• Fri
  • Aug 1, 2014
  • Updated: 8:27am
The Biz View from Peking U
PUBLISHED : Wednesday, 16 July, 2014, 8:44am
UPDATED : Wednesday, 16 July, 2014, 1:27pm

What Chinese hospitals can learn from the beer industry

While the rest of China has modernised, the hospital sector has not. In spite of powerful urbanisation and consumer wealth trends that should be transforming Chinese health care, most hospitals are not dissimilar to 15 years ago. In service, cost and quality, little has changed. The problem for China’s hospitals is modernisation.

The key is to start at the end. Decide what a modern Chinese hospital system would look like and work back from there. I argue that the real goal is the creation of several large Chinese hospital chains. Each chain with 100-200 hospitals and 15,000-20,000 beds. At that scale, each chain would have the management depth and operational scale necessary to modernise. You would see system-wide improvements and upgrades in services, facilities and technology.

Such large modern hospital chains are what you see in India and the US today. Fortis in India has 75 hospitals and 12,000 beds. HCA in the US has 165 hospitals. IHH out of Malaysia has 5,000 beds in 33 hospitals. Ideally, China wants 5-10 of these large hospital chains. Such chains would also break you out of the current system which is mostly small, stand-alone hospitals.

The key to creating chains with 100-200 hospitals is following the path of least resistance. Don’t fight or try to transform the entire system. Take the easiest path from here to there. And I argue that the path of least resistance is merging 200 existing public hospitals under a large and particularly well-run SOE. And interestingly, this approach is exactly what was successful in the beer industry. More on that later. But here’s the rationale for why this is the path to take.

The hospital assets already exist - and they are overwhelmingly public.

You already have hospitals in every city in China. They blanket the country. There are about 24,000 of them and they already handle 192M inpatient admissions per year. To replicate such assets would take decades. And to launch a new private hospital chain you would also have to compete with this existing, and low price, system (not easy). This existing public system is politically strong and able to price aggressively. Building a private business against this is very difficult. Use what already exists.

The doctors and nurses are in the public hospital system.

Human capital is the biggest constraint in the current system. While 9,700 of the existing 24,000 hospitals are private, this is actually only about 11 per cent of patient flow. Most private hospitals are pretty small – effectively clinics. The doctors are almost all in the public system. And there is no indication of a large scale migration of hospital staff to the private sector. In fact, most physicians are fairly wary of such a move. They overwhelmingly want to stay in the security of the public system. However, they would like more money and to move up to the Tier 3 hospitals if possible.

Patients don’t want to go to private hospitals.

In a 2012 McKinsey patient and physician survey, patients overwhelmingly preferred public hospitals. When asked about “value for money”, 53 per cent of affluent consumers thought the private hospital were worse than the public. And only 11 per cent thought it was better. By about the same numbers, they also thought the clinical skills of the doctors and the quality of medical devices were better in public hospitals. And, most importantly, the public hospitals were much more trusted. Private hospitals scored very low on patient safety and doctor’s ethical standards. Basically, people trust the public system far more.

So if you wanted to create large hospital chains in a private system you would have to transform public opinion, convince doctors and nurses to change careers and build lots of large hospitals across the country. That does not sound like the path of least resistance. It sounds like fighting the entire system.

The path of least resistance is larger SOEs doing lots of public hospital M&A. Pull 100-200 small state-owned hospitals together under one well-managed SOE (there are some). And let that group knit the hospital mix together into a functioning and modern chain. One SOE that comes to mind for this type of SOE consolidation strategy is China Resources. And they are currently building a hospital group. There is also a role for private money here to finance the deals and to provide incentives, but it's the SOE that matters the most.

And that brings us, at last, to the beer example.

If you go back to 1980, the situation in Chinese brewers looked similar to that of hospitals today. As a result of the party’s goals in the 1950’s and an explosion of beer consumption in the early days of reform, you had breweries in every city in China. Virtually every city had its own small state-owned brewery. They all offered beer at very low prices. And they had all the management and personnel issues you would expect in small SOEs. That legacy of small state-owned beer assets is similar to the hospital picture today.

After the opening of China in the 1980’s, there was a massive consolidation of breweries. From over 800 brewers in the 1980s, it was reduced to 250 by 2009. And of these 250, four major brewers constituted over 50% of the market. There was consolidation, rationalisation and modernisation, mostly at the regional level. That is almost exactly what you want to see happen in hospitals.

And while private brewers, especially foreign giants like Anheuser-Busch and Heineken, tried to participate in this, it was the larger Chinese SOEs that led the consolidation and modernisation wave. China Resources in particular was very effective at this. The key skill was acquisitions of state-owned assets and the larger SOEs are far better at this than private or foreign companies.

Today, 30 years later, the top three beer makers in China are Yanjing, Tsingtao and China Resources - all SOEs. Is it so unreasonable to assume that one day the top three hospital chains in China will also be SOEs created by consolidation of legacy hospital assets?

You can read more about such Chinese mega-trends in my number 1 best-seller the One Hour China Book. Now available on Amazon for the price of a medium latte (www.onehourchina.com)


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This article is now closed to comments

I stopped reading in the half and would suggest that Mr. Towson should do his homework again.
Maybe then he knows what the real problem and task are of Chinas health and hospital system.
Good ideas but where is the evidence that China is innovating much of anything these days?
John Adams
The same rationalization and consolidation happened in the Chinese refrigerator and air-conditioner industry in the period 1990 - 2,000 ( and also in very many other light industries) except that it was all done without the need for State intervention and SOEs. It was all done by TVEs (Township and Village Enterprises) and entrepreneurial top managers - and the free market
China eventually started to lead both the USA and even Japan both in high production standards and in using the latest environmentally-friendly refrigerants, using world-leading German technology.
this kid (writer) dose not have a CLUE!


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