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

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

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

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

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

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

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

Source: UNDP

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

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

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

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

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

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

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

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

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

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

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

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

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