A Door to Unprecedented Growth in Preschool and Elementary Education
Market drivers behind the growth in China’s preschool and elementary education systems are, to my knowledge, unprecedented in the history of public and private education. Equally amazing, given the nation’s reputation for highly restricted and difficult-to-navigate markets, is that Chinese government and education executives, under increasing pressure to deliver on substantial expectations, are expressing what appears to be a genuine desire to explore partnerships, resources, and curricula from outside China. In fact, they feel they are just now able to start overcoming a self-imposed isolation that meant ignorance of educational development in the rest of the world and are anxious to advance their pedagogy and productivity.
For any firm not already in this market, finding the right Chinese partner and getting government support are critical—but increasingly do-able. How First-Decision Education Group, headquartered in Beijing, is thriving offers a window into how to succeed in this remarkable market. Mrs. Zou Jing, CEO and co-founder of First-Decision (with her husband, Brad Reinert, an American), and Mr. Reinert are star examples of a new breed of China-based entrepreneurs. I met them when Jing, as she likes to be called, spoke at the AEP/AAP International Markets Forum, which I chaired last June. At their invitation, early last month we toured their schools and met government education decision makers across a wide swath of China. This is their story and a foreshadowing of tomorrow's global education market shifts and opportunities.
[“Gan bei” means “bottoms up,” a phrase I learned over wine toasts at many meals we shared with officials. Relationship building and deal making in China are about far more than alcohol, but it’s a great ice breaker. In a postscript to this article, I share some of the personal side of this fascinating Odyssey.]
First-Decision Education Group
First-Decision Education Group (First-Decision) invests in education projects based in China. Since 2003, First-Decision has grown with 32 schools and contracts for schools. The core business is owning and operating bilingual elementary and preschools in China. First-Decision’s model school has been recognized by the Chinese Association for Non-Government Education (CANGE)—a kind of trade association run by the government for private school operators—as one of the top 100 preschools in China. First-Decision has also been recognized as one of the top ten investment brands in the Chinese preschool education market. It operates the largest private preschool in Beijing (with about 1,000 students and a waiting list of 200) and large pre- and elementary schools in Kunming and holds contracts to open more in other areas, including Zhejiang, Shandong, and Yunnan provinces. We visited them all. Prominent in First-Decision’s vision is teaching kids to speak English, think, be creative and have fun, busting out of the traditional mold of test-focused authority-respecting passives that has guided pedagogy to now. In China’s IP free-for-all, First-Decision’s business model is to package products and services that respond to all key stakeholders—kids, parents, teachers, headmasters, and government officials.
More Preschool-Age Kids in China Than in All U.S. K-12
Under China’s “one child” policy, its preschool population is growing by about 17 million annually, making the cohort aged 2-5 a whopping 68 million kids, for whom the government is committed to providing preschool through high school education. Some 62% of preschool-eligible kids are currently enrolled, a fraction of them in strong schools and the balance ranging from serviceable to custodial. (That number, in comparison to the considerably smaller fraction of U.S. kids in preschool, is one of many indicators pointing to what our economy will be up against in a decade or two.) Serving these kids are about 150,000 preschools, of which some 110,000 are private. Private preschools are members of the CANGE’s Preschool Committee, a government-sponsored association staffed by national education department employees but whose members are Chinese entrepreneurs. Jing is Vice President of Yunnan Province Non-Government Education Association. Her primary responsibility is cultivating international collaboration from Pre-K through university. For the same reason, she’s also VP of the 4,000-member Shangdong Chamber of Commerce in Zhejiang Province and an officer of other such associations. To do business in China, especially education-related business, requires government blessing. Not always the final decision makers, government officials, including those with which CANGE works, are critical to gaining access to and support of the local and regional education managers who do make the decisions. As evidenced during our tour, Jing is a master at leading relationship-building conversations, humorous one minute and strategic the next, weaving First-Decision’s value proposition into CANGE’s and education officials’ needs.
The government usually provides the facilities for both public and private preschools (more on this below), and tuition is charged for both, though considerably less for public than private. Government funds cover teacher salaries in the public schools but not in the private. Model schools which we visited were far from rudimentary, reminding me of the excellent private school two of my grandkids attended in Houston, right down to the furniture and classroom computer. It’s a new world for China’s education officials, and they crave insight into best practices from outside the country. They spoke to us of wanting to bring new resources to teacher pre- and in-service training, better ESL curricula, traveling to visit exemplary programs, partnering with universities, curriculum providers and academic centers, better managing relationships with parents, and improving English language instruction and headmasters’ management skills.
English is a compulsory subject in China, beginning in elementary school, and high-stakes entrance exams for both high school and university test English skills, not to mention parents’ awareness that career options for their children take a big step up for those who speak English. All this is electrifying demand for preschool education and particularly for those with bilingual (about a half hour of English a day) and international (a half day of English) curricula. Adding to the drivers for English education in preschool is that China’s fastest-growing regions are often “special economic regions” fueled by international trade for which English is the lingua franca. What’s more, as the country moves from agriculture to industry, urban areas are increasing dramatically in population. The country already has 70 cities with populations over one million, and “small” ones like Hangzhou, located two hours’ drive from Shanghai (itself home to 30 million), have six and a half million. If some wag hasn’t already jested that China’s national bird is the construction crane, a visit to any of their cities will immediately bring the thought to mind. Recognizing that population spurts mean dramatic growth in school-age cohorts, government regulations for housing development projects above a certain size require developers to build and donate to the community at least one preschool, elementary, middle, and high school. One city is building 200 new schools. The problem is there are nowhere near enough teachers, let alone ones skilled in teaching English and no universally recognized Chinese EFL curriculum. First-Decision is working on answers for all these problems. It currently employs a cadre of American teachers recruited annually at U.S. and other international colleges and universities, as well as Chinese teachers specially trained in teaching EFL using the company's proprietary curriculum. Two-year olds in the First-Decision schools I visited charmed me by alerting their teacher to my presence and then greeting me, all in English.
Commenting on China’s growth, Brad Reinert, who grew up in Denver and previously spearheaded European distribution for a California-based high-tech firm, told me, “I've lived in China for ten years, and when I try to explain to people what is happening here (in terms of the economic development), most people can’t really wrap their heads around the scale, scope, and speed of it all until they see it for themselves.”
To give you a feel for doing business in this exploding market, though the names won’t mean much to you, here is a list of the kinds of people with whom you’ll want to be developing relationships: Mr. Guo Fuchang, President, CANGE Preschool Education Committee; Mr. Yang Zhibing, Secretary General, CANGE Preschool Education Committee; Ms. Su Jing, President, China Preschool Education Press; Mr. Liang Gongqin, Ex-Deputy Governor of Yunnan Province, President of Yunnan Association for Non-Government Education; Mr. Liu Xugang, President of Shangdong Chamber of Commerce in Zhejiang Province (if you know enough Chinese geography to realize that Shandong and Zhejiang are both provinces, and are confused by Mr. Liu’s title, the Shandong business community does enough business in Zhejiang to have a branch of its Chamber there) and Chief of Chinese Institute of Educational Research; Mr. Zhang Bing, Deputy Secretary, Secretary of Politics and Law Committee, Zhoushan Municipal Committee of the Communist Party of China; Mr. Zhang Zuoping, Vice-Mayor of the People’s Government of Laiwu; and Mr Jin Zongyi, Vice-Secretary General of the People’s Government of Laiwu. We met them all and I was impressed by them all. These were hardly stereotypical functionaries in Mao jackets but instead educated professionals, many of whom, but for the language gap, reminded me of educational administrators I’ve met in the states.
Would You Invest in a Chinese Company?
If you’ve been reading the financial press lately, you’ve seen stories questioning the validity of audits by Western firms of some of the biggest publicly traded Chinese corporations, including giant New Oriental Education, traded on the NYSE, the country’s hottest education success story. According to Trace Urdan, Senior Analyst, Wells Fargo Securities, who follows publicly traded education stocks, on “Dec. 17, 2012, KKR & Co L.P. announced that it has closed on a $6 billion pan-Asia fund, the largest private equity pool ever assembled for the region and its second in the region. According to Reuters, the new fund was over-subscribed. KKR’s first fund, raised in 2007 at the height of China-mania, was $4 billion. It also has a $1 billion dedicated China fund. Asia-based private equity firms now account for 14.5% of funds raised globally this year, or $50.2 billion, up from 8% in 2009, according to Thomson Reuters data.”
“Broad-based fears concerning potential fraud and the enforceability of shareholder rights in China among public market investors has depressed U.S. listed small and mid-cap Chinese stocks. While the new KKR fund is not dedicated to distressed Chinese equities exclusively, we believe the superior diligence that private capital is able to exercise in the region means that private equity is increasingly likely to cherry-pick premier assets from among the generally depressed Chinese equities in the public markets, including one or more of the education-related names. Even outside of education, we think any concerted effort by KKR and others to lead leveraged buyouts of U.S.-listed Chinese stocks will raise valuations for all.”
Getting Over the Rainbow
All this is not to say that, for a non-Chinese firm, gaining entry and traction in the Chinese school markets will be anything like opening up sales in Washington and Oregon for a U.S. East Coast firm. A foreigner, for example, cannot own a private preschool but can be a minority partner with a Chinese entity. Business structure matters too, with “wholly owned foreign enterprise,” often called a “WOFE,” pronounced “woofie,” based on the acronym, a popular format. For tax purposes, locating the WOFE in Hong Kong has advantages. Doing all this takes recruiting savvy legal talent and in-country personnel who understand English as well as Western culture and business practices, on top of related Chinese business expertise. First-Decision’s management team’s combination of native-born Jing and her American husband and partner, Brad, an experienced entrepreneur in international markets, is ideal. That contract terms may sometimes be interpreted more as suggestions than requirements is one more hurdle. The low-hanging fruit is clearly related to English language instruction, but as with any international diversification, curricular material must be carefully vetted and adapted. Ultimately, in addition to all the above, having a well-connected partner is critical. Even with all this accomplished, the “usual” issues of sales infrastructure, marketing, and collections present unique twists.
Bottom line: With a total population near 1.3 billion, the gigantic size of China’s educational challenges are easy to imagine. What is now becoming clearer is that it is transforming into an addressable market. China has a really big education problem on its hands and is looking for help wherever it can be found, international sources being high on their list.
[First-Decision and HellerResults Group are exploring ways to jointly help non-Chinese education firms explore and build operations in China. Additional photos from the trip are here.]
