Turning Gray into Gold: Servicing Shanghai’s Aging Population

The city of Shanghai, like the rest of China, is rapidly approaching a crisis. It is not an economic crisis, but a social one: The population is aging quickly, and already more than 20% of the city’s permanent residents are older than 60.


 


In the past, China’s elderly were cared for by their children in the family home, and in some cases, where the elderly were destitute or had no children, they were sent to senior homes. But those efforts are far from sufficient. The homes are full, and the situation is worsening. To make up the shortfall, since the mid-1990s, the government has encouraged mainly Chinese private companies to develop for-profit senior housing. Since 1998, both domestic and foreign companies have been allowed to operate not-for-profit retirement compounds that often resemble those in the West. Foreign companies are required to operate alongside a local partner, with foreign ownership capped at 70%.


 


But even that hasn’t helped. The few companies that have entered the market have struggled, despite the fact that members of the aging population and their children are quickly moving up the economic ladder and have ever-larger disposable incomes. In addition, old social stigmas are disappearing: Many elderly people would be happy to move into senior housing or to accept home service if the right service existed at the right price. According to experts interviewed by China Knowledge@Wharton, the demographic crisis represents a rare opportunity for companies to develop new services for a population whose purchasing power is increasing and whose demand shows no signs of slowing down. 


 


Enormous Potential


“China is facing the challenge of turning gray very quickly in the next decade, and even now, the senior population is already big,” says Jin Yuliang, chief strategist at Hangzhou Stronger Data, a start-up technology company which creates communication services for the elderly.


 


The challenge is huge: More than a fifth of the city’s permanent residents were older than 60 at the end of 2007. And according to the Shanghai Academy of Social Science, that figure will grow about 1% per year, which means by 2020 more than 30% of the population will be over 60, while the average lifespan of a Shanghai resident is 81. Based on data released by the local government, nearly 20% of Shanghai’s senior citizens, about 500,000 people, would like to live in a senior housing facility. However, senior housing in Shanghai is full, except for in the luxury segment.


 


“Openings occur only when someone passes away,” says a manager at Liang Cheng Nursing Home, a non-profit facility in northern Shanghai that was established in 1994 and is operated by the local government. It collects a monthly fee of RMB 1,500 from about 50 residents, and the government helps with refurbishing and upgrading costs. Although the Shanghai government hopes to have 100,000 beds available to seniors by 2010 (up from the current level of 70,000 beds in Shanghai’s 560 retirement homes), those will not be sufficient to meet the demand.


 


Limited Success


So, will Shanghai’s growing gray population be a gold mine for developers and investors? That’s not clear yet, say analysts: The demand is huge, but so far, the road to profit has been filled with pitfalls.


 


One development, Cherish Yearn, entered the market in May 2008, when it opened an 800-unit, RMB 560 million (US$82 million) facility in southern Shanghai. Cherish Yearn has many of the features found in American retirement communities, such as a wellness center, dining hall, short-term accommodation for residents’ families, a hospital, and so on.


 


Cherish Yearn serves the mid-range market and operates as a non-profit organization. Units measure about 40 square meters and feature a kitchen, bedroom and living room. Residents pay a one-time fee of RMB 350,000 (US$51,000) and an annual fee of RMB 20,000 (US$2,950) for life-long service. Jin Chizhe, the company’s sales and marketing manager, admits that the high fees are an obstacle. “Our concept is totally new to the Chinese market,” he said. “Our major challenge is selling this new style of care to the elderly.”


 


So far, 45 units have been purchased, and Jin says it will take four years for the remaining 755 units to be sold, leaving the facility to operate in the red until that time. It is a difficult field and timing is important, Jin adds. “Everyone knows retirement homes have great potential, but very few are investing in this sector so far.”


 


Other investors also have not fared well. Shanghai Holiday Retirement Housing, a joint venture involving U.S.-based Holiday Retirement Corp. and a local company, opened a for-profit retirement community in 1998 but shut down three years ago. In 2006, Germany-based Augustinum announced plans to build a for-profit, high-end retirement community in southern Shanghai scheduled to open in 2010, but construction has since halted. “Foreign companies should start as non-profit operations because there is no established business model for profit-oriented organizations,” suggests Pascal Jia, a lawyer with Z&H in Shanghai, who has researched the city’s retirement home market and has written a book on the topic.


 


Non-profit operations receive benefits from the government, giving them an advantage, Jia says. “Non-profit homes can receive [government] benefits and thus lower their fees, as the elderly are currently not able to afford such high fees for care.” Another reason for the relative lack of activity in this promising sector, adds Jia, is that most investors seek short-term profits, while in the elderly care industry, profits normally come more slowly.


 


Non-profit organizations must reinvest any income back into the operation and upkeep of the facilities. In return, they receive tax breaks, discounts on utilities and other benefits. To add incentive, the government is considering a law allowing non-profit retirement home operators to sell their facilities after several years of operation to a third party, which can then operate them as for-profit organizations. According to Jia, this would allow a company to enjoy government benefits while it builds a brand image, creating value for the buyer before it changes its business model.


 


Home Service Opportunities


Other senior-oriented markets may prove easier to crack. “By 2040, 700 million people in China will be past the age of 60, and 20% of them, or 140 million, will need living assistance — roughly double the current number. The market for the senior business will be huge,” says Zhu Lei, CEO of China Youth Home Service Company, a Beijing-based home service management company which has hired more than 30,000 people to staff dozens of its chain companies across China.


 


“The senior citizens of tomorrow have already invested heavily in residential housing today, and they may not want to give up their comfortable homes to live in a retirement home. This psychology will help any service that can make their home [situation] more convenient and happy [become a] highly demanded [one],” says Zhu.


 


Zhu predicts that home service will become a mainstream part of the senior service industry in China, which in the long run will likely include “health care, food, psychological services, entertainment, tourism and so on.” Of those, he says, health care and home service would be the two primary sectors.


 


But, he cautions, the market is still in its infancy. “The market has not really started,” he says. “There are too few qualified people to provide the service, and demand far exceeds supply, which results in a volatile labor market full of low-quality service, including poorly trained and educated service staff. And if the clients are unsatisfied, they will be unwilling to pay for the service.”


 


Hangzhou Stronger Data is planning to launch a mobile phone with both hardware and software specially designed for the elderly — including a larger screen and a one-button call feature — in the coming months in a testing region. “I am optimistic about the popularity of our products, since the Chinese have a tradition of caring for their elders. We also plan on introducing more services to seniors, including entertainment and healthcare services, when our users exceed a certain amount,” says Jin Yuliang, the chief strategist. At the same time, the company’s products will appeal to and be paid for by the children of the elderly, since the new technologies will make it easier for them to keep in touch with their parents, he notes.


 


No Cultural Hurdles


Traditionally, the elderly in China are cared for by their offspring, but in an increasingly modern and urban environment, and with fewer children due to the one-child policy, that is no longer a given. “Some elderly people know their children are busy with work, and don’t want to be a burden, so they propose the idea of moving to a retirement home,” says Gui Shixun, a professor at the Population Research Institute of East China Normal University. In some cases, people send their aging parents to a facility where they can receive adequate assistance. “It could be a modern version of filial piety [respect for parents] to send parents to a senior’s home,” Gui says.


 


Zhu Jiubao, 66, a retired engineer, typifies the new trend. He lives with his wife and son near Luxun Park, where hundreds of retired people gather to socialize and exercise among their peers. “I come here to maintain my health,” he says on one cold Sunday afternoon. When asked about senior housing, Zhu notes that while he prefers to be cared for by his son and his son’s future wife, it may not happen. “Everything changes so rapidly, we may have no choice. Whatever happens, the most important thing is for me to take care of myself and have regular exercise.”


 


He Zidao is also a daily visitor to the park. His 28-year-old banker son is married but does not have any children. “They just want to work and make money,” he says of his son and daughter-in-law. “We can’t rely on them, so I’ll probably go to a senior’s home because in ten years, they’ll be facing the busiest time at work.” He adds that he has no difficulty accepting the change in traditional family practices.


 


People who have worked or been educated abroad are used to the idea of senior care facilities. Charles Zhao, 32, and Sophia Wu, 32, both obtained their graduate degrees overseas and returned to work for U.S. companies in Shanghai. Wu, who is due to have a baby this year, says she would choose to enter a retirement home when the time comes for herself, although she plans to take care of her parents herself. “Our parents may not be able to accept new concepts, but we can. The reason we would enter a retirement facility is not to survive, but to enjoy the rest of our lives.” Wu also notes that her child, as part of a future couple, will have to care for four parents and maybe eight grandparents. “Once our parents retire, they would love to live together and look after our children, but when we get older, our kids will need their own room and space. We’re different.”


 


Business sectors related to the elderly — such as healthcare, insurance, cultural centers for seniors, geriatric studies and care giving — will likely see a significant growth in the coming years, says Gui Shixun: “The elderly already spend more money on health food products, and in the future, people in China will have even higher incomes and greater purchasing power.”


That growing purchasing power, further fueled by China’s tradition of filial piety, will create many more opportunities to develop services for senior citizens. But the main push is demographic, as China’s senior population continues to grow at surprising speed. The combination of rising incomes, a fast-growing senior population, government support and surging demand is creating a once-in-a-generation opportunity. The only question is what kind of providers – senior homes, health care, home service, food, entertainment and all the others – will be able to take advantage of the new trends. The successful companies will create a win-win situation for themselves, and for senior citizens in China.

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