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China’s edtech players look to transform business models in 2022

Business retrenchment, campus closures, and plunging stocks – these are the words that have been haunting China’s edtech industry that was once flourishing with over 10 million staff.

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Surviving companies have either turned themselves into non-profit entities or shifted their operations

Some 25 online education companies closed their business in 2021 in the wake of China’s crackdown on private education, according to Chinese research firm 100EC. Nearly half of the companies were based in Beijing with a history from one to 27 years.

Established in 1994, Juren Education was the oldest company on the list. In a letter to its students, the company expressed regret for not being able to issue full refunds but transferring students to other tutoring companies.

With 39 centres in 11 cities, Wall Street English was another big name that went bankrupt. The business was closed almost overnight, failing to pay wages to its employees and leaving students in chaos.

Those companies which survived the crackdown also suffered heavy losses. Leading tutoring corporations including New Oriental Education & Technology Group, TAL Education Group, and Gaotu Techedu closed their lucrative K9 operations at the end of 2021.

“We lost 90% of our market value, our revenue dropped by 80%”

“In 2021, New Oriental withstood a storm of changes and many of our operations are surrounded by uncertainty,” wrote Yu Minhong, founder of New Oriental, on his personal social media account recently.

“We lost 90% of our market value, our revenue dropped by 80% and 60,000 staff were laid off. We paid nearly 20 billion yuan (£2.3 billion) for tuition refunds, employee dismissals, and classroom lease cancellations.”

Although New Oriental published an official statement pointing out Yu’s post was not authorised by the company, the impact of the sweeping regulations can be felt to some extent. In the financial results published by the company, New Oriental suffered a net loss of US$800 million to $900m (£595.2m to £669.6m) in six months ending November 30 2021, mainly resulting from the termination of the K9 school subject-based tutoring.

Revenue from K12 courses, including the K9 business, accounted for 93.65% of Gaotu’s net revenue, reaching 3.9 billion yuan (£460m), according to the company’s financial report for the first half of 2021. TAL also stated that profits from K9 services comprised the vast majority of the company’s total revenue for the financial year ending February 28 2021, but no exact figures were provided.

Timeline of policies

In July 2021, the Chinese government released new rules banning for-profit tutoring in core school subjects and restricting foreign investment in the sector. The policy aimed at reducing workloads for students and easing financial burdens for parents as the market had been filled with slogans like “Enabling your children to win from the starting line” and “If you don’t enrol your children, we will be helping your children’s competitors”.

Progress was said to be made in the governance of after school training institutions, with an 83.8% reduction in in-person tutoring and an 84.1% reduction in online tutoring, according to the press conference held by China’s Ministry of Education in December.

On December 13, the Ministry of Education released a statement for strengthening the management of educational apps. The registration of apps for core subjects would be suspended until online tutoring companies finished their registration process.

The apps that perform functions including ‘photo search’, which provides students with answers after they take photos of the questions, will be temporarily removed. This kind of learning method makes students lazy, affects their independent thinking, and goes against the nature of education, the statement read.

At the end of December, authorities in several Chinese cities issued a pricing guide on curriculum-based after school tutoring. The fees have dropped dramatically compared with the situation before the regulations but they vary slightly due to regional economic levels.

For a session with less than 10 students, it costs 70 to 80 yuan (£8.2 to £9.4) in megacities including Beijing and Shanghai. Other cities set lower prices for the same type of classes with places including Hainan province charging only 25 yuan (£2.9). The fees for online education were further reduced ranging from about 10 to 20 yuan (£1.2 to £2.4).

The future direction

Surviving companies have either turned themselves into non-profit entities or shifted their operations towards vocational training, non-curriculum classes, as well as areas not connected to education.

The once most promising edtech giants, including Yuanfudao and Zuoyebang, transformed to non-profit status in December and have been allowed to provide online tutoring and educational products of core subjects in January.

The two companies each faced a maximum penalty of 2.5 million yuan (£290,000) in May because of misleading commercial advertising practices. In a joint statement released by online tutoring firms in January, they launched an initiative to win back public trust by adhering to regulations on advertising, course registration, and guideline prices.

New Oriental will reduce the tutoring in traditional subjects and pivot towards more innovative and quality-based products and tutoring including smart learning hardware and STEAM (Science, Technology, Engineering, Arts and Mathematics) programs, according to its statement released on January 22.

In a groundbreaking move, Yu expanded the company’s business into the agricultural area selling farm produce online. The live-streaming business was also confirmed by the company as one of the key areas for development. A new e-commerce platform for selling agricultural and other products will be built on the basis of the technology developed for its live-streaming classrooms.

“Students aged from 2 to 18 will still be our primary focus”

TAL will undergo a transformation in two directions: innovative service will be provided based on digital content and quality education will be provided for 2 to 18-year-olds. On the other hand, they will focus on live streaming, and further increase the investment in research and development in education technology, according to Zhang Bangxin, founder of TAL.

“After saying goodbye to K9 curriculum teaching, students aged from 2 to 18 will still be our primary focus. And our objective will become more long-term,” said Zhang.

“The focus of our business will shift from the notion of ‘learning changes destiny’ via school subjects tutoring to quality training where students will develop abilities that will benefit them for life.”

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