U.S.-Asia Business
China’s Edtech Market Soars in Stay At Home Era
One lasting impact of the COVID-19 pandemic is a surge in China’s online education market.
With schools closed in China for several months and only now starting to reopen, the classroom has become virtual, and so-called edtech is booming.
The private education sector has grown rapidly in recent years, after China reformed its education market to permit international and private schools to operate as a supplement to the government-controlled compulsory education system for first grade through ninth grade students.
Fueled by the shelter-at-home policies and cities under quarantine, China’s online education businesses have emerged as one of the growth areas in an economy that has been hit hard by the novel coronavirus outbreak. Market research firm iResearch estimates online education to reach $54 billion this year, up from $37 billion last year.
Online tutoring set to blast off
With schools closed but students still expected to study hard to excel, the tutoring market is booming. Market research firm Frost & Sullivan pegs the tutoring segment at $64 billion currently and projects it will increase to $70 billion next year. About 10 percent of that amount is online now (about $4.4 billion), but the firm forecasts online tutoring will reach $53 billion in three years.
One of the drivers of this growth is the need to pass the rigorous college entrance exam known as gaokao that the majority of Chinese students take. So is parental pressure for children to achieve and get into the best universities. Most parents in major Chinese cities are spending at least $7,000 annually on their kid’s education, according to a study by edtech media platform in China, JMDedu.
“The education market in China will see a very big change and will be adopted in a much bigger way,” says Shanghai-based venture capitalist Jeff Chi, managing director of Vickers Venture Partners.
China’s edtech market sector has been capturing steady flows of venture capital despite an overall downturn in Chinese VC investments to $49 billion in 2019.
China has led education VC investment growth over the past five years, accounting for half of all spending in this sector. According to a report by global education technology source HolonIQ, Chinese venture investment in edtech outpaces spending in the U.S. by a long shot. China invested approximately $3.5 billion through the first half of 2019. That compares with $1.7 billion invested in the U.S. in all of 2019, reports education news organization EdSurge.
The education market in China will see a very big change and will be adopted in a much bigger way.
China counts eight edtech unicorns
Moreover, of the 14 edtech unicorns (privately held companies worth at least $1 billion) that existed as of early 2020, eight are from China, HolonIQ statistics show. There’s even an education incubator for startups in Beijing’s hi-tech zone looking to scale up.
Another sign of the sector’s robustness is how many Chinese education companies have gone public in recent years. Since 2017, as many as 25 Chinese education companies have become publicly traded stocks. Others such as Beijing-based New Oriental Education & Technology Group, a large provider of mainly offline classes, went public years before in 2006, well before the edtech boom began.
A good example of this new era is China Online Education, commonly known as 51Talk, which went public on the New York Stock Exchange in 2016. CFO Min Xu said a large opportunity exists in China because the market penetration is low, in the single digits. In the wake of the COVID-19 pandemic, the Beijing company’s first quarter 2020 revenues were poised to increase 40 percent over the comparable period a year ago. He also said he expects the business to turn a profit for the first time, partly because of volume—about 140,000 lessons daily. “So far, our system has survived the traffic," said Xu.
Fierce competition in China edtech
Competition in China’s edtech sector is fierce, with numerous players. Marketing costs and heavy discounting to attract and retain customers eat into profitability, and only the strongest companies can survive. Differentiation or specialization is key to achieving long-lasting growth and profitability.
51Talk focuses on K-12 grades with one-on-one English-language lessons for Chinese students in smaller cities outside Shanghai and Beijing and relies on Filipino teachers.
The more premium-priced Chinese startup VIPKid also specializes in teaching Chinese kids English, but with teachers in North America. The business, formally launched in 2014 by entrepreneur Cindy Mi in Beijing, has attracted more than 600,000 paying customers but continues to need additional financing to chase the opportunity. VIPKid has raised mega-financing of more than $1.1 billion from leading venture capital firms that include Sinovation Ventures and Sequoia Capital China, as well as Chinese tech giant Tencent.
Another well-funded Chinese edtech startup is Yuanfudao, which started off as a test-prep tool but pivoted into larger classes with multiple tutors, usually led by a primary instructor. Yuanfudao recently raised a massive $1 billion in financing from Tencent, Hillhouse Capital, IDG Capital and Boyu Capital. The round brought the Beijing-based company’s total funding to $1.8 billion, at a valuation of $7.8 billion.
Liulishuo, or LAIX, provides a different model. Founded by Yi Wang, a Princeton PhD in computer science and former Google product manager, his innovative edtech company, which went public on the NYSE in 2018, reported $147 million in net revenues for 2019, a 61 percent increase from the prior year. LAIX is disrupting the online education sector by helping Chinese people learn English through AI-powered, interactive, customized courses accessed on mobile phones. The app, which has cumulative registered users of 161.6 million, has cleverly integrated games and social sharing to make for a fun learning experience.
This is, after all, China, where new business models with staying power continue to be innovated in education and many other fields.