In 1998, Michael Lin decided he wanted to set up a first-class medical care facility in Shanghai. The Taiwanese American businessman took over two floors of a hospital belonging to the State Power Corp, Lin's partner in the deal. However, it was not until October 2002 that the facility, called the Shanghai Chen Xin Hospital, finally had a soft opening of its dental clinic and a few examination rooms on the same floor. The rest is still under construction.
Even getting this far has meant surmounting a series of hurdles, from hassles involved in opening a bank account to disagreements about fire extinguishers. Lin's advice to other foreign investors eyeing China's medical care sector? "Don't try it," he says. "You don't know the kind of life I've led for the past three-and-a-half years."
China's medical care sector is open to foreign investors, but confusing and changing regulations make it a difficult market to enter. And since most such joint ventures target the tiny percentage of the population who can afford expensive treatment, the market is small. Still, a tiny percentage in China is as big as the entire population of some countries and that's enough to lure a few brave pioneer investors.
Choosing the right Chinese partner is crucial to navigating the regulatory morass. One reason Chen Xin's renovations took so long is because of complex specifications. "Without our local partner's help, we never could have done it," says Lin. Before assuming that anything meets inspection, "have your local partner check it first", he recommends. Otherwise, even seemingly small details can slow down a joint venture.
Take Chen Xin's fire extinguishers. Step on to one of the joint venture's gleaming white floors and it's like being transported out of China. From the plush reception area to the modern art hanging on the walls and the computerised billing system, this is a modern, stylish hospital. Naturally, Lin did not want to install the ugly, bulky regulation extinguishers supplied by the fire department, but officials insisted that they must. Finally, the State Power Corp negotiated a compromise. Chen Xin's extinguishers were designed by a Japanese company, but manufactured by the fire department.
Even with the right partner, dealing with the government can be tough. "We were lucky to have found a totally supportive and foresightful partner – the Chinese Academy of Medical Sciences," says Roberta Lipson, CEO of the US-headquartered Chindex, the foreign partner in the 50-bed Beijing United Family Hospital (BJU). Opened in 1997, BJU is China's first and best-known joint venture hospital. Still, getting the necessary approvals from a multitude of ministries and departments took "months and even years of clarifying our intentions", says Lipson.
"After receiving government approvals, we had to embark on receiving approvals for the construction, as well as finding ways to secure materials which were suitable for building an 'international standards' hospital," she explains.
Foreign investors must constantly monitor China's fluid regulatory environment. World Link's two Shanghai-based medical clinics, opened in 1996 and 1998, belong to a joint venture between Shanghai Alliance Investment, Medical Resources International (MRI) of Singapore and Shanghai's Ruijin Hospital. Since the two sites opened, however, the rules have changed and foreign investors can no longer have more than one location with the same investor structure. Therefore, World Link is "changing the structure of the partnership," says general manager Paula Hsu. "We like to co-operate with the government."
Investing in just one clinic might seem a tempting option for foreign investors wanting to test the waters, but regulations mandating a minimum investment make that unappealing. Investors must commit to at least Yn20m, and foreign investors can only own 70 per cent of the venture. Lin has so far sunk Yn20m into just two floors for Chen Xin, though he is looking to take over more floors of the hospital if things go well. As for World Link, MRI also invested Yn20m in each site. "It's big for a clinic," admits Hsu.
China's WTO entry won't loosen those restrictions. "The essential difference WTO brings is a reduction in the tariffs on medical devices," says a Western commercial consul. "There is no WTO implication for hospital ownership." Under its WTO accord, China pledged to reduce its average tariff on medical equipment of 9.9 per cent to 4.7 per cent by January 1, 2003. But as Lipson points out: "Perhaps WTO entry will attract more foreign investment and improvements in the overall economy are certainly good for the business of high-end medical providers."
So why do foreign investors even bother with China's medical care market? "I figure my family or friends might come to live here. I want them to have good medical care," says Lin. He looks to turn a profit in six years. World Link is just barely profitable, but BJU achieved earnings of US$476,000 on revenue of US$8.8m in 2001. The original investment was US$7m.
Lipson believes BJU's 2002 revenue will be up "substantially". She adds: "We were able to see profits in the third year of operation, and they have been growing impressively ever since." Profit margins will improve as Chindex is able to achieve economies of scale by sharing administrative services and some clinical resources between the Beijing hospital and Chindex's outpatient clinic in the suburbs of Beijing, which opened in late 2002. Some US$1.5m is being spent on expanding facilities at its Beijing hospital. These include a new paediatric inpatient unit, new adult medical/surgery unit, day surgery centre and intensive care unit. Additional hospitals are planned in Shanghai and Guangzhou, and some doctors will rotate between the facilities.
Targeting the expatriate market
Foreigners are the main customers for these joint ventures, though more than 30 per cent of BJU's patients have Chinese passports. At World Link, 70 per cent of the customers are expatriates, including Hong Kongers and Taiwanese. Chen Xin is targeting the estimated 500,000 Taiwanese living in the Greater Shanghai area. But with local incomes rising, Lipson believes that in a decade, "maybe 5 per cent of the population will be able to afford high-end medical care, which will be equivalent to a population similar to the size of France".
Hospitals or clinics aren't the only options for foreign investors. China claims to have some 200 joint venture hospitals, but they take a variety of forms. At one end is BJU, which is 90 per cent owned by Chindex (it was built before the current regulations came out). At the other end are joint ventures like Guangci Hospital, on a floor at Shanghai's Ruijin Hospital, which is only an equity investment by the World Link investors. Guangci is managed and staffed by Ruijin.
Deciding on the kind of investment to make depends on your time horizon, says the commercial consul. If you're just looking for a return on investment in the fastest possible time, pursue a primary market like Shanghai, he recommends. Also, target a location with expatriate patients with overseas insurance. But World Link's Hsu recommends tapping the local market: "The expatriate market already has a lot of competition." More adventuresome investors might look to China's vast western regions. The government wants to develop that area and the investment rules are less restrictive – for example, full ownership might be allowed.
Then there remains the issue of finding the right local partner. The commercial consul stresses the importance of finding a cultural fit. "The reason most JVs fail is there needs to be a cultural fit," he says. China is also actively seeking investors. "From the Chinese government there has been an overall increase in awareness of the need to improve medical care," says the commercial consul. China recently signed up to the Joint Commission on International Accreditation Standards, and has been sending groups of government and hospital officials, as well as doctors, abroad on learning missions.
Three groups travelled to the UK in 2002. In late September, for example, a group of six led by the Ministry of Health visited three hospitals with a focus on studying the more patient-focused healthcare delivery system of a Western country. "The thing that is going to be driving demand for most joint ventures in the near future is the Joint Commission on International Accreditation Standards for hospitals," says the commercial consul.
After a joint venture is up and running, be prepared for problems such as finding and keeping good overseas doctors. "It is hard to find doctors," admits Hsu. Of World Link's dozen or so doctors, 90 per cent are from overseas. Chindex's Lipson says: "We found ourselves faced with the monumental challenge of recruiting a highly capable and experienced professional staff consisting of providers from China and 15 other countries to come together as a team, and subscribe to a common language and common protocol."
Keeping local staff is also tough. "Many of your staff want to go abroad," Hsu explains. "They see working here as a good stepping stone to other things."
Then there's the challenge of trying to meet the needs of a patient population that includes Westerners, locals and other Asians. "Everybody comes in with different expectations," says Hsu.
So, as the pioneer in China's joint venture hospital industry, what advice does Lipson have for potential investors? "Think long and hard," she says. "This is the most difficult and complex cross cultural management challenge we have ever faced."
Still, actions speak louder than words. Chindex's second joint venture hospital involving an investment of US$8m is set to open in Shanghai this year.
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