The Biz View from Peking U

Keep away from the 'unicorns': Four Chinese businesses you should avoid

PUBLISHED : Thursday, 26 June, 2014, 11:43am
UPDATED : Thursday, 26 June, 2014, 4:18pm

A good rule to remember: If something hasn’t happened yet, there are probably good reasons why. 

On a regular basis, new China business opportunities are pointed to with great enthusiasm. There are big proclamations about their inevitability. And while it is exciting to be a first mover against such opportunities, it is worth remembering that most attempts at being first fail. What usually happens is you flail around as a small venture for a long time. You just end up wasting years of effort. 
So when new industries or opportunities are pointed to as both inevitable and awesome, my question is always “well, if it is so great then why hasn’t it happened yet?” And I call these the “China unicorns” – the businesses everyone talks about but nobody has ever actually seen. 
Here are four unicorns that have been in the news recently that I think should be avoided.
Senior living (i.e., real estate for the elderly)
Chinese senior living has been predicted for about 10 years. The idea is that housing communities for seniors are a natural play given China’s large and growing elderly population. This idea also feeds off the general excitement about rising consumer wealth and urbanisation. Plus it’s a real estate business which is basically China’s national sport. So senior living is an idea that hits all the big buttons. 
So why after ten years are there still so few senior living projects in China? These are pretty simple development projects. And with 1.6 million apartments built per year, you would think there would be tens of thousands of senior units built annually. But we’re still not seeing them.
The main reason senior living hasn’t happened is the market. Senior living units are sold to seniors who, by and large, are not a wealthy demographic in China. These are people in their 70s who came of age before the opening of the country, are not wealthy and are slow to spend money. As a result, there is no clear market for senior living units.
When you try to cost out a development, you have no idea how much you can sell them for, or if you can. Some groups have attempted to skirt this problem by selling to the children of seniors - but separating families is not a great idea in a country with historic Confucian norms.
Per the unicorn analogy, if this was an attractive business we would see tens of thousands of units being built. Chinese real estate moves particularly fast. But we’re not seeing this and there are good reasons for that. 
Private hospitals
Hospitals in China are a similar “where are they?” situation. The demographic trends and consumer spending all point to robust hospital growth. In fact, they have been pointing to it for about 15 years. But we have not seen big activity in state-owned hospitals (M&A, expansions, etc.) and even private Chinese hospital chains typically contain just 3-5 hospitals.
Compare that to private hospital chains in India, Turkey, and the Middle East. They dwarf anything in China today. For example, Fortis Healthcare in India, launched in 2001, now has 12,000 beds and 75 hospitals. IHH, based in Malaysia, has grown to 33 hospitals in nine countries in just the last several years. Even Saudi Arabia has built larger private hospital chains than you see in China. 
There are good reasons why China’s hospitals have lagged behind those in most every other developing economy. The state owns most of the assets and the economics of individual hospitals are really problematic. There is also great difficulty in hiring doctors and nurses. While there are some changes in private hospitals in the last year, it’s still mostly a unicorn today. This situation could finally change this year. 
Canned soup
Convenience foods are actually a pretty interesting China story. Some are wildly successful – like instant noodles and “long life” milk. For example, Kangshifu’s business in China has made it the world’s largest noodle manufacturer. And China’s “long life” (i.e., you don t need to refrigerate it) milk industry has boomed on the back of scary stories about what is sometimes in real milk. 
But other convenience foods, such as canned soup, are surprisingly absent in the mainland. It turns out it’s hard to sell quality food in a can when the alternative is a fresh vegetable market down the street.
China seems to be skipping a whole generation of processed foods by integrating some agriculture directly into the cities. The availability of cheap farms, retired labour and a robust mom-and-pop food sector makes it a tough market for multinationals trying to sell many of the foods one would see in US supermarkets.
Funeral and burial services
A last example is “deathcare”, which has been in the news recently. Ageing Chinese demographics are supposed to lead to lots of opportunities in funeral and burial services. There was also a particularly hot funeral services IPO in Hong Kong last year. 
The unicorn question is the same. Why hasn’t it happened then? People have been dying in China for a long, long time (about 9 million per year). Why is there not one large funeral or burial services company in the Mainland? All the companies are small and operating locally – with a mix of private and state-ownership. 
The reason in this case is the regulatory environment and the limited availability of land for burial. The market is there and is proven, unlike in senior living. But the rules are problematic and have largely stunted the growth of the industry. Again, this may be a great business one day. But it’s not really happening today.
Basically my advice is: Never be first in and never be last out. If it looks like a unicorn, let someone else spend years knocking down all the barriers. Then if they actually succeed, you can follow them in.
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