We were featured in the Fall 2016 issue of The PIE Review (Professional in International Education) and discussed the deepening role of global private equity and investment in international education sector.
Here is a PDF copy of the article.
We were featured in the Fall 2016 issue of The PIE Review (Professional in International Education) and discussed the deepening role of global private equity and investment in international education sector.
Here is a PDF copy of the article.
Article by Tim Culpan discusses venture investments in China and includes our view of similar transactions to date.
American venture capitalist Kobe Bryant may soon learn that a drive to the basket doesn't always end with two points.
Bryant, an 18-time NBA All-Star and co-founder of venture capital firm Bryant Stibel, this week announced he's investing some of his firm's cash in Chinese education-technology company VIPKID. The move comes weeks after Sequioa Capital and Jack Ma's Yunfeng Capital led a $100 million round of funding.
VIPKID is one of dozens of companies tapping into the desire among Chinese parents to give their progeny a leg up on the competition. A 94 percent climb in New York-traded New Oriental Education over the past year helps explain why investors such as Ma, Bryant and Jeff Stibel are willing to take a punt.
Shares of New Oriental Education & Technology have swung between gains and losses amid China's fickle market for education.
Like New Oriental, VIPKID is focused on the increasingly crowded market for foreign-language (read, English) learning in China. As Bryant Stibel says:
VIPKID is bringing the North American elementary school experience to Chinese children.
At first glance, the market potential looks to be there. China has a huge population with a hunger to get ahead. Jack Ma, himself a former English teacher, is the poster child for a simple kid who became a billionaire through education and hard work.
“It’s a no-brainer for me," Bryant, who holds the record for the most seasons with the same team, told the Los Angeles Times. "We have to look for companies adding value to society, helping kids learn and grow.” It apparently took Bryant less than the span of a half-time break to make the decision.
But as Educated Ventures partner Todd Maurer wrote recently, a note of caution ought to be sounded on the billions of dollars pouring into China's edtech sector, given a likely peak in the number of children going to school.
World Bank data show gross primary school enrollment jumped from 92.1 percent in 2001 to 114 percent in 2009 before falling off again. It's probably no coincidence that companies such as New Oriental made their mark during this boom, leading to U.S. listings. With a lag of about six years between primary and secondary school, we can expect that later-year enrollments and the accompanying revenue have already topped out.
As the school-age population slows or declines, education providers need to lure more of that shrinking pool to their platforms. Yet there were 9,500 online-education providers in China at the end of last year, according to data from China's E-learning Research Institute -- including as many as 2,400 focusing on kindergarten to year 12 (K12) -- making it a crowded and fractured sector.
Maurer points out that while New Oriental is the dominant player in the after-school tutoring business, even this giant can lay claim to only 2 percent of the market. No wonder then that the E-learning Research Institute estimates just 5 percent of online-education providers turned a profit last year.
Kobe Bryant may think that his investment is a no-brainer, but as the third-highest points scorer in NBA history he also wears the crown for most field goals missed. His playing strategy was that you have to put up a shot if you want to make the basket. Even he knows you can't always make a slam dunk.
UNESCO notes that this figure can exceed 100% because of over- and under-age enrollments and students repeating
The World Bank/UNESCO data end at 2013. Later years aren't yet available.
To be clear, missed shots aren't necessarily seen as failure but a product of playing style.
Our Op-Ed in EdSurge discusses the opportunities and emerging challenges for education technology investing in China.
There is little doubt that China’s record $1.7 billion invested in 44 edtech companies last year is helping to provide one of the world’s most dynamic education market with increased access quality learning and spurring a movement toward social impact investing. But in the competitive scramble for gaining market share at high cost and rapid speed—not to mention the rush for early investors to cash out—there are seeds of potential failure. In fact, many Chinese online education companies are already folding with only an estimated five percent of such firms earning a profit in 2015, despite an overall online market that exceeded $20 billion in sales. (All monetary figures in this piece are in US dollars.)
The latest test of public scrutiny is 51Talk, an online English language platform that uses teachers in the Philippines to conduct synchronous one-on-one classes with Chinese students through an Uber-inspired “shared economy” model. 51Talk recently filed for a small but high profile $45 million initial public offering in the U.S. (under its parent company China Online Education Group). But it is already facing “six suspicions” in a Chinese-language article at Whale Media. What’s so suspect? Its claim to be the “largest online education company in China” by using an unsourced research report as well as its own hand-picked measures for what is considered “largest”; its creative use of “gross billings” that reflect up-front cash paid by students without revealing average student retention levels in its courses; its accumulated losses ($50.5 million in 2015, $15.4 million in Q1 2016) based on heavy student acquisition costs as well as deferment of employee costs; and issues surrounding tax compliance, social welfare obligations and other financial issues.
Time, of course, will unravel this tangle of issues. Yet it’s worth noting that Chinese education companies have their own unique historical context. Here are a few points to remember.
First, China’s education market demographics, dating back to the turn of this century, will never be repeated, as primary enrollments are now declining. But between 2000 and 2012, the country saw a massive expansion in student enrollment; the number of K-12 students jumped from 233 million to 251 million, and higher-ed students increased from five million to more than 24 million.
This sudden growth created unprecedented demand for tutoring services, international student pathways, higher education and English language study. This meant that China’s early entrants benefited from substantial unmet demand, peak K-12 populations, a shortage of university seats, and mass urban affordability for items such as educational games, private schools, study-abroad programs, and the services that support them.
Second, despite this growth, China’s consumer education market remains remarkably difficult to quantify. Consider that the recognized education giant of China, New Oriental, claims a large share of TOEFL and related overseas test preparation, but only one to two percent market share in China’s aggregate after-school tutoring market. Now try to figure out the other 98 percent of addressable consumers supplied by over 75,000 firms in the English language segment alone, not to mention other after-school tutoring competitors.
The result is that China’s ill-defined, but super-sized market plays havoc on investor expectations. Several high-flying Chinese companies listed in the US have been severely cut down to size. Take, for example, Ambow Education which was whacked with questions over financial and governance issues; ChinaCast, the first satellite-based online education company, which wascrippled by executive corruption allegations; ChinaEdu, an online higher education service provider, which pulled its moribund public listing in the US via merger after years of sluggish growth on top of its anemic size and a tightly regulated customer base; and one-time investor darling Beijing Jadebird, a joint venture between India’s Aptech and Peking University, which after many years has faded quietly into the woodwork.
This leads to the third point: companies that consolidated their market share and shrewdly utilized financial resources were able to emerge dominant in China by also extending their brands to new education segments. New Oriental’s launch of its popular online platform, Koolearn, extended its learning center network into online tutoring. TAL’s move into early-stage edtech investing seeks to leverage synergies with U.S. higher education companies such as Minerva and Knewton. NetDragonWebsoft’s pivot from multi-level gaming to learning games culminated in its offshore acquisition of diversified global K-12 education provider, Promethean. As a result, early investors in these companies enjoyed smart returns since their IPOs, as Figure 1 indicates. But they are outliers.
Fourth, unlike the past decade, today’s new crop of existing and aspiring Chinese Unicorns (see Figure 2) emerge from a startup scene that is soaked with education-focused venture capital. There is good reason: China’s thriving consumer-facing learning market is now richer as well as more mobile, tech-savvy, and globally obsessed than ever before, ushering in new opportunities in areas such as English language tutoring, international credentialing, virtual reality, and learning-based games. This has led nearly all of China’s leading internet companies (including Alibaba and Tencent) to invest in direct-to-consumer edtech startups and subsidiaries (along with leaders from India, South Africa and Europe), as covered here on Educelerate.
I have previously argued that Asia is emerging as the world’s edtech laboratory with China at its center. And that companies that can harness the right technology, deliver consistent quality to China’s consumer-facing education sector, and maintain sustainable levels of returns to both investors and students, will be the world’s next education leaders.
But with high expectations comes the fall. Relatively few Chinese education companies have proven that they can handle the added investor and regulatory scrutiny that comes with being a public company, particularly in the US. This time around, at least we have history as a guide.
"No need to listen for the fall. This is the World's end." -- Rudyard Kipling, Kim
During a long, cold flight to Almaty in the late 1990s I sat sleepless reading Peter Hopkirk's landmark history of the region, "The Great Game: The Struggle for Empire in Central Asia." My colleagues and I were about to spend the week meeting with Kazakhstan's Ministry of Energy as well as its largest companies, all heavily armed by private security guards touting AK-47s while discussing their IPO plans in London. That alone was an eye-opener even Hopkirk would have missed. But what was unique about this trip was our informal mission, backed by the Chinese government, of introducing the idea of a vast pipeline in Kazakhstan that would reach from China's far western Xinjiang region to the Caspian Sea. The Kazakhs at the time, fearing rather engaging China, were having none of it.
Fast forward to China's "One Belt, One Road" initiative launched amidst much fanfare this year and not coincidentally in tandem with its sponsorship of the Asian Infrastructure Investment Bank (AIIB). If successful, these two moves promise to have a geo-economic impact on par with China's immensely ambitious development policy toward Africa. However unlike Africa, China's focus on driving a renewed "New Silk Road" through Central Asia faces an already crowded field of post-colonial (and post-Soviet) military interests, natural resource competition, a resurgent and irredentist Russia, and a potential threat of IS terrorism in the region.
What is more, despite its natural wealth and historical location as a crossroads, Central Asia remains stunted by income inequality and lack of advanced educational attainment--two areas, I would argue, which hold the key to the Great Game. This is because the success of any New Silk Road will likely require far more than the odd gas pipeline or wad of investment dollars but rather a level of development that enhances economic inclusion and can foster political and social stability, open borders, and diversified economic growth. In this sense, a single aspect of Central Asia which has been largely discounted must now be confronted: the education of its people.
Central Asia by the Numbers
To the uninitiated, the traditional concept of Central Asia is comprised of the five countries of Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan and Turkmenistan. I've included Afghanistan in our analysis since it borders on three Central Asian republics and injects its own development challenges onto the region, whether they like it or not. As a failed education state, Afghanistan also serves as warning to the region about what an alternative path might look like.
Table 1 summarizes aggregate economic and education data for the Central Asian republics, centered on long-term indicators:
Figure 2: Comparative Economic and Education Data: Central Asia and Afghanistan
OMore recently, and to add further urgency to what is a region in transition to emerging market status, Central Asia has fallen victim to collapsing oil prices, aborted resource investments, and economic weakness in Russia (which provides remittances and is the main export market for the region). Under these conditions, it would be folly to believe that massive hydrocarbon projects alone will galvanize economic development without a level of education that acts as both an economic stabilizer and a key to social change, not least, to root out corruption based on resource extraction and control.
Where, then, is Central Asia heading in terms of educating its populations and what are the challenges ahead?
Early Success at Primary School Levels
Central Asia's republics are relatively well educated at early ages. Universal primary school completion—a key indicator of future educational attainment—was reached or exceeded in most countries by 2012 and many were closing in on this goal in 2000 (see Figure 2). By comparison, Afghanistan is a failed education state with a paltry 34 and 38 per cent of children competing primary school in 2000 and 2012, respectively, not least due to the exclusion of girls. According to one wide-ranging report on Afghanistan's educational system in the 20th century, the number of students enrolled in 2000 barely exceeded levels achieved in 1978 and, even more distressing, remained far below the enrollments levels in the country during the more peaceful 1960s and 1970s. Beyond Afghanistan, Pakistan and Bangladesh also face deep challenges, where only 72 and 75 per cent of children finished primary school in 2012.
In comparative terms, this illustrates that Central Asia is not the educational wasteland often thought of in popular imagination and should provide some solace to future policymakers and investors.
Figure 2: Primary Education Completion Rates by Country, 2000 v 2012
Declining Fertility Rates Put Less Pressure on Educational Systems
Supporting this early age education trend is a sharp decline in fertility rates. As I have noted in previous research, it is axiomatic that declining population pressures and less stress on educational systems can improve educational outcomes. One study by the British Council has underscored the correlation between standardized test scores and falling birth rates in East Asia, a finding that can apply to other regions as well.
In Central Asia, Kazakhstan has maintained a consistently low fertility rate (as measured by birthrates per woman) of 2.7 times since 1990 which contributes to the fact that its educational outcomes are the highest in the region. More important are its "high-birth" neighbors which have reduced average births dramatically: Uzbekistan, showing a declining fertility rate from 4.1 in 1990 to 2.5 in 2012; Tajikistan falling from 5.2 to 3.8, and Turkmenistan from 4.3 to to 2.4 births per woman. Contrast this with Afghanistan, which had 7.7 births per woman in 1990, reducing to an improved but still high 5.1 by 2012 (see Figure 3).
Directionally, the five Central Asian republics are primed for positive education outcomes for the simple reason that fewer children to educate equates to more potential support per child--financial, pedagogic or otherwise--and higher potential attainment beyond primary levels.
Figure 3: Total Fertility Rates: Birthrates per Woman by Country, 1990 v. 2012
Gradual Moves to Higher Education Attainment, But Uneven Success
With higher numbers of primary school graduates and lower stress on the student pipeline through moderating population size, we can expect a trend toward longer student engagement cycles and higher educational attainment through University if both capacity and affordability are sufficient.
Thus far we can see gradual improvements in Central Asia together with other, more depressing trends in tertiary enrollment rates. As Figure 4 indicates, Kazakhstan grew enrollments rapidly from 2001 to 2006 (at peak close to 790,000 students), but declined through 2010. The country's tertiary gross enrollment rate (GER) of 48.5 per cent in 2013 is largely in line with OECD averages and far higher than China and India, although its population size is vastly different. Kyrgyzstan and Tajikistan are two other countries that have registered some moderate growth in tertiary enrollments. Kyrgistan is a particularly high GER of 47.2 per cent, with Tajikistan with a much lower (tough still relatively impressive) 25.4 per cent.
Uzbekistan and Turkmenistan are more problematic, with low GERs (8.9 and an estimated 8.0 per cent, respectively) and declining tertiary enrollments in the case of Uzbekistan (note that Turkmenistan does not report tertiary enrollments--never a good sign). Moreover, Uzbekistan reported high secondary enrollment completion suggesting that a lack of capacity may be severely limiting student attainment in the country.
Figure 4: Tertiary Enrollments by Country, 2001-2012
International Mobility and Engagement Is Plugging the Capacity Gap
As in many other parts of Asia, the lack of domestic higher education capacity coupled with higher attainment levels, greater affordability and increased savings has traditionally propelled the movement of students abroad to destinations such as the UK, Australia and the US, and this is happening for Central Asian students as well, although most end up in Russia or non-Western University systems.
As Figure 5 illustrates, several Central Asian countries have increased the size of their tertiary student cohorts overseas. Three countries are worth mentioning: Kazakhstan, which almost doubled its student abroad cohort to reach almost 44,000 annually by 2012; Tajikistan, with international students rising from 1,337 in 2001 to 9,128 in 2012; and Turkmenistan, which since 2007 has rocketed to a level of 27,959 students by 2012.
In 2014, a combined 3,203 students from Central Asia were studying at US colleges and Universities, a level however which is comparatively low and far less than even Nepal, which sent 8,155 students. Kazakhstan sent 2,102 students to the US in 2014 out of an estimated total of 44,000 students (using its 2012 data), or a mere 4.8 per cent of total.
Clearly US higher education is only a bit player in Central Asia--compared with Russia and to an increasing extent China--with significant scope for growth and engagement. Consider that out of thirteen international branch campuses in the region, all but two are hosted by Russian Universities; in Kazakhstan, all international branch campuses are Russian. The US is seeking to remedy this strategic deficit--most recently through the launch of the American University of Central Asia and other government-led initiatives--but far more educational engagement is needed to build the level of educational capacity, and quality, that can serves the region's future interests.
Figure 5: International Mobile (Offshore) Enrollments by Country, 2001-2012
Education Spending to Accelerate with Regional Growth
Finally, there is no reason to believe that Central Asian households will act any differently from the rest of Asia as their wealth increases and opportunities for educating their children unfold. The propensity for emerging Asia, including its poorest regions of South Asia and Myanmar, to spend a significant proportion of household income on supplemental education is well established, and an area I previously analyzed in the case of both poor and rich students in emerging economies.
At present, two countries--Kazakhstan and Turkmenistan--are posting significant increases in GDP per capita (as measured in PPP) and at levels far above averages within Developing Asia. However the remaining populations of Uzbekistan, Kyrgyzstan, and Tajikistan lie beneath the $4,000 to 5,000 PPP "middle class" threshold and are growing from a much lower base. Differing levels of affordability will demand a more nuanced approach to the region as a whole.
Figure 6 illustrates these changes in affordability through the relative strong economic cycle ending 2013.
Figure 6: GDP Per Capita at PPP (Current International Dollars), 2001-13
In sum, educational and economic progress within Central Asia will not be easy but the region has a decent foundation base from primary school levels. Country profiles differ widely, with Kazakhstan leading across many statistical indicators, including access to higher education and affordability. The region's reliance on Russia is unstable, if not problematic, in terms of educational needs and priorities. Chinese investment may help to galvanize a region in need but not if it relies solely on large scale infrastructure projects.
The clock is ticking on economic and social stability in a region propped up by resources rather than human capital. Investors and policymakers who plan to travel along this New Silk Road should take note.
With so many emerging market economies and currencies on the boil, it might be counter-intuitive to explore investing in markets that are even less developed. But in the realm of education, there are increasingly compelling reasons to do so.
Within Asia, so-called Frontier Markets began as a classification for financial portfolio investors and the indices that track investable assets in these countries. Although the boundaries are not uniformly agreed, countries on the frontier often exhibit higher GDP growth trajectories than emerging and developed economies due to favorable and young demographics, low economic bases, technological application with high initial impact, accelerating urbanization trends, and, importantly, steep literacy and education trajectories.
Indeed, education appears to be a key catalyst for countries to move from frontier to emerging market status. This brief survey suggests that Asia's frontier markets can offer well defined early-stage growth opportunities across the entire student cycle, from pre-K to corporate training. Yet understanding the complexity of these markets is critical, and not for the faint of heart.
Where is the Frontier?
In defining the frontier within Asia, we have selected nine countries for comparative analysis, four of which are included in one or both of the FTSE and MSCI indices—Bangladesh, Pakistan, Sri Lanka and Vietnam—and an additional three—Mongolia, Myanmar, and Nepal–which we think merit inclusion as potentially attractive education markets for interested investors, education providers and stakeholders.
Figure 1 provides a basic comparison of economic and growth indicators by country, together with references to key education demographics. This much is clear: these countries represent a sizable and dynamic part of the Asian economic landscape including above-average GDP growth, young populations, varying affordability thresholds towards “middle class” levels, and targeted foreign direct investment.
But the counter-narrative is that education quality and provision is nowhere near sufficient to accommodate bulging populations under the age of 15 years and prepare them for future work. There are acute supply constraints of schools, universities and teachers both today and far into the future. Hence if dramatic solutions, innovations and education investment are not found soon in many of these frontier markets, then a demographic disaster awaits rather than demographic dividend.
Figure 1: Comparative Economic and Education Data by Selected Country
Asia's stark education imperatives
Six measures can help to fill in the details.
First, universal primary school completion—a key indicator of future educational attainment—was reached or exceeded in most countries by 2012 with the exception of Pakistan and Bangladesh (see Figure 2). Despite some effort, only 72 and 75 per cent of children finished primary school in Pakistan and Bangladesh in 2012, a level that puts these two countries at least one to two decades behind their peers and is likely to haunt policymakers for the foreseeable future.
At the high end of the spectrum, Vietnam has been far ahead of both Southeast Asian and other frontier neighbors, dating back to 2000 when over 97.8 per cent of children had already completed at primary levels. It is therefore no surprise that Vietnamese students have rapidly moved toward higher levels of academic achievement after primary school. As we will see later, the result has also put acute pressure on expectations for world-class educational quality, the willingness of households to invest in their children's future outside of formal schooling, and high labor productivity.
Following behind Vietnam are Myanmar and Nepal, both of which rose dramatically to primary completion levels of 95 and 101 per cent, respectively, in 2012. Sri Lanka has maintained near universal primary completion since 2000 as has Mongolia, the latter benefiting from relatively low population demographics. These developments have pushed education pipelines toward higher education demand and beyond the most basic needs.
Figure 2: Primary Completion as % Total Relevant Age Population, 2000 and 2012
Second, it is axiomatic that declining population pressures and less stress on educational systems can improve educational outcomes. To some extent the inverse may help to explain the lagging results from Pakistan and Bangladesh at the primary level--and a higher level in Sri Lanka--but is goes further. A study by the British Council has underscored the correlation between standardized test scores and falling birth rates in East Asia, a finding that may be even more relevant to Asian frontier markets where population sizes are considerably larger.
Consider that Pakistan’s birth rate per household has dropped from 6 in 1990 to 3.3 in 2012; Nepal from 5.2 to 2.4; and Bangladesh from 4.6 to 2.2 over the same period (see Figure 3). Vietnamese birth rates have dropped from 3.6 per household in 1990 to 1.8 per household by 2012. As a result, the majority of birth rates in Asian frontier markets have declined by over 50 per cent level in a single generation.
Directionally, this is positive for the simple reason that fewer children to educate equates to more potential support per child--financial, pedagogic or otherwise--and higher potential attainment beyond primary levels for these countries.
Figure 3: Changes in Birth Rates Per Household, 1990 v 2012
The third observation flows from the previous two: that is, observable trends toward longer student engagement cycles and higher educational attainment. We can see this at work in Figure 4, but the results are mixed. Vietnam, Pakistan and Bangladesh have experienced dramatic gains in tertiary enrollments to date, yet relative enrollment rates differ. For example, Vietnam reported a 24.3 per cent tertiary gross enrollment rate (GER) in 2012 which is about half of OECD levels but on par with China. There were lower GERs of 9.5 and 13.2 per cent observed for Pakistan and Bangladesh despite higher absolute student numbers, a function of lower secondary completion rates and limited university and other tertiary options.
Notably, Vietnam's higher education or tertiary enrollments increased from less than 700,000 in 2001 to over 2.2 million in 2013, with a significant amount of runway ahead. This enrollment level is now on par with Thailand whose tertiary enrollments peaked in 2007 despite being almost 3 times as wealthy on a PPP per capita basis than Vietnam (US$14,393 v US$5,294, respectively, based on World Bank estimates).
Elsewhere, enrollments in Myanmar and Nepal have grown incrementally from a small base but remain a fraction of Vietnam's participation at the college level. To cite one example, for all the noise around the opening of Myanmar, the country's tertiary students numbered approximately 666,000 in 2013 and any future "take off" timing is difficult to predict, although certainly not in doubt as the country begins to open to the outside world.
Figure 4: Tertiary Enrollments by Selected Country, 2001-2013
Fourth, the lack of domestic higher education capacity coupled with higher attainment levels, greater affordability and increased savings has traditionally propelled the movement of Asian students abroad to destinations such as the UK, Australia and the US.
As Figure 5 illustrates, Asia's frontier markets have all been increasing their share of students going abroad. Three countries stand out: Vietnam, where student abroad levels have risen by 5 times since 2000; and Pakistan and Nepal, where outbound enrollment levels have tripled.
In the US alone, Vietnam's dramatic rise in study abroad has risen from 9,851 students in 2001 to 16,579 in 2013, the eighth largest contributing source for international students. Over 11,500 students were enrolled in Australia that year. Since affordability matters greatly to offshore study trends, we can expect more frontier countries such as Myanmar, Mongolia and Sri Lanka to increase their share as income levels rise.
Figure 5: Offshore International Student Enrollments by Country, 2001-2012
Fifth, with fewer births and greater chance to educate a larger proportion of the population, labor productivity will benefit significantly.
At the leading edge of the frontier, Vietnam has consistently registered among the highest growth in labor productivity in Asia over the past two decades, averaging 5.0% per year between 1990 and 2000 and 4.8 per cent from 2000 to 2012, according to APO data in Figure 6 (which measures productivity using annual GDP growth at constant basic prices per hour).
This level of sustained labor productivity correlates to educational levels: only China/Korea (1990-2000) and China/India (2000-2011) exceed average Vietnamese growth levels over this time period. Further down the list in Asia, countries such as Sri Lanka have started to show stronger productivity since 2005 while others, such as Pakistan and Bangladesh, lag far behind the productivity rates in nearby (and better educated) India. Only improved education is likely to tip the balance.
Figure 6: Labor Productivity Growth: GDP at constant prices per hour, 2005 PPP data
Sixth, the propensity for emerging Asia to spend a significant proportion of household income on supplemental education is well established, as I previously analyzed in the case of both poor and rich students in emerging economies.
Increasing GDP per capita in Asia's frontier markets will only diversify and deepen student expenditure further, with Sri Lanka, Vietnam, Mongolia, and Pakistan exceeding the $4,000 PPP "middle class" threshold (see Figure 7) and Myanmar close behind. As such, the catch-up phase with more developed Asian markets is only just beginning, with the entire education ecosystem--from supplemental tutoring to English to degrees--to be driven by consumer-facing demand.
Figure 7: GDP per Capita at Purchasing Power Parity (PPP) levels, 2000-2013
In sum, these measures of educational and economic progress for Asia's frontier countries provide a broad map of emerging opportunities across the student spectrum, with varying levels of risk-return for education providers and investors.
In a perfect world, with Singapore-like efficiency and relatively tame population sizes, public sector solutions could suffice. But Asia's frontier, and its stark educational imperative, is far from ideal. What is needed are immense levels of private capital, innovative models of delivery, local entrepreneurial talent dedicated to managing the quality and scale of student outcomes, and corporate activity to meld learning to workforce needs. A deeper engagement from foreign education companies, universities, global start-ups and technology platforms is calling.
Emerging market currencies are plummeting against the US dollar. What will be the impact on the international education market? If we are to judge by the amount of discussion within the industry on this topic, the answer would lie somewhere between not much and who cares. Which may be extremely short-sighted.
Recall that the 1997 Asian financial crisis, and the Tequila and Russian crises punctuated around it, offer very little guidance to what can happen to international education demand and the movement of students around the world. The main reason is that the size and depth of the international education market was a fraction of what it is today, so there is no historical precedent. Moreover, forecasting international currency markets is about the last thing college admissions officers and development executives need to think about as the academic year begins, assuming they even have the analytical training and background to make sense of it what is happening.
This analyst does not see how the international education market will be immune to dramatic changes in currency values and their impact on affordability across an international student base largely drawn from developing economies. And in a world of relative US dollar strength and a material decline in emerging market spending power (in USD terms), the full brunt is going to be felt by the US education market. There is scope for winners and losers--and some emerging market currencies may strengthen against the dollar--but the current pull-back in emerging market economies is in its early phases and will have profound and unexpected implications for the industry.
International education is being driven by students from Emerging Economies
Emerging markets have long been a driver for internationally mobile study around the world and to US universities specifically. By 2014, EM students represented 7 of the top 10 source countries for study in the US and 17 of the top 25 markets. Figures 1A and 1B illustrate the aggregate foreign enrolments by nationality over the 2005 to 2014 period--with leading EM countries such as China and India, followed by others such as Korea, Saudi Arabia, Mexico and Turkey. In short, the US market is highly sensitive to these regions.
It's worth noting that China's dramatic gains in international student enrollments have taken place largely within the framework of a strengthening and stable RMB against the US dollar, and outsized economic growth in the country (not to mention peak high school demographics and other factors). Chinese student enrollment trends are expected to moderate, for reasons I outlined previously, but the current turn in China's economic cycle and potentially the RMB threatens spending decisions in countries far beyond its borders.
Figures 1A and 1B: International Enrolments in US Higher Education and Training is Predominantly Driven by Emerging Markets
The bottom line is that declining local currencies against the US dollar will have an immediate impact on international study in the US particularly since higher tuition and related expenses are usually paid in cash by foreign students rather than financed over the long-term. To be sure, student decisions are not only based on affordability but also programmatic quality, academic reputation, geographic proximity, prospects for future immigration and other intangibles. But for many students and their families, a difference as much as 10 to 15 per cent in cost can hit hard on household budget decisions.
What will be the impact of a strong dollar education market?
Market participants should now be asking how deep the current directional trends in EM currencies will impact specific countries and student cohorts who are most sensitive to rising costs; what strategic options exist for Universities and education groups that are targeting this young and dynamic market; and which host countries will lose or benefit from these structural shifts in key emerging economies.
Let me offer a few ways of analyzing this.
First, declining local currencies directly increase the real cost of study in terms both tuition, travel and associated expenses. Students and their families that are most vulnerable to these changes, and who reside in countries where currency declines against the dollar are particularly steep, may opt out of US study entirely, switch to a cheaper country (eg. Australia, whose own currency has dramatically weakened against the US dollar over the past year and may offer a more affordable alternative) or reduce the overall "seat time" spent overseas as part of a multi-year degree program.
Figures 2A and 2B chart percentage changes in US student enrollments by nationality with a specific highlight on India and China, the former experiencing significant growth volatility at high volume over the 2005-2014 period. Vietnam and Turkey, both important source countries for the US, have also shown uneven growth trends, yet at different times. Why?
Figures 2A and 2B: International Student Enrollment Growth Rates in US by Source Country, 2005-2014
As a first shot, Figure 3 illustrates the annual change in local currency v. US dollar with annual changes in US international enrollment. The results are charted individually for India, Vietnam, Turkey and China and show clearly that declining enrollments are correlated with sustained local currency weakness against the USD over the historical period. In fact, enrolment declines in these examples (apart from China, which until recently has been mainly appreciating against the USD) were almost always preceded by local currency declines: in India (2008-09 and 2011-12), Turkey (2009, 2011), and Vietnam (2007-2010), three major US source markets.
There are caveats in reading too far into this analysis: these are only correlations, we do not know if the currency was simply the cause or lagging indicator of another reason for enrolment drops (e.g. a weak real economy, visa problems), or if any unusual short-term programmatic enrollments have skewed the data. Having said that, we cannot dismiss the impact of weakening currencies on international education demand in the US in these cases, as it evidently matters.
Figure 3: Annual Percentage Change (%) in Local Currency v. USD and US International Student Enrollments shows correlation for India, Turkey, and Vietnam
Second, the fall in local currencies may prompt students to explore higher education options closer to home--including the provision of foreign degree programs locally via transnational education ventures ("TNE")--or to look at relatively cheaper destinations such as Australia, which has experienced its own collapse of value against the greenback and offers lower-cost alternatives to students worldwide. In my experience, US universities tend to believe that foreign competition doesn't matter. Intensifying growth in enrollments outside the US suggest otherwise.
In fact, we are projecting that TNE in many non-US countries around the world will experience a further nudge forward as the dollar strengthens. Australia should be a major beneficiary at home and indeed has already experienced positive trends (see Figure 4); other, smaller regions such as the UAE, Mauritius and Malaysia may also provide more value to students from parts of Africa and the Middle East. With the advent of English language University programs across a number of leading Asian Universities, this analyst would expect that Intra-Asian study will also increase in popularity.
Online education, which is often an after thought, should also benefit from any pullback in international student mobility, perhaps mostly in the case of non-degree training and MOOCs such as Coursera and Udemy that serve the global market.
Figure 4: Australian International Enrollments and the Aussie Dollar (Annual % Change)
Third, and on a related point, a relatively strong dollar against EM currencies will reduce the cost of delivery for American higher education providers, ranging from teaching and curriculum support, technology use and local administrative costs. This trend will favor more robust US TNE expansion in selected markets in Southeast Asia, Africa and Latin America. For example, students at NYU Shanghai may be willing to pay the relatively expensive tuition but save on living and travel expenses, which can be a significant proportion of overall study cost. Other TNE programs may be offered at significantly lower tuition overseas than at the parent institution back home, a model that may become more compelling if real costs are lowered to run such programs.
Fourth, a stronger dollar could accelerate US outbound study--which, accounting for only 1.5 per cent of total students in 2013, offering ample room for expansion--and provide a needed source of revenue to education providers in host countries. To date, most US study abroad programs have been short-term exchange and year abroad programs with only 3.5 per cent deemed "long-term" study, according to Open Doors statisticssinice . In a strong dollar environment, cost-conscious (and perhaps more adventurous) US students might be prompted to take a degree from overseas.
Figure 5 : US Students Abroad by Region (Percentage of Total), 2013
International Education as Non-Trivial and Export Sensitive
Final question: why does this matter?
The annual impact of international student revenue on the US economy is non-trivial; and higher education is one of America's most prized exports. According to this analyst's estimates the aggregate tuition revenues for international higher education were USD 76 billion in 2015 and will grow to between USD 111 to 130 billion by 2025, a figure that does not account for the large ecosystem of services that feed into and support the study abroad market. American universities have come to rely on a constant stream of foreign student revenue (USD 27 billion in 2015 alone) based on differentiated pricing at the high end, which support their own fiscal targets as well as those of local communities. Whether this cozy arrangement continues is an open question.
In sum, the recent currency rout in emerging markets, if proven sustainable for a multi-year period and seeping into real economic growth, will create more budget conscious international students considering US study; prompt the rise of TNE development options overseas and renewed competition from Universities outside the US that offer greater value; potentially increase US outbound study, and create knock-on effects for online learning and students choosing to stay at home. Meanwhile US Universities who lack the means to lower costs through tuition discounts or scholarships, believe that sky-high tuition levels for foreign students are here to stay, or who may not be offering differentiated value to foreign students for the price being charged, might want to check their prior assumptions, diversify their student recruitment strategies, and plan for a more uncertain future.
In 2004 the late C.K. Prahalad published The Fortune at the Bottom of the Pyramid, his brilliant contribution to understanding how companies and investors can help to eradicate poverty among the world's three billion poorest without sacrificing--and indeed improving upon--their profit-driven business models. In a sense, his ideas were a precursor to the "doing well by doing good" meme as it applies to the world's less developed markets. Within the education sector, C.K.'s standard bearers today could include companies such as Khan Academy, the world's free-tutoring platform, higher education courses delivered online, anywhere by Coursera and the successful private schools for the poor approach exemplified by Bridge International Academies in Africa.
Yet from a pure economic perspective one thing is clear: the majority of sustainable and profitable opportunities for developing educational products and services in emerging economies are focused on "mass luxury" rather than "mass poverty" markets.
To be sure, the world's aggregate demand for education still lies squarely at the bottom of the pyramid but spending habits are changing. I have written previously about the ways in which education technology companies and Universities are investing in more disadvantaged student segments and geographies and recognize how the most underdeveloped educational regions such as sub-Saharan Africa can offer outsized returns to both investors and students. But whether we like it or not, education is becoming a global luxury good with some of the most lucrative and impactful investment opportunities being derived from this segment.
Consider for a moment where the bulk of household discretionary spending on education is now targeted: sending children abroad for college, enrolling them in personalized academic tutoring, providing them with specialized foreign or English language coaching, placing them in international boarding or private day schools, accessing unique educational experiences for children after school, packing them off to uber-competitive summer camps. These activities go beyond basic educational needs, and although parents and students may view these expenditures as a necessary luxury to stay ahead in the global brain race, that is just semantics: this type of consumption is aspirational, brand conscious and, in relative and often absolute terms, expensive.
There will be profound investment implications from both projected wealth increases among the emerging market middle classes and their higher propensity to spend on premium goods and services in education.
Here are a few observations:
1. Global middle class consumers located in emerging markets, and particularly Asia, will disproportionately drive global consumption through 2030. Higher income levels will create natural demand for more aspirational and experiential consumption of goods and services.
Figure 1 charts the rise of Asia's higher-end consumers (measured at >$20 per day income) which increased from a mere 1 per cent of its population in 2008 to approximately 21 per cent by 2030. By comparison, Latin America begins at a much higher percentage--25 per cent of population was at "high" income in 2008--and hence grows far less through 2030 but notably exceeds the projected percentage of high income populations in Emerging Europe.
Figure 1: Higher Income Bracket (>$20/day) as % Total Population by Development Region: Asia Moves from 1% to 21% Between 2008 and 2030F
The full impact of Asia's relative position in terms of emerging wealth at the individual level is even more profound when considering the percentage changes in Figure 1 against overall population size, as measured in Figure 2. On this calculation Asia's middle class incomes rise from less than USD 1 trillion in 2008 to a mind-bending USD 31 trillion by 2030. Let's repeat that: a $30 trillion bracket expansion for populations over $20/day in 15 years.
Figure 2: Total Wealth Created From "High" Income Bracket by 2030 in Developing Regions (Unit in Chart: Billions) Skews Largely to Emerging Asia Exceeding USD 31 Trillion
2. A sizable part of middle class consumption--as measured by disposable household expenditure--will be devoted to private, supplemental and mobile education.
To cite just one example, I have written previously about the demand for academic tutoring across Asia and the interesting finding that spending is not confined to rich countries; in fact some of the poorest households in Asia, such as Myanmar and Bangladesh, are now enrolling among the highest proportion of their children in extra tutoring and academic preparation. Given the low per capita income in such countries we can reasonably assume that these expenditures constitute a significant amount of household income.
This is illustrated in Figure 3, where both low income and high income countries across Asia are participating widely in some form of academic extracurricular activities. Wealth expansion in future decades will only deepen expenditure pools.
Figure 3: Low Correlation Between Household Affordability and Participation Rates in Academic Tutoring, Making it a "Necessary Luxury"
3. Private school supply options are gradually widening with the advent of more permissive regulatory frameworks, greater dissatisfaction with public education, a desire for international academic standards, and increasing parental status anxiety.
As Figure 3 illustrates, the relationship between general affordability (measured by GDP per capita in PPP terms) and the number of premium international schools in major international cities is not statistically significant since population size, the quality and availability of domestic education options, the level of expatriate children enrollments and English language usage can differ widely by geography.
However what Figure 3 does indicate is that a large cluster of emerging cities above the $20,000 per capita GDP threshold begin to establish significant numbers of private international schools in places such as Beijing, Shanghai, Sao Paolo and Abu Dhabi. Moreover a few cities at much lower income levels, such as Ho Chi Min City and Mumbai, have already established over 50 international schools and may foreshadow the level of potential future demand as wealth rises.
Figure 4: GDP Per Capita and Growth in International Schools Clusters Above Affordability of $20,000 PPP Levels
This demand for premium-priced private education is consequential for education investors. Between 2014 and 2024 alone, international schools are projected to add almost USD 30 billion additional annual revenue to school operators, reaching USD 64 billion annually (see figure 4). In comparative terms, corresponding levels in 2000 were only USD 4.9 billion and indicate just how firmly this growth has taken root.
Figure 5: Robust Global Expansion of International Schools Projected to Create USD 65 Billion Annually by 2024, Almost Double Current Levels
4. Although low-price or freemium models are naturally scalable across emerging markets, companies serving the middle to top portion of the education affordability bracket may benefit more extensively by achieving both an increasingly relatively high volume of customers and premium-priced education services.
Consider travel, which is the single largest luxury consumption item worldwide and contributes more than US$460 billion or 25 per cent of the annual US$1.8 Trillion luxury market as estimated by Boston Consulting Group in 2012.
Youth, student and language travel account for a considerable proportion of this--an estimated US$194 billion (based 207 million arrivals) in 2012--and as Figure 6 indicates, a market projected to reach US$320 billion in annual value (300 million arrivals) by 2030.
Figure 6: Language Travel and Study Represents the Purest Form of Education as Luxury Good, Part of a $200 Billion Industry
5. The world's leading education companies and those waiting in the wings are decidedly not serving the the bottom of the pyramid, but rather emerging mass luxury segments and the pathways that feed them.
Tables 1 and 2 list some of the more well-recognized and financially impactful education companies in the world across respective segments mentioned previously: Test Preparation, English and Study Tours, International Private Schools, Early Education, Higher Education, International Study and Supplementary Skills. The majority of these companies serve the haves rather than have-nots.
Table 1: Representative Companies By Education Segment: Test Prep, English and Study Tours, International Private Schools, Early Education/Tutoring
Table 2: Representative Companies By Education Segment: International Study, Higher Education, Supplementary Skills
There are many competitors not included here, some of which are public and private schools, free online platforms and world-class NGOs. Their work should be lauded; a few will succeed in achieving a superior ROI to both investors and students.
But these entities and the student demographic they serve are exceptions to a much more prevalent rule: the coming age of mass luxury education consumption based in rising wealth, inadequate local provision, global academic hyper-competition, and a desire for more engaging, meaningful and unique education experiences for both children and their status conscious parents.
Asia-based households continue to spend significantly on educational activities outside of school, allocating an average 13 per cent of their total disposable income in 2014. Mercifully over two-thirds of households save regularly for this purpose--though some have been known to plunge dangerously into debt--a fact consistent with past surveys and our own analysis.
What is most intriguing about this spending is that it's not confined to rich countries; in fact some of the poorest households in Asia, such as Myanmar and Bangladesh, are now enrolling among the highest proportion of their children in extra tutoring and academic preparation. The reasons should be familiar to anyone with knowledge of the region: a "keeping up with the Wang's" mentality to survive the national exam race; often inferior public sector options; growth in overall consumption expenditure within households across the income spectrum; increasingly reliable technology access to learning from rural areas; and a move toward higher aspirational goals leading to University enrollment.
Specifically, in Figure A below I utilize updated 2013-2014 survey results from MasterCard which gauge Asia-Pacific families and their propensity to enroll children in academic-related extracurriculars (excluding English language lessons). I then place this enrollment percentage against household consumption expenditure across all major Asia-Pacific countries. The vertical axis ranges from 0 to 60 per cent of children who are counted as enrolled within a survey household, and the horizontal axis measures average household consumption expenditure on a PPP basis of between US$2,000 to slightly over $30,000 annually.
Individual countries are noted by their abbreviations.
Figure A: Percentage Enrolled in Academic Tutoring v. Household Expenditure (PPP basis)
The results are a higher enrollment rate among countries in the top left quadrant, being among the poorest on average: India, Bangladesh and Myanmar. Other countries in the same range of per capita expenditure such as Indonesia, Vietnam and the Philippines have much lower enrollment rates in academic tutoring by household. Richer countries such as Singapore, Korea and Taiwan average around 40 per cent. China enrolls children at less than half of India's levels in extra tutoring.
There are some outliers: Vietnam has only 1 per cent of children surveyed enrolled in academic tutoring although 39 per cent of children were enrolled in English language training. The same is true for Indonesia, which enrolled an average 5 per cent in academic tutoring but 24 per cent in English. By contrast, only 1 per cent of children in India enrolled in such English language preparations, suggesting markedly different priorities across the region.
This post originally appeared in the Educelerate blog on June 16, 2015.
Are US colleges approaching a peak in Chinese student growth? In the past few weeks there have been articles ranging from how addicted college admissions officers are to Chinese student enrollments to the indictment of 15 Chinese students for lying on their applications and US schools expelling 8.000 Chinese students for cheating. Just this past month the international education focused NAFSA Conference featured a panel on pronouncing Chinese names and a separate education investment summit at the New York Times Center saw several education company executives outdo each other with bullish prognoses on the business of Chinese transnational education (both Chinese students coming to the US as well as domestic US edtech products being exported to China).
All this excitement is understandable, but for those of us who have been watching China for decades, it's all a little late.
To be fair, the China mania does feed off some impressive numbers. According to the latest IIE Open Doors data, Chinese students reached 274,439 in the US for 2014, a 339% increase from 2004 (and a bracing CAGR of 18%), which currently account for a sizable 31% of total international students studying in the US. With international students in the US representing $26.8 billion in total tuition for 2014 (and supporting 340,000 jobs), the implied revenue from Chinese students totals $8.3 billion. Looking ahead, we estimate that the US foreign student market is expanding at a 2.5-5% CAGR through 2025 which will correspond to a $35.1 billion to $45.8 billion market. If we assume that China will continue to occupy a third of the projected market, its revenue contribution to US colleges and universities will reach a massive $10.8 to $14.1 billion annually.
But these direct revenue contributions do not even begin to include the economic gravy train that includes everything from education technology and service platforms to various education agents, passport services, early study tours, assessment tools, essay ghost writing, test-preparation, English schools, freshman-year foundation programs and high school pathways that feed, support and are dependent upon ever higher levels of Chinese student enrollment. In summary, the total size of the Chinese student market is actually far higher than even the headline numbers suggest and the direction and depth of Chinese student growth matters to a lot of stakeholders beyond the international officers of US universities.
But here’s the bad news.
There are several countervailing factors that may limit the continuing growth in Chinese students to the US that go beyond a simple “reversion to the mean” argument (although this also holds relevance) and relate to the nature of China’s own educational system, economic needs and, to some extent, capacity pressures in the US. In fact, we are already witnessing early warning signs: 2014 was the first year to show a decrease in Chinese postgraduate enrollments. As Chinese students feel less of a need to gain a US PhD or Masters degree, domestic education and research capacity build to higher quality levels. Our contention is that a similar, albeit more slowly emerging trend will take root for undergraduate students as well, for a number of reasons:
First, China’s available pool of high school graduates—as measured by future enrollments in the system—is rapidly declining. According to Ministry of Education figures, regular (non-vocational) secondary school enrollments reached a high of 86.9 million students in 2005 and declined by almost 20% to less than 73 million by 2013 (see Figure 1). As a consequence China’s gaokao, or higher education exam, peaked in 2008 at 10.5 million and is estimated to register 9.4 million students this June. For the past decade, increasing graduation rates and college enrolment rates in China have acted as a counterbalance to a quickly dwindling student pool. But these rates are reaching relatively mature levels while China’s age 15 population, according to World Bank estimates, continues to decline further from 10.3 million in 2010 to 8.6 million by 2020.
Second, any incremental enrollment growth into the US will come from Chinese provinces and interior regions with lower income demographics than major cities. These students are also generally less prepared in English language skills given the relative lack of quality English preparation in their home schools compared to China’s megacities. According to a Brookings study based on US immigration data, in the years 2008 to 2012 approximately 4.3% of all international students studying in the US came from Beijing followed by megacities Shanghai (2.5%), Nanjing (0.8%), Chengdu (0.7%) Guangzhou (0.7%), and Shenzhen (0.7%)—a combined total of 9.7%. Moreover these few cities accounted for roughly 40% of all US enrollments from China over the period.
Why should we care? There is a loose parallel here to US for-profit institutions that over the past years expanded college enrollments by taking in more “at risk” students who relied on Title IV loans. Fortunately for many college bursars, the Chinese are paying in cash; however, rural and provincial students outside megacities are often more at risk given their relatively lower ability to pay combined with lack of access to US credit. For reasons cited earlier, these students may also require more attention to make the transition to US study. A recent IIE survey found that over 62% of Chinese students thought that US tuition was too expensive, even though most of this survey was conducted in the relatively wealthy areas of Shanghai and Suzhou province. Language was also deemed a challenge to studying abroad. (We understand that the US start-up Quad Learning is adapting its American Honors community pathways programs for international students, which should work well is seizing on this market change.) Simply put, the deeper US colleges dig into the potential Chinese student pool, the greater the challenge in both sustaining enrollment growth and maintaining student quality.
Third, the scarcity value of having a US degree in China based on a past notion that only China’s “best and brightest” can study abroad, is long gone and further diminishing as foreign enrollments surge. There are a number of consequences to this: not only is a US degree no longer a golden ticket to success in China; employers can have a hard time distinguishing between good and average students, not to mention recognizing the thousands of lesser known US colleges from which Chinese students matriculate. There is also the question of Chinese students returning to a labor market after four years abroad (and most do, see Figure 2), with fewer local guanxi (connections), access to job recruitment activities, and local market knowledge that is applicable to China’s rapidly changing economy. In this sense, studying abroad can also be a disadvantage in China’s labor market. In my own discussions with Chinese counterparts over the past decade, US study has increasingly been perceived as a way for rich kids who are not shudaizi (bookworms) with middling gaokao scores (if they take the gaokao at all, and not just opt for the “luxury” of taking the SAT earlier on) to buy a fall-back option should they not secure entrance to a Tier 1 or 2 Chinese university. Of course, there are exceptions: elite US schools or programs in the Health Sciences, Engineering and selective MBAs, still carry cache back home. And multinational companies heavily recruit English-friendly employees that have graduated from well-known US schools. But the overwhelming majority of Chinese students are not enrolled in these prestigious programs and the future of employment in China resides not within multinationals but non-state, small and medium size enterprises. (And don't even start on the future of over-priced executive MBAs amidst China's continued austerity campaign.) Over time, we expect these factors to weigh more heavily on Chinese student decision-making when it comes to spending extended periods of time overseas.
Fourth, China’s transnational education ("TNE") profile is rising steadily as seen in the localization of branch campuses, dual degree offerings and twinning programs with US and other foreign universities, thus providing more options to gain a foreign degree at home. The Chinese government understands its relative undersupply of universities and employable skills gap and has been investing in the creation of new Chinese universities, including with foreign partners. By the end of 2014 there were over 1,000 Sino-foreign programs (80% at undergraduate levels) officially approved from fewer than 600 programs in 2011; if we add the more than 600 approved programs at the vocational level brings this TNE total to 1,600 programs. Moreover, every indication suggests that TNE growth will persist as China seeks, with the collaboration of foreign universities, to further diversify its science and arts curriculum, import world-class research methods and faculty, and generally upgrade its underlying system—all to the benefit of local students. University Ventures has founded a technology leverage model to exploit this opportunity through its EdVantage America, which has created a new online-enabled pathways program providing the first one or two years online (available "at home"), with the student then able to complete their program in the US at a partner institution. (We have also noted that EdVantage's UV sister portfolio company UniversityNow has expressed some initial interest in exploring the international market, and we do believe their low-price, all you can learn privately paid model could be well adapted to supplement this shifting China opportunity).
To be sure, a significant number of students will always opt to study in the US for the reasons we all know: living in a foreign country, experiencing local culture, gaining a Ivy League degree, seeking a high quality education, or pursuing a chance to immigrate. However China itself will increasingly provide higher quality, lower-cost alternatives to foreign study at home (and through online TNE delivery in the case of certificates and competency based education, a factor not discussed here but noted). As TNE enrolment rates increase, there is often a zero sum impact on US onshore enrollments.
Fifth, there are signs of international student capacity constraints at many US universities, driving Chinese students to enter state, private and community colleges. International students already account for over 20% of total enrollments at such prominent US universities as USC, University of Illinois, New York University, Purdue University, UCLA, Northeastern University, and Harvard. We believe that the Top 100 schools on which the Chinese have historically focused are saturated. This can be seen anecdotally in headline news such as this Chicago Tribune article on Chinese students at the University of Illinois as well as in our conversations with new international recruitment models like Wellspring International Education, which is doing much work with regional universities in the US. Wellspring believes those schools with strong rankings on the US News regional lists with the STEM programs sought by Chinese students do still have an opportunity to grow. Indeed, just a few miles from our LA offices, Santa Monica College enrolls 3,320 international students representing 10.3% of total school enrollments, with over half to three-quarters coming from Asia.
There is nothing inherently wrong with this; on the surface it represents a healthy diversification of US study locations. But remember that for many Chinese students (who are not shudaizi) there is a premium or luxury element attached to study abroad that has been applied successfully to major US cities and states. Whether increasingly provincial Chinese students will be willing to enter into relatively provincial schools in towns across America remains to be seen. Indeed, its perhaps telling that within California, 27,779 foreign students with F1/M1 visas are enrolled in the state’s Community College system, which amounts to almost 3.5% of all international students in the US. At the macro level, optimists may counter that the US is nowhere near the levels of foreign students in Australia and the UK, where foreign students make up upwards of 25% and 18%, respectively, of the entire higher education system. But many leading US schools are already at this level and why should the overall US necessarily approach anywhere near these levels rather than that of say, Canada (still just 8%)? The US higher education system exceeds the UK and Australian markets by a factor of 10x and 20x, respectively. To approximate the penetration of foreign students in these Commonwealth countries, the US would have to expand to 2-4 million international students, effectively consuming every transnational student in the US, UK, Australia, Europe, Canada, Japan and South Africa! In reality, the US share of all international students has actually been declining over recent years. Moreover, any outsized growth at all will have to come from somewhere other than China: consider that both the UK and Australia have started to experienced uneven Chinese enrollment growth as its students reach peak levels, stretching the natural urban-rural geography and immigration limits of China.
Finally, just to extend our thesis above into emerging education technology and disabuse any Silicon Valley cheerleaders hyping the export opportunities, we believe China and Asia are emerging as the World's Test Lab for EdTech. Indeed, China investors and start-ups are already responsible for nearly one third of all annual EdTech investment as well as the majority of all growth equity financings and nearly all IPO activity in the education sector.
In summary, Chinese students in the US are a critical component of America's higher education system and, from a political perspective, a positive force in Sino-US relations. The size and importance of this market will remain unchallenged, however enrollment growth, even from China, has natural limits. If our earlier projections cap Chinese student enrollment expansion at 2.5-5 % CAGR--which we believe is probable--China will still be contributing upwards of $15 billion annually (non-inflation adjusted) to the US by 2025. But this is well below the double-digit growth of past five years and, on the downside, a 5% CAGR is neither easy to achieve nor a guaranteed outcome. Universities and enabling service businesses that remain wedded to the idea of compounding student numbers would therefore be well advised to check their assumptions, and perhaps diversify their geographic portfolio, before the party ends.
We can only get our continent to have inclusive growth if we are educated and change our mindsets -- Doreen E. Noni, World Economic Forum, 2014
It doesn't take a great deal of macroeconomic digging to understand the profound development opportunities that are emerging across Africa, which by 2013 was receiving $57 billion in foreign direct investment or more than double the $26.2 billion in foreign aid funneled to sub-Saharan Africa from OECD countries. But without profound changes in the way education is accessed, delivered and made affordable, many of Africa's economic accomplishments will remain narrow, unsustainable and socially divisive.
In a recent article I discussed some of the low-cost alternatives to African education and the potential role for education technology. Beyond this, there are also profound pressures on putting the continent's rapidly growing youth population to work as well as expanding the supply of available education and training.
Figure A provides some basic comparative data aggregated across Africa, Asia and Latin America--three of the world's largest development markets (statistically we are referring here to sub-Saharan Africa). What is most striking is Africa's severe gap in higher education in the face of a youth bulge, and the increasing number of students that are looking elsewhere in the world to fulfill their higher learning needs.
To understand this context, consider five brief observations.
Figure A: Education Demographics Across Three Continents: Africa, Asia and Latin America
First, Africa's aged 15-19 population is expected to reach 151.1 million by 2030, which is three times the size of the same demographic in Latin America and virtually equal to Asia, according to UNCTAD projections. This age bracket is both an important indicator of potential college-bound or vocational students and generally the future funnel for the workforce, and Africa will lead the world in it, with an estimated 43 per cent of its total population under the age of 15.
Second, while workforce pressures may not be as severe for governments in Asia to handle, Africa had only 6.3 million students enrolled in tertiary education in 2012 compared to 97.6 million in Asia and 22.8 million in Latin America--a massive gap to close, particularly when considering Africa's rapidly expanding population. Looked at another way, the ratio of incoming secondary to tertiary students is 7.7x for Africa against a much lower 3.2x and 2.7x for Asia and Latin America.
Third, affordability is challenging across the education cycle and in every African country. Current estimated Sub-Saharan Africa GDP on a PPP basis is $2,546 or less than half of Asia and a third of Latin America at $10,872. Moreover, since African countries represent the 8 of the world's top 10 countries in family income inequality as measured by the Gini index the actual purchasing power of individual African students is undoubtedly lower than the headline statistical figure represents. How to deliver quality higher education with limited family and government funds, and without an adequate supply of universities on the ground, now begs for immediate solutions.
Fourth, African students, to the extent they can afford it or gain assistance, are voting with their feet with approximately 288,198 students going abroad by 2012, a level far exceeding Latin America. For American universities, it is interesting to note that only 31,114 African students were enrolled in US universities in 2014 (3.5% of total international students in the US) compared with much higher levels from Asia (1.47 million students or 64.2%) and slightly higher levels in Latin America (72,318 students or 8.2%).
Fifth, Africa is only beginning to internationalize its higher education system. Currently there are only 10 international branch campuses in African countries compared to 88 in Asia and 15 in Latin America. Despite Africa's utter lack of higher education supply and quality to match future demand, the education world has yet to respond in full measure.
"A fly before his own eye is bigger than an elephant in the next field." Anon. (Chinese)
It is tempting to watch the merry-go-round of dealmaking among education entrepreneurs and venture geeks and settle into the idea that one can just can invest into something quickly, build scale and dominate a particular corner of the education market--or, if that doesn't work, sell your company to the next fool. It might even be plausible if you're a financial investor with a seven year time horizon who can tap either strategic or public market exits without any longer-term considerations. But for leading education companies and University operators, with time horizons in the decades if not centuries, a few high-profile minority investments rarely provide the level of deep, strategic and durable market presence that is necessary to create a meaningful impact for both students and stakeholders.
Perhaps it is for this reason that M&A has long been the favored strategy for multinationals and other foreign competitors expanding into the Asian region, and the education sector will be no different. For despite serious challenges to acquirers in terms of less than permissive industry regulation; attitudes toward change of control and foreign majority ownership; skepticism toward private for-profit entities; limitations in deal size; and emerging local acquirers, the past decade has already witnessed a solid number of of strategic platform investments and add-on acquisitions across a range of educational institutions and service businesses. Moreover, with Asia's highly fragmented markets, scaled-up local competition, and the full impact of past venture and private equity investment into education companies now maturing, the years ahead are primed for an even larger wave of consolidation as existing education giants vye for market leadership and those still eyeing the region from the US and elsewhere begin to realize that their clock is ticking.
To understand this further, I collected a representative set of M&A transactions in Asia's education sector between 2004 and 2014. The data include predominantly control-based acquisitions and investments executed on a cross-border basis, with strategic minority investments and invested equity as part of joint ventures are intentionally excluded.
The results of this survey, as illustrated in Figure A, are drawn from thirty-three distinct education-related acquisitions across the region.
What does the data tell us?
Figure A: Selected Asia-Based M&A in the Education and Services Sector: 2004-2014
Geographic and Country Focus
First, in terms of geographic focus Australia and China were the most active areas for cross-border acquisitions accounting for 27 and 42 percent of total deals (by number). This should not be surprising. Australia is a relatively open, competitive marketplace as well as a global leader in attracting international students and a magnet for Asian immigration. As such there has been consistent investment into Australia from leading postsecondary companies such as Kaplan, Laureate, and Apollo both as a way to purchase initial scale in a vibrant English language higher education market and to tap rapidly growing cohorts of inbound international students. Foreign participation also fits with the Australian government's economic policies.
For its part, China has been the most active education market in Asia with M&A transactions spanning K12, tutoring, English language learning (ELL) and private higher education including through both private and public market transactions. Notable cases here include Pearson, Laureate, and Raffles Education in Singapore. Their wide range of activity is a function of many factors attributed to China's own economic rise but also to the particular demographics of higher education including a peak in the number of high school graduates (and potential pool for college), a wave of private minban colleges over the 2000s, surging levels of study abroad, and higher propensity to spend on cram schools and English language study.
But the concentration of deals in Australia and China also suggest a lack of activity elsewhere. Notably, there were relative few (6 per cent) of M&A transactions in India despite its massive need for education-related FDI; Singapore accounted for 9 per cent. While this low level of activity has no doubt been influenced by regulatory ambiguity and government aversion to for-profit tax status in the case of higher education, other education needs such as vocational skill investment have also lagged in terms of geographic distribution and quality. Outside of India, there are several markets in ASEAN--such as Vietnam and Indonesia--where M&A activity has been largely absent despite enormous development needs. Japan and Korea, among the toughest buyout markets to crack in education or any other industry, were also off the list but these markets offer less-defined growth opportunities.
The second observation is that M&A activity has been concentrated within three sub-sectors: higher education, professional and vocational education, and English training, accounting for 36, 30 and 12 per cent of total transactions, respectively.
Why these deals have been aggregated as such can be explained in a few ways:
As noted previously, it is often what is missing that is more important. Within education sub-sectors, activity in the K12 and international school area sector is on the rise in terms of venture and equity investment but less so on the M&A front. The roll-up of schools under Nord Anglia is one exception; other school "chains" such as Maple Leaf and Dulwich in China are being built organically. But the speed at which demand for K12 assets is increasing, with operators looking to build scalable presence across the region, may invite more multinational strategic activity with heavier capital commitments in future.
A Few Active Acquirers
Third, there has been a small cluster of buyers with over 79 per cent of acquisitions led by four highly acquisitive companies: Laureate, Kaplan, Pearson and Raffles (with some late activity from Apollo). In cases where other multinational groups with education interests were active in Asia-- publishers such as McGraw Hill, Wiley and Bertelsmann are examples--market entry has usually been in the form of opportunistic minority equity holdings or revenue partnerships rather than acquisitions. There are a few companies such as EF (English First) which have used a build rather than buy strategy, but these are the exception. In the case of China, EF began with a joint venture and but later opted for a wholly-owned build-out model which has proven successful in maintaining control over its country strategy. Yet its success was also in no small measure due to significant prior international experience as well as the nature of the English language sector, which is less regulated than more formal, accredited education.
How long will this concentration of acquirers last? US for-profits such as Kaplan have been active internationally for decades and several, such as Laureate, have been acquisitive from inception. Through shrewd M&A strategies they have developed specific platforms in Asia and will continue to grow organically as well as through selected acquisitions. But the future will be different.
The past decade in Asia has opened up the M&A field and we have only begun to see the presence of large, domestic players placing bids as part of formal investment banking auctions. If the historical experience of other industries such as TMT are any indication, then domestic education competitors in Asia will become much more acquisitive over time, both inside and outside the region, in a race to consolidate locally fragmented markets and develop more globally integrated platforms.
At the same time, competitors such as Apollo Education Group, who only recently became an owner of Open Colleges in Australia, will need to build a much deeper presence in the region to make its international diversification efforts meaningful to shareholders. Still other market participants, from educational publishers to leading Edtech platforms, may currently have some presence in Asia but will realize, if they haven't already, that their positioning is relatively non-material in terms worldwide profit contribution.
I have written frequently here about Asia being at the epicenter of education market development over the coming decades. If I am correct, the pressure to own assets in Asia will only rise as education markets consolidate, localize and expand far beyond current levels. Companies with coherent and well-executed M&A strategies will be on the inside rail to take advantage of higher growth through strong local commitments and knowledge if they have skin in the game; many others, relying on a hodge-podge of joint ventures and smaller "opportunistic" investments, may no longer be in the position to effectively compete at all.
This post previously appeared as an article in Edsurge on April 14, 2015.
In the world we live in, unprecedented opportunities to learn co-exist with enormous inequality. Today there are over 100 more children enrolled in primary schools in lower-middle income countries than a decade ago, and early childhood education is skyrocketing--a fantastic outcome in such as short period of time. Yet there are also an estimated 250 million children still cannot adequately read, write and count and 57 million are not in school.
The key reason is cost.
A recent UNESCO study estimates that the total cost of educating all children at pre-primary, primary and early secondary levels reached $100 billion in 2012 and will rise to $239 billion annually between 2015 and 2030 (an estimated $20 billion deficit per year). The concatenation of more children achieving higher levels of education within dramatically expanding K12 populations across Asia, Latin America and Africa is unleashing immense pressures between affordability, fiscal budgets and educational supply on one hand, and the attainment of higher learning and employment expectations on the other. In Africa alone, a projected college enrolment rate increase of 7 to 30 per cent over the next twenty years is going to require governments to spend 50 times the current level of $1 billion per year spent across the entire continent.
There are two fundamental ways to tackle these challenges: either lower the cost of education (while hopefully retaining quality and equity) or get someone else to pay for it. For basic education, the primary sources of education finance continue to be domestic country budgets, multilateral agencies and country-specific aid programs (like the World Bank, UNESCO's Capacity Development for Education For All Program and USAID) and overseas remittances. Yet in the face of bulging education demographics and funding costs this is not enough and it is the private sector--and most specifically the EdTech community--which must fill the gap.
Here are a few ways this is happening.
Seed and Venture Funding for Low-Cost Schools and Services. Venture and seed funding offer a lifeline to education entrepreneurs, who often have no access to traditional forms of bank lending, in an education industry which has little experience with private sector involvement. Not surprisingly, the most ambitious education start-ups in developing countries are now getting funded through venture capital.
For example, Pearson's Affordable Learning Fund (PALF) and a number of affiliates have sparked investments into low-cost school chains including Sudiska pre-schools in India, APEC middle schools in metro Manila, Omega Schools in Ghana, and Bridge Academies in Kenya. These are for-profit, scalable schools charging as little as $3 per month to families and harnessing technology to deliver curriculum and centralize management costs.
Their level of ambition is wild: Bridge, with a recent investment boost from Mark Zuckerberg, is targeting a 100x expansion from its current 100,000 plus enrolment base to 10 million by 2025. Still, the capital in play is miniscule. PALF has only $50 million to manage and others such as Unitas Seed Fund in Bangalore are approaching $20 million. Larger, follow-on investments to develop a global network of "academies in a box"--and the edtech innovations to power them--are only beginning to make a difference.
Alternative Loan Finance and Repayment Methods. Global Emerging Markets are now facing higher borrowing costs on the back of rising interest rates. This is bad news for students in countries that an lack institutional lending capacity for education. The traditional use of tuition discounts, subsidies and financial aid will help only at the margins, leaving how loans are accessed and structured for the emerging mass of potential students as a key solution.
Consider a recent IFC sponsored study of 70 alternative finance companies and the range of financial innovations on offer. Included are Ideal Invest, which uses asset backed securities and big data scoring to fund low-cost and low interest loans in Brazil, and Eduloan, which uses innovative screening and risk management methods to reach middle income borrowers in South Africa. Still others are more efficiently matching loan profiles to employment prospects, creating job-related payback schemes, and creatively working with education-related micro finance.
Peer-to-Peer Lending and Crowdfunding. The popularity of US-based "P2PL" or peer-to-peer lending (in which technology allows the matching of individual lenders with borrowers outside of traditional intermediaries such as banks) and student finance management platforms such as SoFi, Prosper and CommonBond; DonorChoose for teachers and projects; and peerTransfer for internationally mobile students, has quickly spread around the world. Not surprisingly, Asia is now the second largest region for crowdfunding, growing 320% last year to $3.4 billion raised and double the estimated rate of the US in 2015. Companies such as microcredit P2P platform CreditEase in China and FairCent in India are a template to the future, offering vast potential for student needs and a way around traditional banking systems.
Business Activism and Investment. Multinationals have long complained about talent gaps across emerging markets. Yet a recent survey showed that $20 billion per year is spent on corporate social responsibility (CSR) by Global Fortune 500 companies but only $2.6 billion, or 13%, is education related. There are exceptions--IBM spends an estimated 72% of its CSR budget on education--and large-scale initiatives such as CISCO's Networking Academy or Santander Universities (the education division of Banco Santander) are delivering education investment and innovation to where it is needed most.
But for many companies operating globally, education is still viewed as a "social responsibility" rather than a commercial imperative. Businesses may recognize that the process of educating, securing and retaining talent is the best way to build sustainable profits and shareholder value--but they must do something about it while their future workers are still students.
With the world now in reach of educating every child, pressures related to the funding and cost of education are, paradoxically, going to intensify. In the years ahead, more primary school graduates will create higher demand for secondary and university education and, in turn, a deeper pool of potential workers in search of employable skills. This dynamic calls on private companies to provide the type of innovative technology, funding and market-drive growth solutions that have already shown so much promise, but which will require even more attention to those populations who need it most.
In March I had the honor of presenting at Baylor University's Global Business Forum on the topic of the Global Classroom. Participants included Dr. Jouni Valijarvi from the Finnish Institute of Educational Research, Dr. Patrick Blessinger, author of Democratizing Higher Education: International Comparative Perspectives, and many other education professionals.
My keynote deck is attached here.
Back when I was studying economic development theory, the idea that "many are called, few are chosen" was part of the debate on whether South Korea would break through the middle income trap. That debate has ended: Korea is a shining example of success--and higher income--in no small measure from the educational drive and prowess of its people.
Fast forward to Indochina. In a recent article featured in Barron's, what is called "The New China" was profiled as an emerging geographic cluster including Vietnam, Cambodia, Laos, Myanmar and Thailand. This region, with a collective economic output of $640 billion in 2014, 20% annual export growth over the past four years, increasing FDI from Japan and Korea, competitive low wages and a workforce ten years younger than the 30-35 age group found in China, is no doubt on the move. But a quick analysis of comparative education trends favors one country in particular, and that is Vietnam.
Consider a few education statistics that are reminiscent of Korea a generation ago:
Compared with its neighbors, Vietnam's educational achievements are even more striking.
First, Vietnam has been far ahead of its neighbors in primary school completion, dating back to 2000 when over 97.8 per cent of children completed at level. As Figure 1 indicates, other countries in the immediate region (such as Cambodia) have made dramatic gains through 2012 but are at least a decade behind Vietnam in terms of attainment.
It is no surprise that Vietnamese students have rapidly moved toward higher levels of academic achievement after primary school. The result has put immense pressure on expectations for world-class educational quality and, when that is not available, the willingness of households to invest in their children's future outside of formal schooling, such as in cram schools, English lessons and study abroad.
Figure 1: Primary School Completion as % Total Relevant School Population by Country
Second, the correlation between standardized test scores and falling birth rates in East Asia among powerhouses such as Korea is also relevant to Vietnam. Vietnamese birth rates have dropped from 3.6 per household in 1990 to 1.8 per household by 2012, a decline of 50 per cent over a relatively short time. Thailand has reduced 2012 birth rates to an even lower 1.4 per household by 2012 but from an already low 2.1 in 1990. What is the impact? Fewer children to educate equates to more potential support per child--financial, pedagogic or otherwise--and increased spending per child overall. This is what educational companies and schools are reaching toward today.
Figure 2: Number of Births Per Household by Country
Third, Vietnam has consistently registered among the highest growth in labor productivity in Asia over the past two decades, averaging 5.0% per year between 1990 and 2000 and 4.8 per cent from 2000 to 2011, according to APO data (which measures productivity using annual GDP growth at constant basic prices per hour, see Figure 3).
This level of sustained labor productivity is directly related to educational levels. Only China/Korea (1990-2000) and China/India (2000-2011) exceed average Vietnamese growth levels over this time period.
Figure 3: Labor Productivity Growth: GDP at constant prices per hour, 2005 PPP data
Fourth, Vietnam's higher education or tertiary enrollments have risen from less than 700,000 in 2001 to over 2.2 million in 2013, with a significant amount of runway ahead. This enrollment level is now on par with Thailand (Figure 4), whose tertiary enrollments peaked in 2007 despite being almost 3 times as wealthy on a PPP per capita basis than Vietnam (US$14,393 v US$5,294, respectively, World Bank 2013).
Enrollments in Myanmar and particularly Laos and Cambodia have grown incrementally from a small base but remain a fraction of Vietnam's participation at the college level. To cite one example, for all the noise around the opening of Myanmar, the country's students numbered approximately 666,000 in 2013 and any future "take off" phase is difficult to predict and probably many years away.
Figure 4: Tertiary Enrollments by Country, 2001-2013
Figure 5: Offshore International Student Enrollments by Country, 1999-2012
Fifth, the movement of Vietnamese students abroad at the university degree level reached 53,802 in 2012, an increase of 47 per cent from 2008. This trend is a natural consequence of high academic achievement amidst limited university capacity, the result being a flight to international quality. A further catalyst is higher affordability and increased savings for education.
Figure 5 charts Vietnam's dramatic rise in study abroad from 9,851 students in 2001 and, beginning in 2007, far surpassing Thailand and its other neighbors. By 2013 Vietnamese students in the US had reached 16,579, the eighth largest contributing source for international students, and over 11,500 students were enrolled in Australia.
Finally, TNE or transnational education programs have increased significantly since 2007, in large part due to a more permissive government approval environment (Figure 6). Based on the latest available data, there are 193 officially approved foreign higher education programs in Vietnam, of which 64 per cent are at undergraduate level.
Half of all TNE programs were approved between 2010 and 2012, another sign that Vietnam's advances in education will only deepen in the coming years.
Figure 6: Approval of Foreign Education Programs in Vietnam (By Number), 1998-2012
When Michelle Obama visits Cambodia next week as part of a White House and US Peace Corp initiative to help the world get the estimated 62 million girls back in school (see Let Girls Learn initiative), she might want to congratulate the Cambodian government for not only enrolling girls in school but making sure they complete their studies.
At the primary school level, the data is compelling. The most recent statistics compiled by the Asia Development Bank indicates that girls have in fact made dramatic improvements in primary completion between the years of 2000 and 2012.
The figure below provides a snapshot of Southeast Asia, an area that was plagued by low female completion rates only fifteen years ago, particularly in India, Pakistan, Nepal and Cambodia. With the exception of Pakistan, in which 44 per cent of girls are still not completing primary school, many parts of the region are now close to full completion. In terms of population-weighted completions, India is at the top of the list.
Primary School Completion Rates* for Females, %
With the scramble for international student revenues now at fever pitch among Universities, cram schools, education service providers and investors, assessing the current and future market value of international education is no longer an academic exercise. For many countries, the recruitment and servicing of international students has reached a level of economic value that impacts bilateral trade balances, local community businesses, job creation and the financial health of its Universities. In the US, the combination of state and federal budget cuts with declining credit quality among many Universities has created further imperatives in the recruitment of international students who are often charged a premium tuition and pay in cash.
On the surface, estimating current market value is a straightforward calculation that includes tuition revenue, living expenses (including housing and food) and, where available, education-related tourism. There have been a range of forecasts, including those of the British Council, that have identified and modeled the most fundamental student growth drivers, from the propensity to study abroad to the rise of affordability and ease of mobility.
My purpose here is not to re-write these forecasts but to change the composition used in valuing the international student market in aggregate. From a quantitative perspective, the "international student market" is primarily focused on the Main English Speaking Destination Countries or MESDCs (e.g. US, UK, Australia, Canada, EU) which host the bulk of internationally mobile students in University degree programs. But a more comprehensive market valuation must capture all foreign programs delivered by Universities which includes those on a cross-border basis such as overseas branch campuses, twinning programs and joint or dual degree arrangements. This element of transnational education ("TNE") would include students that are enrolled in foreign programs inside their own home countries.
To begin, let's first establish a baseline value. Figure A provides the breakdown of current market value for international mobile students in the MESDCs according to the latest publicly available data and with added estimates for the EU (ex-UK) and Asia. In aggregate, this yields a current annual revenue of $81.6 billion with the US leading at $26.8 billion followed by Australia and UK at $15.5 and $16.1 billion, respectively.
The corresponding number of students that reflect this value in 2014 was approximately 2.5 million with an average student economic value of $30,520.
Figure A: Current and Projected Internationally Mobile Student Market Value (in US dollars)
Second, with historical growth rates over the past decade of between 2 and 3 per cent annually, the projected value in 2025 can be illustrated in two scenarios: moderate growth of 2.5% p.a. and high growth of 5% p.a. Note that I have assumed no tuition inflation or changes in relative currency rates over the period, which may render these results conservative from a dollar standpoint. Using these assumed growth rates, the projected market value in 2025 is between $119 billion and $139 billion, with a range of $35 billion and $46 billion in revenue generated annually in the United States alone. Splitting the difference brings an annual market value of $130 billion.
A third leg of the analysis captures the value of a transnational education. According to recent C-BERT data there are 201 international branch campuses in operation today (of which 77 are US Universities) and another 22 branch campuses under development. Foreign joint programs offer less reliable data but within the most active TNE host countries, all of which are located in Asia (China, Hong Kong, Malaysia, Mauritius, Thailand, Vietnam), one study found that 3,050 foreign programs were in operation at the end of 2013. For the purposes of this forecast, and based on my own work around the world, I could reasonably assume that there are 3,500 programs active worldwide today at an average of 75 students per program, which yields an enrollment of approximately 263,000. Add to this an average of 2,000 students per branch campus (or 402,000 students) and the total number of students in TNE would reach approximately 665,000 annually.
Since TNE data is unevenly reported and measuring average tuition for foreign programs is a conundrum as host country programs are often pegged at domestic tuition levels (as opposed to branch campus tuition which is more in line with international levels), we would have to assume a much lower average value per student. This is particularly relevant in large host countries such as China, Vietnam and India, and for this reason I have assume significantly lower average tuition of $3,000 per student for foreign programs and $15,000 at branch campuses. Based on our pool of 665,000 TNE students and tuition assumptions, the market is currently valued at $3.8 billion and, if we assume a modest 1.5% growth rate per annum, a level of $4.4 billion by 2025.
Admittedly, the paucity of hard data limits a more rigorous forecast and these figures are illustrative of what potential range in values the international education market may provide. On the other hand, the analysis includes only direct revenues associated with international study abroad or through TNE. What about the preparation that students receive and pay for prior to leaving their own countries? What of test preparation related to international study (TOEFL, IELTS) or other support services such as application processing, essay writing, and agency , foundation or "bridging" programs to undergraduate study? What about short-term, non-degree international programs, including English? Or the emerging popularity of online study and educational technologies that facilitate international study?
A more comprehensive valuation of the "international student market" would ultimately require these inputs as well.
Finally, it is worth noting that the tremendous enrollment gains and significant economic value that has been achieved in the international student market is only a rounding error when compared to total tertiary enrollments around the world, which reached approximately 196 million students in 2012 according to UNESCO data and are continuing to expand in places such as South Asia and across Africa. At minimum, this only underscores the potential future promise of the international student market which, at a current 2-3 per cent market share for tertiary students amidst insufficient supply, has a long way to run.
Note: an original version of this post contained a UK revenue figure of $10.7 billion; it should read US$16 billion after currency conversion.
Editor's note: a more concise article on this theme was initially published by EdSurge
If the US is the world’s education technology leader, Asia is fast becoming its most critical testing ground. The reasons for this are unambiguous: Asia is home to the world’s largest pool of K12 and college enrollments, has acute needs for educational access coupled deep internet and social media penetration, fosters hypercompetitive examination systems and offers a wide dispersion of household affordability that ranges from the world's richest countries to its poorest.
Yet the most profound impact from Asia’s education breakout is going to be felt on many US-based education companies, Universities, investors and entrepreneurs who are operating today in what is arguably a mature, advanced but relatively low-growth and saturated American market.
Consider a recent list of EdTech’s “most loved” companies in the United States: more than half depend (or will soon depend) on global students to drive revenues, and logically so. The MOOC value proposition of low cost or freemium access is unquestionably global in its value proposition (forget about US higher education dominance) and this is borne out by directional enrolment and early revenue trends at Coursera, EdX, Udacity, Udemy and, at the elite end, Minerva. Language Learning start-ups Open English, Duolingo and the latest edtech darlings in this space are by definition tied to future Asian and global student demand if they expect to gain any reasonable scale (indeed the largest funding round for a language learning start-up was the Chinese investor led $100 million round for the China-based Tutor Group. Adaptive learning innovator Knewton, in announcing a recent partnership with Chungdahm Learning in Korea and Sebit in Turkey (not to mention the very rationale in having the international fund Atomico lead their Series B round), signaled both its nascent expansion into Asia as well as the limitations of its own home market.
I can think of several structural changes in the world’s addressable education market that will further drive Asia to its epicenter in terms of both technology application and innovation.
First, for all the talk of discreet education technologies and ventures that offer positive value to students, any education competitor hoping to provide the most sustainable and meaningful impact over time will need to operate at significant scale, across multinational populations, address local systems needs and offer a level of technological or service solution that reaches beyond the US school system.
The fact that Asia's education markets dwarf American levels by a magnitude of 10 times the number of K12 enrollments, as well as provide an unmatched diversity within a system of 600 million students at varying levels of economic development, should therefore grab every education entrepreneur and executive by the neck. According to an OECD report, of the 204 million 25-34 year olds with a tertiary education in the world by 2020, Asia will account for well over 55 per cent of them, with China and India accounting for 29 and 12 per cent of degree holders, respectively (notably, the US will lag behind India at 11 per cent). This expansion is now snowballing as gross enrolment rates in less developed Asian countries still remain far below OECD levels while K12 numbers multiply. In short, education demographics matter, and even moreso when combined with concurrent growth in middle class wealth.
Second, Asia is now the fastest-growing e-learning market in the world with outright leadership in a number of key areas, including games-based, mobile, and social-based learning.
According to recent data:
Third, pressure on Asian governments to create jobs is immense, unleashing vast opportunities for education-to-work and skills-based platforms. The key difference with the US—where online education can often be synonymous with flexibility and convenience—is that online learning in parts of Emerging Asia can represents the only viable method to overcome geographic access and affordability challenges.
According to a Stanford Center on Longevity forecast, working age (16-64 year) populations in Asia will expand rapidly through the year 2050 with the most profound "worker bulges" occurring in countries of South Asia--specifically India, Pakistan, Bangladesh—which also suffer from relatively low educational attainment. To cite one example, India's employment segment must add 300 million more people of working age in the coming decades yet it has woefully inadequate educational infrastructure and capital to deliver these outcomes without mass technological solutions.
Fourth, as global R&D shifts to Asia so will the needs for higher-order human capital, setting the stage for a larger regional carve-out of the estimated $300 billion corporate training market. Traditionally led by American companies, over half of industry training revenue is now derived from non-US markets and much of it online. In a recent survey, corporations reported dramatic gains in the use of online and blended learning for training purposes with over 54% of surveyed companies using some form of online learning, and blended learning rising from 39% in 2012 to 43% of companies surveyed in 2014. Asian companies, and individuals who are self-funding additional training in places such as India, are following suit.
Fifth, Asia’s education ecosystems are addressing specific market failures with solutions that offer deeper local context, better user interface, and lower cost structures than many US education ventures can offer. Examine the leading education ventures in places like India and China and invariably they are local, not foreign transplants.
There has also been a renaissance in education-related venture and capital markets funding. According to Asia Venture Capital Journal, the region’s venture capital activity has reached record highs in 2014, posting $14.2 billion into 1,600 deals, a 40 per cent increase over 2013 and far exceeding levels a decade ago. As a subset, education-related deals have been on the upswing, with corporate investors such as Xiaomi, Alababa and CITIC in China, Wipro in India, and education giant Benesse in Japan headlining key investments.
Further down the food chain, Asia’s current crop of education start-ups and early stage ventures are geared toward providing wider education access, extending the student lifecycle from early childhood education to career skills, and improving outcomes for both schools, teachers and students. Recent funding examples include adaptive learning platforms KnowRe in Korea and KungFu Math in Singapore; social learning networks Kelase and Zenius in Indonesia and Brainly in India; online learning ventures such ClassDo in Japan, vocational MOOC platforms such include Uniquedu, Guokr and Geek College in China, DeltaViet in Vietnam and online exam platform Rankjunction in India; early education QLL in Taiwan and Taamkru in Thailand; improvements in Asia’s vast test preparation industry through Mana.bo in Japan and Rockit Online in Vietnam; and the education app provider RevoTech in recently awakened Myanmar.
As with many other industries, from TMT to healthcare, Asia’s shrewd localization and creation of new technologies has historically brought forth waves of local competition, from well-connected start-ups to opportunistic conglomerates, that end up seriously challenging foreign entrants. This is now happening across education content, technology and services, with the participation of well-resourced investors and technologically advanced partners.
So here’s a succinct memo to education investors and entrepreneurs in the US: your chances of “putting a dent in the universe” will increasingly require conquering Asian markets first.
Editor's note: This post first appeared in the online publication EdReach.
From A Nation at Risk to US Education Reform and National Security, education and economic competitiveness have long been part of America's geopolitical calculus. But with an emergent China gradually moving toward deeper innovation and a smarter workforce, the stakes have suddenly become higher.
In a recent New York Review of Books article, educator Diane Ravitch reassures us that China's educational system is actually the worst of all and that US testing reform efforts that try to adopt China's model to raise competitiveness are misguided. She makes two essential points. First, that China's (and, by extension, East Asia's) Confucian-influenced exam-centric system stifles creativity and innovation. Second, that until the obsession with standardized testing is abolished the US cannot hope to escape from its current education malaise. Unfortunately, she is wrong on both counts.
Her main argument is deceptively simple. Reformulating arguments in her review from Yong Zhao's book Who’s Afraid of the Big Bad Dragon? Why China Has the Best (and Worst) Education System in the World , she argues:
"China has the best education system because it can produce the highest test scores and the worst system because those test scores are purchased by sacrificing creativity, divergent thinking, originality, and individualism. The imposition of standardized tests by central authorities, he argues, is a victory for authoritarianism. His book is a timely warning that we should not seek to emulate Shanghai, whose scores reflect a Confucian tradition of rote learning that is thousands of years old. Indeed, the highest-scoring nations on the PISA examinations of fifteen-year-olds are all Asian national or cities: Shanghai, Hong Kong, Chinese Taipei, Singapore, Korea, Macao (China), and Japan."
This constant theme, the idea that Asian rote learning is terrific for exam scores but squelches innovative thinking (not to mention leading to a depressed childhood) has long been a bugaboo in Korea, Hong Kong, Taiwan, and Singapore. Yet each of these countries has continued to thrive, with higher value-added economies, larger numbers of college and post-graduates, and richer populations. China, which only entered the ranks when it (or more specifically, Shanghai) agreed to submit PISA exam scores in science and math and then quickly emerged at No. 1 in the world, is now the most high profile "worst" educational system.
I have worked at ground level across China and Asia and know that their schools are imperfect, in constant need of reform, and parents can suffer from the immense pressure that the exam system creates. However given the rapid, sustained and largely equitable growth in East Asia over the past three decades it is hard to see how their educational systems are "the worst" and that they discourage "creativity and innovation" assuming, of course, that these oft-used but vague terms can be measured. So when Ravitch dismisses the entire East Asian post-war economic boom and its educational underpinnings in countries such as Korea and Singapore as a system of rote "not to be emulated," and then suggests that Americans can live with low PISA scores because they always have (PISA was established in 1997), we have truly entered a world of American complacency and low expectations.
China's educational system reflects economic priorities
It is worth noting that the 1990s and 2000s decades reflected China's need for massification in the form of wider educational access, college-level achievement and the development of practical vocational skills. During this period, national educational priorities were specifically not focused on creativity and innovation but rather with harnessing a surging 18-year old population that would drive China's manufacturing exports, help build domestic infrastructure, and provide a foundational set of capabilities in the areas of engineering, logistics, and then management and finance. High test scores were simply a natural consequence of this hyper-competitive national exam system starting with the zhongkao (middle school exam), ending with the gaokao (higher education entrance exam), and with an array of other mock tests along the way. With respect China's specific stage of development, the system worked. Parents and students across China have a razor focus on gaining more job-ready skills and higher standards of living; their children work hard for it. The results of the last 15 years alone, a time when China's higher education system increased from less than 2 million to over 26 million students currently, speak for themselves.
Did China's ability to triple its GDP per capita from less than $1,750 in 2004 to over $3,580 by 2014, with over 767 million people employed in the workforce in 2013, represent the world's worst educational system? Skeptics such as Professor Yong Zhao may suggest that education had little or nothing to do with China's economic prowess and that exposure to foreign education and technology was the trick. Certainly education alone cannot explain China's dramatic growth patterns. Yet a significant amount of foreign capital and technology would never have come to China without an increasingly skilled (and semi-skilled) workforce and the technical capabilities to sustain and deepen this investment were predominantly provided from the local K12 and higher education system.
As China's national priorities change, the educational system will "re-balance"
Future years may or may not provide the same result. Today there is a near universal recognition that China needs to re-balance its economy, shifting from investment to consumer led growth centered higher value-added services. The education system must re-balance as well. To date, official policies from China's 12th Fifth Year Plan (2010-2015) have already shifted investment and emphasis toward vocational education (by reclassifying over 600 Universities into vocational colleges); gaokao reform (including the introduction of oral English and wider choice of academic disciplines); increasing multi-disciplinary degrees with foreign Universities in China (recent approvals of dual and joint degrees with foreign Universities); and permitting, in selected local Universities, non-exam factors in student admission.
Following the path of other East Asian countries, China has not thrown out standardized testing and fundamental skills development in search of some holy grail for innovation and creativity. As with countries such as Korea, Singapore and Japan, China is working within the testing system and improving incrementally. In this sense, the "test or innovate" choice that Ravitch poses is not binary but syncretic. Both systems, East and West, if properly combined to reflect the cognitive and creative needs of students, can succeed at scale. That is a lesson for both China and the US.
Investment reflects need to reach ChinaEd 2.0 and Innovation
Investment in new education ventures is critical in both countries. In China the private sector, taking its usual cue from Beijing, has ramped up investment across the range of tutoring and workforce training platforms, early education, language portals, private international schools, international student services, online student systems, and a wide spectrum of adaptive learning and related technology.
In the first five months of 2014, China's private equity investment in education is at the highest level by value in over six years, with approximately $325 million targeting a range of educational products and schools specifically designed for the Chinese student. In a further sign of interest in more innovative curricula and approaches, the publicly traded Chinese after school tutoring company TAL Education Group led the first close of what should total $70 million of investment into US higher education start-up Minerva. Even including such cross-border interest, Chinese EdTech investment still runs far shy of US levels, but we are early in the investment cycle and China's most innovative companies only starting to take notice. In 2014 e-commerce giant Alibaba invested $100m in Tutor Group, a mobile operator Xiaomi created a separate education company to disrupt the system. Internet leaders Ten Cent and Baidu have established education divisions as well.
Are we are on the cusp of a dramatic turn in China's educational ecosystem with new education concepts and investment capital taking a more central role? The elements are well aligned: deep economic and educational system reform, rising household income, global competitive pressures and the creation of high-value services industries such as healthcare, renewable energy and entertainment. Hence the coming years will likely deepen education investments in early and middle school tutoring, online higher education, international pathways, private schools, vocational-to-employment platforms, and edtech ventures that address China's most pressing needs: geographic accessibility, cost, and performance (including innovation and creative capabilities).
Make no mistake: the Chinese educational system remains luan, or chaotic. But chaos provides needed opportunities for experimentation and risk capital. Given the ongoing reforms at the central versus provincial levels--namely, issues around the gaokao, improved vocational student tracking (with elements from the German "Dual System" and Singapore Vocational Schools), and rural educational achievement--the implementation process will be anything but smooth.
China's reforms are intended to provide more flexibility within the system but without getting rid of the core exam system that has brought it this far. In the years ahead, we will begin to see more choice in specialized study, a sharper focus on marketable skills, and, in China's most advanced regions such as the Yangtze River Delta area and Guangdong, a deeper focus on spoken English language and liberal arts. Meanwhile, the "shadow" system of tutoring and test preparation will continue to act as an escalator for more of China's 200 million K12 students, who will be working hard, gaining fundamental skills in science and math, and to ready to compete with their counterparts in America.
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How important are Universities in creating R&D and contributing to national innovation? A recent report by the Asia Development Bank highlights the differences between countries in Emerging Asia and developed country averages.
R&D Performance by Sector (as % Total Value)
Stanford's Center on Longevity provides some intriguing long-range projections for working age (16-64 year) populations in Asia through the year 2050. As the chart below indicates, the most profound "worker bulges" occur in countries of South Asia--specifically India, Pakistan, Bangladesh--as well as the Phillipines. India's employment segment expansion alone is near 300 million people.
Important to note is that these are all of these countries in dire need of significant upgrades to overall education attainment and skills investment. The clock is ticking.
As a corollary, both Vietnam and the US will also have relatively young working populations by mid-century, whilst China, with an 18-year old population that peaked around 2012, is expected to have a workforce declining relative to 2010 (but still approaching 900 million people).