Your Roadmap to China’s Education Sector 

Part 1

The COVID-19 pandemic forced China’s student population, the largest

in the world, to stay at home and look for more innovative ways of

learning. Over 200 million children from K to 12th grade grow up in

an intensely competitive environment, where only 40% of them can

secure a place at university each year.

But thanks to an increasing number of online education tools and an impressive fiber, broadband, internet coverage even in remote regions of the country, most Chinese students have been able to continue learning.

Even before the quarantine forced millions of people indoors, China’s online education was doing extremely well. STEAM education (science, technology, engineering, art, mathematics) constitutes, along with K-12 education, the largest segments of China’s EdTech market, which in 2018 reached US$300 billion in revenues. Investors have taken notice of this opportunity.

HolonIQ estimated that between 2014-2018, investment in Chinese educational companies was one-and-a-half times greater than the total amount of money spent in the United States, the European Union, and India combined.

Last January, the Chinese Ministry of Education decided to postpone the spring semester of schools and kindergartens to curb the spread of the coronavirus. This caused the move online of over 278 million students, further expanding the user base for EdTech.

The State Council’s investment of US$6 billion into AI and tech support for education in 2019 is a testament of the central government’s commitment to support online education tools.

The COVID-19 health crisis has not only impacted the private sector for education in China, it has changed the industry’s landscape and dynamics as well.

Most educational institutions, from public schools to after-school tutoring centers, have either delayed the start of in-person lessons or switched to online learning. Traditional tutoring companies have been seriously affected, as they were forced to suspend their services and refund their students.

On the other hand, downloads of online tutoring apps soared five to 30 times the numbers seen before the outbreak. For example, Dingtalk, an office software developed by Alibaba and widely used by schools and students, has been installed 1.1 billion times in China during this epidemic period.

Spurred on by the rising demand for private and vocational education, and China’s ever-growing internet economy, the country’s online education industry has quickly become one of the world’s most lucrative markets, with annual revenue increasing from RMB 122.54 billion (US$17.5 billion) in 2015 to RMB 269.29 billion  (US$38.5 billion) in 2019.

However, some experts fear that China’s private education industry will witness negative growth in 2020. While private school education providers will remain stable due to resilient demand, training businesses, such as after-school tutoring, English language teaching and vocational training, as well as the experience-based education segment, which includes educational tours and early-years learning centers, will experience an economic blow due to social distancing rules.  

Online classes have been the main solution for schools and tutoring institutions since the beginning of the outbreak. Some online tutoring apps have leveraged this opportunity to attract students by offering free or low-cost classes, leading to a surge in online education user numbers and adoption rates.

“This is like a natural marketing campaign for these companies,” said Jiao Wei, an analyst at Shanghai-based research firm 86 Research. “Parents who didn’t know much about online education can now see how it works and how classes are being streamed online.”

The company TAL Education, which offers after school education, has partnered with more than 300 public schools across China to stream free classes, and its Xueersi unit is providing complementary K-12 online tutoring sessions. Other education firms are also launching more e-learning courses, while developing data tools to analyze student performance and help teachers track their progress.

In 2019, the market for China’s online after-school tutoring was RMB 20 billion (US$2.8 billion). Companies offering online solutions to schools and offline training providers also benefited from this exponentially growing demand for online education.

China’s training businesses (tutoring, test preparation, English language lessons, vocational training) have moved from offline to online delivery to offset the effects of both the outbreak and its associated regulatory impacts.

Though millions of new users have opted for online training programs, there is a lot of customer overlap among competitors and low attendance rates. The conversion rate to full-fee paying users will probably not be as good as expected. However, online education is a growing trend, and customer acquisition costs should fall drastically in the short term.

The competition gap between leading and lagging offline training providers will increase, because larger companies will be able to survive this period thanks to their online programs. Smaller firms could face a cash flow shortage and may have to close.

In terms of online competition, the leading players will gain further domination in the market. Large online classes are the mainstream product right now, and they also offer the best economic model in terms of scalability and profitability.

Currently, education companies are focused on customer acquisition, conversion, and retention capabilities. Product differentiation is not a priority at this stage. In the after-school tutoring segment, it will be hard for any late-comers to gain a significant market share from the current market leaders.

Industry experts estimate that after the normalization of the education sector, leading offline providers, and some of the medium to small-sized ones will keep offering online courses as a supplement or tool to attract new customers.

Another possible outcome in the future could be a combination of online and offline delivery, a blended learning solution that connects online and offline venue, content, teaching, or services.

In the long term, online education will assume a more permanent and central role in China’s education system. Some policy specialists have described previous epidemics like SARS in 2003, and now COVID-19, as ‘black swans’ or ‘tipping points,’ which could transform the online education industry into a mainstream one.

Despite its recent rapid growth, regulations surrounding the online education industry have been few and mostly fragmented. This will probably change as the government closely monitors the sector, increased usage and rise of new online learning enterprises, with the result being a more systematic regulatory framework.

China’s Ministry of Education committed significant resources to ensure learning is undisrupted to encourage all schools to leverage online platforms to continue teaching. This initiative has been imitated in many other countries around the world with severe COVID-19 outbreaks, especially in the degree education sector.

Besides the collaboration tools that are already in place, educational tool providers are also playing an important role in offering both the public education system and private tutoring businesses with online resources to facilitate teaching, such as live streaming platforms, video conferencing, chatting rooms and online tests.

This segment consists of not only internet giants, but also educational sector specialists. With their large customer base and online traffic advantage, the larger internet companies already enjoy half of the market share and plan to build their own educational ecosystems.

Overall, teachers and students have expressed reluctance to retaining online tools when schools reopen. This has made many EdTech companies cautious of overemphasizing the impact of the epidemic for their business and is making them evaluate the possibility of entering the offline market.

Doubt remains over whether the quarantine-fueled demand for EdTech is just a trend. Users are not guaranteed to stick, and teachers have yet to embrace the online platforms as long-term supplements to in-person classes.

Should you have questions about your road map to the Chinese education sector, complete the below inquiry form with your questions and comments. 

DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.

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