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Cover Story

'Social enterprises' rise in Asia amid skepticism

New breed of company aims to help the world -- and make money

BANGALORE -- Wearing blue surgeon's scrubs as he chats with a heart patient from Bangladesh, Dr. Devi Shetty hardly looks like a typical corporate chairman. But there is little about Shetty and the hospital group he founded, Narayana Health, that is typical.

In addition to his roles as founder and chairman, Shetty, 64, performs heart surgeries every day at Narayana's Bangalore cardiac facility, just one in a network of hospitals and specialty clinics the company runs across India. Among the mementos in his office is a photo of him with Nobel Peace Prize laureate Mother Teresa, whom he served as a personal doctor. A quote on his desk reads: "The world's biggest problems are also the world's biggest business opportunities."

It was working with Mother Teresa that inspired Shetty to start his own hospital to treat Indians without access to good health care. "One day, she was in the hospital and I was examining a kid who had a heart operation," he recalls. "She was keenly watching and when I finished, she said, 'Dr. Shetty, I know why you are here. God created children with a hole in their hearts, realized it was a mistake and sent you to fix it.'"

Working with Mother Teresa inspired Devi Shetty, shown here in his Bangalore office, to found Narayana Health. (Photo by Takuya Imai)

Shetty founded Narayana in 2000 and has since treated thousands of lower-income people with heart conditions. His cardiac facilities have dramatically reduced the price of bypass surgery to as low as 100,000 rupees (around $1,500) -- about one-tenth of that in the U.S. Partnering with the local government, the hospital pioneered low-cost health insurance, making coverage affordable for India's mid- to low-income population.

Narayana addresses a huge gap in India's health care services, where millions of low-income patients have been underserved, especially when it comes to expensive treatments such as heart operations. Its affordable, no-frills medical service has attracted patients both at home and abroad. Narayana now runs 24 hospitals with over 7,000 beds in India and the Cayman Islands, and conducted over 16,000 cardiac surgeries in the year ended in March 2017.

All of this sounds like the work of an especially well-run and innovative charity or state-backed health company. But in fact Narayana is a public company, backed by investors including JP Morgan, which began investing in the company as early as 2008. After it listed its shares in 2016, Narayana's market capitalization touched $1 billion and it posted earnings and revenue growth in its first year as a listed company.

Key to this success is a focus on keeping costs low. Narayana uses disposable surgical gowns, offers bare-minimum group rooms for patients and maximizes efficiency on surgical procedures so that Shetty and his colleagues can perform at least one or two heart surgeries a day.

"It's an economy of scale," says Shetty, who sometimes sees as many as 100 patients and works around 14 to 16 hours a day.

The hospitals' high volume of patients allows young doctors to gain experience and hone their skills quickly, making Narayana an attractive career choice for doctors. The hospital also runs higher-margin businesses for wealthier patients, offering luxury patient rooms fitted with TVs and "executive lounges" for fast-track consultation and admission into the hospital.

Narayana makes a good case for investors looking to pair long-term returns and social impact. For CDC Group, a U.K.-based development finance institution that invested $48 million in Narayana in 2015, the hospital chain certainly served both purposes. Srini Nagarajan, CDC's head of South Asia, said at the time that Narayana "makes a compelling case" for investment because of its "development impact" as a leader in low-cost health care in India and the "significant expected job growth" for the country's poorer regions.

Narayana is just one example of Asia's burgeoning social enterprises -- companies that measure success not just by the profits they make but also by the good they do in the world. A catalyst for the spread of social entrepreneurship globally was the rise of the "creating shared value" (CSV) concept created by Harvard University professor Michael Porter. His central idea -- that companies aiming to improve society are more sustainable and profitable in the long term than those focused on creating profits for shareholders -- would seem radical, if not fanciful, in many boardrooms.

But there are signs that the CSV concept is spreading in Asia, albeit from a small base. Some 75 companies in the Asia-Pacific region responded to the Business Call to Action, a United Nations initiative launched in 2008 that challenged companies to develop inclusive business models. The global alliance has grown to more than 200 companies.

Similar networks of global social entrepreneurs are growing. There are about 800 fellows in Asia supported by Ashoka, a group that identifies and invests in social entrepreneurs, out of 2,962 fellows globally. B Corporations -- companies certified by U.S. nonprofit B Lab as meeting standards for social and environmental performance, accountability and transparency -- now number over 2,300 globally, about 50 of which are in Asia.

"Bottom of the Pyramid"

The expansion of such networks is supported by the increasing number of young Asian entrepreneurs looking for professions that go beyond simple moneymaking. According to a study led by auditing company Deloitte released in 2015, two-thirds of millennials cited their organization's purpose as a reason they chose to work there. Only 27% believed businesses should focus on profit, while the rest said the focus should be shifted to business strategy and impact.

"We cannot attract next-generation talent if they are joining Olam [only] because they can sell more cocoa or coffee," said Olam International CEO Sunny Verghese in a recent interview with Nikkei Asian Review. "They are only motivated if they are doing something that has some meaning."

Panasonic founder Konosuke Matsushita, seen here in this undated photo, was ahead of the curve with his business philosophy of "mutual prosperity."   © Getty Images

The concept of social business is not new in Asia. In Japan, a business model that aims at benefiting all three parties -- seller, buyer and society -- already existed as early as the 17th century. Panasonic founder Konosuke Matsushita's business philosophy of "mutual prosperity" echoes Porter's CSV concept. But the idea took on more weight after the financial crisis in 2008, which made companies and investors re-evaluate the conventional market mechanisms that caused the global economic downturn.

Whether the concept will ever penetrate deeply into the global corporate world remains questionable. Some scholars, such as professor Andrew Crane of the University of Bath's School of Management in the U.K., have argued that the CSV concept is too idealistic, with little regard for the real-life problems facing companies. And despite the scandals and corporate wrongdoing exposed by the financial crisis, there has been no shortage of examples of bad corporate behavior since. That persistence of the "greed is good" ethos was demonstrated by Martin Shkreli, the former CEO of Turing Pharmaceuticals, who in 2015 attempted to raise the price of an AIDS drug by 56 times to $750 per pill.

"Plenty of companies still operate without regard to their social impact, often causing considerable harm," Mark R. Kramer, who co-authored "Creating Shared Value" with Porter back in 2011, acknowledged in Fortune magazine.

But it is certainly true that an increasing number of companies -- especially the larger ones that are often under the critical eyes of the general public -- have been trying to adapt the CSV concept and are "making real change in the world: reducing greenhouse gases, increasing economic opportunity and promoting better health," to borrow Kramer's words.

En Lee, partner and head of the Asia-Pacific region for LGT Impact, an impact investment arm under a private bank owned by Liechtenstein's royal family, goes further. "The financial crisis definitely changed corporates' mindsets and made them look at inclusive business models for long-term value creation," Lee said.

Asia has several factors conducive to seeing social business take off. One is the prevalence of a number of social problems beyond the public sector's capacity to fully handle -- poverty, rural development, improving the livelihoods of women and waste management, to name a few. The gap between public service and demand is especially acute in large developing countries such as India and Indonesia.

"Asia is the place where accumulation of wealth meets prevailing social problems, driving the creation and funding for social enterprises," Lee said.

Chandru Chawla, head of M&A, new ventures and corporate strategy at India-based drugmaker Cipla -- known for its "dollar-a-day" HIV-AIDS treatments -- illustrated those social problems with a sobering figure: "Today, 45% [of India] is in poverty. We cannot escape that reality."

On the flip side, the rural, low-income population that had traditionally been off the radar for large companies is increasingly becoming their target market because of its sheer size and potential income growth. But tapping into that population requires a different business approach, and this is where the concept of social business comes in. "The bottom of the pyramid market is where the real dynamic growth is, but traditional companies don't know the market well enough to feel comfortable entering," said Hans Wahl, social entrepreneurship initiative director at French business school INSEAD.

"This is where the collaboration with social entrepreneurs with business propositions to the demographic comes in," Wahl said. "Smart companies are identifying this opportunity and striking partnerships with social enterprises."

Saving lives

Balancing profitability with social impact -- all while expanding business scale -- is a challenging task for social enterprises, especially younger ones. A research paper by Rockefeller Foundation points out that the social enterprise landscape in the Association of Southeast Asian Nations follows a "long-tail" curve, meaning there are only a few larger and established social enterprises, followed by a slightly larger number of midsize ones, and finally a sea of smaller social enterprises that make up most of the pool. The paper points out that social investments in the region are "very head-heavy," meaning that the bulk of the funding goes to larger enterprises at growth stages and beyond. Meanwhile, the vast number of enterprises in the pregrowth stage have no real interest in growing beyond community-level size, the paper said, and thousands of these startups "unfortunately lie somewhere outside investment capital."

One company in emerging Asia that has made it beyond the early stages is Medical Technology Transfer and Services in Vietnam, which makes medical equipment for neonatal intensive care units. MTTS sells these lifesaving devices at affordable prices to local hospitals.

Nga Tuyet Trang founded Vietnamese medical device maker MTTS after witnessing newborns die unnecessarily at hospitals due to a lack of equipment. (Photo courtesy of MTTS)

It was the brainchild of Nga Tuyet Trang, who started out working for a U.S.-based medical organization in Hanoi that connected local doctors and foreign health care equipment designers. She was disturbed by the number of Vietnamese babies who died because the hospitals did not have proper equipment.

"I was badly shocked to see an infant die of breathing difficulties, then covered by a piece of white cloth. That was one of the key elements encouraging me to start a social enterprise, even when Vietnam had not set out any regulations for this kind of business," Trang, 38, said.

After a course in Denmark, Trang felt she had enough knowledge and experience to start her own business back home. In 2004, she and three friends started MTTS. A partnership with the California-based East Meets West Foundation helped the Vietnamese company research and develop devices to treat the most common causes of death among newborns.

Despite fundraising challenges, MTTS trialed its first locally made device at the Vietnam National Children's Hospital in 2004. It cost $250, compared with $1,500 for imported devices at that time. Winning a contract with Vietnam's biggest children's hospital was a breakthrough; within the first year, MTTS had installed 20 devices at three hospitals in Hanoi and Haiphong.

Since then, MTTS's devices have reached hospitals in northern Vietnam, mainly via aid programs sponsored by the Danish Embassy, the Hanoi International Women's Club and individual donors. About 30% were commercially purchased by hospitals. The company made its first overseas sale, to Laos, in 2007, and now it has sold 3,100 products to 350 hospitals in 25 Asian and African countries. MTTS has also trained 3,500 health practitioners.

The company was named a "Social Entrepreneur of the Year 2017" by Schwab Foundation for helping care for and save the lives of 1.3 million babies, including 75,000 in 2016 alone.

Not long ago, Trang got a call from a friend in Nepal who told her that one of the company's devices had helped save a newborn's life.

"Nothing could make me happier than to hear that news," she said. "Our effort has saved a lot of lives at home and abroad."

Nikkei staff writers Kentaro Iwamoto in Tokyo and Kim Dung Tong in Ho Chi Minh City contributed to this report.

 

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