Lesson for market, hope for society

New guideline aligns education with national goals, gives edtech startups fresh way.

Until China firmly cracked the whip on haphazard private-sector education in late July, not many among the business and investment communities engaged in the multibillion-dollar sector realized the joy ride on the gravy train, characterized by a cart-before-the-horse approach to market shares and bottom lines, cannot be an endless one, insiders said.

Jiang Ya and Feng Chongguang, analysts at CITIC Securities, said: “The new guideline (issued in July) is just the starting point. We expect the K9 (kindergarten to 9th grade) after-school tutoring segment will embrace a long period of supervision in both business development and fundraising.”

For one, education, from society’s perspective, has sanctity and cannot be allowed to be trifled with by runaway market forces.

For another, if, in the name of competitive education, both students and their parents are driven to untold stress and desperation, then the hoped-for payoffs of pursuing such curriculum-intensive, expensive education-better grades and, ultimately, a solid foundation for a better life that can add value to society and economy-would be in jeopardy.

So, the 4.12 million businesses-startups, partnerships, listed companies, what have you-that constitute China’s private education sector have put themselves on the path of a quick course correction, in order to sustain their pursuit of billions of yuan in annual profit and double-digit annual growth, and, more importantly, to align themselves with national goals, experts said.

Nowhere is this change of mindset more apparent than in the nation’s online education segment that, in the estimates of iiMedia Research, grew by about 10 percent to 454 billion yuan ($70.1 billion) in 2020.

Well-known startups, their investors-some 30 domestic and global big-name labels such as Hillhouse Capital, Sequoia Capital China, DST Global, SoftBank Vision Fund, Tiger Global, Temasek and GGV Capital have all helped incubate and nurture stars in the sector-and aspiring icons with an eye of the IPO bandwagon are redrawing their future plans, even as students and parents wonder with bated breath about the present.

To understand the current tumult in China’s education sector and its implications for economy and society, it is important to digest recent history.

China, the world’s most populous nation, is also home to the world’s largest vocational education system. A Xinhua report stated that in 2020, the central government allocated 25.71 billion yuan to boost vocational education.

That was preceded by a mushrooming of private-sector firms offering a plethora of courses and programs-English-language modules, skills and crafts, fine arts, so forth-designed to complement formal education offered at schools.

The idea behind cocurricular courses coupled with curriculum-reinforcing programs of the private sector was to ensure the holistic growth of nation’s future manpower remains consistent with the needs of 21st-century industry and economy.

In rising China, there were hundreds of millions of takers for such programs among the upwardly mobile, increasingly affluent middle-income group. For instance, in major cities like Beijing, most of the students, especially middle school students, enroll for at least one or two after-school tutoring programs.

Technologies-the internet, mobile apps, big data, artificial intelligence and 5G-were incorporated innovatively and imaginatively in this endeavor, spawning a whole new sector called edtech (short for educational technology) that gave birth to iconic startups, which went on to raise billions of dollars via IPOs, private equity deals or venture capital.

But cutthroat competition and brazen market-oriented approach to education ensued, finally forcing the hand of China’s top leadership to issue a stern guideline in July, proposing wide-ranging reforms in the sector.

What made everyone sit up and take notice was the way stocks of some education companies got savaged by retail and institutional investors alike.

For instance, New Oriental Education and Technology Group Inc and TAL Education Group, which are considered giants of the sector, dropped between 30 percent and 40 percent immediately on the Hong Kong and New York stock exchanges.

For perspective: on Feb 5, shares of New Oriental Education and Technology Group traded at HK$142($18.25) in Hong Kong. But, by Aug 5, they crashed a staggering 89 percent to HK$16.24. TAL fared worse-its shares tanked by 93 percent from $80.37 to $5.71 during the same period.

Investors, it can be argued, understood the implications of the new guideline that states all educational institutions offering tutoring on school curriculum will have to register as nonprofit organizations.

So should businesses offering classes on weekends, holidays, summer and winter breaks. Effectively, this allows tutoring only on weekdays for a limited number of hours.

A visitor (left) experiences a VR-enabled immersive classroom at an expo in Wuzhen, Zhejiang province.

A supplementary guideline issued later by the Ministry of Education turned the spotlight on nine years of compulsory education before high school-from elementary to middle school.

In China, school curriculum typically includes subjects like Chinese language, mathematics, foreign languages (English, Japanese and Russian), ethics, chemistry, history, geography, physics and biology.

Data from analytics firm Tianyancha showed most of the 4.12 million education firms in China focused on K12, or kindergarten to 12th grade, last year.

Industry insiders said the new guidelines represent the hardest crackdown ever on the education sector. The aim, they said, is to delink education from industrial-scale financial capital and to significantly reduce excessive intellectual as well as financial burden on students.

The new guideline also states that edtech companies will no longer be allowed to raise capital through IPOs. Listed companies and overseas investors are barred from investing, or acquiring stakes, in education firms that teach school curricula.

This immediately forced Yuanfudao, an online education startup that boasts a market valuation of around $15.5 billion, and Zuoyebang, another startup whose market valuation is estimated at $11 billion, to pause their IPO plans.

And those already invested in profitable education firms cannot cash out and exit in a hurry either. An investor who sought anonymity said: “We admit in internal meetings that we will lose a big sum in this round. We won’t make any education investment at least this year.”

But some investors with fine market nous may have already cashed out. For instance, in the first quarter of this year, Hillhouse Capital sold out all of its 4.05 million shares of TAL Education Group and 4.64 million shares of 17 Education and Technology Group Inc, a Nasdaq-listed online education company.

Gu Mingyuan, professor of Beijing Normal University, said, “All these developments seem to signal that after-school tutoring will become a supplement to school education, offering services related to students’ interests in certain areas like sports, music, dance, art and technology.”

Agreed CITIC Securities analysts Jiang and Feng. Existing education companies may have to transform their business and become quality education firms with focus on art, music, vocational education and education technology, they said.

Since the new rules prohibit foreign firms from acquiring or holding shares in school curriculum tutoring institutions, and also from using the route of variable interest entities, or VIEs, listed companies may face the risk of delisting or may have to spin off curriculum-related businesses, they said.

A reliable and knowledgeable source said internet major Bytedance has already scaled down its curricula education businesses Qingbei Online School and Guagualong, but the company has not confirmed this.

Since Bytedance is a listed company, it can no longer include education in its portfolio, so that part of its overall business has to be spun off inevitably, the source said.

But not everyone is pressing the panic button. In fact, some entrepreneurs seem to believe it is always the darkest before the dawn, so are quickly evolving future moves, not only to reduce potential losses but to explore potential new opportunities.

They are seeking to expand their user group from primary school students to college students and even adults. Signs of this potential trend appeared even before the guideline was announced formally.

For instance, in July, TAL Education Group launched its new brand of service called Qingzhou, which focuses on tutoring for postgraduate examinations and qualifying exams for studying abroad, including TOEFL and IELTS.

Wang Lei, who heads Qingzhou, said TAL is also mulling new vocational skill improvement training.

A woman walks past a billboard advertising a Chinese education firm in Beijing

Speaking on conditions of anonymity, an investor close to online education leader VIPKid said the company is considering expanding its business to adult English tutoring. VIPKid currently offers kids aged 4 to 12 one-on-one online English courses with teachers based in the United States.

Gaotu Group launched a new version of its mobile app covering language training, college student examinations, finance, public examinations, teaching, studying abroad, certain types of vocational education services, and a family education system class.

“It is the darkest moment for us but it also can be a good moment. We must adjust to survive,” said Chen Xiangdong, founder of Gaotu, in an internal letter at the end of July that also announced some layoffs are inevitable-a euphemism for downsizing by a third, which translates to several tens of thousands of job cuts.

Yuanfudao launched a science education product whose Chinese name translates to Pumpkin Science. This move is in line with a key transformation direction for education firms-STEAM education, an acronym for science, technology, engineering, arts and mathematics.

Pumpkin Science enables kids to explore science in a hands-on way with interactive AI content. Ma Bin, head of Pumpkin Science, said the main aim is to empower kids to explore living knowledge themselves.

Doushen (Beijing) Education & Technology Inc announced it will promote comprehensive business transformation and shift to non-curricular services such as after-school programs and art classes.

Chu Zhaohui, a researcher with the National Institute of Education Sciences, however, said uncertainty arising from the recent guideline will likely continue to cloud China’s education and training industry for some time to come.

“The form of after-school tutoring may be changed, but as long as demand does not decrease, off-campus training institutions may continue to exist,” said Chu. “Now, it’s like the first domino has overturned. It remains to be seen to what extent the policy will affect the whole industry.”

Author: Cheng Yu, China Daily

You might also like