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.