Why is China’s K-12 market garnering the attention of the likes of Sony and Lego, not to mention the usual suspects such as Pearson, Blackboard and other large education firms? One obvious reason is the enormous potential market size there. In 2014 there were 200 million students in K-12 institutions with an estimated market size of USD 40 billion. Compare that with a mere 62 million students enrolled in K-12 education the United States—though it is worth noting that per capita spending on education in China is still less than in the US. In addition to the obvious economic trends of mass urbanization and rising incomes across the country, a closer look at political and social factors makes it clear that changes are under way in the K-12 system there that international firms would be wise to keep tabs on.
English language learning is no longer the only game in town for international vendors. Customer bases in saturated urban markets with increasingly fierce competition from local schools, not to mention well-funded online providers such as VIP Kid, are now showing signs of erosion for large international companies like EF English First and Pearson. As a result, the attention of these companies and of investors is shifting to China’s K-12 market. Of the 33 venture capital deals involving Chinese ed-tech companies in Q1 2016, just 12 were targeted to companies focusing on K-12. But those 12 deals accounted for 62% of all funding.
Much of this newfound interest may be tied to policy developments. China’s recent National Five-Year Plan has singled out education technology as a key area for development. The plan calls for a “market competition + government subsidy” system to support digitization in schools. There are new policies in place to support a more “well-rounded” STEAM (Science, Technology, Engineering, Arts, and Mathematics) education in place of previously favored STEM education. The effect of these new policies is that schools are now requiring mandatory class hours that cover subjects outside of the core curriculum, the National Curriculum Standard (NCS). K-12 schools in China are responding to these new policies—and to the demands of many parents in big urban markets like Shanghai who have grown disillusioned with the intense focus on “exam culture”—by branching out into new subjects. An array of would be suitors as diverse as Sony, Lego and Pearson are developing products to take advantage of the demand for curricula and materials for teaching about modern technologies such as coding and robotics. In fact, Pearson is rolling out its largest effort in China’s K-12 market to date this fall with a 100% localized suite of STEM courses.
China’s tiny portion of private K-12 institutions is also due to expand, a welcome development for companies marketing “international” curricula and products there. These types of institutions are moving beyond the narrow niche of international schools for foreign children to serve new customer segments such as middle-class Chinese families due to increasing demand from parents, but also due to supportive policy from China’s government. A draft law allowing for-profit operation of private K-12 schools enrolling Chinese students is set to go into effect in the near future, which will certainly lead to more schools in first- and second-tier cities offering international curricula as a selling point. The demand for this type of education is higher than ever. Many parents of the booming upper-middle class fret over getting their children into competitive universities abroad, and this trend is not likely to reverse itself anytime soon.
If international companies contemplating a move into China’s market from afar read the tea leaves they will discover that there are opportunities to meet the needs of the world’s largest single market of K-12 students with new and innovative products. Investing in as complex a market as China surely presents risks, but international companies operating there now are aligning their business strategies with the political and social trends present in today’s market and finding new growth sources for their products. Forming partnerships, courting investment and investing in or acquiring local companies are well-trodden paths that pioneering firms have taken into the Middle Kingdom. The flourishing ed-tech scene there has produced a new crop of companies touting extensive networks of students, teachers and schools and forging relationships with companies like these has long been central to market entry strategies for international firms. Looking ahead, there is likely to be more involvement from international companies in China’s K-12 education space. As is the case in most lucrative markets, the companies who come out on top will almost certainly be the ones which have the best market intelligence they can act on.
For a more in-depth look at China’s K-12 market, our full report is available for complimentary download.