[Note: below is Chapter 9 from Great Wall of Numbers]
Over the past four years I have had a chance to live and work throughout China. This was done in the capacity as an instructor, teacher and professor at a variety of colleges and schools across the country. Along the way I have met numerous fellow travelers, international teachers and businesspersons who have worked across the wide expanse of China’s educational systems.
I say systems because there is a cornucopia of private international schools, public schools, specialized Montessori schools and a seemingly infinite amount of training centers called bǔxíbān (companies and institutions that typically offer after-school programs such as EFL, GRE, GMAT, art, business and math training). These all exist to meet the demand of an extraordinarily large population that culturally values formalized schooling for educational attainment.
For example, in 2006 there were an estimated 16.7 million students studying at 336,200 elementary schools and 21.2 million students studying at 361,300 junior high schools (the reason for the relative decline and difference in the cohort sizes has to do with the one-child policy). More than 9 million high school seniors take the national college examination (gaokao) each year, the top percentage of which typically then study overseas. And approximately 8 million college students now graduate each year in China, a rate that has quadrupled since 2002.
In addition, as I mention below, there are a number of extra-curricular training centers called bǔxíbān that cater to the growing domestic demand for foreign educational services. For instance, in 2011 more than 20,000 Chinese high school students took the SAT as part of their quest to study overseas. With 58,196 test-takers from the mainland, one in five people who took the GMAT in 2011 was from China – a 45% increase from the previous year (and up from 11,000 in 2008). Both tests are conducted entirely in English. New Oriental Education – among many other training centers – alone trains and tests up to 200,000 students a year in standardized tests like TOEFL and SAT.
In January 2009, then-Premier Wen Jiabao stated that there were roughly 300 million English learners in China. For perspective, there are 600 times more Chinese studying English than Americans who study Mandarin. From primary school through the first two years of college, nearly every student in China is required to take English. One of the subjects tested during the gaokao, the annual national college entrance exam, is English. And with great commitment comes great costs. In 2002 the estimated price tag on EFL education was $1.4 billion and according to a 2009 McKinsey & Company report, “China’s foreign-language business is worth $2.1 billion annually.” As I mention below, this is substantially lower (5x) than their peers such as Japan and South Korea.
Who teaches these EFL courses? According to People’s Daily, approximately 100,000 foreign teachers and experts are recruited each year to work on the mainland. But before jumping on a plane and starting a new EFL division of your company overseas consider that not only would you need various licenses to start up a new firm, but that the EFL market is already sorting the wheat from the chaff. For example, a large number of nation-wide EFL providers including: Disney English, Wall Street English and English First (EF) are owned and operated by foreign companies. EF is actually the world’s largest EFL company, with 34,000 employees and more than 500,000 paying students globally. New Oriental Education and Ambow Education were both founded by Chinese nationals. They rank among the top EFL providers in China and are even traded on the NYSE.
So like all business startups, be sure to do a SWOT (strengths, weaknesses, opportunities, threats) analysis and identify what your company can provide that is not already being serviced. Even with these well-funded incumbents, a case could be made that entrepreneurs (both foreign and domestic) can still create a profitable business model, catering to specific niches (e.g., first-contact health care providers, hospitality managers, financial and securities traders, lawyers and paralegals).
While some have argued that EFL might be bubble activity, there is arguably a lot of organic, bottom-up support for this drive into English. For instance, according to Jun Liu, English professor at the University of Arizona, as of 2007 about “40,000 foreign companies have been set up within China and employ 25 million people.” As a consequence a lot of the day-to-day operations are conducted in English, such as emailing, accounting, finance and sales. And this outward push from within organizations can be illustrated by firms such as Air China – the third largest carrier in China – which has introduced an incentive program for its employees to learn English from a large TEFL provider. Similar incentive programs exist at foreign-owned multinationals such as Eli Lilly, Metro (a large German supermarket chain) and Intel. On a governmental level, in a bid to help tourists and foreigners, one such firm – English First – was even hired to teach taxi drivers and volunteers during the Shanghai 2010 Expo; they were also the official trainers for the 2008 Beijing Olympics.
And with a goal of becoming distinguishable and eventually an international brand, most businesses and large SOEs have adopted English names such as China Unicom, Lenovo, Agricultural Bank of China, China National Petroleum, State Grid and China Railway. As I mention later in Chapter 12, this push outward presents an opportunity for US companies and institutions to help market and educate Chinese firms looking to do business overseas. On this note, in June 2012, Shaun Rein, the author of “The End of Cheap China,” made the case that China will continue to need American education and American educators. He makes a persuasive call for US-based educational entrepreneurs as well as educational companies and institutions to set up shop on the mainland. And if you do not, someone, perhaps even your competition will.
What you and your firm can do
For perspective, South Korea, which invests more on EFL education than any other country, collectively spends between $10-$15 billion a year on EFL education; one 2005 estimate put the figure even higher, 1.9% of GDP (approximately $16 billion). And with a number of domestic programs similar to its neighbors, Japan spends about $8 billion a year on EFL. Thus with a population ten times the size of Japan and a GDP six times the size of South Korea, there is a lot of potential room for EFL growth in China, which as noted above, spent $2.1 billion on EFL in 2009.
How much do these programs at a language center typically cost? I spoke with a high level Chinese manager in charge of operations at a large EFL training center in Pudong, Shanghai who has had 20 years of experience working at Disney English, Wall Street English, EF, Web English and Huapu (the latter two are Chinese-owned and managed). According to her, “ten years ago it was a seller’s market as there were relatively few language centers and as a consequence they could charge enormous tuition fees, upwards of 400,000 RMB [$64,000] a year primarily because there was and still is a large demand for authentic face-to-face experiences. In return the centers provided one-on-one intensive training with laowai – native English speakers – for hours each day. Today, because the market has matured over the past decade, the average high-end language package now costs about 30-40,000 RMB [$4,800-$6,400] annually in larger cities like Shanghai and Beijing – which is still a somewhat high amount considering the annual wages for most urban residents is less than $9000 a year. Yet, there still a number of firms such as RISE and baite (百特英语) that specialize in providing English-only, total immersion environments for their customers – at a substantial cost.”
One of the ongoing issues that any service provider in any country must continuously deal with is figuring out the right price point for attracting potential customers. Online education is one way to create flexible rates; as a consequence several EFL programs are now available at substantially lower costs compared with ten years ago (e.g., 500 RMB per month). Another example is while the value of an EFL package is subjective based on each individual’s preferences, there are ways to make repayment easier. Take for instance, payment plans. At some language centers they are now allowing customers to pay by installment. And according to this same source, even though 10-20,000 RMB [$1,600-$3,200] a year is now considered a “reasonable sweet spot” in the mind of the typical middle class worker in a Tier 1 city; some of these consumers still would like flexibility and assistance and thus providing month-to-month billing allows them to achieve a win-win compromise.
Catering to specific clientele
In November 2012 I spoke with Cathy Su, a six-year marketing veteran at English First (EF) and Fujian native, about education-related business opportunities in China. According to Su, “parents will go to great lengths to sacrifice themselves for their child’s educational future. For example, in order to send their children overseas, many are essentially price inelastic. Some are willing to invest and spend substantial amounts in order to help their children get an overseas education. They do this for multiple reasons, yet in every case, the students all need both coaching and training to prepare for standardized tests like the SAT, GMAT and TOEFL in order to matriculate overseas.”
While there are cultural components (such as li or 禮) to this seeming inelasticity one of the key issues that Chinese families currently face is as Charles Zhang (the founder of internet giant Sohu) recently explained in an interview,
“I believe the US system is definitely better than the Chinese system. First of all, China just has way too many people. The entire system becomes very competitive and thus opportunities are limited. Education in China is not education; it is selection. Of course, the biggest selection process is the national college entrance exam, the Gaokao. The Chinese system naturally must prepare children to study for this inevitable exam, but the preparation is the complete destruction of creativity.”
Zhang’s comments were similarly echoed by Paul French, the Chief China Market Strategist at Mintel who recently noted that, “[t]here simply aren’t enough places at enough good universities for all the Little Emperors capable of attending and passing the required exams.” Little Emperors (八零後) are single children born and raised under the one-child policy. And due to this confluence of scarcity and demographic pressures, this ultra-competitive labor market has motivated parents to push their only child to accumulate other degrees and certificates (see below). For example, according to a report from Mintel, “three-quarters of middle-class Chinese parents expect their child to earn a postgraduate degree, while only 32% said they would be happy if their child stopped at the undergraduate level.”
This sentiment was similarly noted by Wendy Bao, with whom I also spoke in November 2012. She is originally from Zhejiang and has worked throughout EF over the past 10 years in positions such as a product manager, market analyst and in business intelligence. According to Bao, “Chinese parents care more about education for kids than themselves. Or rather, if there was an investment decision between the two, Chinese parents will invest more in their children’s education and extracurricular activities because they see their progeny as more important than their own personal achievements.”
Such sacrifice is illustrated by the family of Wu Caoying, who now attends a three-year polytechnical school. Growing up in Shaanxi province, she is the only child of her parents. Her father works in a coal mine, earning $500 a month and her mother earns $12 a day “tying little plastic bags one at a time around 3,000 young apples on trees, to protect them from insects.” Together they have scrimped and saved for their daughters education and spend more than 50% of their monthly earnings so that their daughter could attend a boarding school during high school and can now matriculate to the polytech. In return, Caoying is expected to help take care of her parents after they retire.
While part of the education-centric ethic stems from various Confucian teachings (e.g., xiushen or修身) that most Chinese are taught from a young age another reason why foreign degrees are sought is that this highly competitive labor market has led to credentialism (e.g., obtaining a certificate or degree merely to collect it for your resumé and CV). As a consequence Cathy Su also thinks that because of this education ethic, that in addition to traditional EFL training there is essentially an insatiable demand for niche services such as SAT coaching. This may be especially true since the middle class is expected to grow from 300 million today to an estimated 600 million by 2020. And as I noted in Chapter 6, with a growing middle class comes growing disposable incomes. Furthermore, wealthier Chinese families are increasingly looking to send their children abroad in part because of the hyper competitive domestic climate and due to the perceived creativity-friendly environment at Western institutions. For example, a 2012 report from Hurun regarding high net worth individuals (there are approximately 2.7 million HNWI in China), “85% plan to send their children abroad for education.”
And what do these Chinese students do after completing their degrees? While many of them obtain permanent residency, others return to the mainland (see ‘brain drain’ in Chapter 19) as future innovators and policy makers. For instance, several of the largest internet companies in China were founded by Chinese nationals who attended US institutions for college and graduate school. Charles Zhang (Sohu) graduated from MIT; Robin Li (Baidu) graduated from SUNY Buffalo; Joseph Chen (Renren) graduated from University of Delaware, Stanford and MIT; Gary Wang (Tudou) graduated from Johns Hopkins and the College of Staten Island; James Liang (Ctrip) graduated from Georgia Institute of Technology; Victor Koo (Youku) graduated from Stanford and UC Berkeley; and numerous executives in the management teams at Sina and Tencent attended a US college. In addition many others at Alibaba attended other Western institutions or joint ventures like the China Europe International Business School, the first business school to offer an MBA on the mainland. Harvard has several programs designed specifically to educate and facilitate information exchange with future Chinese policy makers. One of its programs called China’s Leaders in Development brings in “50 to 60 official each year.” Its Kennedy School has trained 150 Chinese officials since its program began in 1998. All told about half of the 668 Chinese students in the 2012-2013 school year at Harvard are enrolled in the Graduate School of Arts and Sciences.
In fact, while the legal issues are still being sorted out, there may be opportunities for both non-profit and for-profit traditional brick-and-mortar schools in larger mainland cities. For example, many Chinese families are faced with a dilemma in terms of educational options on the mainland. On the one hand they can send their children – or usually the only child – to public schools. While some of the public schools are opening special classes for students wanting to study abroad (SAT, AP, A-level prep), public schools are usually considered substandard due to lack of funding and rote memorization learning methods. Another viable choice is for families to try and help send their kin overseas yet this is financially cumbersome to most middle-class families. A third option is private schools, yet there are currently very few private schools on the mainland, thus the other two options above place many families in an uncomfortable bind (e.g., they would like their children to receive the best education possible but have limited choices).
This may be changing however. Two years ago Wellington School, a 150-year old British school, was replicated in Beijing. For £15,000 a year ($23,800), Beijing parents can now send their children to this new school based on the British public school system. Oxford International College (unrelated to Oxford University) charges up to $41,700 a year in its private schools located on the mainland and also emulate the British education system. And while it take some time before such imports are more widely accepted, the only other alternative currently is international schools, though while relatively popular, they are also both very exclusive (you typically need to have a foreign passport to be eligible) and prohibitively expensive ($10,000-$35,000 a year). Yet the trend towards international schools is growing. According to Reuters, there are now 338 such schools (up from just 22 twelve years ago) whom collectively enroll 184,073 students.
Or conversely perhaps your firm can help place Chinese students in American schools. For example, according to the Association of Boarding Schools, “about 5,600 students from China [are] enrolled in its 285 member schools in the US this academic year [2012-2013].” According to the US Department of Homeland Security, in 2010-2011 the amount of Chinese students studying at private schools in the US was 6,725, up from 65 in 2005. In terms of costs, some international programs like Leman Manhattan Preparatory School in Manhattan cost $68,000 a year (30 out of the 40 international students at Leman are currently from China). Other boarding schools in the New York metro area cost an average of $46,875 a year. As a consequence, the opportunities for foreign experts and entrepreneurs looking to wade into both sides of the market may be viable, even for administrative tasks.
For instance, US institutions and organizations collectively spend $980 billion annually on education, twice as much as China. Due to a variety of factors including large spending per capita, US institutions continue to attract foreign talent. For example, there were 765,000 foreign nationals studying in the US in 2011 – including 158,000 Chinese (there are now 194,000 Chinese studying in the US). And according to the US Department of Commerce, these foreign students contributed $22.7 billion to the economy and many stay after graduation (Chinese students alone added $5 billion to the US economy in 2012). Thus in an effort to improve both the quantity and quality of its graduates as well as raise its standing on league tables and rankings, every level of the Chinese government is implementing plans to invest ever larger sums of funds into education; including recruiting foreigners (for comparison, 24,000 Americans studied in China in 2011).
Yet, with the administrative, marketing and teaching prowess gained from over six decades of being at the top of the international educational marketplace, managers and entrepreneurs at US institutions could conceivably capitalize on their skill bases and leverage them in China’s expanding market. A year ago, in March 2012, Stanford University opened the doors to a new joint venture, Stanford Center at Peking University making it one of the first permanent higher education facilities to open on a Chinese campus. NYU has set up the first Sino-US joint venture university that will award a double bachelor’s degree (from both the local Shanghai branch and NYU in Manhattan). Classes began in the fall of 2012 and students from the mainland will pay 100,000 RMB ($15,948) a year to attend. And Julliard, the performing arts conservatory, is building a campus in Tianjin (southeast of Beijing) catering to students aged 8 to 18.
At the same time however, enthusiasm should be tempered as a joint Yale University – Peking University undergraduate program “collapsed” this past July due to “high expenses, low enrolment and weaknesses in its [Yale] Chinese-language programme.” Similarly, Duke University’s venture with Wuhan University has run into several major problems. The construction of the new Duke Kunshan joint campus has been delayed five times over the past three years due to “slow” and “shoddy” workmanship. Thus success in this segment is not necessarily a foregone conclusion.
Another role that foreign administrators may be able to utilize is that of an agent, or admissions consultant. According to one estimate, “8 out of every 10 Chinese undergraduate students use an agent to file their applications.” These agents in turn will help candidates fix their admissions essays, find the best references to write recommendation letters and otherwise guide clients through a streamlined process to foreign-based colleges. Maybe you and your company can utilize your expertise to work with new clientele.
However, as touched on above, the mainland education industry can also be tricky. For example, in order to be granted a license, certifications have to be recognized by the Ministry of Education. Online-awarded degrees and certifications are typically not accredited by the Ministry. As a consequence you may have to set up a physical brick-and-mortar office in order to do business within the Chinese marketplace. In addition, alternative certification programs such as Microsoft’s MCSE, Cisco’s CCNA, Huawei’s HANA and others like Certified Nutritionist are increasingly prevalent – so as long as they are recognized by what the Ministry deems as a legitimate institutional authority.
For instance, what if your company trains and educates workers in an ISO management process in the US? If you wanted to expand into China you may need to reinvent your firm on the mainland by creating a brick-and-mortar office location before you can legally market within China. A consequence for failing to do so would be the trials faced – according to a source at the company – by the University of Phoenix, which despite its 35 years of history, was originally not seen as a legitimate degree awarding institution in China.
National Quality Assurance (NQA) is one of the largest ISO registrars in the world and an Accredited Certification Body (ACB) that coordinates with regional sub organizations to train, audit and certify organizations and companies in ISO 9000 family of quality management certifications. SNQA is the organization in charge of verifying, confirming and auditing ISO 9001, ISO 13485, TL9000, BRC-CP and several other standards on the mainland. In January 2013 I spoke with Jason Jia, who is managing the new Wuhan, Hubei office for SNQA. Jia is originally from Anhui but has spent the last 3 years working in sales for SNQA. He noted that, “there are long-term opportunities for foreign ISO experts that can provide to mainland firms such as training and auditing services. However one of the challenges facing these same companies is that communication issues are usually a big problem. In addition, the maintenance and foreign labor overhead expenditures relative to local labor are usually cost prohibitive and as a consequence the daily maintenance fees are typically so high that most Chinese firms cannot afford it. For example, we as a certification organization pay the auditor company a daily training and on-site verification fee and this quickly adds up when taking into account the relatively higher per hour costs charged by foreign companies.”
One lively human resource area within the education labor market provides large compensation packages yet has relatively few candidates: if you have internationally recognized awards, Chinese institutions will hire Western superstar teachers to improve their table rankings. For example, three years ago Jiao Tong University in Shanghai scored a coup, recruiting French virologist Luc Montagnier, who discovered HIV and subsequently received the Nobel Prize in 2008. Another case is, Rao Yi, who grew up in China but spent 22 years at Northwestern University before being lured back to become the dean of Life Sciences at Peking University. All told, the Chinese national government in a project dubbed the “1,000 talents program” (see more below in Chapter 15) is offering perks and bonuses up to $150,000 in an attempt to lure “foreign-educated Chinese scientists, academics, financial experts, and M.B.A.s.” And according to Wang Huiyao, head of the Center for China and Globalization, approximately 15,000 individuals have come to the mainland through this program.
At the same time, if your goal is acting as an intermediary and talent recruiter, expectations should be tempered with a dose of reality. For example, Pat Sullivan, an accountant and chairman of international recruiting at Young Harris College told me in March 2013 that there are a number of obstacles created by current US immigration policies, which put numerous roadblocks in the way of foreign students seeking to study in the United States. According to her, “The paperwork required for US Visas, health certificates, assurances of financial solvency, and other forms are always more time consuming than one would expect. Planning for the arrival of foreign students must begin months in advance and requires the active participation and assistance of the host educational institution.”
Consequently, for those entrepreneurs looking to open up a new seminar or class room system, several questions need to be answered: where will you find customers who are willing and able to pay? How will you build, manage and incentivize a sales force team to convert leads into customers? Who will teach and design the curriculum for the courses? Where will these seminars and courses be held?
In terms of taxes, there is one other challenge for foreign-owned companies that is not entirely unique to the EFL industry, yet should be recognized and addressed. As mentioned above, each province has its own legal requirements for business licenses and certifications. For example, in Shanghai, in addition to a college degree a foreign teacher is required to have at least 2 years of previous teaching experience as well as a TEFL certificate from an authorized institution. On the business end, due to relatively strict capital controls (e.g., individuals are limited to $50,000 in transfers annually) it can be relatively complex to repatriate your profits and assets from schools as there are also numerous taxes, tariffs and levies that do and do not apply specifically to educational companies. While not explicitly discouraged, creative accounting, subcontracting and the “Hong Kong shuffle” (see Chapter 10) have become increasingly popular tactics by EFL firms to reduce tax liabilities. Thus it is recommended that you speak with an attorney or tax expert before you invest in a new EFL program.
In terms of educational activities irrespective of being indoors or outdoors, according to its September 2012 report, Distimo noted that the popularity of English-based apps in China for the iPhone still remains very high. It is the 2nd largest installed language for apps overall and thus foreign entrepreneurs – including those in the education industry – may be able to turn this embedded built-in language base to their advantage. Because the userbase is already largely familiar with Romanization, that is one less problem to be concerned with. You might consider creating online virtual EFL classrooms based on apps for smartphones and tablets or rolling out cloud-based video courses that can be viewed by anyone with an internet connection.
In fact, one point Wendy Bao explained to me was that online classes and programs like Khan Academy will be the future of education. Khan Academy is a popular non-profit educational organization that focuses on making micro lessons on a variety of topics and has delivered more than 200 million lessons online. In Bao’s words, “while online courses may have a slower uptake in China due to a limited – yet growing – telecommunication infrastructure, because of their inherent flexibility for being offered and accessed throughout a wide variety of time slots, this will enfranchise rural and urban students who can now utilize global knowledge databases. These same students – who due to their inland locations and schools lacking the funds would otherwise not have access to experts including foreign instructors whose language skills are highly sought after and could be substantially cheaper via telepresence.”
Yet again, one challenge, as Bao mentioned, is that the telecom infrastructure is still relatively limited in bandwidth. For example, as I note later in Chapter 15, according to their Q3 2012 speed survey, ChinaCache, the largest domestic content delivery network (CDN), notes that while the overall speeds are a little slower than previous speed rankings, Shanghai currently leads the country in average speeds at roughly 3.44 Mb/s and Beijing is 10th at around 2.5 Mb/s. Akamai Technologies (a global content delivery network provider) ranked China’s average internet-connection speed at 94th globally, at 1.6 Mb/s. In addition, depending on the regulatory and monitoring issues discussed in Chapter 20 with the Great Firewall, quality of service and bandwidth may decline as you leave the larger Tier 1 cities. Thus entrepreneurs should take these factors into account while making a business plan.
In December 2012 I spoke with Eric Azumi, vice-president of information systems at EF. According to him “the online market is just now beginning to be tapped. There have been limitations that continue to be overcome including computational and bandwidth issues that arise in every country but especially in China. Voice recognition services similar to Siri will probably be the next technology incorporated into this segment and eventually, as the online industry matures, it will be commoditized. What I mean by that is that at some point all competitors will have very similar software stacks in terms of features and functionality, yet there is always room for value-added services – especially as more direct-teacher training is replaced with mobile learning.”
Azumi gives as an example, the technical changes over the past 15 years as online classrooms evolved from text-only, to incorporate audio, then video via telepresence (e.g., webcams) and as he predicts in the near-term, real-time voice recognition. Yet again even with all of these competitive forces with large, well-funded, experienced incumbents he thinks that “because of the relatively low barriers to entry just about anyone can still set up an educational center in China and elsewhere, especially if they cater to niche groups or provide a unique environment such as how coffee shops in Japan have been turned into English conversation centers that provide both relaxed and informal way of improving language skills. And because people by-and-large still insist on face-to-face time, the general acceptance of online education will take time to diffuse here and around the globe. Furthermore even with the advent of on-demand instructional services there are still many opportunities for traditional schools in 2nd & 3rd Tier cities which are still nascent markets that have not been exploited yet.” These technological challenges and opportunities related to cloud computing are further expanded on in Chapter 13.
Yet for those willing to face these technical challenges, the financial rewards could be lucrative. According to one recent estimate, up to 380 million people in China will “need high-quality education and training resources across the country” from 2012 to 2017. And a large percentage (~30%) of these people are expected to utilize online services and tools, creating a potential market worth an estimated $11 billion in revenue. However, to temper any get-rich-quick enthusiasm, the amount of investment into Chinese education companies fell to $46 million in 2012, less than a quarter of the previous year. Why? David Chen of AngleVest – a venture capital group focusing on angel rounds – noted that “the timeframe for growing an education business can be drawn-out, and a challenge for fund managers who have to achieve returns by a specific date.” Thus once again, while there is potential revenue there is also required patience for returns on investment.
Takeaway: The education market in China has the potential to be both large and profitable. However, gone are the days when you could merely jump on an airplane, get off and instantly set-up a market-leading company. The industry has become increasingly competitive with both professionalized workforces and various rules and regulations such as licensing and certification guidelines. But as long as the Chinese economy and population continue to grow, there should be continued opportunities for entrepreneurs and companies who have done their due diligence. This chapter does not discuss guanxi, a cultural phenomenon involving personal connections within the hiring and deal making process in all Chinese business transactions. But that is a very complex topic worthy of several copious volumes and touched on in Chapter 10.