China Law Blog

The Middle Kingdom Life Blog (an absolute must read for anyone thinking of doing anything education related in China) has a two part series on what it takes for foreigners to open a school in China. (h/t to China Journal) This quote from a foreign school owner, cited at the beginning of the first part of the series, sums it up: "If I had known what I was in for, I would have instead shot myself in the head; twice.”

The posts are "Opening Your Own School." Part One is here. Part Two is here. Both are written by Ken Hayes, who describes himself as "a former U.S. Army officer and professional educator who had a long and successful career working in corporate training, public education and private sector management prior to moving to China several years ago. Ken is a frequent content contributor and consultant to the guide and, together with his Chinese wife, owns and manages a very successful private English language school." Surprisingly, they are amazing insightful. I say surprisingly because my firm has been contacted probably a half a dozen times by educators seeking to open schools in China and, without exception, none of those contacting us had any clue at all as to what would be involved and as to what the costs would be.

Hayes' advice is so good and so China-centric that it actually applies beautifully to all sorts of foreign business in China.

Hayes actually starts out explaining why the genesis of this cluelessness:

Many people, Chinese and foreign alike, look at owning an English training center (hereinafter, “school”) as a relatively easy way to make money. It seems simple enough; rent some space, toss in some desks and blackboards, hire some teachers, then spend all day counting the stacks of money rolling in.

By all outward appearances, the school business in China seems to beckon, “C’mon in, the water’s fine!” Yet, the overwhelming majority of those who jump into the water wash up scarred and broken on the reefs. I’m told 95% of new schools fail within two years, and I believe it.

If anything, that 95% sounds too low to me and I doubt it accounts for those that are planned, but never get started at all. There was a period where my firm did a steady stream of Mexican natural resource joint ventures (fish, timber, etc.). Every time a new one would come in we would ask the client if he (because it was always a "he") was aware of any such joint venture that had actually succeeded. The response was ALWAYS pretty much the same. "No, but ours is different because our partner is the [cousin, brother, son, brother-in-law, best friend....] of the [President, Mayor, leading industrialist, Minister of Energy, Minister of Fishing....] To this day, I do not know of a single one that actually worked. Starting a foreign language school is the new Mexican joint venture.

Hayes says the first decision someone thinking of starting a school in China must make is whether to open a "fully legal business" or an "unlicensed shoestring school.” Hayes wisely counsels against the "shoestring" variant:

My observation is that if you start as a shoestring school, you’ll end up remaining a shoestring school. An underfunded, illegal school attracts the wrong kind of attention and isn’t very competitive in the market.

If you are satisfied running such an operation, ducking and weaving to avoid paying the fees and fines associated with this sort of operation, having to move when neighbors or competitors complain, then proceed at your own risk.

However, you should be prepared to accept the notion that this is all your school will probably ever be—essentially a fly-by-night outfit skirting the edges of the law with little potential for expansion. Expansion costs money and shoestring schools can typically only yield a fair living wage at best. Thus, the funds needed to make significant expansions won’t come from operating a shoestring school.

This may seem like bucket of cold water being tossed upon the dreams of many. After all, the very bedrock of entrepreneurship is the notion of small enterprises growing into big ones: right?

The fundamental issue is one of legality. Microsoft, Dell and Hewlett-Packard didn’t spend their formative years operating entirely illegally. As a foreigner, you’ll naturally draw more than your fair share of attention. But when you attempt to compete, illegally, with the locals, expect that attention to be focused, white hot, upon your actions.

Training centers and foreign affiliated schools are coming under increasing scrutiny and regulatory supervision. The trend is towards more, not less, supervision and enforcement.

Hayes has this absolutely right and what he says above applies with equal force to all foreign businesses in China.

So according to Hayes, after you have determined to go the legal route, your next step is finding the right Chinese partner. This is necessary because these schools "must be licensed in the name of a local citizen who is a career educator."

Hayes then sets forth what to consider in choosing your Chinese partner, and again, his advice applies beautifully to virtually any China business venture:

You should select a partner who has a record of doing successful business in China. Simply being Chinese, although a necessary condition, is by no means a sufficient one.

Your girlfriend, wife or neighbor may be well-intentioned, sincere and hard working but without business experience, they can bring little to the table. Being a school teacher is not sufficient experience with which to be a Chinese partner in the business of running a school.

You should choose someone who has done business with the public as well as the government. Real business people in China can instantly recognize when they are dealing with one of their own, as if it were a sixth sense. An amateur can easily get eaten alive.

You need to have a long, frank talk with your proposed partner over a spreadsheet. You need to project the next five years’ growth of your school.

In my experience, Chinese business people have very high expectations of achieving their ROI (return on investment) in a rather short time. That notion is founded in cost opportunity.

The current situation is what I call the “Crazy Money From the Sky” syndrome. China has been flooded with investors looking to do business. Imagine, if you will, that the U.S. Army’s 82nd Airborne dropped a division of paratroopers over Beijing every month. But instead of paratroopers, they were businessmen with rucksacks full of money—with a burning eagerness to spend it all.

Chinese businessmen went from obscurity to prosperity overnight. And every month, another division of moneymen land in Beijing. Soon, the norm, the expectation, was that wealth can and will be attained nearly overnight.

Contrast that expectation with the reality of running a school. The first years are a money pit and the school requires constant nursing and attention. Many Chinese businessmen don’t have the patience for a school as an investment. And why would they? Money spent on a school could be put into a “Crazy Money from the Sky” venture with near-immediate potential returns. So, in an irrational market, their rational decision is to focus on investments with rapid returns.

You need to be very sure your partner fully understands that opening a school is the slow boat, not the express train, to profitability.

I love the line about being Chinese not being sufficient. Though this ought to be obvious, I have seen too many instances where clients have assumed Chinese law expertise of someone simply because they are Chinese to think they would not do the same on the business side as well.

Hayes then goes on to discuss some of the hiring issues you will face and the factors you should consider in choosing your location. The next episode will be on choosing the property and if you are at all serious about starting a school in China, I urge you to tune in.