, I’m very surprised by the many changes,” Dr. Wang, a Johns Hopkins Medical School Professor and probably the leading expert on nutrition in China, said as he pointed at his own PowerPoint slide earlier in the day, a map depicting all of China’s KFC restaurant locations. The image made the audience of ninety students and health professionals chuckle and wiggle uncomfortably in their seats.

Yet for all the agreement on the pace of change in China, Dr. Shujun Li, the recently retired head of Beijing United Family Hospital’s surgery unit was still greeted with a roomful of approving nods when he pointed out that “the term ‘market’ does not fit to today’s situation” in the sphere of Chinese hospitals and clinics. Similarly, there was a rustling of pencil on paper and a clattering of laptop keys when keystone speaker Sheldon Dorenfest, CEO of the Dorenfest China Healthcare Group, said that in China’s broader healthcare sphere the market is not the private market. Rather, “the market is the public market.”

For some, one or both statements may seem confusing. Beijing United is one of China’s two largest, private for-profit hospital chains and it is foreign owned. Yet here we have one of its medical officers saying that despite all of this, a healthcare market in China is an illusion. The Health Statistics Yearbook 2011,put out by the Chinese Ministry of Health shows that there were 13,850 public hospitals in China in 2010, compared to 7,068 non-public hospitals, hardly numbers suggesting a non-existent private market.

Two key insights make sense of Dr. Li’s statement.

First, for the majority of Chinese, healthcare is only accessible with the aid of public insurance, so there is no private market to which they can turn for alternative, non-profit services. Moreover, the health institutions they can reasonably access are all regulated by the same price control mechanisms so almost all fees will be identical. Because they cannot choose between healthcare providers on the basis of any meaningful entities, they are not really a market consumer and for them there is no market.  There is a strong argument to be made that a market exists when underground practices like red envelope payments are considered but that’s an article for another day.

Second, for those Chinese who can afford to look towards private healthcare providers they don’t really have 7,068 non-public hospitals and clinics from which to choose.  The majority of these non-public healthcare “hospitals” are mom and pop healthcare businesses, like elective procedure providers and check-up centers, and dental offices, that offer little or no clinical services.  For example, Beijing United is successful because no other non-public hospital in Beijing offers what it does: a full range of clinical and preventative services. So,  even in the realm of non-public, i.e. ‘private’ hospitals and clinics, consumers really have no choice and therefore, in a sense, there is no market.

And the insights that explain Dr. Li’s statements are critical for understanding Mr. Dorenfest’s point on the existence of a public market only. The dominance of public entities in the healthcare market who admit patients, dispense drugs and purchase medical equipment, and the small size of the private healthcare market – and, again, the private healthcare market gets very small if you don’t count the mom and pop enterprises with little or no buying power – means that entrepreneurs have to work with public entities or risk failure by betting on a very short list of private market clients.

As a side note, I am not seriously positing that there is an absence of a healthcare market in China, per se. “The public market is the market,” to be sure, is not equivalent to “there is no market.” There are many things that can be done to operate profitably in a public market, and a public market is a form of market. A combination of pharma sales and hong bao are presently being used to circumvent price controls. Also, even though pricing may be fixed, hospitals may compete with each other to some extent for volume or case-mix (some procedures may be more desirable to perform than others). Further expounding on this point, if Beijing United is really the only hospital in its class as it claims, that does not mean there is no private market in Beijing – it means that Beijing United has a monopoly (a market with one dominant player). Beijing United likely monopolizes a small high-end niche market. Other Beijingers must make the choice between going to a myriad of specialty hospitals, TCM hospitals, village and county clinics, etc. Demand at these various places is determined by the choices of the Beijingers – a market exists.

Getting back to the point, however, the big lesson, which brings together both the points on dynamic change and public market dominance, is that investment in China’s healthcare market is a task which should not be taken lightly. Not only does the gravity of issues implicate — as conference presenter Michael Zakkour principal of Technomic Asia put it — “the future of China.” The complexity of the situation also demands of potential entrepreneurs in the area a sophisticated plan of action and not a ‘shortcut’ strategy which looks to cut out the complicated labyrinth of public institutions and ministries controlling the healthcare space.  Mr. Dorenfest summed it all up with the last few words in his closing address, “Even though I was a very seasoned entrepreneur in the West, I was in preschool in doing business in China and had to learn more to be successful…[I]f I bought hospitals in China with what I knew about doing business in China I would be making bad investments be pouring money down the drain.”

What is looking to be a top-flight China healthcare conference is going to be held on Saturday, March 24, at The University of Pennsylvania’s Wharton School, in Philadelphia. The conference is the 2012 Intercollegiate US-China Healthcare Conference,  an all day event offering a panel of expert speakers and panelists and opportunities for discussion and networking. The theme will be “Transforming the Face of Chinese Healthcare.”

I am writing about this conference because I know two of the panelists very well.  Michael Zakkour of Technomic Asia will be on the Health Policy and Investment Panel. I have worked on a number of matters with Michael and I can vouch for his knowledge of China’s health care industry. Damjan DeNoble will be on the same panel with Michael and he will also moderate the Senior Care Delivery Panel. Damjan is one of the driving forces behind the Asia Health Care Blog, where he describes himself as follows:

Damjan co-founded Asia Healthcare Blog with James Flanagan, in 2009. He is currently a JD/MA dual-degree candidate, in Law and Chinese Studies, at The University of Michigan Law School. Last summer he clerked at the offices of Harris Bricken, a boutique international law firm widely admired for its China Law Blog.  He graduated from Duke University in 2007, with a B.A. in Public Policy, concentration in health policy.

If you have an interest in China healthcare, this would seem to be the conference to attend.  If you go, please report back on how it went.

I live in a house with three fashion-conscious females, which means a fairly steady TV diet of Project Runway and Fashion Police (both of which I really like), Say Yes to the Dress (which I hate) and What Not to Wear (which I despise maybe more than any show on TV). Overall, I love fashion because it is a leading source of business for my law firm. For years, we represented companies that sourced their clothes manufacturing to Korea, then China came along, and now Vietnam.

I have always liked fashion related clients because they have such interesting intellectual property issues which can vary so much from country to country. Can you copyright an article of clothing? Can you trademark it?  Can you copyright the design? What about “look and feel.” It depends.

There are no fewer than three excellent fashion law blogs and all frequently discuss the IP issues inherent in the business:

I am talking about fashion today not just because there was no Project Runway episode this week, but because I just learned that Michael Zakkour, who has been helping foreign (mostly Western) fashion companies in Asia for many years (and with whom I have worked on many China/Vietnam projects), will be speaking in New York City next month on China fashion. The title of Mike’s talk is “One Year on the Front Lines in China’s Luxury and Apparel Markets” [link no longer exists]. The talk is being put on by the Manhattan Chamber of Commerce, the Fashion institute of Technology and Technomic Asia and it will be on October 3.

Here’s the blurb on Mike’s talk:

China is now the number one market in the world for apparel and accessories and is also the world’s largest market for a wide-array of other luxury and premium products.  Renowned China expert Michael Zakkour, Principal of Technomic Asia, a consulting firm, will take you on a fascinating journey into the world of Chinese fashion, apparel, accessories and luxury products, detailing a year-long study of what the consumers want, who is selling it to them, and how they do it.

Topics will include:

  • The China apparel and accessory market (market size and scope, current trends, business opportunities and hurdles, case studies, how to get started or expand in China)
  • China’s appetite for fragrances and body care products not made in China
  • A comprehensive look at the Chinese consumer (demographics, spending habits, what they want and what companies can deliver)
  • What the next 1-5 years will bring to China and why winning there is crucial for the survival of commercial pursuits

Mark Greiz, Professor at the Fashion Institute of Technology and Chief Consultant at MG Consulting will also be speaking. Professor Lawrence Delson of the Fashion Institute of Technology and New York University and President of Delson International Inc., will be moderating the event.

If you are involved in or interested in the fashion business as it relates to China, this is a can’t miss event.

By Steve Dickinson and Dan Harris

The American Chamber of Commerce in Shanghai just issued its 2010-2011 Business Report. This report should be required reading for all companies doing business in China or who are planning to do business in China. Our good friends over at Technomic Asia co-authored the report.

The report is based on surveys of AmCham members. This is critical. The report is not based on the impressions of academics and government officials. It is based on the day -o-day experience of companies that are working on the ground here in China. The critical findings of this year’s report are:

• The majority of respondents are operating in China with a focus on the China market. 58% focus primarily on the China market and only 10% focus primarily on manufacture for export. The notion that most U.S. companies are in China solely for the purpose of manufacture and sale to back to the U.S. is simply mistaken.

• U.S. companies are continuing to move from first tier cities like Beijing and Shanghai to second tier cities like my beloved Qingdao. 39% of respondents reported that they are considering moves to second tier cities.

• The major concern of U.S. companies in China is inconsistent interpretation and enforcement of Chinese laws and regulations. Respondents were not concerned with the content of law and regulations. Rather, they expressed concern that the laws and regulations are being applied in a way that favors SOEs against foreign owned entities. This concern is particularly acute with respect to the second tier cities of the center and the west. Concerns about the legal environment is preventing some companies from making the move to these regions, even though the central government strongly encourages such moves.

• The second major concern of U.S. companies in China remains the employment system. There are two major concerns. The first is the steady rise in wages, an economic phenomenon. The second is a continuing lack of clarity on the rights of workers under the Labor Contract Law.

• In its own blog post on the findings, Technomic Asia noted how American companies are faring so well in China, having just come off their “best-ever performance since 2000:”

U.S. companies had their best-ever performance since 2000, with revenue, profitability and market share up sharply from 2009, following an uneven period of growth from 2008-2009 due to the global economic downturn. Among the report’s highlights:

87% of U.S. companies in China report revenue growth, surging from 47% in 2009 and 77% in 2008.

79% of U.S. companies in China say they are in the black, up from 65% in 2009 and 70% in 2008.

61% of U.S. companies in China state that they gained market share for China products and services, up from 40% in 2009 and 52% in 2008.


• Technomic Asia also noted how the overwhelming majority of American companies are optimistic about their China futures as “about 9 out of 10 U.S. companies in China forecast a revenue increase for 2011. China is a the No. 1 priority for 20% of U.S. companies, and the percentage of companies that will increase China investment in 2011 by more than 15% doubled over 2010.”

These fundamental findings of the AmCham report are completely consistent with our own experience in China. China is remarkably open to foreign participation in its economy, which means that most U.S. companies are in China with the goal of selling in the China market. China is a huge place. To sell into the China market, most foreign companies must move into the second and third tier cities. A major impediment to that move to the second and third tier is the inconsistent and frankly unfair enforcement of national law at the local level. It is an issue that we face every day in our own practice in China. Every foreign company operating in China needs to assume that it will be required to address this issue on a daily basis.

Nonetheless, there is plenty of money to be made.

What are you seeing out there?


By Simon Malinowski, a Harris Bricken 1L summer associate.

Technomic Asia has done yet another excellent podcast on what it takes for Small and Medium-sized Enterprises (SMEs) to succeed in China This one is entitled, “Challenges for SMEs in China: an interview with Steve Crandall,” [link no longer exists] and it focuses on the hiring of personnel in China.

Crandall starts out by talking about how the key to succeeding in China is having people who can take an idea and make it work as a viable business. Finding these people is a constant challenge for SMEs in China.

SMEs lack the prestige of the larger multi-national corporations that can hire based on name recognition and perceived room for opportunity. On the other hand, due in large part to their smaller size, SMEs frequently find themselves growing at exponential rates and need personnel to sustain the growth. This rapid expansion places a particular burden on human resources, making effective hiring critical to the SME’s continued growth. Many SMEs are finding themselves unable to satisfy their hiring needs and are finding this lack of the right people to be a serious constraint to their growth.

Steve also talks about the importance of foreign companies in China understanding and separating out their core values from their culture. The core values of a business, and by implication, the manner in which a business is run, can be taught to new employees. Teaching culture is a very different thing.

To make themselves more appealing to job applicants, foreign SMEs in China must present themselves in an appealing way. They should be prepared to show the benefits of working for a smaller business. Though money is important in all aspects of the hiring process, the potential for the prospective hire to succeed in and grow with the company is of paramount importance as well.

Steve also notes that no matter how badly the foreign SME needs additional China employees, it should not rush into hiring. Interviews should be thorough and conducted by more than one trusted existing employee. And background checks are an essential step in finding the right people. The prevalence of phony CVs in China means that calling an alma mater to confirm a prospective hire’s authenticity is a good way to “quality control” your hiring process.

For more of Steve Crandall’s take on SME hiring in China, click here and give the whole thing a listen.

The other day I did a post, entitled, “Beware The China Joint Venture,” where I again railed against doing joint ventures in China.  It listed six of my previous posts highlighting problems with joint ventures. Kent Kedl, of Technomic Asia, which describes itself as “a strategic consultancy firm whose mission is to assist globally expanding companies to build their Asian businesses through high quality market strategy and implementation assistance,” left a great comment analogizing joint ventures to marriages.  Kedl says that just as a high divorce rate does not mean all marriages are bad, so too the high rate of joint venture failures does not mean all joint ventures are bad.  I completely agree, but note the rate of bad joint ventures seems to exceed that of bad marriages.

Mr. Kedl really shines in pointing out the two most common ways companies fail in their joint ventures:

In 20 years of doing China market entry and growth strategy work, we have seen our shares of VERY bad JVs (and participated setting up a couple of them in the very early years) and have concluded that foreign companies most often fail in two ways:

1. They see a JV as their “China strategy.” A JV is NOT a strategy: it is a tool to realize your China strategy (which should be expressed as “We are going after China growth opportunities in Market X with Product Y through Distribution Channels A, B & C and defending ourselves against Competitors D, E & F”). The JV should be seen as only one option for realizing this strategy. China is becoming more open every year to creative structures so a potential JV should be compared to many other options…and chosen ONLY when it is the best way to realize your identified strategy.

2. The second way companies fail in China JVs is to “marry their first date.” Honestly, too many times have companies approached us saying “we want to do a JV with this company that we just met at a trade show.” One US company we know tried to force-fit a JV with a Chinese company like this and (thankfully) gave up after trying for two years. We started over with them again, confirming and validating their China strategy (see above) and, once we determined that our strategy required a JV of some kind, then looked at over 250 different companies before settling on 4 companies to do some serious due-diligence on and then, finally, one to begin negotiations with. By this time they were confident that a JV structure was for them, they knew EXACTLY what it needed to look like in order to work, and they had (as much as can be expected) confidence that they had found the right partner.

So true.