Elderly Care, an Immature Market

China’s rapidly ageing population coupled with an expanding middle class means that increasing numbers of elderly Chinese people will be looking for private senior care in the future. In the report below Helen Chen and Ken Y. Chen from L.E.K. Consulting explain how the promotion of senior care to “encouraged” status in the Foreign Investment Catalogue in 2011 is opening up investment opportunities for foreign companies.

ageing populationChina is already home to over 167 million people over the age of 60, more than the total population of Germany and France combined. And this segment of China’s population is only increasing, expected to rise by another eight million a year over the next five years.

The speed of ageing in China is unique, considered one of the fastest growing in the world thanks to a rapidly falling mortality rate coupled with a low birth rate—a result of the country’s infamous one-child policy. This ageing citizenry has led to a ‘4-2-1 paradigm’, where a growing number of couples are responsible for just one child but four parents. As a result, nearly half of the country’s elderly population lives alone.

In an effort to provide for this ageing segment, last December the Chinese Government set a target of creating an additional 3.4 million senior housing beds by 2015. While the number sounds substantial, if met, this will still only provide housing for approximately four per cent of China’s elderly. Thus, in the Foreign Investment Catalogue, senior care was elevated to “encouraged” status, opening the door for foreign investment in the industry and inviting investors and operators in to leverage their knowledge and expertise in what is a relatively new market for China.

Shanghai’s Pudong New Area was one of the first to act on this mandate, announcing last June that it would allow private enterprises to participate in its senior care market. Their new policies in the matter include a pilot program that encourages investment targeting the high-end market in order to provide expanded options for residents as well as to improve the quality of care offered.

Senior population that can afford high-end housing and care in tier 1 cities (2010)With an increasing level of household wealth, it is projected that over one fifth of China’s senior population will be able to afford high-end senior housing and care by 2020, establishing this as a truly lucrative market segment. Based on a recent L.E.K. analysis, Shanghai in particular appears to face a supply gap when it comes to high-end eldercare institutions.

Seizing the opportunity on the heels of Pudong’s announcement, a joint venture (JV) between investor Columbia Pacific Advisors and US senior living provider Emeritus Corporation was publicised, stating approval from the Shanghai Government to open the first foreign-owned, for-profit senior care facility in China. They, along with others, believe the market is ready for expansion and have plans to open up to 30 similar facilities across the country once they lock in their model in Shanghai.

Also, in Qingdao, Internationaler Bund (IB) from Germany and Qingdao Baden Holdings Co from China set up a JV called Baden Chorden. This project was completed and commercialised in 2012.

Nonetheless, not all are as quick to jump in; regulations, market entry, business models and selecting suitable partners have kept many on the sidelines, looking for their opportunity to enter the game, and there have been some casualties. Back in 2006, German company Augustinum began a JV project in Shanghai, but this failed two years later due to the policy barriers around land development approval.

As with all budding markets, the regulatory environment around the senior care industry is still quite loose. The lack of clear policies and procedures has given many operators pause. While it has become increasingly easier to set up a Wholly Foreign-Owned Enterprise (WFOE) in China, more companies are looking into JVs to navigate the vague regulatory waters and complicated approval processes. However, although JVs can provide a market-entry advantage, they do come with their own set of unknowns, which is why it’s important to know how to structure such a deal upfront, providing an opportunity to exit down the road if needed.

Whether through a WFOE or a JV, the market presents unprecedented opportunities for developers and operators alike, and as the senior-living sector is still in the early stages of its development, some have taken these loose strictures as an opportunity to design senior dreamlands, utilising technology and facility design to a degree that might not be feasible in stricter regulatory environments.

Along with developers and operators, L.E.K. has found that insurance companies are also planning to develop large-scale, comprehensive senior communities, leveraging their pool of existing customers to promote new housing investments. Chinese insurers, in particular, are looking into the market, but their success is contingent upon attracting the right partners to develop senior care projects, and thus several are turning to foreign operators to meet the Chinese consumer preference for international brands.

There are great opportunities in the senior care market, and as the government seeks to attract foreign investment and experience to provide for its aging population there is much to be gained for investors, operators and developers alike. But as companies investigate and prepare to enter the market they will need to be able to decipher the consumer demands as well as understand how to best navigate regulations, build appropriate models for the market and identify potential partnership pitfalls.

L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and analytical rigor to help clients solve their most critical business problems. Founded more than 30 years ago, L.E.K. employs more than 1,000 professionals in 21 offices across Europe, the Americas and Asia-Pacific. L.E.K. has been on the ground serving clients in China since 1998.

L.E.K. advises and supports global companies that are leaders in their industries – including the largest private and public sector organisations, private equity firms and emerging entrepreneurial businesses. For more information, please go to www.lek.com.