Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
SinoCare Group – China
Prepared by Ning Jia and George Foster
Founded in 2005, SinoCare Group is a hospital management company based in Beijing. The company operates and owns general hospitals in conjunction with local provinces to change the quality of healthcare delivered to the Chinese middle class within the state system. SinoCare forms joint ventures with selected provinces, currently Sichuan and Jiangsu, respectively.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable growing company? How did it change over time?
Porter: “The initial idea came when I had a manufacturing company that supplied Kennaway with golf club heads. Getting healthcare for my Chinese employees that was available was very rudimentary. So I became aware that there was very limited healthcare in China available to what I would call ‘normal Chinese citizens’. In fact, there was an evolution in that my first project with Yanhui was on a product for diabetes in China. The idea started originally from whether Chinese herbal medicines could be applied to diabetes and moved into making the first Chinese-designed insulin, which is just going through the SFDA approval. While doing that, we were talking to people about the Chinese healthcare system generally, and together with someone that Yanhui knew well, we decided there has to be a change in the Chinese hospital management system. Then it came down to the question of whether China would follow the American path, which is all private, or whether China would follow more of a European path of comprehensive coverage and insurance. If you want to provide general coverage to your population at the lowest cost for the nation, then I think you need to take the single-payer model. I am well aware of some of the limitations that happened within the Chinese system, but I think the government delivered significant results for its population. The approaches have not yet focused on healthcare but I think in the next wave the Chinese leadership will focus on healthcare as it is one of the areas of infrastructure that needs to be improved and is also an area of legitimacy for the Communist Party as a way the Party delivers visible benefits to the population.
“I think the pure privatization of the healthcare sector could produce a cost explosion for the Chinese government. Our formula at SinoCare is a moderated margin. We need to learn how to be effective within a fairly clear price cap. We are hoping to become the model that China eventually uses. Our proposition is to take existing state hospitals, keep them within the state reimbursement system, and work on them to get healthy entities.”
Ma: “John and I have known each other since I was a student at the UCSF. After working together on several small medical-related projects (e.g. medical equipment and artificial medical insulin pumps) in China, we came to a consensus that China’s healthcare industry and hospital management were significantly lagging behind that of the US, and we wanted to do something to change the situation. China’s healthcare sector at the time was not fully opened up to private and foreign capital. Foreign players mainly operate private hospitals and specialized clinics that provide high-end medical services to China’s wealthy class. But we wanted to focus on public hospitals that provide medical services to the general public. Our idea was to import advanced western hospital management ideas and practices to China and change the way Chinese hospitals are operated while leaving the current healthcare system and infrastructure intact. But we soon realized that it was extremely difficult to operate public hospitals in China without acquiring a sizable equity stake. Hence in 2007, we decided to raise additional capital that would enable us to invest in Chinese hospitals to implement our new management practices.”
Q2: What were the major growth accelerators for your company in the early years of high growth?
Porter: “There was a strong need for better healthcare availability. The government recognized that something needed to change.”
Ma: “China’s healthcare industry is subject to strong government regulation. Prior to 2007, foreign capital had only limited access to China’s healthcare industry, which was a major challenge for us given our foreign background. As a result, SinoCare did not experience a strong growth momentum in the early days. The situation was changed after 2009 when the State Council launched a new policy to encourage greater private and foreign capital involvement in the nation’s hospitals and clinics as part of a health system reform programme that aims to make affordable healthcare available to the general public. Under the new policy, foreign investors can now take up the majority shareholding of a hospital, which enabled us to tap into more hospitals and subsequently accelerated our growth.”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
Porter: “Accessible markets, human capital/workforce, regulatory framework and infrastructure, education and training all played an important role in the growth of our company.”
Ma: “One aspect is that the Chinese government finally recognized the need to reform the healthcare sector and to encourage private and foreign capital to play a more active role in the transformation. Public hospitals in China used to be monopolistic with little competition. The development of private-capital-funded medical institutions would exert significant competitive pressure on public hospitals and force them to continuously improve in multiple areas, including operating efficiency and service quality. Another key aspect is the strong social force behind healthcare reform. China’s current healthcare system is hospital-centric instead of patent-centric. The ‘care’ component of healthcare is not properly implemented. However, patients are expecting more in terms of the quality of medical care. Hospital administrators are also eager to improve operating efficiency and service quality. Investors and hospital management experts including us also have strong incentives to pursue the same goal. Together, they formed a strong driving force leading to the reform of the healthcare sector.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges.
Porter: “In terms of regulatory framework and infrastructure, we took some risk in anticipating the direction that the healthcare reform would go. At the same time, we believe we built a model that is robust if the pace of reform is a little slower than announced, because that can often happen. The Chinese government has good intentions about where it wants to drive these things, but a lot of stakeholders still need to be lined up. There is significant announcement, but the translation of announcements into detailed guidelines can take a long time.”
Ma: “As I mentioned above, the regulatory framework of China’s healthcare sector was not favourable to foreign players prior to 2009. Since we were a fully foreign-invested hospital management company, it was virtually impossible for us to directly tap into the nation’s healthcare market. So we had to opt for an indirect approach to circumvent institutional limitations, including setting up a wholly foreign-owned enterprise structure, which was quite time-consuming.
“Another challenge we encountered in the early days was to convince people of the validity of our business model. The general perception at the time was that high-income groups with greater payment ability will seek medical services from high-end, private hospitals while the medical needs of the general public will be covered by non-profit, public hospitals. Those are two distinct niche markets. But what we wanted to achieve is to provide high-quality medical services to the general public at a price similar to what the public hospitals charge, via the improvement of hospital operation and service quality. However, none of the other hospital management and investment companies were doing the same thing at the time. They were mostly operating private hospitals or specialized clinics. How to convince people, including some of our own staff, of the validity of this new idea was a real challenge. We also have to think about how to broaden the scope of our business and improve the service quality of hospitals under our management, while delivering reasonable financial return to our investors. Luckily, all of our investors share the same long-term vision as me. They were not looking for a quick cash-out and were willing to be patient. In retrospect, I think finding the right investors whose interest and vision are well aligned with the entrepreneur is very important.”
Q5: Large companies can play an important role in the scaling up of early-stage companies with high growth aspirations. These roles can include being customers, suppliers, marketing partners, joint venture partners, and so on.
(a) Describe the key areas where interaction with larger companies helped promote your growth path.
Porter: “Large companies are great as intelligent customers and suppliers. They are very helpful.”
Ma: “As investing in large hospitals entails greater upfront investments and risks, we started from smaller hospitals to prove the validity of business models. Hospitals of different sizes face many common management challenges. But having said that, compared to smaller hospitals, large hospitals do possess more resources and have better developed infrastructure that enable us to implement advanced technologies and management ideas, as well as facilitate collaboration with Western medical institutions.”
(b) Describe the challenges and potential problems that larger companies may have played in limiting the growth path of your company.
Porter: “From what I have seen so far, large companies are generally not as good as marketing partners or joint venture partners because the pace of decision at small and large companies is so different. It often creates problems. I had another company a while back, and the management was thrilled because we signed a joint venture deal with a large IT company. But our management can never get the sales force of that company to pay attention to our product, even though it’s a great product. But so far, for SinoCare, large companies have not affected us as they are not in our space.”
Q6: Your current revenue growth to date had been predominantly focused on your own domestic market. What are the major reasons for this major revenue focus to date on domestic markets?
Porter: “We are perceived more as a domestic company than most. At SinoCare, we are a China-centric model. We are not trying to bring better knowledge from elsewhere. We are about solving a problem in China, and go outside for technology when we need it, but in general we are about a Chinese approach to a Chinese problem. I don’t have any intention to take the company outside of China for the time being. We need to get the leading market share in China.”
Q7: What would you view as the greatest challenges in growing a sizable revenue presence in markets beyond your own domestic country or region? In deciding when and where to seek growth in international markets, what characteristics of a country’s ecosystem would be most important in attracting you to invest significant resources in that non-domestic country or region?
Porter: “Hospital service is such a country-specific market. Going from the US to Europe when the US had better technology makes sense, but hospital service is very cultural to their country. If we choose to expand abroad, in all likelihood, it will be with the help of the Chinese government with Chinese aid hospitals in Africa. If we can train up enough staff with English speaking capability, I would look at providing our team into the single-payer systems in Europe which are dysfunctional. I would consider doing the same type of turnaround in Europe using our expertise. There is a window of opportunity on that. It’s not going to be activated in the next 4-5 years. But I do have a company that supplies ambulance services to the NHS in the UK. My dream eventually would be to bring SinoCare efficiency into the NHS.”
Q8: Building a company that aims to have sustainable high growth inevitably will have both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in your entrepreneurial journey.
Porter: “A high moment was when we achieved class III status for our hospitals. A low moment was having to remove a senior colleague from the company for misconduct.”
Ma: “As I mentioned above, the business model we adopted was new and many people had doubt about whether we could succeed with such a model. The first several investments we made were in small hospitals that were near the edge of bankruptcy. We approached and convinced the hospital management of the opportunity to make a change. As it turned out, under our management, these hospitals not only survived but the revenues tripled in a year’s time. This was a high moment for us as it demonstrated the validity of our business model.
“A low moment was in the early days when we had the money and were ready to make the investments, but no hospital was willing to work with us due to lack of faith in our ability to make a positive change. We had to ask and convince the hospitals for the opportunity to partner. Now that we have a proven track record, it is much easier to strike deals. In some cases, the hospitals approach us instead.”