Benefiting From China's College Diploma Boom

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The New York Times recently highlighted China's dramatic push to educate its younger population. Like everything else in this tightly controlled economy, the government is putting the pedal to the metal. In fact, the country has quickly closed the education gap with the West, though it hasn't yet caught up. This aggressive push comes with risks, but also huge opportunity.

Education is Key
China's growth boom has rested on the sturdy shoulders of under-educated factory workers. China has been a powerhouse at making all of the things more developed nations want using a low-paid labor force to create cost advantages. That, however, can only take the country just so far and its leaders are well aware of the benefits that a highly educated population has bestowed upon countries like the United States.

So, according to the Times, the country's leaders have been putting $250 billion a year toward higher education. That's a lot of money. Even if the effort isn't as efficient as hoped, China's population of college educated individuals will likely surpass the absolute number of graduates in the United States. That will largely be a function of the different population sizes, so, percentage wise, the United States will still be “better educated.”

Still, if China has proven one thing with its push to industrialize, its ability to throw bodies at a task creates a formidable competitor. Education is likely to be a similar situation.

Some Risks
The path to more college degrees, however, isn't likely to be smooth. There is a skill to teaching, and simply putting up a new school doesn't make good teachers magically appear. So the quality of the education in China is suspect once you get past the top colleges.

Nor does a highly educated workforce guarantee long-term success. Neighbor Japan is clear evidence of this. While Japan is a large and important economy, it has struggled for two decades despite possessing some of the brightest minds in the world. Some suggest that the ability to be creative and work “outside the box” are factors lacking in Japan. China's stringent control over just about every aspect of life suggests that it will be hard to teach these skills to its students.

One factor that should frighten China is that college students tend to be activists and an educated population may demand more change. China might wind up regretting its decision to educate its population because it will become more difficult to control. While the country is making important moves to open up, it still has a long way to go. An agitating population could make that process more difficult.

China might also find that it simply doesn't have enough jobs for all of its new students to fill when they graduate. That would be a horrible state of affairs, particularly since highly educated and out of work citizens in authoritarian states are particularly pesky. More so when there are lots of them grouped together in city centers.

Some Opportunities
An increasingly educated population, however, comes with notable benefits. One is increasing wealth. This is where the biggest opportunity probably lies in China. More money means more spending. Companies that can stake out notable positions in the country are in-line to benefit.

Wal-Mart (NYSE: WMT)
Wal-Mart is one company that should be on investors' lists. While best known for being the largest retailer in the United States, it happens to be the largest in the world, too. It currently has nearly 400 stores in China, a market it entered in 1996. China is a particular focus within the company's International division.

It is specifically targeting middle-income customers in China seeking a combination of value and quality. Moreover, Wal-Mart is making a notable push to gain scale in the e-commerce space, an area it was late to in the United States. For example, it has a big position in Yihaodian, a local web retailer. China was one of the International division's top three contributors in fiscal 2012. Wal-Mart is a relatively low risk way to gain exposure to the increasing wealth that normally comes with an educated population.

Yum! Brands (NYSE: YUM)
Yum! is another company that investors should look at, though it is notably more risky than Wal-Mart. This fast food company has been aggressively expanding its Pizza Hut and KFC brands in China, a country it openly calls its top priority. It has also been buying Chinese food concepts, looking to boost growth through domestic brands. One thing that college kids do well is eat out, usually at places that make less than healthy, though relatively cheap, food. Yum! will be there to serve them.

Of course, having a notable exposure to China can be problematic. KFC's reputation has been tarnished by a scandal over the quality of chicken from one of its suppliers. Although the company ceased using the supplier because it found the chickens didn't meet its own standards, that hasn't helped mollify a population that sees a Western food concept associated with low quality food. Sales are likely to be weak for several quarters because of this event. That, however, could be a buying opportunity for more aggressive investors.

General Electric (NYSE: GE)
Industrial giant GE isn't going to benefit from increased spending. However, a new collection of highly educated workers will be a valuable talent pool for the company. The impact of that can't be understated, particularly in a country that is highly ethnocentric.

While the company doesn't break out China as a market, it has been pushing into the nation via sales of its airplane engines and gas turbines. It also recently inked a deal to buy mining equipment maker Industrea Limited, which serves Australia and China. Like Yum! using a native brand to expand, General Electric will likely find having more Chinese “brains” on staff highly supportive of growth in the country.

This same thing will be true of IBM (NYSE: IBM), as well. In IBM's case, however, the company's shift toward a services model is actually synergistic with China's push to graduate more students. Chinese companies would clearly prefer IBM to send programmers and engineers who speak, read, and write Chinese fluently and, more importantly, understand the Chinese culture. The more educated graduates, the more potential to make clients happy.

Long Cycle
China has a long upswing ahead of it as it industrializes. Education is just one more step along the way. However, education can only do just so much. There will be clear beneficiaries that investors should watch. That said, China's population is large but won't expand forever. Since highly educated individuals tend to have less kids, this issue could, over the longer term, exacerbate the impact of the country's ill-advised one-child policy that has the potential to lead China down Japan's current path.

Such an outcome is years away, however, so investors should keep focused on making money now. Using and serving an educated population is an opportunity worth taking some risks for.


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ReubenGBrewer has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company and International Business Machines.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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