asia

Edunomics Focus: Pushing into Asia's Education Frontier

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.

Specifically:

  • Youthful populations of 540 million in aggregate, with a range of 23% to 34% under the age of 15 years. 
  • Projected 165 million students in the higher education pipeline--between the ages of 15 to 19 years--by 2030.
  • Average GDP per capita in PPP terms of $6,163, which represents a threshold level for middle class growth in demand. 
  • Increasing, but by no means adequate female access and completion rates through high school.
  • Rapid early increases in internationally mobile students in Vietnam, Pakistan and Nepal based on both higher educational attainment and lack of educational supply and quality 
  • Deepening technology application to learning at all stages.

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

Source: APO Productivity Database, 2014.

Source: APO Productivity Database, 2014.

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. 

M&A in Asia's Education Sector: Flies and Elephants

"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.

Sector Concentration

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: 

  • Higher education IPOs are highly restricted across much of Asia which creates a natural path to M&A activity as a viable alternative. This is especially true as financially-oriented owners of higher education properties often do not often have the option to go public and must sell to strategic investors (or other financial investors).  Proprietary college acquisitions, such as those undertaken by Laureate, are typical examples.
  • Professional and vocational education products and services may have a greater ability to go public than colleges but they often rely on some sort or credible badge or certification--if not accreditation--that draws upon international standards and entities which represent them.  This favors foreign buyers. Moreover, some companies that take the IPO path may have significant cash on the balance sheet but remain need of strategic direction and be more amenable to a sale, such as Pearson's "take-private" acquisition of GEDU. 
  • By contrast, Asia's tutoring-based and supplementary education companies are by nature consumer-facing, less regulated businesses and often more attractive and understandable to pure financial investors. They also present a clearer path to IPO and, being less encumbered by regulators, have the ability to scale quickly.  Since many tutoring companies often serve local curriculum and testing standards, the argument to bring in foreign expertise is often less compelling. 
  • In a similar vein English training companies are not accredited and have lower barriers to entry which, as with many tutoring companies, offer a range of exit options. This also rings true for many online services and education technology platforms.  But English language is an area where a strategic tie-up with a multinational leader can create substantial value and synergies and thus we have witnessed more activity in this area than other tutoring businesses across Asia.

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.  

 

"Letting Girls Learn" in Asia

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, % 

 

How Asia is Emerging as the World's EdTech Laboratory

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.

Does Higher Education Drive R&D in Asia?

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.  

The findings: 

  • Most countries in Asia have a low Higher Education contribution relative to developed countries, suggesting that scientific research at University level remains a fraction of developed countries.
  • Chinese R&D is largely driven by the business sector.
  • Indian higher education contributes one-sixth the level of the developed world to R&D, with government the main lever. Indonesia is also highly reliant on government R&D.

 

R&D Performance by Sector (as % Total Value)

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. 

 

 

Where are Asian Households Spending Their Money? (Hint: Education)

By 2030 Asia's emerging middle class is expected to account for over 60 per cent of total world spending and, if past history is any guide, a significant part of family budgets will be spent on education.  But what exactly?

A recent survey by MasterCard profiled 16 markets in the Asia-Pacific over 2012-13 and asked families how they are prioritizing their education and child "enrichment" spending.  Summary findings are as follows:

  • Just over two thirds of Asia/Pacific consumers save regularly for their children’s education and on average, this takes up 14% of their monthly household income. The highest market is Myanmar at 18%; the lowest is New Zealand with 8%.
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  • More than two thirds of households in Asia/Pacific spend on enrichment classes: the majority of children in China and South Korea are enrolled in learning a foreign language, while markets such as Australia, New Zealand and the Philippines place more emphasis on sports.
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  • More than half of parents in India (54%), Taiwan (52%) and Thailand (52%) are spending on extra tuition classes for their children, closely followed by Malaysia (46%), Singapore (45%) and Bangladesh (45%). Chinese (53%) and Korean (50%) households were more inclined towards foreign language classes. More than 50% of respondents from Hong Kong preferred their children to learn a musical instrument.
  •  
  • Overall, a third of Asia/Pacific consumers intend to take up an educational course in the next year – highest in China (53%), South Korea (50%), Malaysia (44%), Thailand (43%), Hong Kong (41%), and Singapore (38%), and lowest in India (8%), Indonesia (12%), Japan (14%) and Vietnam (16%).

I have taken the raw data and set out two comparative charts below, concentrating on the three the most popular categories:  Tuition (Academic), Foreign Languages and Sport.

First, we see the differences across the region between tuition and language spending, which also correlates to high propensity to international students studying abroad in English speaking countries.  Korea, China and Hong Kong are obvious examples.

Household Education Spending Priorities I: Asia-Pacific Survey Data (% of Families)

Second, we can see how academic tuition spending correlates (or not) with sports.  For example, while Indian families spend predominantly on tuition a more developed country such as Australia spends mainly on sports and related enrichment activities.

The broader implications are that Asia is a two-tiered education market in terms of spending, which should not be surprising given the vastly different economies within the region.  Overall we can expect that emerging middle classes will spend as much as they can on assuring basic quality education by paying extra tuition or enrolling in private schools when they can.  Once that is secure, and as we move up the income ladder, the priority for English language (think: jobs in service sector, higher education abroad) becomes more critical as a percentage of the family budget.  Finally it suggests that Asia offers a highly diverse set of entry points for investors, educational institutions and private education providers in a region that - at the average household level - is in the midst of dramatic spending increases.

 

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.   

Why Asia's Real Competitive Race Will Be Brains, Not Arms

In late 2012 the governments of Indonesia, Thailand and Malaysia followed a long line of Asian countries in calling for the end of "cheap labor." This was on the back of China's tumultuous labor issues at Foxconn and elsewhere, which signaled a push toward higher wages and the need for economic "re-balancing."  Yet developing Asia’s economic shift toward higher value added services and the attempt by individual countries to avoid a “middle income trap” will depend primarily on how quickly and effectively their future populations are educated, and it is not an easy task.  Governments can pronounce loudly about raising minimum wages and building innovation centers, but without more competitive and targeted education investment many will fall short -- and this will have serious economic, social and investment consequences.

Fortunately, educational access is now less of a problem.  Between 1970 and 2005, college enrollment rates in Asia grew from an average of 6% to 35%, with rapid acceleration in Korea (8 to 71%), China (1 to 22%), Malaysia (2 to 29%), and Hong Kong (7 to 32%). Supporting this pipeline was a drive toward universal primary school graduation rates, which rose in Asia from 78% to 96% of students over the period, and high school completion, increasing from 28% to 72% (based on UNESCO data). This new generation of students helped create Asia’s economic second-generation “miracle” (after Japan, Korea and Taiwan led the way) and is how Asia has sharpened its competitive edge in manufacturing and selected service industries.

By 2020 the number of students enrolled in college in the Asia-Pacific is expected to reach 100 million students; 200 million by 2034. At this time 42% of global enrolments will be from East Asia and the Pacific.  China alone is expected to have roughly 20% and 30% of the world’s total college enrolments by 2035, while other countries projected to have large numbers of enrolments by 2035 are Indonesia, Vietnam, Malaysia and the Philippines.  In South Asia, India will be the world’s second largest market in terms enrolments after quadrupling its present enrolment levels; Iran and Bangladesh are expected to be in the world’s top 10 and Pakistan in the world’s top 20.

Driving this change in education investment and intensity are several critical factors:  demographics, affordability, technology application, workforce demands, public finance, the globalization of education, and the role of private investment. 

Education demographics and access will continue to expand.  Asia as a region is educating more students for longer periods of time than ever before and it is moving rapidly towards universal K-12 completion.  The figure belowshows enrollment ratios for high school and college by country, which by any measure is a dramatic improvement from a few decades ago with most countries (with the notable exception of Pakistan, Cambodia and Laos) approaching or surpassing the levels of secondary education found in so-called “high income” countries.

College Enrolment Rates (Gross %) in Asia:   “High Income” versus the Rest

Source: UNDP

Looking ahead, Asia's current student pipeline is such that higher secondary completion rates will, in turn, create a larger demand curve for post-secondary education and hence professional training.  Moreover, even China’s enrollment rates will need to double just to reach OECD levels of 50-60 per cent participation -- and China is a relative development star.   Laggards such as India (with fewer than 15 percent of high school students going to college), Vietnam and Indonesia are only now beginning their takeoff phase. 

Higher per capita income translates to education spend.  By 2030 the Asia-Pacific region is projected to account for almost 60% of all global Middle Class Spending (as measured in Purchasing Power Parity dollars), from barely more than 20% in 2009 (see figure below).  This is expected to have a profound impact on household education spending, where levels estimated at 15 per cent of total household income is spent on education in countries such as Korea and China. 

Asia’s Percentage Share of Spending by the Global Middle Class (in 2005 PPP US Dollars) to 2030

At a macro level, economic growth as measured by GDP correlates closely with spending on education at the household level, from K-12 through continuing education.  In larger developing countries such as China and India, as in Japan, Korea, Taiwan and Singapore before it, discretionary savings by families have been the main source of education funding and their savings levels are among the highest percentage worldwide.  

Culture explains Asia’s intense education focus but there are other, more structural reasons:  public education has been affordable and heavily subsidized at the college tuition level (as opposed to the student loan model in the US), allowing families to devote significant resources to supplementary education, early education and K12 cram school programs geared toward college admission.  Like the US, there has been considerable discontent with public education systems across the region, allowing parents with higher disposable income to take education into their own hands while giving their kids a leg up to outcompete everyone else.  As Asia’s middle classes expand, places such as India and Vietnam will be under mounting pressure to boost private innovation and education-related investment for decades to come.  The mad competition among student populations that we have long witnessed in Japan and Korea is already filtering across the region as “examination hell,” the race for credentials and higher paying jobs continues without end.

Online learning and technology intensity is gaining speed.  By 2012 Asia had over one billion internet users representing 44.8 percent of the world; China alone had 513 million users. Yet Asia’s relatively low penetration rate of 26 per cent suggests many more people will gain access.  Just as many Asian countries leaped straight to mobile rather than fixed line communications, advances in online learning will obviate the need to build-out expensive, capital intensive and slowly evolving brick-and-mortar education systems at the time when rural demand is massive.  It is now cliché to note that Web and IT-related learning technologies will expand access, create student-centric learning models, facilitate peer-to-peer interaction, provide scale for cross-border education application and collaboration, lower delivery costs, and challenge inefficient educational systems everywhere.  In Asia the use of online education offers a truly transformative impact.

Spending splurge on training and certification.  Multinationals operating across the region claim they are starved of management and engineering talent. Skills training and human resource management are expected to become even more central to successful global business strategies, regardless of industry, as the number of people working in services and knowledge industries continues to rise.  This is especially relevant to Asia, which is also moving rapidly into tradable services.  In China and many parts of Asia, the so-called “talent gap” is a well-documented problem and is already inhibiting productivity growth.  The response will be more direct investments in global talent acquisition and training by multinationals and other stakeholders, either by themselves or outsourced, as traditional education options fail to meet the needs of the workplace. 

Employment pressures cannot be sustained by the public purse. As the figure below illustrates, the most severe employment pressure between now and 2050 will fall upon India and South Asia generally, as well as the Philippines, Vietnam and Indonesia.  All of these countries, with the exception of the Philippines, have been laggards in education development within Asia and will require Herculean efforts just to keep pace with these changes.  This will place even more pressure on education investment.  By contrast, China’s aging population will lessen this burden after recently reaching a youth population peak.

Asia’s Workforce to 2050 (Millions of Workers):  Employment Pressure Mounting

Borderless student platforms provide alternatives to Asian students. Education is in the early stages of large-scale globalization despite the conservative and self-preservation instincts among many educational institutions around the world.  Historically, teaching and training has been culturally specific, confined physically to the community, and linguistically impenetrable to a large swath of population.  As economies, workers and languages are increasingly operating across borders, education must follow. Anticipating this change, international students exchanges are expected to nearly triple to 8 million in 2025 from 3 million in 2005, with the US and Asia driving this growth.  Note that the United States has a highly visible foreign student community and accounts for 22 percent of the entire international student market, yet only 3.5 percent of students on college campuses came from abroad in 2008.  US students increasingly studying in Asia will also make this a two-way street.

Private investment and for-profit models in education will expand dramatically.  Early and growth stage venture capital and private equity interest continues to provide funding opportunities for education and training companies in China and Asia.  This follows a clear pattern set in the US a decade earlier, and through the present day venture capital interest, and is creating deeper public markets and a wider range of investable companies on both sides of the Pacific.  Strategic buyers across education and media sectors, are aggressively investing in late-stage education businesses and schools across emerging markets as they seek to expand their respective global footprints.  As the world’s obsession with education is reflected in capital market investment, venture capital, strategic buyers, and individual investors should drive favorable long-term liquidity conditions.  

I will address specific investment trends and opportunities in a future post.