China’s Next Act: From Hollywood to Harvard?

Could China buy America’s top universities? When this question appeared on Quora a few years ago it was quickly dismissed as unworkable from a governance perspective. But the ambition behind the question remains: If Chinese investors could, they would. What else might China acquire from America’s $1.3 trillion education industry if Harvard is out of reach? We are about to find out.

The unlikely parallel is Hollywood. In just the first few weeks of 2016 Chinese conglomerate Wanda Group acquired blockbuster Legendary Entertainment for $3.5 billion following its previous $2.6 billion acquisition of AMC Theaters; China Media Capital injected $100 million into blockbuster Imagine Entertainment, and Perfect World Pictures arranged a $500 million finance deal with Universal Pictures. In the adjacent digital games market Chinese acquisitions are stacked high, including Internet giant Tencent's investments in Riot Games, Epic Games, a strategic minority stake in Activision Blizzard, and, more recently, established content streaming partnerships with HBO, Warner Brothers and the NBA.

Meanwhile e-commerce leader Alibaba has invested in companies ranging from LA-based Snapchat to startups such as Fanatics (online sports) and Kabam (video games), and more recently in online education company iTutor Group. China’s total M&A activity in the US during 2015 was $14 billion, with an additional $2.3 billion invested directly in startups since 2012, but this is only the beginning for the media and entertainment sector.

What do education and the Hollywood entertainment complex have in common? Despite obvious differences, both are industries where consumer demand is off the charts in China and where creative talent, technology, intellectual property (IP) and innovative content are coveted. Both are being disrupted by digital delivery models and adjacent competitors. Both operate in global markets where “Made in America” matters.

To date, US and UK education-related businesses have received a paltry $350 million in investment from China and other regional investors, based on our estimates. But there are strategic and financial reasons why China's investment into US education will accelerate.

China’s Move into US Education Markets

First, intensifying competition within China’s domestic education sector is creating acute needs to differentiate by using unique foreign content, services and technology. The latest example is TAL Education’s investment in Knewton following an earlier investment in the Minerva Project, a type of alliance that not only offers China exposure to advanced technologies and innovative US education brands, but also signals to local consumers a superior level of quality and prestige.

Second, China’s internal educational reforms are driving consumer choice. Specifically, changes in the national gaokao and zhongkao exams, experimental admission standards at selected universities, and the internationalization of higher education pathways are fueling explosive demand for international schools in China and boarding schools abroad. A growing emphasis on early-age English immersion programs and extracurricular experiences also makes U.S.-based companies attractive partners.

Third, Chinese companies are looking to continue serving Chinese students even if they study overseas. Thus far, Chinese students are studying in both U.S. colleges and higher schools at record levels. Yet Chinese competitors, such as Universities and service providers, are largely absent in the U.S. In 2015, there were 304,000 Chinese students in U.S. higher education and 34,758 students in U.S. K-12 system, the latter growing 290% in a single year. According to the National Association of Foreign Student Advisers, international students overall contributed roughly $30.5 billion of economic value in 2015; a simple extrapolation, based on Chinese students as a percentage of total international students in the U.S., puts China’s contribution at over $10 billion annually. Yet despite such a large potential revenue base, there is a dearth of Chinese investment into US-based pathways, tutoring, boarding school and service businesses.

Fourth, from an American perspective a potential Chinese investor can provide access to its own deep market and a built-in platform for product distribution and student access. Many U.S.-based education and edtech companies simply do not have the networks, knowledge and resources to execute a meaningful China strategy, despite a scattershot of loose cooperative partnerships in emerging markets of questionable value and depth. With U.S. education markets offering limited scale compared to emerging economies, the case for venture and private equity-backed firms, from K-12 tutoring to proprietary vocational colleges, to search for more investment-intensive Chinese partnerships—including partial sales or buyouts—grows stronger.

Fifth, China itself is an emerging edtech market with an impressive lineup of mobile, e-commerce and media competitors, from well-known conglomerates mentioned above to new ventures such as NetDragon Education, iTutorGroup, and 17zuoye. Last year marked a high point of early-stage capital raises in China, amounting to $317 million in the first half of 2015 and placing China on a globally competitive level. Furthermore, many of these firms are cash rich, acquisitive, and innovative. For some, the added benefit of diversifying away from Renminbi (the Chinese currency) denominated revenues and risk—and possibly increasing their public valuations at home—provides a further nudge.

Industry after industry in China has struggled with intensifying domestic competition, a push toward innovation, exacting consumer demands, and the extension of their businesses abroad.

In the U.S., total Chinese investment now exceeds $50 billion and could reach $200 billion by the end of the decade. The question is not whether a critical mass of Chinese investment will enter America's vaunted education sector, but when it will arrive. From U.S. education entrepreneurs to college leaders to venerable US education brands in need of a remake, Chinese capital, and the potential market access it can provide, may soon be coming to a classroom near you.

Todd Maurer (@td_maurer) is a Partner at Educated Ventures and Founder of 3/1 Global Research