Category Archives : Emerging Markets

Case Study: Corporate Credit Card Market

Brief:

Evaluate the current and medium term potential of the corporate credit card market in China and Japan, conduct interviews with potential customers to understand their decision making behavior and preferences, and conduct a complete “eco-system” analysis of the market leader in these two countries.

Emerging Strategy’s Approach:

Emerging Strategy developed a thorough understanding of the needs and purchasing behavior of corporate decision makers relating to financial services. We also assessed the relative use and popularity of different types of products such as cards used primarily for ‘T&E’ (Travel and Entertainment) purposes vs. those used for corporate purchasing. Emerging Strategy’s consultants conducted over twenty in-depth interviews as original, primary research in each country. Respondents included senior corporate executives responsible for making decisions about financial services vendors; sales, marketing, and operations employees at major banks and credit card companies, as well as industry observers and analysts. This was in addition to leveraging any existing on-line secondary research, government reports, journals, etc.

Impact:

The client has fresh information from the market about competitor activity, market dynamics, and tactical sales opportunities with some of the major corporations operating in those markets


Case Study: Market Entry Strategy for Surgical Imaging Solutions for Integrated Operating Rooms in China

Client Situation:

Amid rising demand for integrated operating rooms (IOR) particularly in established economies, our client was poised to accelerate its surgical imaging solution business globally—it acquired a company offering clinical Video-over-IP solutions, and has since been providing clinical information management systems to healthcare institutions in the U.S. As the company sought to leverage its new acquisition in penetrating new markets for surgical imaging solutions, it engaged Emerging Strategy to conduct a comprehensive go-to-market strategy study for the Chinese market.

Emerging Strategy’s Approach:

The purpose of the engagement was to inform our client’s decision-making on three key questions:

  • Where to play: Identify growth market segments and analyze drivers and obstacles in these segments
  • What to offer: Identify customer needs in priority segments
  • How to win: Examine and benchmark prospective partners, reflecting on the customer (hospital) needs and advise our client on its acquisition and channel partnership strategy

To obtain insight into these topics, our consultant team utilized a rigorous primary research strategy that sourced valuable insight from decision makers at customer organizations, experts and other knowledgeable stakeholders in China’s healthcare space.

Impact:

Emerging Strategy evaluated the competitive landscape for Integrated Operating Rooms (IOR) in China, including both international and domestic competitors, as well as identifying attractive customer segments and strategic go-to-market plays, providing a valuable foundation of market intelligence for the company to consider its product strategy for IOR and surgical imaging solutions there.


China’s quest to grow its electric vehicle market relies on heavy-handed policy intervention

China’s booming electric vehicle market is driven mainly by generous government subsidies

China is saying goodbye to double-digit growth in its domestic car market, but one segment stands out for its phenomenal growth. Electric Vehicles (EVs) and New Energy Vehicles (NEVs) have caught on in a big way in China, making it the largest EV market in the world with 37.7% of global sales in 2016.

The Chinese government is throwing its considerable weight behind the EV segment, a fact which was reaffirmed in Beijing’s 13th Five-Year Plan released in 2015. This important policy roadmap set a goal to have five million NEVs, including cars and buses, on the road by 2020. Beijing’s strong commitment to become a dominant player in this market is driven by two political risks: its over-dependence on oil imports and the severely polluted air in its cities.

Beijing’s commitment has manifested itself in very favorable policies for both NEV manufacturers and consumers. The central government provides subsidies to manufacturers that invest in NEV production and Chinese consumers purchasing an NEV can receive the equivalent of USD 6,740 in subsidies. The value of NEV subsidies for consumers provided by the central government in China reaches a similar level to those in other countries such as the UK, France and Japan. Many local governments also provide incentives on top of those from the central government, including cash subsidies, free parking spaces and free license plates (no small sum considering the fact that license plates can cost as much as USD 12,000 in cities like Shanghai).

The government has also ramped up its efforts to add more charging stations to overcome buyer “range anxiety”, an issue which has long plagued the adoption of NEV vehicles. At last count there were more than 85,000 public charging stations in China, up 65% from the end of 2015. Local governments have set an ambitious target in this area as well. For example, Beijing’s government has plans to install 400,000 charging points in its megalopolis by 2020.

So far, surveys show that satisfaction among NEV owners in China is high—the majority say they would purchase NEVs again and interest from Chinese consumers in NEVs has tripled since 2011. Although Chinese consumers have generally preferred foreign car brands over their Chinese counterparts, this does not seem not the case for the NEV market. This gives Chinese brands the opportunity to cement a strong position in the market as it further develops.

Government incentives have generated overcapacity

There is more to this growth story though, and not every aspect of China’s NEV market is as rosy as the figures make it out to be. China’s extensive financial support to the NEV market has undoubtedly created strong incentives for both consumers and suppliers, but the Chinese NEV market is not on track to reach government growth targets set out in the Five-Year Plan. Instead, downsides to China’s supportive policies are beginning to emerge in the form of overcapacity and imperfect competition.

More than 200 Chinese NEV manufacturers have entered this market to date, producing over 4,000 licensed NEV models. Some of these manufacturers only sell several hundred cars per year, far from the scale necessary to generate returns on investment in the automotive industry. To provide a glimpse of just how quickly this sector has expanded, there were only 140 manufacturers accounting for 1,300 licensed models in 2015.

Another hurdle to a mature market is that low-cost NEVs dominate—66% of market share belongs low-cost cars, which utilize basic technology and require lower R&D costs. Less than 20% of China’s NEV market share belongs to high-end NEVs backed by heavy investment in advanced technology and R&D. Time will tell if low-cost, low-quality NEVs produced by tiny outfits surviving on government largess will continue to account for such a large part of the market in China.

Battery shortage and protectionist policy crimp NEV production

The push for five million NEVs on China’s roads by 2020 is limited by scarce battery supply. And the scarcity of lithium-ion batteries is not just an issue in China. In fact, the price of lithium-ion batteries rose 300% from 2015 to 2016. If China’s NEV market grows as its current rate to an annual production volume of 2.2 million in 2020, the demand for batteries would reach 84.8 GWh,  far higher than the global output of 15.7 GWh produced in 2015. This scarcity has prompted a flood of investment in battery manufacturing operations in China. In fact, ninety percent of new lithium-ion battery manufacturing projects in the pipeline are expected to be located there, a big victory for government planners with designs to dominate the market for this critical technology. However, demand for batteries by Chinese NEV manufacturers will likely still far exceed supply.

China’s NEV manufacturers have long favored batteries from Korean and Japanese manufacturers due to their lower cost and better performance, especially in larger vehicles such as SUVs and buses. However in June 2016, the Ministry of Industry and Information Technology, China’s government agency responsible for NEV subsidy policies, left some prominent foreign companies off a list of battery manufacturers approved to receive government subsidies. Samsung and LG, two Korean industry giants which manufacture batteries for many of China’s NEV producers and have extensive operation in China itself, were left off. The upshot of the policy move is that producers of NEVs hoping to sell cars in China will think twice about using batteries from non-approved suppliers like LG & Samsung in cars. The announcement of this move encouraged at least one Chinese manufacturer to scale down production of one of its larger SUV models over concerns that its eligibility for subsidies may be at risk. Exclusion from the list means that from January 2018, manufacturers of electric vehicles using batteries made by manufacturers not included on the approved list will not be eligible for government subsidies.

Subsidy reduction could ruin the party

 Government subsidies in 2016 stood at 30 billion RMB (USD 4.5 billion). Not surprisingly, local governments and manufacturers have jumped at the opportunity to cash in, leading to the fragmentation and overcapacity we see in China’s NEV market today. In the period from January to October 2015, the sales volume of NEV was 174,000. However, the number of vehicle registration plates issued for NEVs was just 108,000. This means as many as 70,000 EV cars were produced but not sold to consumers. This unintended consequence of government interference in China’s NEV market is an open secret in the industry.

The central government reacted to the situation by enacting a new subsidy policy in August 2016. Under the new policy, only qualified manufacturers will be eligible to receive NEV subsidies moving forward. This is expected to leave out more than a third of Chinese manufacturers which fail to meet the policy’s qualification standards. Vice Minister of Finance Song Qiuling said that the government subsidy policy will be adjusted further in 2017. And while the subsidy amounts are not expected to be reduced significantly, today’s high levels are not sustainable, according to Song, because they will put pressure on government finances and continuing heavy-handed government intervention in the NEV market is also not seen as beneficial to the its long term competitiveness and development. This delicate balance between government support and market forces raises questions about the viability of NEVs in China over the long term. Without generous subsidies, Chinese consumers may no longer want to purchase NEVs. According to a recent survey, only 38% of consumers would be willing to buy NEVs without the government subsidy. China’s government planners have a remarkable record of meeting their stated targets, but the ambitious goal for NEV use requires a careful balance of policy support, fair competition and customer demand. So far, it is clear that China has work to do in all three areas to realize ambitions of its 13th Five-Year Plan.


As international trade liberalization goes into reverse gear, what impact on U.S. businesses with global interests?

We continue to believe (or is it hope?) that the long-term arc is towards greater openness and lower trade barriers. However, the near and medium-term conditions may be quite the opposite.

The U.S. has generally trended towards lowering barriers to trade over the last 150 years, and since World War II the U.S. has promoted the liberalizing and democratizing effects of trade and interconnected economic relationships as evidence of its superior free-market approach in contrast with the closed economies of Soviet Union and other communist states. In fact, the U.S. has not withdrawn from a single trade agreement since 1866, when the Canadian–American Reciprocity Treaty with Great Britain was terminated in the aftermath of the American Civil War.

U.S. trade relations with other countries fall into the following categories:

  1. Free trade agreements, such as NAFTA, TPP and the proposed TTIP
  2. Normal trade relations, also known as “most favored nation” status (MFN)
  3. Lack of normal trade relations, which applies only to North Korea as trade relations with Iran and Cuba were headed in a positive direction under President Obama

The Obama administration and its Republican and Democratic predecessors have worked with other developed and emerging economies for many years to make sure that a large portion of global trade was conducted per a U.S.-led framework.

This effort is most evident in the twin trade deals that are now unraveling: the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Plan (TTIP). Together, these two trade agreements would have governed a substantial amount of global trade with strict rules designed to open markets to competition and provide a level playing field for U.S. companies. Despite the hard-won commitment from TPP’s eleven member countries, it is clear that the TPP isn’t moving forward in its current form, and the TTIP has an uncertain future.

This has several implications for U.S. companies. Besides the obvious loss of free-market access to rising economies in Asia and the world’s largest economic zone, the European Union, a medium-term trend towards protectionism and an uncertain policy and investment environment for U.S. companies operating outside the U.S. may lead to curtailed ambitions for international growth or a delay in the execution of global market expansion.

There may be an upside of a renewed focus on U.S. business and investment, but it is the rare U.S. headquartered company that pursues international growth without attending to its domestic market first. Thus, in the medium-term, it may lead to a slowdown in the diversification of revenue from non-U.S. sources.

Executive Suite Questions:

  1. Are the international markets important to our company’s growth strategy likely to continue working in the direction of increased trade liberalization or are they likely to be in the cross-hairs of a Trump administration?
  2. What other countries offer viable and addressable markets for our goods, other than China, Mexico and those visibly on Mr. Trump’s policy agenda?

Timely market intelligence lowers your risk in a fast-changing international environment

The one thing people can agree on with regards to this U.S. election is that the results were surprising. You can avoid blind spots for your business by asking the right questions and sourcing timely market intelligence to in support of your corporate function, whether it is Strategy and Planning, Corporate Development, Marketing or others. If you are a business leader with P&L responsibility, the quality of market insights and decision support in this uncertain environment could be a difference between making or missing your targets.


Will US-China trade conflict under Donald Trump impact your business?

“We can’t continue to allow China to rape our country” — Mr. Trump at a Ft. Wayne Indiana rally in 2016

This is Part 3 of 4 of an initial series of posts on this subject.

Mr. Trump will need to tread carefully with China, because although the U.S. is its largest export partner, accounting for ~17% of exports, the proportion of China’s net exports to GDP declined from 9% in 2007 to 2% currently, placing China in a stronger position to absorb shocks.

China is the 4th largest export market for U.S. goods and services, after Canada, the EU and Mexico, accounting for $124 billion of exports in 2014.  Mr. Trump’s economic plan is tough on China, stating “China’s unfair subsidy behavior is prohibited by the terms of its entrance to the WTO and I intend to enforce those rules and regulations. And basically, I intend to enforce the agreements from all countries, including China.”

While we do not believe a wholesale renegotiation of the WTO is on the cards, nor blanket tariffs of 45% on Chinese imports as floated during the campaign, there is certainly a possibility that specific goods such as steel will be targeted for some tariffs, and that some tariffs may be temporarily imposed on various other imports to make good on campaign promises. Therefore, there is a real possibility of escalating trade conflicts between the U.S. and China.

In some preemptory sabre rattling, Global Times wrote in an editorial likely sanctioned by the Chinese government:

“Large orders for Boeing planes would switch to Europe, U.S. auto sales in China would face setbacks, Apple phones would essentially be crowded out, and U.S. soybeans and corn would be eradicated from China”

Mr. Trump has also promised to confront China over currency manipulation, claiming that the Yuan is undervalued, helping Chinese imports into the U.S. and hurting U.S. exports to China. A contrarian view expressed by some observers is that while China has historically suppressed the value of the Yuan, that is a past issue and not a current one. China’s restrictions on capital outflows suggests that the exchange rate is stronger than it would be without the numerous limitations the government has imposed.

The collateral damage to a deterioration in U.S.-China trade relations could impact the in-progress China-U.S. Bilateral Investment Treaty (BIT), that some have called the world’s most important bilateral investment agreement. And though it is continuing at a brisk pace, it also faces uncertainties. The BIT would put in place important rules to protect U.S. investors against discrimination and arbitrary treatment, with the U.S. promising the same for Chinese investments. If the BIT were to be derailed as part of the broader disagreement over trade and monetary policy, it would be a significant set-back to U.S. corporate investments in China.

Executive Suite Questions:

  1. As a U.S. exporter to China, will the Chinese market become more restricted to us as part of China’s retaliation strategy? If so, which sectors will be affected most?
  2. As a U.S. company manufacturing in China and importing goods into the U.S., if the U.S. imposes high tariffs on China-made goods, which countries are the best alternatives for relocation? How embedded are our supply chains and how quickly can we reduce exposure to manufacturing in China for importing goods into the U.S.?
  3. What mitigation strategies such as partnerships and joint ventures with Chinese organizations should we consider to reduce our risk of a backlash in China?

Timely market intelligence lowers your risk in a fast-changing international environment

The one thing people can agree on with regards to this U.S. election is that the results were surprising. You can avoid blind spots for your business by asking the right questions and sourcing timely market intelligence in support of your corporate function, whether it is Strategy and Planning, Corporate Development, Marketing or others. If you are a business leader with P&L responsibility, the quality of market insights and decision support in this uncertain environment could be a difference between making or missing your targets.


If Donald Trump fulfills his promise to repeal trade agreements – what are the implications to U.S. businesses?

A trade war may be triggered by Mr. Trump if he abolishes an existing trade agreement or raises tariffs on imports. This would hurt many U.S. businesses that manufacture components or finished goods overseas and ship them back to the U.S. This is Part 2 of 4 of an initial series of posts on this subject.

Mr. Trump is allowed by U.S. law to impose tariffs of no more than 15 percent for up to 150 days, on all imports, unless a national emergency is declared – in which case tariffs can be imposed for longer periods. Other laws allow the president to impose tariffs on targeted goods. Import tariffs will result in a significant hit to U.S. businesses and consumers who would end up paying more for imported goods purchased in the U.S. as well as goods with significant components that are imported.

A big chunk of the supply chain for manufactured goods is now located internationally – and these supply chains are deeply embedded. Short-term trade wars will do little to reverse the long-term trend towards global supply chains, that are driven by a combination of labor arbitrage, risk management, and environmental regulations but also by the fact that rising incomes and growing middle classes in emerging markets are increasingly important customers for goods produced by U.S. headquartered companies, and businesses often seek proximity to customers.

Consider the price tag of consumer electronics items over the last 25 years. Even ignoring enormous enhancements in features and functionality, the actual sticker prices of equivalent goods have dropped while wages have increased. It is by no means certain that Mr. Trump has the desire to expend political capital on double digit percentage price increases on consumer electronics, automobiles and automotive parts, furniture, building materials, and many other industries that have a direct impact on U.S. consumers’ pocketbooks.

With retaliatory tariffs a foregone conclusion, U.S. exports will also be affected, leading to potential job losses in U.S. manufacturing centers including states that Mr. Trump carried, just as the prices of consumer goods are also trending upwards due to the above mentioned import tariffs. This double whammy is a lose-lose proposition.

Executive Suite Questions:

  1. What is our exposure to imports from countries that Mr. Trump has vowed to target, including Mexico and Canada (NAFTA), China, Japan, and the South American and Asian countries that are part of the soon to be defunct TPP?
  2. What percentage of our current and near-term revenues and profits were projected to be derived from exports to these international markets?
  3. What other locations should we look at for manufacturing and sales growth moving forward?

Timely market intelligence lowers your risk in a fast-changing international environment

The one thing people can agree on with regards to this U.S. election is that the results were surprising. You can avoid blind spots for your business by asking the right questions and sourcing timely market intelligence in support of your corporate function, whether it is Strategy and Planning, Corporate Development, Marketing or others. If you are a business leader with P&L responsibility, the quality of market insights and decision support in this uncertain environment could be a difference between making or missing your targets.


China’s new private education law pulls schools out of legal grey zone

This article was first featured in the Emerging Strategy Education Monthly. Sign up here for rich insight into the education business in the U.S. and around the world.

The Chinese private education sector has been booming. The number of private schools nearly doubled between 2005 and 2015 from 86,000 to 163,000, according to the Ministry of Education. However, the legal designation for all of China’s private schools has always been non-profit, as profit-seeking education entities were not legally allowed. The amendment to China’s law governing private education passed in early November 2016 has now made profit-seeking schools legally allowed in China for the first time. The opportunity for education organizations to legally operate profit-seeking schools for the first time is just one of the opportunities these regulatory changes pose.

On November 7th, China’s National People’s Congress passed an amendment to the “Promotion of Private Education Law”, which will come into effect on September 1, 2017. According to the the amendment, private schools shall be categorized as non-profit and for-profit and the two types of private schools shall be regulated separately. This is big news for private education organizations in China. The law allows private schools, excluding schools that offer “compulsory education” such as private primary schools and middle schools, to designate themselves as for-profit entities. Under the revised regulations, these newly legal profit-seeking schools will realize a few specific benefits:

Full autonomy in tuition fee setting

For-profit schools will have full autonomy in setting their tuition fees without any intervention from the government. Before the amendment, the government had to be informed about any tuition fee changes or approve them in some cases. This is particularly welcome news for some high-end private schools that want to further differentiate themselves in the market.

Stronger protection for asset ownership

As for-profit private schools will be subject to the corporate law, which protects the assets of business owners, for-profit school owners will be able to own the school assets legally after paying taxes. Before the amendment was passed, private school owners had no right to dispose of school assets once schools stopped running.

Going public without legal barriers

Before the amendment was passed, it was extremely difficult for private schools to have access to the financial market due to various restrictions imposed on non-profit schools. In order to bypass the restrictions, some private schools had to list themselves in overseas markets and transfer the profits to their overseas investors through financial vehicles such as “Variable Interest Entities” (VIE). However, going forward the longstanding legal barriers to go public will be lifted. Shareholders of the for-profit schools will now be able to obtain dividends legally. Many private schools are expected to be listed on the domestic stock market as a result of these regulatory changes.

Both for-profit and non-profit schools will face challenges and risks from the new law

Although there are clear benefits for private school operators resulting from this new amendment, some legal barriers may persist for private schools that offer both compulsory and non-compulsory education, such as schools that offer classes from grade 1-12. If they would like to go public, they would have to separate their for-profit and non-profit units and list only the entities offering education that is legally allow to be for-profit, such as pre-K or grades 9-12.

Another likely negative impact on profit-seeking schools will be the loss of preferential policies that private non-profit schools have long enjoyed. Many private non-profit schools have been receiving government subsidies in the form of cheap land or tax benefits. Although it is up to local jurisdictions to implement the law, and the details of the implementation laws have yet to be released, it is expected that for-profit schools would see government subsidies and other incentives reduced. Many schools, once they designate themselves as for-profit, may face abrupt cost increases, which will impact their bottom lines. However, as for-profit schools will have autonomy to adjust tuition fees at their discretion, some schools may find that the rising costs can be offset by tuition fee increases in the long term.

The choice posed by this amendment raises questions for many schools. Although those that must remain non-profit or those that choose to do will enjoy the same preferential policies as public schools, they will find it more difficult to give their shareholders any form of financial return going forward due to the cancellation of the “reasonable rate of return” policy.

This policy was legalized in 2002 and was intended to give financial incentives for non-profit school owners. However, in order to be eligible to receive funding from some local governments, most private schools actually never took advantage of their right to generate a “reasonable rate of return”. Although by giving up “reasonable rate of return”, some school shareholders were still able to gain “grey income” through various financial vehicles or complicated transactions. Whether the government will tighten regulations on those financial vehicles or not is not yet clear.

Further growth and consolidation of the private education market is expected

Overall, the amendment provides clarity in longstanding grey areas such as who are the legal persons of private schools and who own the schools’ assets etc. Although the private education market will be more regulated, the clarity of regulations may make investors feel more confident in entering this market than before. We expect that a deeper participation of capital markets will help to drive further growth and consolidation of the private education market in China. Possibly the biggest winners from these regulatory changes are those schools offering supplementary, non-degree education, since they do not offer compulsory education the amendment will have minimum negative impact on them.

For additional insight into China’s private education market, download our full report Opportunities for Private Education in Emerging Markets


Malaysia government policy driving rapid growth of private and international school enrollment

 

Malaysia’s growth of private school enrollment in the past decade is striking. It grew from less than 1% in 2002 to 15% in 2013, and is expected to continue rising. This rapid growth is driven by the soaring demand for private and international schools catering to the needs of urban middle classes. With one million students enrolling in private K-12 schools and only 142 international schools present, there appears to be a significant down market opportunity for international schools, particularly for those that have the capability to offer international curricula and programs that meet the needs of local families, such as additional religious instruction.

The rise of international schools in Malaysia is being driven by government efforts to reform education. Since the government considers international schools an engine of economic transformation, it removed the limits on foreign ownership of international schools, introduced tax incentives, and removed the 40% enrollment cap for Malaysian students. Furthermore, in order to transform Malaysia into an educational hub, the government has invested in large-scale projects such as The New Kuala Lumpur Education City. Prestigious international schools have been invited to open locations, which will likely raise the number of Malaysian students enrolling in international schools. As a result, the speed at which international schools have opened new schools has more than doubled since 2010. The country added 4.6 schools per year on average between 2000 and 2009 (26 schools in 2000 to 67 schools in 2009). But between 2009 and 2016, it has added 10.7 schools per year (for a total of 142 schools in 2016). Local students are becoming the majority at international schools in Malaysia for the first time.

 

screenshot-2016-09-13-16-57-59

Source: UNESCO Institute of Statistics, Emerging Strategy Analysis

Another factor contributing to the growth of Malaysia’s private education sector is the strong traction that private religious schools have achieved in recent years. In 2005 there were 20 private religious primary schools and 15 such secondary schools. Within a decade the numbers grew to 43 primary schools and 74 secondary schools. Many such schools offer instruction in English, and some offer international curricula such as Cambridge International Examinations (CIE), in addition to religious teaching. While tuition varies within each school category, private religious schools tend to charge lower tuition than international schools, which attracts parents who are concerned about poor quality and a lack of moral education found in public schools. Malaysia’s low score in the 2012 PISA cycle further motivated middle class families to send their children to private religious schools.

It is expected that the privatization of K-12 schools in Malaysia will further deepen and the number of private schools offering extra international programs, particularly in large cities such as Kuala Lumpur, is likely to rise. Enrollment of local Malaysian students in down market private K-12 schools is also expected to rise, as the dip in oil & gas prices has prompted a significant drop in enrollment at high end international schools among expatriate families who are pulling up roots in response to layoffs in the energy sector.

The growth of private schooling in emerging markets is a direct response from rising middle classes to their governments’ failure to provide quality education for the 21st century economy, and this trend is likely to continue. Malaysia has supported international schools in order to propel economic growth, and many operators have already gone down market to enroll a substantial number of local children in low-cost schools. A careful consideration of curricula offerings is important for schools hoping to expand in Malaysia. For instance, programs that offer both international programs and subjects matching local preferences such as religious instruction may be necessary to attract new students. For international schools looking for growth opportunities, Malaysia’s rapidly growing local private K-12 education space warrants a closer look.

This article is an excerpt from Emerging Strategy’s report Opportunities in Private Education: China, India, Indonesia, Malaysia and the UAE

 


China’s K-12 market is a newfound focus of product development and investment from top international companies

This article was originally published on LinkedIn Pulse by Adil Husain, Managing Director at Emerging Strategy. Our full report is available for complimentary download.

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.

VC Investment in Chinese Edtech Companies

Source: JMDedu

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.

Screenshot 2016-09-07 18.29.32

 

 


Case Study: Niche B2B Manufacturing Market Landscape of China

Client Situation:

Our client was a global manufacturer of flexible packaging used by leading food, consumer products, medical, pharmaceutical, and other companies worldwide. In 2013, they entered the Chinese market by acquiring a local specialty film manufacturer and were looking to increase their market share in protective films in the APAC region. The company sought to inform their internal strategy with analysis of the external commercial environment – the market landscape, competitors, customers and suppliers.

Methodology:

We proposed analyzing the competitiveness of various protective film markets through the lens of Porter’s 5 forces analysis framework. We also agreed that deep dive profiles into key competitors, customers and suppliers that were of interest to the client would also be beneficial. We conducted a funnel type market landscape analysis to evaluate the upstream product demand directly impacting the nature and scope of demand for downstream components such as protective film.

Emerging Strategy utilized primary research to gather information and compiled data to fill in the gaps in available secondary sources. Our target primary sources for this study composed industry experts and regional chambers of commerce where the local specific industry hubs were located. These sources provided us the hard to find data we required to complete this project.

We provided information about size, drivers and expected growth of upstream and downstream markets by product application, material structure and complementary profit driving markets. We also provided an enhanced understanding of the competitive landscape in China and all the value chain players, together with identified unmet customer needs and opportunities.

Result:

The insights generated by Emerging Strategy provided a clear picture of the protective films market in China, giving our client the market intelligence they needed to help develop a growth strategy for the region. These insights facilitated a leaner utilization of resources and targeting of emerging opportunities for scaling up. Our project also provided insight on how aggressively they should pursue expansion in this market and the required capital expenditure to support their growth strategy.