Russia’s Untapped Potential: Beyond Hacking

Russia is not an education superpower.  What if it were? This may not be an idle question as the country seeks to bolster its international position–no less under a Trump Administration–and to counteract the perception of either being a state-sponsored hacker or geopolitical bully.

Domestically, Russia’s persistent de-population trend over the past quarter century coincides with a global shift to renewable energy and a structural shift in commodities demand which injects long-term economic pressure on its growth trajectory, regional relationships and social stability.  But there is an opening for the Kremlin to revive foreign investment activities, scientific innovation and elevate Russia’s “soft power” status:  move toward a more open, privately-funded and globally engaged education sector.

Post-Soviet Education Measures

It has been 25 years since the fall of the U.S.S.R.  Based on a 1989 census the former Soviet Union had a literacy rate of nearly 100 per cent in urban areas with 60% of children over 15 years competing secondary school and 8 per cent completing higher education with a degree.  According to the OECD, nearly 52% of high school graduates were enrolled in tertiary education by 1992.  This placed Russia well above OECD averages at the time.  Since then, the introduction of private education models for professional training and K12 schools, and a partial opening to the West following glasnost, has improved Russia’s educational performance further.

Figure 1 summarizes this comparison over the past two decades.

Notably, certain measures–such as adult literacy, primary class sizes, secondary enrollment rates–have not changed much over the past 25 years given their already advanced levels. But other trends–affordability, completion of higher education (rocketing from 8% to 54% among 25-64 year age group between 1992 and 2015) and the number of foreign students at Russian universities (213,347 enrolled, placing Russia as the 6th largest higher education system for international students)–all increased markedly.

Figure 1: Selected Education Measures in Soviet-Era and Modern Russia: 1992 v. 2015

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As a result, Russia is today among the most highly educated countries in the OECD.  Despite a recession beginning in 2015 and Western sanctions following its Crimea adventure, Russia’s economic competitiveness as measured by  the World Economic Forum Global Competitiveness Index improved to 45th position this year and the IMF is forecasting a return to growth in 2017 on the back of increased domestic demand.  Yet ask anyone if they can name any Russian companies with global influence outside of Gazprom and there is likely to be a blank stare.

This translates to education investment and activities as well.  Data compiled in the Global Edunomic Index ranks Russia as 16th out of 49 countries across emerging and frontier economies, which seems far below its potential. This is because the GEI’s latest reading has Russia scoring comparatively high on most education measures but falling behind from a foreign opportunity, policy and risk perspective.

Figure 2 sets out these comparative rankings against affordability (eg. GDP on a purchasing power parity basis) where Russia is highlighted (in yellow) behind Poland, Estonia and the Czech Republic, and has roughly the same ranking as much poorer (but rapidly educated) Vietnam.

Figure 2: GDP Per Capita PPP and Global Edunomic Index (GEI) Rankings

screenshot-2016-12-30-10-18-16                                      Source: 3/1 Global Research

 

Privatization and Investment

Lest there be any doubt, Vladimir Putin does recognize the need for education innovation, private sector solutions and the critical role of education to Russia’s future.  In 2012, Russia’s May decrees focused on raising the standards of living across Russia’s interior regions and highlighted the role educational disparities and the need to improve both the global rankings of universities and students in the provinces. But with a reduction in the current education budget for 2016-17 by 11.5%, falling university enrollments and the impact from Western sanctions, there are already calls to suspend the “privatization” of higher education.

Foreign collaboration and investment can fill the gap.  But how?

I recently completed some work on Russia that looked at potential growth areas using a small sampling (see Figure 3) of where Russia’s own investors and education entrepreneurs are moving.

They include:

In short, private education solutions directed at the professional employment market, more efficient tools to manage schools and students, online test preparation (with angles for Russians studying abroad), and edtech startup support is taking shape in Russia.  Moreover, these education ventures lie primarily outside the state sector and are focused on increasing efficiencies, student access and international collaboration.  Several emerging technology platforms such as Dnevnik.ru are exportable.

Figure 3. Selected Education and Edtech Investments in the Russian Federation

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In higher education, Russia is already the 6th largest market for international students with roughly the size of Australia’s international student enrollments.  But more aggressive moves to globalize its universities through joint or branch campuses at home and deeper online collaboration with online providers could bring benefits. Coursera, which currently runs five university partnerships in the country, offers a early test case.

Outside of its borders, Russia already has fair amount of engagement through international branch campuses in Central Asia –according to C-BERT, Russia has 18 international branch campuses of which nine are in Central Asia and one in China but no campuses in Western Europe, the US, Africa or South America–and manages numerous dual degree programs in China based on a history of collaboration beginning with the Chinese Communist Party under Mao Zedong.  But its presence in the US and Europe continues to be limited, and its home universities attract a pittance of Western students.  While China, India and Saudi Arabia accounted for over half of international students studying in the US in 2015, Russia didn’t make the top 25 source countries.

Certain collaborations have already hit self-inflicted problems. Skulkova Moscow School of Management, a private and globally-oriented business school, has created a useful template for international cooperation yet its incubation project with MIT, after a terrific start, was beset by corruption and other issues.  There has been continued collaboration between US and Russian universities despite the past few years of bilateral tensions but also moves to crackdown on “foreign funding” and influence. Perhaps the most benign segment is the K12 level, where international private schools are thriving in large cities such as Moscow and St Petersburg.  As of 2016, there were 28 International Baccalaureate “World Schools” but the increasing demand for students to be “internationally tracked” to pursue higher education studies abroad (including to the US) will most likely reach far beyond this number no matter what the government does (to find a recent comparison, look to China’s recent international K12 policies).

Caveats

There are, of course, important reasons that most foreign investors don’t know or care about Russian opportunities in the education and related technology industries: they fear the IP theft, political risk, anti-foreign bias and corruption that might come with it.  One could do worse than to read Hermitage CEO Bill Browder’s hair-raising memoir Red Notice to see why such fears can be more than justified, even by the most savvy foreign investors in Russia.  As someone who has worked across the most challenging markets for my entire career, I’m not naive to that.  Yet changes are afoot.

I would submit that ventures lying far from the security-state apparatus or strategic industries (energy, telecommunications, defense, banks) could potentially provide an opening for foreign investors if the current pendulum swings and Russia seeks to engage more deeply–economically, financially and culturally–with the rest of the world. A more confident but economically challenged Russia, with renewed US engagement from the private sector, could open the door.

International education and and related technology would be the most obvious place to start.

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India’s Race Against Time

To the naked eye, India looks like an oasis in the middle of a wrenching emerging market economic downturn. In 2015 Indian GDP grew by 7.2% with the IMF projecting 7.6% growth over the 2016-17 period. FDI reached a record US$63 billion in 2015, exceeding China for the first time. And despite more recent concerns over a heated investment cycle and credit issues among India companies, the subcontinent remains a stable and low beta market when compared to its commodity and oil-based exporting peers. But look again, further over the horizon, and the outlook is far less assuring.

Between now and 2050 India will need to employ 300 million additional workers to its existing workforce, and they won’t be tilling the fields. Where to employ them, how to train them, who will pay, howIndia to create a productive use of an impending youth bulge are important questions that will consume Indian policymakers and investors in the years to come. India today has the largest K12 system in the world, with more than 260 million students, a level roughly 30% larger than China and 10 times that of the US. Yet many children are left behind. In fact, looking at India’s respectable college enrollment rates obscures a more troubling picture in the student pipeline: lagging enrollment and completion rates at the secondary/high schools level; an acute lack of teachers to provide quality classroom education; impending shortages of University seats; and a lack of budgetary flexibility to make bold education spending choices in the midst of unacceptably high poverty levels, creaky infrastructure and rural healthcare challenges.

How India responds to these educational challenges will not only have a critical impact on sustaining economic growth but will also define the scale of foreign engagement and investment in areas such as technology and services industries. The Modi government is prepared to take bold steps in terms of universal access to education and research capacity building as part of its “Make in India” economic platform. But government alone will not be the answer given the scale of the challenge, and time is not on their side.

Consider the following:

I. India does well at the high end of achievement but fails further down

Let’s begin with the positive. Figures 1 and 2 set the stage by comparing a range of emerging markets with large populations. Between 2000 and 2013, our cluster of emerging economies experienced dramatic gains in net adjusted income per capita, which correlated strongly with enrolling students into colleges and universities. India was no exception; in fact, its enrollment levels were comparatively high given that its growth in net adjusted income per capita lagged significantly behind China. By 2015, India’s number of enrolled tertiary students approached 29 million compared to 35 million for China. Coupled with a rising number of Indian students studying abroad, the size of Indian graduates represent an laudable achievement that bodes well for the country’s emerging role in the world of science, technology and innovation.

Figure 1: Net Adjusted Income Per Capita v. Tertiary Enrollment Ratios (%): 2000
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Figure 2: Net Adjusted Income Per Capita v. Tertiary Enrollment Ratios (%): 2014
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But focusing on the elite end of India’s educational system obscures some hard truths. India’s comparative situation shifts dramatically to the worse when we look earlier in the student cycle and, specifically, the number of students who make it to high school (upper secondary). By 2014 approximately 56.4% of Indian students were enrolled in high school based on GER (gross enrollment rate) data, as noted in Figure 3. Pakistan, at 31.1%, was even more abysmal, undoubtedly due to the lagging participation of girls, which was a mere 23.2% GER (compared to India’s female enrollment rate of 54.8%, which is nothing to get excited about). But it is here that China pulls far away from India, registering a upper secondary enrollment rate of 87.2%. This has important implications for labor markets and academic achievement in both countries, to the detriment of India. Moreover, India’s close neighbor, Indonesia, was also comparatively strong with a 74.2% enrollment rate.

In short, India may look competitive in enrolling University students and does well at the top end of the brain race, but the number of students left behind represents an immense and growing societal challenge. India passed the RTE Act (Right to Education) in 2009 which secures free and compulsory education for children ages 3-14, but not older. Student drop-outs also skew India’s tertiary data, as these students are off the grid and not counted part of an educational system that has failed them (and no longer counted in the % of high school students who can go to college).

Figure 3: Net Adjusted Income Per Capita v. Secondary Enrollment Ratios (%): 2014

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II. India’s Shortage of Teachers Is Worsening

On the supply side, India’s teacher shortage looks desperate. An estimate by the University Grants Committee concluded that India today needs 1.4 million more trained teachers but does not have the training necessary at University level, where 12 of the 40 central Universities lack a faculty of education. On the demand side, India’s number of pre-primary students has been exceeding China’s levels since 2003 so that accumulating pipeline of early age students is now moving into primary and secondary school grades.

Back in 2014, India was already enrolling approximately 46 million students at pre-primary levels compared to 37 million in China, or close to 10 million additional students per year over Chinese levels. As Figure 4 indicates, the pressure has not been abating but deepening over time, making it even more difficult for India’s stretched educational system to absorb even higher enrollments and provide the level of quality teaching required.

Figure 4: Pre-Primary Enrollments in India and China: 2000-2014

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Figure 5 underscores the fact that India’s primary level teacher-pupil ratios lags our entire country set, including Nigeria and Pakistan. Despite India’s marked improvements since 2000, it still has relatively high teacher-pupil ratios of 33.6x in 2000 and 25.9x in 2013. The only other direct comparable to India in terms of population—China—enjoyed a much lower teacher-pupil ratio of 15.1x in 2013, which no doubt contributes to the latter’s superior educational performance. Conversely, the impact of teacher shortages on educational quality in India leads not only to higher student attrition rates but a drag on future economic growth and productivity.

Figure 5: Teacher-Pupil Ratios (x), 2000 v. 2013

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III. India lags in both educating its women and employing them

Female participation in India’s labor force is falling as the aggregate population pool expands, from an already low level of 38.9% in 2005 to only 28.6% per cent in 2014, according to World Bank/ILO modeling data. Figure 6 places India against selected markets with one clear result: India resides at the lower level of both enrollment and labor force participation on a gender basis. Comparatively, what is most striking is the equivalent rate of female participation in China’s labor force by 2014, which was 70.4% and its 88.2% female high school enrollment—a massive difference from India’s 26% and 54.8%. But this lament also suggests that India’s “gender dividend” could be an enormous fillip to economic growth if more women with higher educational attainment levels are put to work.

Figure 6: Female Enrollment Rates at Secondary Level v. Employment

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IV. Can India Afford It?

India’s ability to increase spending on education is further complicated by its stubbornly high poverty levels despite tremendous improvement over the past decade. As Figure 7 indicates, India had 74% poverty rate in 2000 (based on a measure of US$3.10 per day) which shrank to less than 58% in 2013. India’s expanding population complicates these statistics but the message is clear.

Although education is an important component of any anti-poverty effort, the country’s poverty rates are severe and issues such as basic health, nutrition and infrastructure can crowd out limited budget resources and the ability to tackle specific education gaps. Note that India’s public expenditure on education has traditionally been low at approximately 3.38% of GDP between 2000-2012.

Figure 7: Poverty Headcount (in Millions) at $3.10 per day (US$, 2011 PPP)

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Fortunately, the private and household sectors are picking up some slack. PPP and philanthropic initiatives at the primary level have scaled well over the past decade, including companies such as Intel and Educomp and well-healed foundations at Bharti and Tata. Households are also sharing the burden, perhaps in response to a lack of public solutions. According to one household spending survey released by MasterCard, surveyed Indian families (mainly urban) have among the highest propensity to spend on academic tutoring in Asia relative to income levels (approximately 55% of those surveyed).

Despite this, India will require a lot more engagement from domestic and foreign institutions, companies and investors if it expects to create a quantum leap in education capacity against a rapidly expanding and youthful population. Without incurring more debt upon an already immense national burden, market-based solutions need to take root.

V. Money, Education and Technology

In a recent speech entitled “Money and Education” the government of India’s central bank and ex-Chicago economist, Raghuram Rajan, defined the solution to India’s education crisis across three areas: lowering the cost of education (particularly at college level), embracing technology, and improving University research capabilities.

As I discussed earlier, the latter point—expanding India’s research capabilities—is an important consideration for future competitiveness and indigenous innovation but does not go to the root of India’s more serious problems of educational quality, training and universal access. However Raja’s first two points—technology and cost—are more relevant as well as complimentary.

There are reasons to be sanguine. India’s market in e-commerce for retail purchases currently exceeds $600 billion and is expected to reach $1 trillion over the next three years. This bodes well for future consumer behavior and purchases that are directed at online education and related technology solutions, with China being the most relevant example. Even more importantly, risk capital is flowing to new ideas as the domestic edtech start-up and venture world grows rapidly alongside India’s traditional education and technology leaders such as Everronn, Aptech, NIIT, Emergent Global, Jetking, Classteacher and many others.

However foreign investment remains a wild card. At the transnational University level as well as areas such as private international schools, learning technologies, credentials and vocational platforms, there has been much greater promise than actual results. For years private, for-profit degree education has been suspect by stakeholders which has forced, where possible, creative work-around corporate structures for operating schools and businesses. Non-profit Universities and online platforms have also been hampered, despite some notable successes at free-access Khan Academy and Coursera.

India should drop the mask and internationalize its markets if it hopes to meet the daunting education and employment challenges ahead. Foreign collaboration is critical. Its neighbors—China, Vietnam, Malaysia—have all moved in this direction as both education and labor markets seek a wider connectivity abroad. Pronouncements from the Reserve Bank of India can help, but execution is critical. Time, and human potential, is wasting.

Central Asia’s New Silk Road: Game Changers

“No need to listen for the fall. This is the World’s end.” — Rudyard Kipling, Kim

During a long, cold flight to Almaty in the late 1990s I sat sleepless reading Peter Hopkirk’s landmark history of the region, “The Great Game: The Struggle for Empire in Central Asia.”  My colleagues and I were about to spend the week meeting with Kazakhstan’s Ministry of Energy as well as its largest companies, all heavily armed by private security guards touting AK-47s while discussing their IPO plans in London. That alone was an eye-opener even Hopkirk would have missed. But what was unique about this trip was our informal mission, backed by the Chinese government, of introducing the idea of a vast pipeline in Kazakhstan that would reach from China’s far western Xinjiang region to the Caspian Sea. The Kazakhs at the time, fearing rather engaging China, were having none of it.

Fast forward to China’s “One Belt, One Road” initiative launched amidst much fanfare this year and not coincidentally in tandem with its sponsorship of the Asian Infrastructure Investment Bank (AIIB).   If successful, these two moves promise to have a geo-economic impact on par with China’s immensely ambitious development policy toward Africa. However unlike Africa, China’s focus on driving a renewed “New Silk Road” through Central Asia faces an already crowded field of post-colonial (and post-Soviet) military interests, natural resource competition, a resurgent and irredentist Russia, and a potential threat of IS terrorism in the region.

What is more, despite its natural wealth and historical location as a crossroads, Central Asia remains stunted by income inequality and lack of advanced educational attainment–two areas, I would argue, which hold the key to the Great Game.  This is because the success of any New Silk Road will likely require far more than the odd gas pipeline or wad of investment dollars but rather a level of development that enhances economic inclusion and can foster political and social stability, open borders, and diversified economic growth. In this sense, a single aspect of Central Asia which has been largely discounted must now be confronted: the education of its people.

Central Asia by the Numbers

To the uninitiated, the traditional concept of Central Asia is comprised of the five countries of Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan and Turkmenistan.  I’ve included Afghanistan in our analysis since it borders on three Central Asian republics and injects its own development challenges onto the region, whether they like it or not. As a failed education state, Afghanistan also serves as warning to the region about what an alternative path might look like.

Table 1 summarizes aggregate economic and education data for the Central Asian republics, centered on long-term indicators:

  • Total population of approximately 66 million people (and close to 100 million if we include Afghanistan)
  • A sizable 52.6 million people projected to be of working age (15-64 years) by 2030
  • FDI inflows of US$14.8 billion in 2013 or about half of India’s $35 billion FDI in 2014.
  • Relatively high per capita GDP (in PPP measures) of US$10,307 ($8,914 if we include Afghanistan)
  • Gini coefficients reflecting income inequality at moderate to high levels, ranging from a low of 29 for Kazakhstan to a high of  36.7 for Uzbekistan (but still lower than US levels of 40).
  • Wide variation of educational attainment and labor skills, ranging from OECD levels to rates far below India and China, but overall, lagging.

Figure 2: Comparative Economic and Education Data:  Central Asia and Afghanistan

OMore recently, and to add further urgency to what is a region in transition to emerging market status, Central Asia has fallen victim to collapsing oil prices, aborted resource investments, and economic weakness in Russia (which provides remittances and is the main export market for the region).  Under these conditions, it would be folly to believe that massive hydrocarbon projects alone will galvanize economic development without a level of education that acts as both an economic stabilizer and a key to social change, not least, to root out corruption based on resource extraction and control.

Where, then, is Central Asia heading in terms of educating its populations and what are the challenges ahead?

Early Success at Primary School Levels

Central Asia’s republics are relatively well educated at early ages. Universal primary school completion—a key indicator of future educational attainment—was reached or exceeded in most countries by 2012 and many were closing in on this goal in 2000 (see Figure 2). By comparison, Afghanistan is a failed education state with a paltry 34 and 38 per cent of children competing primary school in 2000 and 2012, respectively, not least due to the exclusion of girls.  According to one wide-ranging report on Afghanistan’s educational system in the 20th century, the number of students enrolled in 2000 barely exceeded levels achieved in 1978 and, even more distressing, remained far below the enrollments levels in the country during the more peaceful 1960s and 1970s.  Beyond Afghanistan, Pakistan and Bangladesh also face deep challenges, where only 72 and 75 per cent of children finished primary school in 2012.

In comparative terms, this illustrates that Central Asia is not the educational wasteland often thought of in popular imagination and should provide some solace to future policymakers and investors.

Figure 2: Primary Education Completion Rates by Country, 2000 v 2012

Declining Fertility Rates Put Less Pressure on Educational Systems

Supporting this early age education trend is a sharp decline in fertility rates. As I have noted in previous research, it is axiomatic that declining population pressures and less stress on educational systems can improve educational outcomes.  One study by the British Council has underscored the correlation between standardized test scores and falling birth rates in East Asia, a finding that can apply to other regions as well.

In Central Asia, Kazakhstan has maintained a consistently low fertility rate (as measured by birthrates per woman) of 2.7 times since 1990 which contributes to the fact that its educational outcomes are the highest in the region. More important are its “high-birth” neighbors which have reduced average births dramatically:  Uzbekistan, showing a declining fertility rate from 4.1 in 1990 to 2.5 in 2012; Tajikistan falling from 5.2 to 3.8, and Turkmenistan from 4.3 to to 2.4 births per woman. Contrast this with Afghanistan, which had 7.7 births per woman in 1990, reducing to an improved but still high 5.1 by 2012 (see Figure 3).

Directionally, the five Central Asian republics are primed for positive education outcomes for the simple reason that fewer children to educate equates to more potential support per child–financial, pedagogic or otherwise–and higher potential attainment beyond primary levels.

Figure 3: Total Fertility Rates: Birthrates per Woman by Country, 1990 v. 2012

Gradual Moves to Higher Education Attainment, But Uneven Success

With higher numbers of primary school graduates and lower stress on the student pipeline through moderating population size, we can expect a trend toward longer student engagement cycles and higher educational attainment through University if both capacity and affordability are sufficient.

Thus far we can see gradual improvements in Central Asia together with other, more depressing trends in tertiary enrollment rates. As Figure 4 indicates, Kazakhstan grew enrollments rapidly from 2001 to 2006 (at peak close to 790,000 students), but declined through 2010.  The country’s tertiary gross enrollment rate (GER) of 48.5 per cent in 2013 is largely in line with OECD averages and far higher than China and India, although its population size is vastly different.  Kyrgyzstan and Tajikistan are two other countries that have registered some moderate growth in tertiary enrollments. Kyrgistan is a particularly high GER of 47.2 per cent, with Tajikistan with a much lower (tough still relatively impressive) 25.4 per cent.

Uzbekistan and Turkmenistan are more problematic, with low GERs (8.9 and an estimated 8.0 per cent, respectively) and declining tertiary enrollments in the case of Uzbekistan (note that Turkmenistan does not report tertiary enrollments–never a good sign).  Moreover, Uzbekistan reported high secondary enrollment completion suggesting that a lack of capacity may be severely limiting student attainment in the country.

Figure 4: Tertiary Enrollments by Country, 2001-2012

International Mobility and Engagement Is Plugging the Capacity Gap

As in many other parts of Asia, the lack of domestic higher education capacity coupled with higher attainment levels, greater affordability and increased savings has traditionally propelled the movement of students abroad to destinations such as the UK, Australia and the US, and this is happening for Central Asian students as well, although most end up in Russia or non-Western University systems.

As Figure 5 illustrates, several Central Asian countries have increased the size of their tertiary student cohorts overseas.  Three countries are worth mentioning: Kazakhstan, which almost doubled its student abroad cohort to reach almost 44,000 annually by 2012; Tajikistan, with international students rising from 1,337 in 2001 to 9,128 in 2012; and Turkmenistan, which since 2007 has rocketed to a level of 27,959 students by 2012.

In 2014, a combined 3,203 students from Central Asia were studying at US colleges and Universities, a level however which is comparatively low and far less than even Nepal, which sent 8,155 students. Kazakhstan sent 2,102 students to the US in 2014 out of an estimated total of 44,000 students (using its 2012 data), or a mere 4.8 per cent of total.

Clearly US higher education is only a bit player in Central Asia–compared with Russia and to an increasing extent China–with significant scope for growth and engagement. Consider that out of thirteen international branch campuses in the region, all but two are hosted by Russian Universities; in Kazakhstan, all international branch campuses are Russian.  The US is seeking to remedy this strategic deficit–most recently through the launch of the American University of Central Asia and other government-led initiatives–but far more educational engagement is needed to build the level of educational capacity, and quality, that can serves the region’s future interests.

Figure 5: International Mobile (Offshore) Enrollments by Country, 2001-2012

Education Spending to Accelerate with Regional Growth

Finally, there is no reason to believe that Central Asian households will act any differently from the rest of Asia as their wealth increases and opportunities for educating their children unfold. The propensity for emerging Asia, including its poorest regions of South Asia and Myanmar, to spend a significant proportion of household income on supplemental education is well established, and an area I previously analyzed in the case of both poor and rich students in emerging economies.  

At present, two countries–Kazakhstan and Turkmenistan–are posting significant increases in GDP per capita (as measured in PPP) and at levels far above averages within Developing Asia. However the remaining populations of Uzbekistan, Kyrgyzstan, and Tajikistan lie beneath the $4,000 to 5,000 PPP “middle class” threshold and are growing from a much lower base. Differing levels of affordability will demand a more nuanced approach to the region as a whole.

Figure 6 illustrates these changes in affordability through the relative strong economic cycle ending 2013.

                 Figure 6: GDP Per Capita at PPP (Current International Dollars), 2001-13

In sum, educational and economic progress within Central Asia will not be easy but the region has a decent foundation base from primary school levels.  Country profiles differ widely, with Kazakhstan leading across many statistical indicators, including access to higher education and affordability.  The region’s reliance on Russia is unstable, if not problematic, in terms of educational needs and priorities.  Chinese investment may help to galvanize a region in need but not if it relies solely on large scale infrastructure projects.

The clock is ticking on economic and social stability in a region propped up by resources rather than human capital. Investors and policymakers who plan to travel along this New Silk Road should take note.

Opportunities in African Education: A Brief Glance at the Data

We can only get our continent to have inclusive growth if we are educated and change our   mindsets — Doreen E. Noni, World Economic Forum, 2014

It doesn’t take a great deal of macroeconomic digging to understand the profound development opportunities that are emerging across Africa, which by 2013 was receiving $57 billion in foreign direct investment or more than double the $26.2 billion in foreign aid funneled to sub-Saharan Africa from OECD countries. But without profound changes in the way education is accessed, delivered and made affordable, many of Africa’s economic accomplishments will remain narrow, unsustainable and socially divisive.  

In a recent article I discussed some of the low-cost alternatives to African education and the potential role for education technology.  Beyond this, there are also profound pressures on putting the continent’s rapidly growing youth population to work as well as expanding the supply of available education and training.

Figure A provides some basic comparative data aggregated across Africa, Asia and Latin America–three of the world’s largest development markets (statistically we are referring here to sub-Saharan Africa).  What is most striking is Africa’s severe gap in higher education in the face of a youth bulge, and the increasing number of students that are looking elsewhere in the world to fulfill their higher learning needs.  

To understand this context, consider five brief observations. 

Figure A: Education Demographics Across Three Continents: Africa, Asia and Latin America

First, Africa’s aged 15-19 population is expected to reach 151.1 million by 2030, which is three times the size of the same demographic in Latin America and virtually equal to Asia, according to UNCTAD projections. This age bracket is both an important indicator of potential college-bound or vocational students and generally the future funnel for the workforce, and Africa will lead the world in it, with an estimated 43 per cent of its total population under the age of 15.

Second, while workforce pressures may not be as severe for governments in Asia to handle, Africa had only 6.3 million students enrolled in tertiary education in 2012 compared to 97.6 million in Asia and 22.8 million in Latin America–a massive gap to close, particularly when considering Africa’s rapidly expanding population.  Looked at another way, the ratio of incoming secondary to tertiary students is 7.7x for Africa against a much lower 3.2x and 2.7x for Asia and Latin America.

Third, affordability is challenging across the education cycle and in every African country.  Current estimated Sub-Saharan Africa GDP on a PPP basis is $2,546 or less than half of Asia and a third of Latin America at $10,872.  Moreover, since African countries represent the 8 of the world’s top 10 countries in family income inequality as measured by the Gini index the actual purchasing power of individual African students is undoubtedly lower than the headline statistical figure represents. How to deliver quality higher education with limited family and government funds, and without an adequate supply of universities on the ground, now begs for immediate solutions.

Fourth, African students, to the extent they can afford it or gain assistance, are voting with their feet with approximately 288,198 students going abroad by 2012, a level far exceeding Latin America. For American universities, it is interesting to note that only 31,114 African students were enrolled in US universities in 2014 (3.5% of total international students in the US) compared with much higher levels from Asia (1.47 million students or 64.2%) and slightly higher levels in Latin America (72,318 students or 8.2%).   

Fifth, Africa is only beginning to internationalize its higher education system.  Currently there are only 10 international branch campuses in African countries compared to 88 in Asia and 15 in Latin America. Despite Africa’s utter lack of higher education supply and quality to match future demand, the education world has yet to respond in full measure.

 

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.  

 

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.

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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. 

 

 

MOOCs in China – Dream On?

American MOOCs (massive open online courses) have always been geared toward large emerging markets so it is no surprise that leaders such as Coursera and EdX are now hurtling into China. It seems deceptively easy: MOOCs deliver course content from US universities through free or low-cost alternatives. They partner with Chinese University counterparts or ISPs to gain channel access to students, some “localized” content and participation, and to provide the level of service necesssary to ease network management and course application in the Chinese context. Then at some point they begin to monetize at scale. China’s deep demand for US college education (approaching 300,000 students physically in the US this year) will, by all accounts, assure this online.

If this sounds promising you might first want to sort through China’s graveyard of US-based technology company failures. These are companies who often failed, or at minimum found it difficult to build a viable online business model in the Chinese context, including Google plus Android, Yahoo, EBay, Zynga, Groupon, Facebook, MySpace…the list goes on. MOOCs such as Coursera will argue that they are not online or even technology businesses but rather just a delivery platform for unique US educational content. That may be true–and it is doubful they will face the onerous regulatory restrictions of Facebook or Google–but it ignores some fundamental facts in China.

Coursera and any other MOOC will face the same operating and competitive market challenges to their ability to build a viable business in China that everyone else has–and make no mistake, MOOCs are a “business” whether they know it or not, particularly as they move from aspirational degree education to massive online training with fewer barriers to entry. They will also confront education-specific issues in a highly protected environment. In China this will be cut-throat competition at both the content and price levels; partner and channel management challenges; adjacent market entrants (local and global); regulatory and credentialling issues; fake MOOC certificates; student and employer complaints; and many other fun days ahead.

I do not intend to distract from the profound opportunities to delivery US education to Chinese students online. China is on the cusp of dramatic changes across its educational landscape, whether in transnational education, study abroad, adaptive and peer-to-peer learning, or the deepening penegration of online education from K-12 through to adulthood. I am personally immersed in these endeavors and believe in their future. But ambition at the individual foreign company level requires a dose of reality in China, no matter how un-Silicon Valley that may sound, and the preventative medicine should be taken early.

Here are a few considerations.

Affordability and Demand is Only a Base Case. 

China is today the world’s largest higher education market with almost 27 million students  enrolled at undergraduate level and this does not include millions more pursuing vocational (non-academic track in China), post-graduate and adult education, the last all potential MOOC students. The future pipeline is also unquestionably strong: a youth population (15-24 years) of over 208 million; 101 million primary school enrolments; and 97 million secondary school enrolments as of 2012.  The equation is complete by adding the well-known fact that approximately 390 million internet users in the country.

Coursera’s initiative to build a Coursera Zone partnerhip with Netease, a major Chinese ISP, looks to widen the MOOCs potential student reach in China and provide the requisite services (including lanaguage translation) to deliver education effectively. The attraction of enrolling a deep pool of students and doing it quickly through embedded Chinese internet companies must be encouraging after Coursera’s early results in India,  where as of March 2013 almost 2.5 million out of 2.9 million students enrolled were from India, or 86 per cent of the company’s total!  These are top line numbers and do not account for either affordability and course retention rates (and courses in India are offered largely for free, a major draw) but do indicate massive early intakes and the potential for equally dramatic moves in China, where affordability is less of an issue in relative terms. Is it too good to be true?

Regulatory Limits

With demand and affordability metrics out of the way, a major challenge for MOOCs in China (and in the US) will be on the product front, specifically: what is their ability to provide accredited degrees and, less so, courses that are credit-recognized by other educational institutions and employers? From an economic perspective, higher education is basically a large cartel which holds competitors at bay through accreditation (although pricing is less controlled than more tightly coordinated cartels such as OPEC). China may prove even more vexing to new entrants for several reasons. First, unlike US universities, Chinese universities are more concerned with so-called capacity building including the addition of curriculum and teaching  capabilities at their core campus. MOOCs may indeed provide some online know-how and add to course diversification on a supplementary basis. However at some point MOOCs may pose a threat to taking enrolled or potential students away from Chinese University offerings (here are few examples of Coursera partnerships) including non-degree offerings provided by such institutions. Second, China’s Ministry of Education (MOE) works with educational institutions in terms of approvals and credit recognition and it is difficult enough for foreign Universities to achieve this let alone MOOCs, which are not even classified as educational institutions of higher learning. They will have difficulty getting through the door let alone recognized by the MOE once they move to gain any type of accreditation.
If, over time, MOOCs will not compete seriously at the degree level in China then they will become training platforms: high volume, low priced, non-accredited (but possibly recognized selectively in the workplace), for particular skill sets. This is potentially a solid and attractive revenue model for companies such as Coursera with its lighter regulatory oversight and scope for unbridled growth. But it also forces companies like Coursera to compete in China “outside of the cartel” and will therefore require sharper commercial instincts and agile execution in the face of low barrier competition.

Competitive Pressures Have Yet to Begin

What are they up against? From an Asian competitive perspective, recent articles suggesting Coursera or EdX as being thefirst Asian MOOCsare nonsense. They are not even the first MOOCs in Greater China, depending on definition of degree and class size. Hong Kong’s Open University has been delivering degrees to students in China, and across Asia, since 1989. What began as more correspondence education is adapting to new online technologies which, after all, are not proprietary to the American MOOCs. This was the path led by University of Phoenix long ago. Within China, the online arm of China Radio and Television University (CRTVU), or Aopeng, is China’s largest online education platform with more than 2 million students. There is also publicly listed ChinaEdu,  another company that provides online delivery of Chinese college degree. Both companies operate learning centers, provide online student services, as well as testing. I doubt that they will sit by and allow US MOOCs to scoop up the market.
Moreover, while it is true that Chinese competitors are supplying Chinese university content and not, say, a leading Artificial Intelligence (AI) course from Stanford, they do operate significant online service platforms and it would be folly to believe that they cannot be repurposed to use Western educational content. In fact, it may only a matter of time before competitive foreign University contracts are signed. Chinese competitors, particularly in non-degree or more mass market education offerings, will most certainly seek to enter the market that Coursera is targeting and will compete ruthlessly.

Delivering At High Volume and on Local Terms

Distribution, branding and localization are other critical issues. The Netease deal noted earlier provides Coursera with immediate leverage to market through a widely used ISP network and online education marketplace open.163.com. The Coursera Zone link will essentially be their Chinese portal. The move is in sync with trends in China where other ISPs, such as giant Ten Cent, are entering  the education market based on loyal existing users in the target segment (18-40 year olds, see here).

Initially this makes strategic sense. However over time it is not inconceivable that ISPs and others in China will seek to go direct to education providers in US or elsewher, or what could be called the “double middleman” problem. Strip all the hype away and Coursera is an online agent and in this context so is Netease, both with some online infrastructure and scale. If Coursera wants to maintain viability over the long-term they will need to build their brand (Coursera Zone) on the back of Netease while keeping the partnerhship thriving and complimentary. Assuming the uptake in enrolments is massive, and profitable (“free” only goes so far in any Chinese partnership), the ability for Coursera to manage the partnership on a commercial basis will be tested.

Finally there is language. Coursera says it will deliver some courses in local language (including some Chinese language course delivered by Chinese University partnerships) and is working to provide course translation and various other localization services. Theoretically English is less a problem in China as it is embedded in the gaokao, or higher education exam, although aptitude can differ widely. One question is whether Chinese students taking foreign courses will want any Chinese translation at all.  At the degree level, major foreign degree programs delivered on-ground in China – Nottingham, NYU, Monash, U London, among many others, are specifically offered in English. This is the attraction for China’s top end students. MOOCs delivering in English would seemingly be well positioned at the top end of this student market. However lower language capablities in China often equiate with lower gaokao scores and overal academic prowess. Is it these students that are slated to take Artificial Intelligence courses? 

We are about to find out.