Last Saturday the Hilton hotel in the Putian was reminiscent of the scene from The Godfather film when the leading mafia families met to settle a dispute. All the big bosses from this city in Fujian province attended, no cameras were allowed inside, and bodyguards made sure that no one was wearing wiretaps. Of course, the tycoons in the boardroom weren’t from the underworld. Instead they lead many of the country’s hospitals, controlling as many as 8,600 medical facilities in an empire worth more than Rmb260 billion ($42 billion), according to Changjiang Times.
After the four-hour session, the Putian tycoons presented a united front, announcing that they would call a halt to all paid promotional activities on Baidu, the dominant search giant in China. The bosses claimed that the move was not designed to provoke a confrontation with Baidu, or to put commercial pressure on the company. But critics say they are doing exactly that.
What’s the big deal?
As profiled in issue 242, businessmen from Putian, once a small fishing village, make up the single biggest group of private hospitals operators in China.
They got their start in the early 1980s, when a local doctor came up with a remedy for treating scabies – an infectious skin rash that was widespread at the time. To make his living, the man travelled around town selling the homemade cure for as little as Rmb1 per bottle. He was so successful that other people in Putian followed suit, turning the small enterprise into a national medical network.
Putian businessmen now tend to target treatments that have higher margins and that can be performed at relatively lower risk. Fertility programmes, plastic surgery and dental care have been especially popular. Importantly, these sectors aren’t normally included under national medical insurance, so patients often choose private hospitals that specialise in these categories.
The Fujian tycoons like to keep low personal profiles, but they were one of the first business groups to advertise medical treatments on TV and radio. They were also some of the earliest advertisers on Baidu’s search pages, putting their ads on the site from 2002 (two years after Baidu was founded) to lure people looking for medical services.
“In the beginning, it was a great partnership: Baidu brought many new clients to Putian’s private hospitals; and Putian’s advertising investment was instrumental to the rapid growth and later success of Baidu,” Changjiang Times concludes.
How did it all fall apart?
In the past, most of the private hospitals have signed annual advertising contracts with Baidu. But the search engine, leveraging its near-monopoly status, has become a tough negotiator, pushing for increases in advertising spending of at least a third a year.
Putian hospital operators are now pushing back. With more than an 80% market share of private clinics, they are some of the biggest advertisers online in China. The city’s municipal secretary Liang Jiangyong even boasted back in 2013 that Putian-owned hospitals contributed Rmb12 billion ($1.93 billion) of Baidu’s Rmb26 billion in advertising sales. Baidu has countered that this figure is dramatically overstated, but industry analysts have estimated that Putian-owned business could contribute between 15% to 30% of its revenues.
Meeting Baidu’s growth targets for online spending has become increasingly difficult and in late March the hospital bosses decided to rebel – with the Putian Health Industry Chamber of Commerce announcing that its hospitals would stop paid promotional activities on Baidu. “The industry is facing severe problems and many medical facilities have been reduced to working for internet firms,” the association claimed.
That may not be too much of an exaggeration. One owner of four private hospitals told the Fujian Daily that he has spent more than Rmb10 million on advertising on Baidu over the last year. His own margins have been shrinking: he claims net income for his hospitals is only Rmb20 million.
“Our advertising budget is very small compared to other larger private hospital networks. I know some spend up to Rmb300,000 a day on Baidu just to become the high bidders on search results. So you can imagine after a year, the advertising costs become very scary,” he told the newspaper.
Baidu, the bully?
It isn’t the first time that Putian’s providers have accused Baidu of overcharging. In 2011, a number of hospitals said they had to pay up to Rmb600 for each click if they wanted to appear in its recommended results. But the complaints led nowhere and Google’s retreat from China in 2012 has seen Baidu strengthen its position in the search market. One plastic surgery clinic says it used to cost around Rmb30 per click when a user searched for cosmetic surgery. But that rate has gone up to a few hundred yuan today. In areas of the country where consumers are wealthier like Shenzhen, the price can reach Rmb999 for the top spots, says Fujian Daily.
The hospital owners are fed up. “Domestic private hospitals dedicate up to 70% of their advertising budget to Baidu. But as the cost for top spots becomes higher and higher, the only way for us to remain profitable is to decrease the quality of our service or increase our prices, which is bad for our brand,” an industry insider told Southern Metropolis Daily.
And the other side to the story?
Last week Baidu fired back at the hospital bosses, describing the Putian protest as retaliatory. It says the tycoons are embittered because it has been refusing to post false or misleading ads, and that up to 60% of the rejected content was from members of the Putian association.
The healthcare ad market is “a long-term driver of revenues” for Baidu, insists Robin Li, its chairman, and it needs to offer higher quality information about medical treatments than its internet rivals Alibaba and Tencent, which have started new services to search for medicines and pharmacies, and to make doctors’ appointments.
The stricter screening also comes at a time when Baidu is launching a new medical platform and a mobile app called Baidu Doctor as part of its effort to expand into healthcare. Policymakers seem keen too: for instance, Beijing’s municipal government is using Baidu’s “health cloud” services for illness prevention and ‘pre-diagnosis assessments’.
So the row with Putian comes at a time when digital innovation looks set to shake up the sector, bringing the established operators into more direct competition with their former commercial partners. Almost all the population now has basic health insurance, up from a third in 2003. But health care coverage has not kept pace with potential demand, and the internet brands sense a huge opportunity to step into the gap.
Bloomberg gives prescription drug sales as an example. “The shift could reshape the $149 billion market for such drugs, by moving sales to web retailers and away from hospitals, which sell almost three quarters of medicines prescribed in the country.”
Of course, the severing of ties with Baidu comes at a cost to Putian businesses. “Marketing is what keeps the private hospitals alive. They can work with other search engines, such as Sogou, but those simply cannot offer the search traffic that Baidu does,” Lu Zhenwang, an internet expert, told the China Daily.
Sure enough, on Thursday this week there were signs that Putian’s tycoons were trying to reopen negotiations by reinstating some ads. But investors in the search firm seem worried too. Since news of the dispute started to make headlines in late March, Baidu’s shares on Nasdaq have dipped by 6%, losing $4 billion in value. The search firm could also face more resistance from other advertisers in the year ahead, especially as the economy slows, which could force Baidu to lower prices and clean up some of its less transparent business practices, warns Doug Young, author of Young’s China Biz Blog.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.