MBA Imports Strive to Compete

Posted November 7, 2008

For more than a decade, some of the world’s top business schools have been marching into China, lured by the attraction of being in the world’s fastest growing economy and the opportunity to educate the country’s future business elite. But as with many companies that came before them, the experience has been a steep learning curve that could fill textbooks on the opaque world of doing business in China.

Despite the fact that many universities have failed, and that few may actually be turning a profit, new universities continue to line up at China’s door, many seemingly oblivious to the challenges and intense competition for a limited number of students. Over the past few years, several foreign business schools have shut down or reduced their operations in China, and it’s likely that more will do the same.

The Case Business School of London, for example, dropped out last February after less than four years in the country, discouraged by bureaucratic red tape, the economic realities and other problems. SUNY Buffalo, the first to enter the MBA market in 1998 in a joint venture with Renmin University, pulled out in 2004 and now focuses on customized MBA programs for multinational companies. The list goes on and on.

“China has a gargantuan appetite for business education and training and it’s also important for multinational companies,” says Walter Hutchens, a professor at Whitworth University in Spokane Washington, who has advised foreign universities hoping to establish a foothold in China. “And so schools wake up and think ‘I should be in China.’ That’s pretty obvious. But what’s not clear is if you can make it work economically.”

Making matters worse, says Mr. Hutchens, business schools often enter the market blind. “If you analyze some of the programs, you’ll find out that business schools have not thought the process through,” he says. “It’s often the case that business schools do not apply the methods they teach when they enter China.” Some new entrants fail to make a market plan, do due diligence, or gain an understanding of the regulatory, political, and legal environments. “Don’t have a dean visit China and fall in love, and think that you can have a couple of banquets and then have a thriving MBA program,” he concludes.

“Right now, my opinion is that the market is saturated in the English-language, international segment at the EMBA level,” says Patrick Moreton, managing director of the program offered jointly by Fudan University in Shanghai and the Olin School of Business of Washington University in St. Louis. “The total number of seats currently exceeds the number of people who are sufficiently ready, in both language skills and work experience, to study with the very expensive faculty that are being brought in from overseas business schools.” He estimates that there are between 350 to 450 potential candidates in China that could meet the requirements for an international EMBA program.

Mr. Moreton argues that the current pool of director-level and above talent that can work internationally, and hence study effectively in an international joint venture EMBA in China, is very small because going back to the early to mid-1990s when today’s directors started working, very few Chinese worked for international companies. “This doesn’t mean that there aren’t a large number of terrific managers working for Chinese companies, because there are,” he says. “But these managers are unlikely to have the language and experience to work well in a foreign Fortune 500 company.”

Mr. Moreton says he suspects that foreign MBA programs may be better placed in China since there is a much larger group of young managers working for foreign companies. But he adds that the problem in the MBA segment is that faculty costs are very high relative to generally lower tuition levels in China: “I don’t know if a top-tier school can make it work economically.”

Bruce Stening, professor of management at the Beijing International MBA at Peking University, better known as BiMBA, says that a lot of foreign universities “lost their shirts in China” because they came with unrealistic expectations. “They thought being foreign was enough, but they had to be both foreign and high quality.” Chinese students are increasingly well-informed about MBA programs and make informed decisions. “People here are very credential oriented,” Mr. Stening explains. “They know what a good school is and what is not.”

The Ministry of Education is also tightening up. “When I met a few years ago with Chinese Ministry of Education senior officials, they counseled us not to launch any new MBA programs,” says Robert Ubell, dean of the School of Professional Education at Stevens Institute of Technology, and head of the institute’s China ventures, “recognizing that even then there appeared to be an oversupply of programs from abroad.” In recent years, the ministry has required existing programs to apply for new approvals, and has been taking a closer look at new applications, a policy that has forced some foreign institutions to pull out or rethink their China dream.

Steven Feld, executive director for international programs at the Robert H. Smith School of Business at the University of Maryland, says seven years in China has taught the school several things about operating in China. “One was that we need to be partnered with the right institution and also the right people in the university,” he says. “That was pretty opaque seven years ago.”

Mr. Feld says that the university recently rethought its strategy and renegotiated its agreement with its partner, the University of International Business and Economics, which included partnering with the UIBE business school—it was originally aligned with a nonbusiness oriented institute at the university. “We have renewed our agreement with UIBE with significant revisions based on what we learned over the past seven years,” he says. The university is using this knowledge in negotiations to set up degree programs in areas such as finance and accounting.

Mr. Hutchens, who ran the Beijing office of the Smith School from 2005-07, says the program hit some bumps on the road. “They spent a lot of money, tried a lot of different approaches and they have struggled,” he says. He adds that the program “hustled to find students,” and that although it had a quota, “we never banged up against it.” “We were never short of capacity, but we were filling seats.”

Mr. Hutchens says that doesn’t mean that the business school has not succeeded in some ways, saying that some students have benefited from the program. “But if it had to be a stand alone as a P&L, it’s not all that clear that it would be flourishing.”

The challenges are so daunting that most programs have had to concede that profits are not possible, at least in the near future. “No one dreams of making heaps of money here,” says Mr. Stening. “The object is generally not to lose money.”

The costs of such programs are high for the local market, with the average 18-month EMBA program costing as much as $50,000—roughly half of what programs charge in the West, while the costs here can be considerably higher. For one, programs have to bring in the bulk of the faculty from abroad, a costly proposition. There is a serious shortage of competent Chinese business professors, which means foreign business schools must use home faculty to teach courses, something that is also mandated by accrediting agencies.

“Local professors can be very knowledgeable in their specific field of expertise, but they often lack the depth of published research, consulting and global executive education delivery of the caliber of a Rutgers senior professor,” says Ira Cohen, chief representative, China EMBA programs for Rutgers University. Foreign professors who come in for intensive teaching blocks often fly in business or first class and then stay at five-star hotels. And to lure them to come to China, high salaries are often offered. “Unless U.S. schools in China are lucky enough to generate large enrollments, the financial outlook is not good for them, given hefty faculty salaries and expensive international travel and accommodation, says Mr. Ubell.

Mr. Hutchens argues that foreign universities have turned the traditional China model on its head: Instead of buying cheap here and selling expensive in America, where salaries are high, the China MBA model tries to sell a high-end American product in China, where incomes are low. “That’s tough to do,” he says, “especially on a sustained basis.”

Moreover, the regulations governing foreign universities entering the China market are also worrisome. “If an institution reads the rules before signing a memorandum of understanding with a Chinese partner, it either will or should have a serious degree of concern,” he says. For one, all foreign universities setting up in China must have a local partner, and must also answer to local education bureaus and the Ministry of Education.

Mr. Hutchens worries that universities and MBA accrediting agencies don’t take into account problems such as freedom of expression in China. “It’s very clear that China is an important business fora,” he says. “But it’s also very clear that the assumptions underlying a Western-style education are in conflict with the assumptions that underlie Chinese politics.” He says the Chinese partner can set limits on what is taught, and he ticks off a handful of relevant topics that could be banned in the classroom: labor unions, corruption, the environment, politics, and even the economics of the Olympics. “If I was an accrediting agency, I would have some problems with that,” he says.

Mr. Cohen says that local partners usually demand 40% to 50% of revenues, and even if there is something left over, the rules make it difficult for any university to take profits out of China, except to cover overhead and overseas expenditures of the foreign partner. The Chinese government stipulates that profits be plowed back into the China program. Mr. Hutchens agrees that while most universities enter the market “with dreams of revenue enhancement dancing in their heads,” this goal is difficult to achieve given the many challenges.

Those that do have the patience and staying power needed to survive in China have quietly shelved talk of making a profit here. Virtually none do. “This year and last year we broke even, and during the previous three years, we lost money,” says Mr. Cohen. “The Rutgers EMBA has never been looked upon as money making, but rather a break-even venture.”

Mr. Feld says that as part of a state university, the Smith School must make enough money to cover costs, but he adds that, “We are not there to send profits back home.” Like others, he cites another rationale for being in China. “Our motive is to be a global business school, and you can’t be a world entity without a presence and contacts in China,” says Mr. Feld. “If you are not here, it’s hard to hold up your head and say you’re a global business school.”

While there are peripheral benefits to being in China, from exchanges between academics and students to the opportunity to gain first-hand knowledge about China, Mr. Cohen suggests that setting up an EMBA program may not be the best way to accomplish these goals. “If you’re idea is to make money in China, that’s not going to happen,” he says bluntly. “If it’s to foster research, you don’t need an EMBA program. There are better ways to do that.” Mr. Cohen’s advice to universities considering setting up new EMBA programs in China? “Don’t do it,” he says. “It’s just not a big market.”

One of the biggest challenges now for foreign universities is the rapidly increasing number of home-grown business schools, sometimes established in leading Chinese universities that are already partnered with one or more foreign business schools. The quality of local business education is improving rapidly, and it’s a positive model because students can get a business education with a local focus, Chinese is the lingua franca in the classroom and tuition costs are significantly lower. Mr. Feld says that you can “count the number of quality programs on your hands and feet,” but he says the choices are growing: “Today you can do a very high quality program at a Chinese institution that is world class, or rapidly approaching world class.” 

Mr. Feld points to the successful example of the Cheung Kong Graduate School of Business, set up by Hong Kong’s Li Ka-shing, which he calls “the biggest change agent.” He says the program, which has been successful at coaxing well-known Chinese academics teaching abroad to come back, has had a huge impact on local MBA institutions. The local competition is “changing the perception of what an MBA is. It’s going to grow the perception, grow the awareness and grow the demand,” he says. “Absolutely it’s competition, but it’s good competition.”

In the meantime, foreign universities are seeking new and creative ways to survive in the China market. Many are trying to establish relationships with leading multinational companies, where they offer short-term business programs tailor-made to the needs of these companies. Such ventures can earn welcome income and there is no need for a local partner. Schools are also seeking more expatriate degree candidates. Mr. Smith says its Shanghai program is 60% Chinese, 40% from around the world. Rutgers, long a leader in targeting foreign managers, claims 60% to 70% of its students are foreigners. 

But even these strategies are looking more tenuous in the wake of the recent financial crisis. Some programs are reporting that students—unsure about their continued employment and whether or not their companies will continue to dig into their pockets to pay the hefty fees for tuition at a top MBA program—are talking about dropping out. Meanwhile Mr. Cohen of Rutgers is looking on the bright side. “I’m praying that the downturn in the economy will mean an increase in enrollments because people will want to invest in themselves.”

Paul Mooney is a free-lance writer based in Beijing.