Asia's Brain Race II - Investment Returns and Pitfalls

By 2030 Asia will witness intensifying urbanization, rising disposable incomes, a shift to service sector training needs, millions more students studying abroad (within and outside of Asia), and extended student lifecycles focused on adult and continuing education.  These trends were present first in Japan in 1970s and 80s, then the “Asian Tigers” of Korea, Hong Kong, Singapore and Taiwan during the 1990s; China and India are now in the grip of such change, and to a lesser extent Vietnam and Indonesia.  For these generations the application of technology is accelerating educational access, reducing price and increasing quality to a point where students across Asia will have an unprecedented opportunity for advancing their education, skills and training needs. 

A significant level of investment and management skills from the private sector will be necessary to drive this transformation.  Over the past ten years, we have seen the beginnings of a vibrant and fast-growing Asian education sector on the back of affordability, demographics and the need to absorb a college age youth bulge.  Based on development patterns within Asia’s more advanced countries, such as Japan and Korea, as well as the US and Europe, the next decade will focus on at least five broad sub-sectors that offer attractive ROI levels to both student and investors.  These include:

  • College Enrollment and Degree Offerings
  • Transnational Students and Services
  • Vocational and Workforce Training
  • Private K12 and Cram Schools
  • Education Technology and Social Networks

College Enrollment and Degree Offerings

India enrolls less than half of China’s high students as percentage of population, yet is projected to have a much younger demographic of 18-24 year-olds through 2030.  Since the late 1990s, China aggressively expanded minban, or nominally “private” colleges to absorb an anticipated demographic high school graduate peak around 2014, which is largely as a result of its success in near universal K12 completion.  India has not kept pace.  Belatedly the Indian government is instituting regulations to allow for private sector participation that should set up a decade-long scramble for positioning in this market, with heavy capital requirements, in what is undoubtedly Asia’s largest in terms of potential growth in degrees.

From an investment perspective, investors will need to think differently with respect to degree education:

  • Unlike the US, there are regulated limits to scale degree education.  This has been a particular challenge in China, where single schools are subject to enrollment caps or strict guidance.  Financial investors and school operators such as ChinaCast, HaoYue Education, PSE Education, Hairui, Minsheng, Bohua and National Education, all backed by private equity, have “rolled-up” multiple colleges under their companies in the hope of continuing aggressive growth expansion leading to a strategic sale or IPO. The results are mixed,  some have already scaled back their plans and finding the management of multiple schools, with differing quality of students and cultures, daunting to say the least.  Strategic investors, such as Laureate and Raffles Education of Singapore, have acquired separate schools in regions of China with less perceived regulatory oversight, though it is unclear internal return targets can be achieved given the level of up-front investment needed, no matter how well managed. Will India, Indonesia or Vietnam be different? Will China return to high growth?
  •  Online degree programs, such as those managed by CRTVU (Aopeng) or China Edu in China, and a host of newly formed Cyber Universities in Korea and Japan, the latter backed by Softbank, are not subject to similar enrollment limits but operate at much lower price points with limited profitability.  This, of course, could change rapidly if and when Asia follows the trends of US online education whereby online and offline degrees are reaching a level of parity as perceived by society and the workforce.  At present, such degrees are considered inferior to traditional colleges and, in some cases, on par with diploma mills for adults. But because of this the prospects for change are attractive.  Online education leader in the US, University of Phoenix, faced similar headwinds in its early days. 
  • Cost and Tuition.  As in the US, Asian consumers at the elite level of society   show very little, or no elasticity to tuition cost increases. Viewing education as a long-term investment, they simply pay it.  However average consumers who, after all, are paying out of pocket and not drawing on financial aid, seem less willing to pay a premium for Bachelors degrees.  This is because across most of Asia tuition has been massively subsidized, allowing parents to spend mainly on cram schools and K12 prep, to the extent they can, in order for their children to score well on higher education exams.  In China, at Peking University, Harvard’s alter ego, a year of tuition costs approximately RMB 6,000 or US$950 to Chinese students and RMB 30,000 ($4,500) for foreign students.  Harvard College tuition was $52,650 in 2011.
  • Graduate degrees and stand-alone graduate schools are currently in short supply, well below US levels.  They are also priced at much more attractive levels, often globally comparable.  [China MBA numbers].  Beyond the elite levels at Asia’s public universities, and coordinated programs with US universities through hundreds of joint MBA programs, the region lags in granting graduate degrees and has instead taken a more vocational approach (discussed below).  We expect that future public-private partnerships and independent schools will grow rapidly in such areas as management, healthcare and education, at both the top and middle of the student pyramid.  Current models in Asia include the Asia Pacific Management Institute (AMPI) in Singapore, owned by Kaplan; Raffles Education, which provides self-accredited degrees in management and design; Masterskill of Malaysia, focusing on nursing and medical education; and Manipal of India. 

Transnational Students and Services

 Asian students, mainly in China and India, will account for the bulk of a roughly 2-3x growth in study abroad - equivalent to 2 million new students - by 2025, and this doesn’t include graduate programs, part-time study, and study travel programs.   Fierce competition and limited seats at Asian top-tier Universities is expected to drive more students abroad, as will a declining dollar, rising middle class affordability, easier academic credit transfer, revenue pressures at US colleges (actively seeking higher paying foreign students), and continuing value of a global and, particularly, US higher education. 

Over the next decade the sector will consolidate and diversify, offering a wider range of services, housing and preparation that traditional universities will need to outsource.  Industry models such as Navitas and Study Group have successfully bridged early markets in the UK and Australia and are aggressively pursuing North American customers.  Companies such as EIC and Aoji in China, and Valmiki Group in India, occupy profitable niches and others will grow to meet rapid local demand.  Conversely, the allure of Asia for US college-bound students will increase dramatically as Asian universities expand English language degree offering and the companies that support it, along the lines of Education Adventure in Korea and Asia Learn.

ESL and CSL

Asia has a range of established education companies that operate in local but fragmented markets, such as well as Benesse, and owner of Berlitz), YBM Sisa, EF Education, Wall Street English (owned by Pearson) and Apollo Vietnam.  Nearly all are face-to-face, franchise-driven businesses and there is room for add-on services.  But the nature of one-on-one tutoring is also changing rapidly, with technology disrupting traditional markets. Global web-based ESL companies provide opportunities to reach many more Asian students at affordable prices with certified teachers in the US, will grow rapidly with more blended learning models, and merit investment attention.

Conversely, the use of online the face-to-face models for delivering Chinese as a Second Language (CSL) has sparked an early and potentially lucrative market in the US, with several small platforms operating from China.  Finally, the integration of social networks with language study is another growth area, both within Asia and internationally based on specific language groups.

 Cram Schools and International K12

There is more money spent on cram schools by Asian households than any other form of education, at every level of economic development.  The sector, largely catering college exam preparation from a child’s early age, has gone through cycles of overexpansion and consolidation first in Korea and Japan, and now China. Demographics in emerging Asia will dramatically accelerate these trends.  Competition is largely based on sub-sector (high school, middle school, early education), locale (city, province), service (military style or resort camp), and curriculum.  Household names, nearly all publicly-listed, include Topia, CDI, Elim, Woongjin and Daekyo in Korea, Waseda, Nagase Brothers and Meiko Network in Japan, and Xueersi (TAL)Xueda, and Juren in China.  But expect to see many more in countries such as China, Vietnam and Indonesia.  Moreover, Megastudy’s early domination of online exam preparation in Korea using “star instructors” teaching online and sharing in student revenue, remains the most dynamic model for future development across the region as Asia’s digital teenagers emerge.

 International private schools, which are extending across Asia and globally, mark the next phase of K12 education, and integrated closely with the cram segment mentality.  The wide reach and operating solutions expertise offered by GEMS Education in India, the British style Nord Anglia and various Montessori-like franchises, or Usha Martin, with partnered with Pearson in India to build K12 schools, all offer increasingly viable school alternatives to emerging middle and upper middle class families across Asia, as well as expat families who move across countries frequently and are in search of education consistency.  Although not quite akin to the charter school movement in the US, Asia’s incremental move toward private schools and “Western” academic models reflect shared frustrations with both access to local schools, the expected academic results once inside, and the perception in places from Chennai to Chengdu that the challenges of living in a globally connected economy are not being met by local educational offerings and curriculum.

 Vocational and Professional Education

 Survey top multinationals and Asia’s leading companies and entrepreneurs about the limits to local growth and their answers will be increasingly related to the dearth of talent, not demand or market access.  There are, for instance, several hundred thousand corporate managers in China and India alone that require applies skills today.  Future training en masse is already a challenge for professional licenses (accounting, law, finance, banking nursing, retail services, Civil Service); certifications (IT, software, BPO, KPO, as provided by Aptech and NIIT); middle management and MBA-style coursework inside Asia’s leading companies and multinationals (leadership, corporate governance); and technical management courses for government technocrats and state sector managers attempting to regulate new, globally competitive industries.  Asia’s dramatic shift to service and knowledge-based industries with global customers will only intensity these needs.

 But who is serving these markets?  Certainly not US companies or educational institutions to any great extent.  While traditional universities train Asia’s elite through Executive programs or advanced degree offerings, the vast middle of the pyramid remains underserved in terms of access, quality and price.  In the possible hint of Asia’s future, Japanese companies such as Tokyo Legal Mind, TAC, and ALC Education have driven the broad licensing and management education market on a national scale through franchise, campus networks and sometimes foreign instructors, while large Japanese zaibatsu have established training ecosystems in-house or around their needs.  Korea’s Credu, originally a Samsung company that serves over 400,00 students, deploys an online training model focused on management skills and which could expand elsewhere, although it has yet to reach appreciably outside its home country.  A few firms who have achieved some scale for management training include GEC China, Jucheng, Ambow and online platform China Distance Education in China; Singapore Management University, Kaplan Higher Education, and LaSalle/Raffles in Southeast Asia.

 With a few exceptions markets are fragmented and compete overwhelmingly among hole-in-the-wall or middle market training firms, ranging from high to dubious quality that use start professors or management gurus for a specific set of corporate or government customers.  Such firms are found all over India and China’s dynamic cities, creating opportunities for emerging and larger strategic and financial investors to consolidate, expand and systematize these markets either through partnerships or acquisitions.  However, for many companies operating at scale, the maintenance of high growth and quality remains a challenge at this formative stage of the markets.  The recent pullback among Chinese IT training firms such as Jadebird, EduAsk, and Siyuan, who ranged between 10,000 to 100,000 students across numerous campus locations at their peak, underlies both the volatile nature of specific industry training and subsequent job placement, and the questionable assumptions around higher cost tuition in third and fourth-tier cities. India’s BPO/KPO sector, with talent needs for companies such as Infosys, Genpact and many others, has largely been served by a giant ecosystem of small providers as well. The race toward consolidated platforms, possibly aided by more sophisticated Web-based learning, is well underway.

 Education Technology and Social Networks

Asian educational technology companies focus mainly on local consumers and demographic access and therefore retain measurable home court advantages, much as they have for Internet and social networking businesses. They have been designed primarily to support the vast K12 and supplementary education segment, and to some extent post-secondary consumers.  Large technology and content competitors, such as Everronn, Educomp, and Tata in India, or CERNET and Aopeng/Open University in China, have for years provided solutions to large gaps in educational access and continue to build market share from a highly fragmented base.

Yet the raw dynamism of technology innovation and investment remains within early and growth stage companies, and this is largely untapped by foreign competitors despite some early efforts by technology infrastructure firms Agilent, as well as Pearson and IBM.  In the years ahead Asia’s expanding student base, lengthening student lifecycle, diversifying K12 models, study abroad demand, its nascent beginning of online professional education, and a generational change in digital education, will open area for exciting educational application, including:

  • Adaptive learning focused on critical and creative thinking, including with innovative curriculum in areas such as STEM.
  • Edutainment, which is already being fueled by the success of Asia’s gaming and tutoring platforms across the region.
  • Online education solutions focused on graduate and professional education (examples global business, heath sciences, public policy).
  •  Low-cost K12 supplementary education adapted to rural areas in countries where universal K12 is lacking, such as Indonesia, India and Vietnam.
  • Models that use traditional labor arbitrage and cost advantages in Asia through technology, as with India’s Tutor Vista providing synchronous math tutoring to struggling US students (or “reverse arbitrage” as US wage levels equalize versus quality of teaching provided by US teachers); and
  • Education social networks, peer-to-peer learning, and the full range of parent-student services that cater to an increasingly competitive global education and labor market.

In sum, the demands and expectations of middle class Asia households are going to dictate changes in the entire educational marketplace, both within Asia and around the world.  The entry of China and India, in particular, as full participants in the global “brain race” will create an exciting environment for education investors, schools and companies, but not without daunting challenges.  Meeting these challenges with clear-eyed analysis, a long-term commitment to Asia and a spirit of innovation will distinguish this century’s educational winners and losers.