All through my late teens, as a student at an elite public high school in the northeastern industrial city of Shenyang, after-school classes were a constant. They were usually held in makeshift classrooms located in random residential buildings close to campus. Scores of students packed elbow to elbow, while a teacher in the front, often from our high school, sweated through derivatives or English participles. Looking back, all that extra study was practically useless: Almost every question I was taught to crack during these sessions was levels above the difficulty demanded by the national university entrance exam, the infamous gaokao. At its best, it was intellectual acrobatics; at its worst, a massive grift.
My experience was not exceptional. By 2020, at least one-third of Chinese households with children of K-12 age (in Chinese) were paying for private classes to supplement the regular curriculum. Outlays by these families floated valuations of the K-12 private education industry from RMB 373 billion ($58 billion) in 2015 to over RMB 700 billion in 2021. In that span, the industry also rapidly moved online.
There were massive open online courses (MOOCs) provided by renowned public middle schools and animation-based interactive learning for the youngest students, but the most profitable innovation was the massive livestream class designed for passing a specific exam, often taught by a celebrity teacher. Livestreams helped the likes of Gaotu Techedu (GSX) and Yuanfudao to rapidly consume 15% of the private tutoring pie and transformed China into the world’s most desirable destination for edtech financing.
Then on July 24, Beijing’s State Council dropped a hammer on the industry with a 15-page collection of regulations known as “The Double Reduction Opinion” (in Chinese). With stated goals of lightening students’ homework load and saving parents money, the new guidelines require tutoring schools to stop teaching core curriculum subjects or spin off such activities into nonprofit units. Foreign ownership and public listings of such companies are banned. So is providing any classes at all on weekends and holidays—thereby slashing marketable hours by 80%. For-profit education companies will be limited to extracurriculars like art and sports.
The directive triggered massive stock sell-offs in the US and Hong Kong. Three of the US-listed stars—TAL Education, Gaotu Techedu, and New Oriental Education—collectively lost $100 billion in market cap from their peak earlier this year. It’s expected most of the $23 billion venture capital invested in the sector in the past five years, an estimate by HolonIQ, will be vaporized.
Decrees from the Chinese upper echelons can often be massaged and delayed to suit local conditions. But after flipping through a dozen interpretations by local governments, I don’t see any wiggle room.
Cities and provinces are racing to be fastest, and strictest. Beijing encourages after-school services to adopt a “learn first, pay later” approach to prevent financial scams. Zhejiang asks its counties to set up “expert commissions” to supervise tutoring outfits on what to teach. Hunan leadership boasts it has “rectified 15,000 after-school training institutions since June, and disciplined 170 teachers who engaged in paid tutoring.”
In the month following this unprecedented crackdown, the smoke has begun to clear. We are getting a better sense which edtech firms will die, which will survive, and which might even prosper.
No more IPOs
Late-stage startups that were anticipating mega-IPOs will likely give up on listing and see their valuations shrink to nearly nothing. Among them are two of the world’s biggest edtech firms: Yuanfudao, once valued at $15 billion, and Tiger Global-backed Zuoyebang. Another high-profile case is Spark Education, which had filed for an IPO in late June. The cash-burning unicorn was dedicated to teaching three- to ten-year-olds math and science through small-class livestreams and animation, and raised a total of $590 million in nine rounds in under four years. Most likely, none of them will be able to raise money at a unicorn valuation for years.
Tencent-backed VIPKid has also shelved its IPO plans. Its business model, also employed by New York-listed peer 51Talks, relied on the now-banned practice of hiring English speakers overseas to tutor Chinese students by video call. VIPKid alone claimed to employ 100,000 North American tutors teaching 600,000 Chinese children in 2019. Under the new regulations, these and other online tutoring companies have to shift swiftly to customers outside China—or face extinction.
The various bans are also having an impact on foreigners employed throughout China in private language schools, known as training centers, which often serve adults as well as children. Many such teachers in August found they couldn’t renew their visas or their visas were suddenly cancelled, according to conversations in WeChat groups.
Giants already pivoting
The edtech giants are downsizing fast. Gaotu, Yuanfudao, Zuoyebang, and TAL have collectively cut tens of thousands of employees. ByteDance’s edtech brand, Dali, has laid off half its in-house K-12 tutors and shut down its one-on-one online English tutoring unit, GoGoKid. There have even been more than a dozen public protests by sacked Chinese staff seeking back pay.
All major firms are attempting to remain for-profit by pivoting into much smaller segments individually worth somewhere between $1.5 and $3 billion.
TAL started offering lessons in the permissible non-curriculum subjects of calligraphy, drama, and the board game go at its existing after-school centers. Youdao, NetEase’s educational brand, just unveiled a new six-app matrix with lessons in arts, robotics, and coding, aiming to rake in some offline licensing fees. Zuoyebang expanded its non-curriculum portfolio by three new apps, the most intriguing of which claims to “cultivate learning motivation”.
Like Dali, Youdao has the option of doubling down on its existing hardware lines. Both could use their traffic portals for paid courses or services unrelated to the K-12 core. The Ministry of Education’s recent announcement that physical education should be worth as many points as math in high school entrance exams makes sports an attractive new path for online-cum-offline providers.
Another direction is adult education. New Oriental’s latest “family education” line hopes to turn a decade-long free service to parents into a profitable business. TAL’s latest spin-off features language training and preparation for the National Graduate Program Entrance Exam. The Gaotu Professional app, launched in May, offers training in accounting, the civil service exam, and other life-long learning pursuits.
Homegrown companies venturing into online language training apps may be able to mine an especially sweet spot: Days after the release of the Double Reduction rules, popular foreign-owned apps like Duolingo and Memrise disappeared from mainland Android app stores.
It’s time for edtech to align more of its business interests with the public education system. First, the national rollout of after-class, on-campus programs, which the Opinion spent a chapter promoting, prompted inventions of CRM software used for billing parents who pay for extracurriculars.
Second, classroom utility tech is entering a golden era as instructional competence needs to rise as homeworking wanes. Data-driven solutions that help analyze academic performance or grade exam papers will be in demand. And finally, MOOCs will gain traction, since they’re hailed as “equalizers of learning resources,” laying down a capitalizing path for platform players, such as Hillhouse-backed EEO (ClassIn).
No place for unicorns
I hope that millions of students across China will feel their study burdens resoundingly lifted soon. The truth is, I was never vocal about wasting my high school weekends in those dimly-lit classrooms. Nor did I complain about constantly moving from one building to another to dodge regulators’ door-knocking. I simply bought that I was “a good student,” and a good student always shows up.
Many determined parents are going to find ways for their children to show up to extra classes like I did, as long as only 6% of the 10 million taking the gaokao each year are admitted into one of the 150 tier-one universities, and standardized tests are the only keys to the kingdom.
It’s these stark facts that have driven so many, including up to 60% of upper middle-class households, to spend so much on online tutors and after-school classes. Affluent families will now simply reallocate their exorbitant education budgets to in-home tutors or to Chinese or foreign teachers found online, sometimes by reconnecting with the teachers abruptly laid off by the edtech giants.
Through the smoke-and-mirrors exercise of aggressive salesmanship and false marketing, parents have been fed, for years, a core message by the tutoring giants: “The school your kid attends is not enough.” As Chinese families follow their inertia to cram, part of the tutoring industry will go guerrilla. But if gaokao-oriented tutoring goes underground, this desperation won’t make any new unicorns rich.