Also “game over” is China’s private education boom which has provided gainful employment to thousands of online tutors around the world, including many South Africans. The article republished below from the Financial Times of London highlights the risk of trying to be capitalist in a communist country. Or, as Sean Peche emphasises, for those investing into the Middle Kingdom. In a related story, exclusive to our partners at The Wall Street Journal, to make Beijing happy the recent NYSE new listing disaster Didi Global (China’s Uber) is considering going private again. – Alec Hogg
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How China is crushing a $100bn sector
Education sector groups like Gaotu Techedu desperately restructure business models after regulatory assault
By Thomas Hale in Hong Kong; Ryan McMorrow and Sun Yu in Beijing – for the Financial Times of London
At the sprawling Beijing headquarters of Gaotu Techedu, one of the world’s biggest online education businesses, staff are braced for the worst after the group lost over 90 per cent of its market value in a matter of months.
“They’ve been laying people off these last few days,” said one employee this week as he left the building after being made redundant. “Everyone is worried,” said another. “It’s not our turn yet but I feel like we are just waiting for it.”
The upheaval for engineers and teachers at US-listed Gaotu comes after regulators launched a sweeping clampdown on China’s $100bn education industry at the weekend.
Companies can no longer make a profit from selling core tutoring services aimed at children, a model that has underpinned years of explosive growth and drawn in billions of dollars of funding from US investors that the new rules ban from participating in the sector.
Industry leaders, which also include New Oriental and TAL Education, are now scrambling to reorientate their business models after their main revenue source, middle-class parents purchasing tuition to help their children pass China’s competitive public exams, was cut off. Goldman Sachs estimates the regulatory assault will shrink the industry down to a quarter of its present value.
In February, before billions of dollars were wiped off their share prices, the collective market value of New Oriental, TAL and Gaotu surpassed $110bn. Online tutoring companies Zuoyebang and Yuanfudao each held billion-dollar funding rounds last year.
Gaotu, New Oriental, TAL Education and Zuoyebang did not immediately respond to requests for comment.
Groups that teach China’s school curriculum will have to register as non-profit organisations under the new regulation, which aims to “reduce the burden of students in compulsory education”.
Anita Chu, an analyst at CCB International, suggested that in a “worst-case scenario”, companies would need to spin-off their after-school tutoring businesses. For New Oriental, she estimated this would hit its earnings by 60-70 per cent and by 80-90 per cent for TAL.
Venture capital firms that have bought into the sector hope that the loosely-worded regulations, which also ban initial public offerings and foreign investment in groups teaching the school curriculum, will leave room for these businesses to continue operating.
“With the IPO route off-limits, we’re looking at other exit options including M&A,” said an investor in an education technology company that has raised more than $1bn.
At Zuoyebang, backed by SoftBank’s $100bn Vision Fund, employees said benefits had been cut and the company’s future was unclear. “Clearly the company won’t be able to get listed now,” said one product developer. “We’ll see what’s allowed in the coming weeks,” said another.
Yuanfudao, an education company backed by Yuri Milner’s investment group DST Global, is trying to readjust. It is now pushing its “hands-on” online learning app that seeks to cultivate “scientific dispositions” in children rather than drilling facts for exams.
The ability to make such plans work will depend on how lower levels of government carry out Beijing’s orders. Jiangsu, a province near Shanghai, on Wednesday suggested it would curtail the ability of education apps to charge students and parents.
Jon Santangelo, a Guangzhou-based consultant at the Beijing Overseas Study Service Association, which works with education tech companies to recruit foreign teachers, said the industry would likely pivot towards non-core subjects such as arts and physical education.
“I don’t see the industry going away. Working parents need a place to take their kids,” he said. “Everyone is dissecting the policy to find ways to reshuffle.”
The owner of a tutoring company in the southern city of Hangzhou said one new line of business was selling day-care services to public schools, although there were government limits on how much could be charged.
Zhang Zhen, a parent in Shanghai who has been buying English tutoring for her second-grade child since kindergarten, said her access to services had been unaffected so far. Another parent said they believed tutoring services would not end “as long as exam-oriented education still determines the future of children”.
“At least you can regulate and tax New Oriental, you can see what they’re doing . . . if you totally just break the market apart and it doesn’t disappear, you’re going to make all these [tutors] freelance,” said Julian Fisher, co-founder of Venture Education, a Beijing-based education consultancy. He added that some parents were already setting up “tutoring co-operatives”.
In Beijing, an employee in Gaotu’s human resources department confirmed the company was “optimising” the size of its workforce but said it was also planning a shift to education services for adults.
“Anything that needs a certificate or has a test, from being a deliveryman to testing into civil service, we can prepare you for that,” he said, declining to give his name.
Additional reporting by Nian Liu and Christian Shepherd in Beijing and Wang Xueqiao in Shanghai.
