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After Government Crackdown, What’s Next for China’s Edtech Firms?

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After Government Crackdown, What’s Next for China’s Edtech Firms?

With new regulations hitting hard at home, China’s education firms are going global.

After Government Crackdown, What’s Next for China’s Edtech Firms?
Credit: Depositphotos

After posting stellar growth in 2020, Chinese education technology, or edtech, firms took a serious hit this summer. Concerned about high-stress education and falling birthrates, the government cracked down on profit-making, K-12 tutoring firms, which are now limited in their ability to earn, raise capital, or go public. Late last month, regulations were also tightened on foreign educators and teachers from public schools working in after-class centers.

If observers were surprised by the new measures, it was only by their extent. Both central and local governments in China have been reining in profitable after-school services since at least 2017, when the “Guiding Opinions of the Ministry of Education on After-School Services for Primary and Secondary School Students” were published. Suining No. 1 Middle School offered after-school reading services starting in 2019, while Beijing recently extended its public school day by two hours, cutting into the time students were spending in private tutoring centers. Last year, the Shaanxi government announced its schools could start charging after-school service fees while ensuring students with financial difficulties would be offered subsidies.

Parents and students largely welcomed the new measures against private education firms. Peter Li from Beijing said he had disliked receiving calls from Yuanfudao (one of the country’s edtech unicorns) late into the evening after registering his child on the app. Teachers – at least those working outside of public schools who did not supplement their income by working in private tutoring centers – were also happy about the changes for their students. Laura, who teaches in an international school in Shanghai, said, “I’m not affected by the new regulations, so I’m happy that my students won’t have to study so much online anymore. I think they’re overwhelmed already.”

Even some edtech professionals are convinced the changes will be a boon overall. M.T., founder of an art edtech firm who preferred not to use his full name, believes that the 25 online education giants that have gone public since 2017 “created chaos on the market.”

“Yuanfudao and Zuoyebang poured money purely into marketing,” he said. Tellingly, more than a third of Yuanfudao’s staff held the job title of “teaching assistant,” while actually focusing on sales.

According to Kai Liang, who leads business development for the U.K.-based MEL Science, “These changes are not unexpected for the industry. They will create a lot more positives than the short-term uncertainty and will give companies who contribute value in learning huge opportunities.”

That optimism aside, many companies have been hard hit. Crumbling stock prices were accompanied by staff cuts, reduced product offerings, and fewer teachers. Before the regulations, English-learning firm ALO7 provided 30,000 classes per week, with teachers mostly based in North America. Since overseas-based teachers are now barred from teaching in China, the firm has taken a big hit. Facing near-stagnant growth in its 2021 revenues, the company had to make significant staff cuts. VIPKids, whose acquisition costs per user had skyrocketed to RMB 10,000 for their five-year class package, is now remodelling after the government limited offer packages to 3 months.

As the rules apply to domestic, compulsory subjects only, companies like ALO7 are now pivoting overseas. Asian countries including Indonesia, Cambodia, Myanmar, and Japan are all popular candidates for Chinese edtech firms looking to go global. CodeMao, a leading Chinese coding edtech firm, is planning its European-Asian expansion through 2022. Similar to Huawei’s strategy, CodeMao expands through non-profit programs and online hackathons, as well as direct government contacts. MeiShuBao’s international department has grown from a staff of 16 to 80 in just a few months, and the company’s upcoming product is designed purely for abroad.

Expanding abroad won’t be an easy task, however. Zethe Kettlekamp, content curator at MidWest Virtual Academy, said, “When companies decide to target foreign markets, they need to spend a lot of time and effort to localize and specialize.” The deep localization of an edtech product goes beyond translating the content and software; it also means being compatible with local legislation, devices, payment platforms, and culture. Javier Fernandez, the education advisor of the Spanish Embassy in Beijing, explains that “the education system is shaped by the cultural and national values of the community. To be successful in implementing educational products abroad, it is essential to know the roots of their system.”

Companies are also seeing opportunities outside of compulsory subjects. The arts, sports, and practical education, like ICT, are not subject to the same stringent rules. New Oriental is currently pivoting toward extracurricular education camps, which became more popular during the travel restrictions impose because of the COVID-19 pandemic. CodeMao plans to develop a longer coding curriculum for primary school students.

The business-to-government path within China is also interesting for a growing number of firms. This is a large, untapped, and still unregulated market that involves selling directly to public schools, whose budgets are often controlled by their local governments. With governments at all levels putting more pressure on public schools to fill the gap the regulations are creating in the after-school market, public schools will need to develop capacity in IT services, curriculum design, and sheer workforce.

According to the head of sales at KanShan, a bite-size primary education edtech firm, “the new regulations actually provide us with more and more opportunities because… schools will need more excellent content, which requires the assistance of external companies like us.”

Experimental schools, which have more leeway and autonomy in their budgets, may be a good entry point for companies interested in developing their business-to-government revenues. The key question, however, will be how much local governments and public schools are willing to pay, and charge their students, for these services.

Despite stringent regulations that have damaged many edtech firms in the market, a sizable number of companies see opportunities for product development. Many are reorienting their customer acquisition strategies through different channels or markets and offering more innovative products. The regulations ousted the newest entrants, but edtech’s largest players may well be poised for the sustainable growth that had eluded them.