China’s vocational education industry ushering in a golden era
Since the Chinese economic reform in 1978, the country has now formed the largest vocational education market in the world. According to a previous report released by McKinsey Global Institute, with the development of science and technology, the rise of robots is likely to result in a displacement of 118 million manufacturing jobs in China by 2030, which entails new skills acquisition and upgrading of the Chinese workforce to adapt to human-robot cooperation.
Due to the continuous advancement of the reform, China’s vocational education industry has now ushered in a golden era of development with broad prospects. Under the impetus of national policies and sufficient funds, will vocational education sector spark next EdTech unicorn with the same buzz and valuation as VIPKid?
National policies to remove obstacles to vocational education development
When it comes to vocational education, most Chinese people still think of degree vocational education, that is, upper-secondary and post-secondary vocational schools. Although the number of universities and post-secondary vocational schools is almost the same in China, the latter has only acquired RMB215 billion ($30.14 billion) of the national investment funds for higher education in 2018 when the total amount reaches RMB1201.3 billion (USD168.43 billion). Lack of funds is the predicament where most degree vocational schools find themselves in. And official data shows that the number of enrollments in upper-secondary vocational schools has been dropping year by year.
At the current stage, there is a prominent skill gap between the knowledge taught by vocational schools and practice, innovation entailed to keep with the rapid economic growth thus enterprises still need to spend time and money training the graduates. This extra effort is dampening small and medium-sized enterprises’ enthusiasm to cooperate with schools. Plus, the limited profits and high employee turnover are also regarded as obstacles to the integration of production and education.
In addition, there is still prejudice against degree vocational schools in Chinese society. Students who have enrolled in vocational schools will spare no effort to further their studies, for example, from upper-secondary school to post-secondary school or from post-secondary school to university and even pursuing bachelor’s degree. And in some schools, this kind of students account for more than 70%.
For the acceleration of China’s industrial upgrading, economic restructuring, the shortage of skilled talents particularly in advanced manufacturing is becoming more prominent. In this context, the State Council has issued a weighty document targeting at the reform framework of China’s vocational education system in February this year. The decision also strongly advocated the integration of production and education by encouraging universities and enterprises to work together to deploy training plans, promoting comprehensive and deeper collaboration, and establishing a number of high-level training centers.
The government has designated 100 billion yuan (about $15 billion) to expand vocational training system. The initiatives include improving subsidies for technical personnel and reshaping educational fund investment mechanism. Moreover, this major reform has also unveiled an important pilot program of academic certificates plus vocational skill level certificates “1+X” model (“1” means a strong foundation of knowledge — traditional academic degrees and “X” is for embracing the future — vocational certificates) will be initiated to encourage students to acquire more skills while obtaining a diploma. The pilot is seen as a part of the country’s plan to transform select universities into “Universities of Applied Sciences” by 2022.
Meanwhile, China’s “Belt and Road Initiative” spurs a surge in demand for skilled professionals. Some giants in this field is already eyeing this market. For instance, the world-leading education group Pearson is expanding its business in market-oriented vocational training sector in China. Given the extreme influence of government policy on China’s development, the country’s strong moves will indeed speed up the vocational education reform.
The potential market in China’s vocational education
According to “2018–2023 China Upper Secondary Vocational Education Industry Development Model and Investment Prospect Analysis Report” released by Qianzhan.com, by 2020, China’s vocational education market is expected to exceed 1 trillion yuan, of which the degree market will reach 176.1 billion yuan($24.69 billion) and the non-degree market will hit 985.9 billion yuan ($138.23 billion).
During last year, vocational education sector saw 68 deals of investment and financing and the amount disclosed has exceeded 4 billion yuan, according to i-Edu. In March 2018, Sunlands, which focus on online degree education and vocational education, was successfully listed on NYSE, and the industrial giant Offcn was merged into a listed company Yaxia Automobile then back-door listed in China’s A-Share market. In November 2018, Golden Education secured a funding of 800 million yuan. Apart from financing and listing, many companies who did not have education businesses began to tap into the vocational education market by acquisition, which is considered to be the fastest path to follow.
And in the first half of 2019, 28 deals were closed in this track. As we covered in our previous market report: “ventures are scattered and niche but with large space to grow. Moreover, the majority of funds in vocational learning are poured into asset-light companies that provide online platforms for non-degree education skills training.”
Investment boom is driven by huge market demand. Amid the new Industrial Revolution known as “Industry 4.0” and “Made in China 2025” Plan issued by Chinese Premier Li Keqiang and his cabinet in May 2015, there will be a severe national talent shortage of 19 million in 2020 and 30 million in 2025. Therefore, in 2016, new regulations on the implementation of the Non-State Education Promotion Law have formally allowed education providers including degree vocational education and private colleges to implement asset securitization and introduce market capital and competition mechanism to address the technical talent shortage problem.
Enterprises also have great demand for talent training. Since 2015, more than 50% of enterprises set education requirement for their candidates at post-secondary education or above, injecting new impetus into the degree vocational education market. Moreover, basic and customized on-the-job training for employees is also required, contributing an energetic space for relevant products.
New product trends in this sector amid the internet environment
In terms of degree vocational education, the pivot towards school-enterprise cooperation enables private schools to make greater difference. Since private schools usually require a relatively large amount of capital injection, for start-ups driven by products rather than funds, they are more likely to tap into this sector by providing B2B educational informatization such as digital textbooks, assignment evaluation system, and online Q&A.
The field of the integration of production and education has already sparked a unicorn Huikedu Group with a valuation of more than US$1 billion. From the perspective of higher education providers, Huikedu covers more than 1,500 colleges and universities including 23 universities in “Double First-Class” initiative (meaning of world-class universities and first-class disciplines) and hundreds of upper-secondary vocational schools. From the enterprise stream, Huikedu has built a widely recognized model of “co-building”, connecting the school education with industry giants’ technology edges such as Alibaba’s cloud computing, Baidu’s AI, Tencent’s “Internet+” and the IoT in Huawei.
The vocational education market is huge but scattered because of the geographical limitations, which just gives rise to potential projects based on new technologies. An integrated model of “online+simulation-based learning+offline” has been formed to overcome the limitations and new leading company may emerge in near future.
With the development of internet technology and the demand for the improvement of professional skills, IT-based learning has become an important sub-sector for on-the-job training. A number of vocational education companies offering such services are growing, such as Sanjieke(三节课), Mtedu(馒头商学院), and ichazuo.cn(插座学院).
Meanwhile, since the students gradually pay more attention to their career development and enterprises have an urgent need for reducing the cost of talent acquisition with befitting background, service providers for job-hunting have also seen unprecedented opportunities. Currently, this track is still a blue ocean market. Fierce competition among companies has not yet heated up.
In addition, many vocational education companies choose to tap into the sub-sector of paying for knowledge online in order to leverage more internet traffic while looking for new growth path. And this is indeed a red ocean market. In the era of knowledge-based economy, massive industrial information has been presented by new carriers like video and audio, giving more possibilities to platform-positioned companies like DeDao(得到, also known as Luoji Siwei), zaih.com(在行) and Ximalaya. But What are the opportunities for education companies? The answer may be to create products targeting online vocational training with new forms like one-on-one live broadcast and online small class.
Benefiting from current policies and huge user base, the vocational education still has plenty of room to grow with fewer high-end products targeting “educational upgrade”. Compared with the development trajectory of e-commerce, is it possible for vocational education to get more top brands like New Oriental and VIPKID in each sub-sector when covering third- or fourth-tier cities?
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