What Multinationals Can Teach Universities Expanding into Emerging Markets

Universities have been around for centuries, and for good reason: they move glacially, if at all. If you were look at a list of the leading American companies in 1920 and try to determine how many have survived to the present day, that number could be counted on both hands. This is not the case for Universities. They have managed to thrive for decades, particularly in the post-WWII period, by operating within insulated and tax-subsidized markets whilst enjoying maximum pricing power, consistently growing demand and unquestioning belief in their value proposition. But that era is coming to a end. 

As with many US corporations before them, educational institutions are now facing a wave of disruptive technologies and competitors and have been scrambling to enter Emerging Asia in search of international revenues and a more globally applicable education product.  Their progression overseas began with the usual cycles of "exports" and exchange of education to joint cooperative ventures and now to more direct, capital intensive ground operations.  The results to date from this more muscular expansion have been sobering, with many Universities acting without a sound business strategy (or even think they need one), an understanding of their target student market, and a set of guiding principles that many of the most successful multinational corporations--humbled after years of their own setbacks--now employ.  As such we can reasonably predict that many Universities will continue to stumble in Asia if they refuse to take heed of these lessons or, even worse, believe that their special status as Universities (non-profit, research-driven) allows them to play by different rules.   

Separating Winners from Losers

To understand why this is the case, consider some background. Temple University in Tokyo, which has been in Japan for over 30 years despite its ups and downs financially, is the only University remaining out of the 40 American colleges that set up in Japan during the 1980s, an astonishingly low survival rate.  We are now in phase two.  By 2012 there were 200 branch campusesoperated mainly by parent institutions in the US, United Kingdom and Australia. The UAE led the world by hosting 39 branch campuses, but the overall number of branch campuses are predominantly in Asia and targeting Asian students in China, India and Southeast Asia.  This does not include the thousands of less-intensive, cooperative agreements and exchange programs existing in Asia and, most conspiciously, in China.  As I have written previously (see here and here), the Asia education opportunity is immensely attractive to Universities and other education providers from the US and elsewhere so it is no surprise that Universities are going deep into Asia with more substantial investment ideas and strategies. 

A recent sampling is set out in the table below.  It  includes a few prominent branch campus and partnership examples for Asia and the Gulf, listing both successes and failures ranging from high-profile investments which were dead on arrival, such as NYU in Singapore, to successful branch campuses set up by Australian institutions, RMIT Vietnam and Monash Malaysia, that continue to expand. 

Selected University Partnerships/Investments in Asia and the Gulf

Source: Various reports; Sinica Advisors LLC

As the table illustrates, there have been a number of failed entry strategies in the past few years.  But failed ventures and expansion challenges are nothing new for Universities entering Asia. Back in 2007, the British research group Agora exhorted Universities to take off their rose tinted spectacles when looking atestablishing campuses in China, spotlighting challengs such as governance, regulation and shareholder disputes. In a more recent article, ICEF summarizeda few new cases including NYU Tisch Asia, which is being aborted due to financial pressures based on a flawed business model; University of Waterloo, low enrolments and misalignment with Dubai partner; and York University School of Business, with unrealistic regulatory assumptions in India. The list goes on.  What is striking though is that the failures or persistent difficulties amongst many Universities are typical to the corporate sector, and that the oft-cited remedies--quality control, business model, regulations, local market knowledge--are something akin to Emerging Markets for Dummies. The real question is whether Universities, assuming they have the resources necessary and a differentiated brand, can plan and execute effectively. 

Here are few areas where they can compare notes with multinationals operating in Asia.

Aligning Partnership Goals that are Realistic and Durable

Mismanaging local stakeholders has been a graveyard for many promising joint ventures and other investment structures in Asia.  Agreeing with counterparts on tangible objectives at the start, and actually expecting that such goals will change over time (sometimes dramatically) should be factored in early. Of course, this is by no means easy to do. McKinsey cites four separate life insurance joint ventures in China which failed within a year as a result of shareholder disputes, a lack of collective planning, and different expectations, or, as the Chinese would say, sleeping in the same bed with different dreams. Other notable failures in China include EBay and Yahoo in the internet sector, two companies which rushed hastily into the market and assumed that their partners thought the same way they did. Conversely a number of multinationals have built durable ventures, such as GM and SAB Miller in China or Hindustan Level in India. They did so by aligning interests with local partners, communicating with them clearly and consistently, and managing these interests over time, at significant cost, and no matter how great the difficulty.

For Universities, the goals of branch campuses and investments are often quite clear--access to local student enrolments and revenue, exchange opportunities for students back home, enhanced global research and curriculum capabilities in professional disciplines. But local partners, whether local government or investors, may have different concepts about the future. They are often at different stages of development, do not have a global brand, or a century of historical operations. Local partners may have more aggressive growth expectations; emphasis on curriculum to promote certain government or community objectives; different admission standards; and an interest in pursuing other partnerships that might actually compete with their other partners.  Partner due diligence is another issue.  As George Mason University learned in Dubai, local partners that underwrite the financially sustainability of the venture campus may be unstable themselves and need to pull the plug. Duke University, with the Kunshan municipal government in China as its direct partner, continues to face delays and serious questions arise as to their choice of partner and local execution team for such an ambitious project, slated at $260 million for the campus construction alone.  The lesson here is not only to know your partner wellbut to work on communicating objectives and incentives constantly, and thoroughly, from inception through the life of the partnership.  Which brings us to a related issue:  financial returns.

Sticking to Rigorous Financial Return and Sustainability Metrics

In the 1990s, at the start of multinational investment frenzy in emerging markets, there was a widespread belief among corporate executives and their Boards that China was somehow different and that their operations did not have to be profitable in the short-term.  This encouraged many companies that had a weak business strategies but strong faith in market demographics ("China is an enormous market!) to make ill-advised decisions which lead many to failure. By the end of the decade this problem was summed up by Rick Yan in an article entitled "Short-term Results: the Litmus Test for Success in China."   

Universities are no exception. While it is clear that metrics used by Coca Cola or Otis Elevator to measure success are not usually those used by Universities--most of whom are non-profit, research-focused, and interested in enhancing academic reputation and ranking rather than quarterly growth in earnings--it is wrong to think that profitability (or surplus), short and long-term, should not be a factor in expanding higher education operations. Local stakeholders, private and government, are often interested in expanding their own prestige and market position, and foreign Universities that start modestly should be prepared that expansion pressures will build.  Moreover, market demand and regulatory conditions can and will change, impacting enrolments and tuition pricing during the initial years and beyond. Competition will require greater marketing expense than first anticipated. Necessary resources and costs may be much higher than estimated. All of these factors suggest that crafting a branch campus or other joint venture strategy should have adequate margin for error and early surplus of operating capital in order to sustain growth and operations.

A glaring example of this occured in 2008 when NYU set up its new Arts campus in Singapore. Initially expected to provide MFA degrees to Asia-based students at NYU tuition rates, less than three years later the campus announced it was set to close due to financial pressures with a reported $6m deficit by 2009 and despite offers of a loan subsidy from the Singapore Development Board.  It is not only that NYU severely misjudged its target market based on its product offering (more on this in the next section), but also that its financial assumptions were operating on a razor's edge in terms of what initial enrolments were necessary to offset the cost of flying in faculty and operating expensive infrastructure. Again, financial surpluses matter.

Gaining a Deep Understanding of Market, Price and Micro Analytics

Corporate strategies in emerging Asia have been driven by excellent on-ground research, primary market surveys, and data analytics, though obviously we cannot expect that Texas A&M will have a marketing effort rivaling Starbucks or Disney. Emerging markets in Asia are extremely fluid and fast-moving, and this includes education where student preferences, curriculum interest, affordability, local currencies, tuition pricing and competitive local education offerings are always in play. As multinationals in Asia know all too well, ignoring local competitors, know matter how large your perceived advantage, is also dangerous. As Yale President Richard Levin has previously noted (see here), Asia's Universities are well on their way to competiting globally at both the elite and mass-market levels, where even the vaunted American advantage in research is shrinking. 

Leading multinationals in Asia, both foreign and local, understand the need to be proximate to the market. I know through my own experience advising the world's top multinationals and Universities that while corporations conduct constant, detailed market studies that inform their decision-making all the way to the Board, Universities usually look at macro indicators (top-line enrolment figures, country selection, gross enrolment ratios, anecdotal interest) and skip the more relevant psychometric, pricing and primary market research surveys that match their specific offerings with local students. By basing an expensive, multi-year expansion into emerging Asia on macro data alone, or even worse through a simple conviction that a large market will float everyone, Universities are creating a development and investment process that is fraught with unnecessary risk. Which brings us to regulation.

Pro-actively Managing Regulators and Officials

Education is a highly regulated industry; we know that. But it presents a number of challenges for investing in developing markets where regulatory risks in the form of local implementation, lack of legal clarity and sudden changes are often normal occurrences.  Multinational corporations entering so-called "strategic" industries in areas such as telecommunications, oil and gas, media, and aerospace have had mixed and at times disastrous results to date. However one thing they agree on is a strategy of "GR" or government relations that is persisent and well-resourced.  Pro-active management or lobbying may be a necessary but not sufficient condition for success, as Rupert Murdoch found after more than a decade of trying to enter China's television media market, but the alternative is to be left to the mercy of others, including competitors.  Caution also is necessary as regulations liberalize in fits and starts.  Witness Wal-Mart and IKEA, which, after many hard years of lobbying are still moving carefully and slowly into India's recently "open" retail goods sector.

This last point is relevant to higher education as India begins to reduce entry barriers for foreign providers through new regulations. Do Universities have the necessary resources to manage regulatory risk? Do they have the patience to plan accordingly? York University's Schulich School of Business was expected to launch its MBA in September 2013 after announcing a $100m campus in Hyderabad with local GMR infrastructure group a few years prior. York and Schulich have deep connections to India going back over a decade, and offer a good representiation of Canadian interests in the country as well as the challenges faced. After delays in India's implementation of new education regulations, the Schulich School recently announced its intention to launch a much less ambitious twinning program referred to simply as Plan B. It still remains unclear when the highly capitalized campus-based plan will go ahead. But the fact that York is clearly ahead of many other Universities in preparation, local relationships, and resources in India should serve as an example to other, less experienced Universities with similar plans, particularly when such a large capital and time commitment is on the line.

Commiting (and Listening to) People on the Ground

Finally, the sheer amount of people multinationals deploy on the ground even before they have a serious presence in market is instructive.  This may not be possible for most resource-srapped Universities but doing so is often critical, even though the numbers will be a lot smaller (compared to MNCs with multiple operation sites and thousands of staff in a single country).  What is perhaps most important though is institutional commitment at senior levels: this inlcudes a signalling to local partners or audiences that the venture is taken seriously from the top down, an attempt to bridge "cultural distance" (see here), and confidence that key value creators such as faculty are fully on board. 

Two contrasting cases illustrate these challenges. Yale University's tie-up with NUS in Singapore (which Yale does not consider a branch campus or able to issue equivalent Yale degrees) has generated a backlash from some of its faculty for both the perceived restrictions on academic freedom in the city state and the way in which the venture has been handled, whereby Yale Corporation managing the process by agreeing to the project without a faculty vote. Although cooler heads may prevail, one can scarcely imagine Proctor & Gamble making a decision at the CEO and Board level to launch a significant project without seriously consulting the senior executives that would be needed to make the venture successful. A full consideration of any potential impact on the brand would also be front and center in any decision, something which is apparently still unclear at Yale.

A more postitive example is University of Nottingham in Ningpo, China. University of Nottingham began with University exchanges and multiple research collaborations in the 1990s, years before it took the plunge to establish a serious local presence. That experience was no doubt helpful in creating a clear vision for its future. A case study highlighting University of Nottingham's joint venture foreign university with Wanli Education Group in China emphasizes the following success factors:  full equivalent quality to UK parent; adjusting program offerings to local context and needs including a "foundational" year for English and other subjects; establishing research in line with China's future needs; senior executive and government commitment; constant and open communication; bilingual staffing and staff mobilility over time; investment of cash and intellectual property. The significant amount of time researching the market, testing it with smaller initiatives, establishing a joint venture with full commitment of cash, IP and management resources, and sustaining the venture with constant new initiatives palatable to both parties may seem inordinate but actually is the minimum required for success. 

In sum, Universities contemplating initiatives with far fewer resources, internal buy-in, and lower levels of commitment might question whether their ambitious vision in Asia is worth pursuing after all.