Weathering the recession - can business schools survive?

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Weathering the recession - can business schools survive?

  1. 1. The Recession and Business Schools ANZAM Institutional Members’ Meeting March 27th, 2009 Professor Nigel Healey University of Canterbury
  2. 2. Overview  The financial crisis  The impact on the real economy  Potential implications for Australasian business schools
  3. 3. The financial crisis US housing Sub-primeInitial Trigger downturn mortgage losses Pre-Conditions Booming credit markets New structured credit products Uncertainty about extent and location of risk De-leveraging Movement to safe liquid Impacts assets
  4. 4. Effects of the financial crisis… On the financial sector:  Massive losses/write-downs  Risk aversion and liquidity preference  Global de-leveraging  Large asset price falls  Credit expensive and scarce – “tax the living to bury the dead”
  5. 5. Effects of the financial crisis On the real economy:  Erosion of business and consumer confidence  Reduced investment spending (credit, confidence, risk appetite)  Reduced consumer spending (negative wealth effects, confidence, fear of unemployment)  Reduced global demand and commodity prices
  6. 6. Countries impacted in different ways Factors impacting USA UK Euro Japan Asia ex Aust / NZ economies Japan Bank losses Crisis a product of credit boom and financial engineering Credit restrictions Export demand Commodity prices
  7. 7. …and growth outlook deterioratingeverywhere 2009 GDP growth forecasts (percent) Consensus forecasts At Dec 08 At Feb 09 Change Australia 1.6 0.4 -1.2 Asia x Japan 3.9 0.9 -3.0 USA -0.7 -2.1 -1.4 Japan -0.2 -3.8 -3.6 Eurozone -0.5 -2.0 -1.5 UK -1.3 -2.6 -1.3 NZ 0.2 -0.9 -1.1
  8. 8. Potential implications for Australasianbusiness schools  Endowment income – b-schools as a cash cow  Executive education  International enrolments  Public funding  Faculty recruitment and retention  Societal attitudes to business schools
  9. 9. Potential implications for Australasianbusiness schools (1) ASX All Ordinaries Loss of endowment income Stock market prices - down 50% Interest rates down from 8% to 3% Alumni giving B-schools as the cash cows – envy over salary loadings
  10. 10. Potential implications for Australasianbusiness schools (2)  Executive education  Short courses –open vs in-company  Executive (company-sponsored) MBAs  Consulting  High-margin, but pro-cyclical
  11. 11. Potential implications for Australasianbusiness schools (3)  International enrolments depend upon:  Availability of university places at home  If demand exceeds supply, some of the excess spills over  Cost of study abroad  Ability and willingness to pay for tuition and living costs  From savings  By borrowing  By students working in host country
  12. 12. Availability of university places athome: the potential demand Tertiary school-age population China India Nigeria 140,000,000 120,000,000 100,000,000 80,000,000 60,000,000 40,000,000 20,000,000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: UNESCO; Economist Intelligence Unit
  13. 13. Availability of university places athome: the spillover effect 350,000 Total international students China 325,000 Total international students India 300,000 Total international students Nigeria 275,000 250,000 Estimated number of international students enrolling in undergraduate and postgraduate study in 225,000 Australia, Canada, France, Germany, Japan, New 200,000 Zealand, United States, United Kingdom 175,000 150,000 125,000 100,000 75,000 50,000 25,000 0 1999 2000 2001 2002 2003 2004 2005 2006 Source: Economist Intelligence Unit; National Statistical Offices
  14. 14. Availability of university places athome: the expanding supply Chinese enrolment rates (%) 120 100 80 Primary Junior Secondary 60 Senior Secondary 40 Tertiary 20 0 1990 1995 2000 2005 2006
  15. 15. Cost of study abroad: exchange ratesdepreciations in Australia, NZ and UK A$ NZ$ GBP
  16. 16. Ability to pay from savings: the HangSeng IndexHang Seng Index Nikkei Index
  17. 17. Ability to pay by borrowing: risk aversion and the credit squeeze 400 US Congress passes TARP package 350 300 US 5-year CDS index Lehman Brothers files for bankruptcy 250Source: RBNZ Bear Stearns aquired by JP 200 Morgan with Fed assistance 150 BNP Paribas subprime funds frozen; German lender US Treasury bails-out SachsenLB requires credit Freddie Mac and Fannie Mae; 100 line Emergency loan from the Federal Reserve to insurer AIG 50 0 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
  18. 18. Ability to pay by borrowing: Asian banking system solvent US$ billion US$ billion 1200 1200 Losses, Asia Losses, Europe 1000 1000 Losses, Americas Total new capital raised 800 800Source: RBNZ 600 600 400 400 200 200 0 0 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 (to date)
  19. 19. Willingness to pay: deteriorating growthand employment outlook in Asia  Falling exports to US, Europe  Slowing economic growth (China), recession (Japan)  Rising unemployment  Growing fear of unemployment  Reports of international students failing to return due to economic hardship in the family
  20. 20. Ability and willingness to pay: fewerjobs while studying and on graduation  Many international students have:  Part-time jobs in term-time  Full-time jobs in the holidays  Right to full-time work in host country on graduation  In-country employment covers part of living/tuition costs  Employment prospects in host countries deteriorating quickly, international students disproportionately affected  Employment prospects in home country also worsening, return on investment reduced
  21. 21. Factors influencing internationalstudent demand: summary Availability of university places at home Cost of study abroad Ability to pay from savings Ability to pay by borrowing Willingness to pay – uncertainty Ability to pay – jobs in host country Willingness to pay – jobs on graduation
  22. 22. Potential implications for Australasianbusiness schools (4)  Pubic funding  Lessons from US state schools, with balanced budget constitutions  Pressure on government expenditure as deficits fuel public debt, debt service costs  Political inclination to see pain of recession shared – caps on public subsidies for domestic tuition, moral suasion in terms of pay settlements
  23. 23. Source: RBNZ 0 2 4 6 8 10 12 US Ch Si in ng a ap or e Ru ss Au iaNe stra w lia Ze ala So u t nd h Af G r lob ica al to ta l UK Ca na da Ja pa n The price of fiscal stimulus packages EU Fr an ce G er m Fiscal expansions post crisis (percent of GDP) an y Sp a in In dia Ita ly 23
  24. 24. Potential implications for Australasianbusiness schools (5)  Faculty recruitment and retention  Demographic timebomb – baby-boomers (1945-60), massification and Asia  Competition from private sector and salary inversion  Short-term:  Shake-out in corporate sector  Collapse in competition from US schools  Offset by exchange rate depreciation  Medium-term: increase in attractiveness of academic careers (ICT post tech-boom, but SUVs post-oil speculative bubble)
  25. 25. Potential implications for Australasianbusiness schools (6)  Public attitudes to business schools  Enron, WorldCom  GFME, Corporate Social Responsibility  Quants vs bankers  Nerds vs Suits  Student demand for vocational business degrees rising, now 20-25% of UG – time for a correction?
  26. 26. Conclusions  Universities – and so business schools – traditionally counter-cyclical  Now many sources of revenue non-public and cyclical:  Endowment income, executive education, international education…  ….even possibly public funding  Short-term gains in hiring  Potential damage in terms of public attitudes

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