China cram schools learn new tricks under tutoring crackdown

From science experiments to cooking classes, Chinese education companies are trying to reinvent their business model nearly a year after a ban on tutoring in the core curriculum reversed years of earnings growth.

Blowing up enormous balloons will be among the 360 or so hands-on lessons and programs on offer at the science learning centers being launched next month by New Oriental Education & Technology Group in seven cities, including Chongqing and Chengdu. The plan is to expand the chain with the aim of drawing 5,000 students this year.

New Oriental has also been opening centers for arts and sports around the country since 2021. The new businesses will be able to contribute to revenue in the fiscal year ending next May, said Chairman Yu Minhong.

These moves are a response to regulations announced last July banning cram schools that serve mainly elementary and middle school students from teaching core “academic subjects,” like Chinese, English, math and history, on weekends or holidays. Openings of new schools were halted, and existing ones were required to register as nonprofit entities.

The crackdown sought to rein in an industry critics saw as a culprit in China‘s high education costs and falling birth rates. Tutoring boomed as household incomes rose, providing a place for children with two working parents to go to after school.

Companies were given until the end of 2021 to comply with the new rules, which have had a visible impact on earnings. Out of 11 listed education companies that said they were affected by the regulations, 10 reported net losses in their most recent earnings reports. Five of those had previously turned a profit.

New Oriental’s partner in the science learning centers is Japan’s Gakken Holdings, which has been printing science books since 1963.

Another big Chinese player, TAL Education Group, announced plans this month to add classes on cooking and cleaning on its Xueersi online platform, which now provides courses in arts and sports.

New Oriental and TAL both saw growth come to a screeching halt as they ended tutoring for elementary and middle school students at the end of 2021, taking losses on school closures and heavy restructuring.

No students were in sight during a visit to a New Oriental location in Dalian on Monday. The number of classes has fallen dramatically, an employee said.

The New York- and Hong Kong-listed company booked a $998 million net loss for the nine months through February, a reversal from its $379 million profit a year earlier. It had 847 schools and learning centers at the end of February, down by half from the end of May 2021.

New York-listed TAL reported a $1.1 billion net loss for the year through February — nearly 10 times its red ink for the previous fiscal year — and has slashed its own school network.

The tutoring ban has also hit Chinese startups. The for-profit education sector had 17 unlisted “unicorns” with a valuation of $1 billion or more in December 2020, according to local research firm ITjuzi. That number was down to six this month. Their total enterprise value shrank from about $50 billion to around $9 billion.

Notably, the tutoring ban does not include noncore subjects such as sports, art and science. Revisions to the national curriculum taking effect in September will add content in some of these subjects, including information technology as well as “labor” courses like cooking and cleaning, to encourage more well-rounded development.

“That could provide a boost to cram schools’ new businesses,” an executive at an education company said.

The cost of these extracurriculars varies by company and subject. Hourly rates for soccer, piano or dance lessons in 10 leading cities, including Beijing and Shanghai, averaged 80 yuan to 240 yuan — about $12 to $36 — as of April, according to China’s education ministry.

Nonacademic subjects accounted for about 60% of the 925 billion yuan ($138 billion) for-profit education market in 2019, which expanded 79% from 2016 levels, according to iResearch.

A research firm affiliated with Duojing Capital forecasts the market for these subjects alone growing 39% from 2021 to 2023. With big names now getting into a space previously packed with small players, competition is likely to be intense.

It remains to be seen how many households will be willing to shell out for such classes. Daiwa Capital Markets Hong Kong expects New Oriental’s revenue to slide from $4.2 billion last fiscal year to $2.8 billion in the year ending May 2024, and TAL’s from $4.3 billion last fiscal year to $1.3 billion in the year ending February 2024, suggesting that a full recovery will take a while.

Author: SHIN WATANABE, NIKKEI Asia