According to the chief China economist of Morgan Stanley, the key drivers of consumption growth in China will shift from first-and-second tier cities to 3rd/4th tier cities. The business and family investment in K12 education will follow the trend.
From 2010 to 2016, the urbanization in China continued to grow dramatically. Third and fourth-tier cities were expected to see a rapid population growth of 2.5% per annum from 2017 to 2030. Meanwhile, the number of primary schools in the remote villages and towns will continue dropping, due to the mergers and closure led by declining enrollments. The students gathering also will also provide favorable conditions for the development of after-school business in the 3rd/4th tier cities.
China’s GDP in 2010 was 6.3 trillion USD (41 trillion RMB), and in 2016 grew to 13.5 trillion USD (88 trillion RMB), which doubled in the six years. Robin Xing, the chief China economist in Morgan Stanley predicted the national annual consumption will rise to $9.7 trillion in 2030, and personal consumption in such cities will grow the fastest at 8.7 percent year on year from now to 2030.
Education Expenditure in 3rd/4th Tier Cities grew tremendously
In 2010, the GDP per capita in the first-tier cities, like Beijing and Shanghai has broken the threshold of $10,000, which indicated the occurrence of consumption upgrade. TAL, a Beijing-based educational training site focused on primary and middle school students, seized the opportunity and took the company public . At that time, it provided after-school tutoring to more than 380,000 students in cities from Beijing to Wuhan, mainly the first-and-second tier cities. Now it has become the leading education and technology enterprise in China, and owns 1.34 billion students.
In 2018, third-and-fourth tier cities like Jinzhou, Rizhao, Lianyungang, Datong, etc., has reached the level of GDP per capita of the first-tier cities in 2010, which indicated the coming up of new opportunities. The expenditure on education accounts for nearly 30% of the whole household consumption, as they have more willingness to change the fate by the power of education. The education demand in more than 300 prefecture-level cities will surely support the development of educational companies.
Enormous Demand for Education in 3rd/4th Tier Cities
The participation rate of extracurricular activities and tutorial classes in third-tier cities has exceeded 50%. K12 education, STEAM, and field trip have already become the new trend in these cities. An educational company named Auto Personal Education earned 107，700 USD（700，000 RMB）on the first opening day in Shangqiu, a fourth-tier city in the eastern Henan province (the disposable income of its urban residents is around 3080 USD (20,000 RMB) annually）, which further confirmed the potential of the market.
To make it more attractive, the markets in these cities are far from saturated compared to the counterpart in first-and-second tier cities, where all the players in edtech field are under extremely tough competition. The less developed the city is, the greater education demand they have, though, the quality of their education recourse is still far from satisfying. However, the good news is the maturity of online live streaming and the popularization of the two-teacher classroom are making it possible for teachers in first-tier to sink to the third and below. While in the past the high-quality teachers were reluctant to go and let alone stay in third-and-fourth tier cities, now they can teach those students without even leaving their familiar living environment.
Besides, due to the high pressure caused by metropolitans, more and more young people are thinking about going back to their hometowns to pursue better quality livings. They also have higher requirement for education both for themselves and for their children.
Finally, the extracurricular market is highly dispersive in smaller cities, and therefore, lies greater opportunities. The cost structure is superior to that of the first-and-second tier cities. The average salary of the staffs, the channel cost, the publicize cost and the rent cost are all relatively low compared to that of the big cities.
Based on all the mentioned above, China’s third-and-fourth-tier cities will surely be the key drivers of K12 education in next few years. There are tremendous opportunities both for the industry giants and startups.
If you want to start or expand your business in China, maybe third-and-fourth tier cities are good places to start!
- In China, the first tier cities refer to Beijing, Shanghai, Guangzhou, Shenzhen and Tianjin. The second tier are the capital cities of the central and eastern regions, coastal open cities and economically advanced prefecture-level cities like Hanzhou, Nanjing, Suzhou, Xi’an, with a total of 35.