Surging Chinese investment in Australia’s healthcare sector looks set to continue in 2018, with the $690 million acquisition of probiotics manufacturer Life-Space Group in late January by Guangzhou-based BY-HEALTH adding to more than $5.5 billion in transactions since 2015.
For the past three years, Australia has become one of the most sought-after destinations for Chinese companies seeking healthcare investments, according to a recent report by KPMG.
Improving public health is one of President Xi Jinping’s cornerstone policies, with an official framework for Chinese healthcare reform launched in August 2016.
Responding to pressure to reduce the health impacts of environmental problems, improve access to healthcare services and increase the availability of more affordable medicines, the reforms promised a commitment to open the sector to market forces, bolstering opportunities for exporters worldwide.
As a result, Chinese demand for cutting-edge healthcare products from Australia has reached unprecedented levels, with KPMG finding that $2.55 billion was invested in 2015, $1.35 billion in 2016 and $1.58 billion in 2017.
By comparison, Chinese companies invested $US4.5 billion ($5.75 billion) in the United States’ healthcare sector from 2015 to 2017.
In Australia, the investment has been highlighted by several large deals, including the $938 million acquisition of hospital operator Healthe Care Australia in 2015, and the $1.69 billion purchase of Swisse Wellness across 2015 and 2016.
KPMG China head of healthcare Jenny Yao said in the report Chinese investors had been attracted by Australia’s reputation for developing, testing and producing high-end products and services that could be easily deployed locally and exported.
“The patterns that are emerging in China’s domestic healthcare sector are likely to strengthen investment demand in the coming years as healthcare assets become a key component of many Chinese investors’ portfolios,” Ms Yao said.
“For Chinese investors, Australia is more than a destination for leading technology or care-providing experience.
“The combination of transferable management know-how, high-level care service experience and state of the art technology are complemented by the ‘clean, green and healthy’ image of Australian products and the attraction of Australia for Chinese health patient tourists.”
Life-Space, one of Australia’s largest probiotics players and owner of the Evolution Health and Ultramix brands, announced in January it had been acquired by BY-HEALTH, one of China’s top online and offline healthcare retailers.
Under terms of the transaction, Life-Space’s management team and manufacturing facilities will remain in place in Australia, with the deal the culmination of around 12 months of discussions, according to managing director Ben McHarg.
However, Mr McHarg said Life-Space’s China push began around three years ago, when it launched an e-commerce-based expansion into the one of the world’s largest consumer markets.
“We had quite an innovative range of probiotic products that were starting to make a bit of noise in the Australian market, first and foremost, with a focus around motherhood and early childhood,” Mr McHarg told Australia China Business Review.
“The baby and the pregnancy probiotics were the first such products on the Australian market and were doing really well with some of the research coming out around the use of probiotics in both gestation and early infant.
“Essentially what that did is it really touched a nerve with Chinese consumers. We saw it first in Australia, and it was right at the beginning of this expansion of cross-border e-commerce trade into the Chinese market.
“Our products were a really nice companion product for infant formula, so a lot of the entrepreneurs, the daigou shoppers and the exporters who were starting to come into this space saw an opportunity to sell our products alongside infant formula.
“That was really the genesis and it took us a little while to get our heads around what that meant, because it wasn’t a targeted opportunity, but as soon as we saw the potential we immediately swung every resource that we had into working out how we could take best advantage of it.”
Life-Space’s China expansion, which took place on leading e-commerce platforms Tmall, JD.com and VIP.com, was the beginning of the company’s move into global markets, Mr McHarg said.
This unearthed the need to partner with a Chinese operator of sufficient scale and local expertise.
BY-HEALTH was one of the first Chinese companies to engage with Life-Space, he said, with the company seeking to offer probiotics across its offline distribution channels, including more than 100,000 pharmacies, 10,000 supermarkets and 20,000 specialty mother and baby stores in China.
“We kind of looked at each other in exactly the same way,” Mr McHarg said.
“We’re very strong in probiotics, but our strength in China was in online cross-border.
“They’re not strong in probiotics but they’re very strong in every other category in vitamins, minerals and supplements, and of course they’ve got this amazing distribution network in offline China that we haven’t yet tapped into.
“There was an immediate synergy in terms of what they could do for us and what we could do for them.”
The financial capacity of BY-HEALTH will enable Life-Space to expand its manufacturing facilities and help the company achieve its ambition of becoming a global brand, with European and South-East Asian markets expected to be the next to be targeted.
Mr McHarg said the transaction was another indication of the growing Chinese appetite for health-related investment opportunities, particularly in countries with strong reputations for not just innovation, but also branding prowess.
“It feels like there has been a shift in China’s thinking about the sort of assets that they want to invest in, and I think it’s a real positive that one of the areas that they’ve found where there is quality and still huge amounts of potential growth is in that healthcare sector,” he said.
“I think it’s one of the few areas where we are globally competitive, but the importance is that the manufacturing and innovation needs to stay in Australia, or that edge is going to be lost.
“They’re not just investing in branding, they’re investing in people, they’re investing in facilities and I think it actually provides a real opportunity for Australia then to become a much bigger global player.”
While the KPMG report flagged broader investment opportunities over the next three to five years for Chinese enterprises, Mr McHarg questioned how many unique brands and operations there were in Australia that would satisfy Chinese needs.
Mr McHarg said while there have been some high-profile brands that have built major operations in China, such as The A2 Milk Company or Swisse, there were not as many truly successful Australian brands in China as what many people perceived.
“There is quite a level of sophistication that I think gets underestimated when it comes to the investment out of China,” he said.
“They understand the market, they understand what constitutes a valuable brand and one that could become global, as opposed to a brand that maybe has tapped into a straight Chinese desire for Australian healthcare products.
“Chinese consumers want to know that they’re buying the best, or one of the best, brands in the country that they’re buying from, so domestic success in the market that you’re manufacturing in is more important than some people seem to realise.
“Chinese consumers are not looking for products designed specifically for them, they are looking to source the best products from around the world.
“Domestic success should be the first measure, and once you’ve experienced that success and you can demonstrate that the Australian consumer really likes the product, you’ve got a much better chance of being successful in China.”