China's tutoring industry finding new ways to survive after government crackdown

(By Caixin journalists Wang Bowen, Fan Qiaojia, Huang Huizhao, Wang Yiran and Denise Jia)

At a 24-hour coffee shop in Beijing's Haidian district, private tutor Ming Tian was explaining a math question to students. A few blocks away in a 20-storey building at the E-wing Center housing scores of after-school tutoring facilities, classrooms and offices were empty.

Huang Zhengxin, father of a daughter in middle school and a son in elementary school, was anxiously looking for alternative summer tutoring channels for his children. Meanwhile, Sun Ke, a veteran employee of an online education company, just lost his job.

So it goes as China's sweeping overhaul of the giant tutoring industry creates millions of personal dramas across the country. Instructors are being thrown out of work in droves and Chinese parents now face new worries about securing their children's futures. The upheaval grew out of a government clampdown unveiled in July that bans all tutoring related to the core school syllabus during vacations and weekends for students in elementary and middle school while barring private tutoring companies from going public or raising foreign capital.

When the State Council, China's cabinet, issued the new rules last month, the tutoring industry was just like "a file on a computer desktop, selected and deleted," said Wang Lin, teaching head of a major online education company.

More than $100 billion was wiped off the market value of three US-traded Chinese education giants -TAL Education Group, New Oriental Education & Technology Group Inc. and Gaotu Techedu Inc. - compared with the stocks' highs earlier this year.

A week after the new rules were released, Zhangmen Education Inc. let go more than 1,000 employees and terminated the leases on two of its office buildings. Zhangmen just floated shares in New York in June. TikTok owner ByteDance Ltd. is laying off thousands of employees working on preschool education and edtech products, people close to the company told Caixin.

After the initial shock - shutting down classes, laying off employees and closing offices - education companies now face a common question: What do they do next to survive?

The answers will vary from company to company, but as they pick up the pieces, China's tutoring enterprises are finding a range of opportunities and promising business structures.

After investors' initial panic, the regulatory crackdown will bring transformation opportunities for the industry in the long term, said Ge Wenwei, partner of Duojing Capital, an education industry-focused research and investment company.

There is plenty of room in the sector for new products, said Wang Jinjing, a managing partner in charge of education and training at Oliver Wyman. With the rapid development of society, the abilities required for members of the next generation to enter the workforce may differ greatly from today, while the speed of knowledge updating in schools is often slow, she said.

"What capabilities will our next generation need to compete on the global stage 20 years from now?" Wang asked. "Parents will really love to pay for high-quality education products designed for the future, and the growth potential is very good."

In addition, local education commissions have a need for education informatisation, or use of new communications technologies to advance development. Compared with individual schools, education commissions usually have larger purchase orders and deeper pockets, Wang said.

The new rules require all private companies that teach compulsory school subjects to become non-profit organisations. Beijing plans to require companies to complete the transition to non-profit status by the end of this year, Caixin learned from staff at the Beijing Municipal Education Commission. Some municipal education authorities in Shaanxi province ordered companies to complete the change by October.

The Beijing education authority suggested a change in focus to sectors that aren't affected by the new regulations, including high school tutoring, vocational education, all-round education and hybrid business models, Caixin learned.

A hybrid business model under the new policy would mean providing tutoring in school subjects from 6:30 pm to 9 pm on school days while providing all-round education on weekends and holidays, such as training in sports, music and arts. This model could help companies maximise student retention and reduce the risk of massive refunds. Businesses would have to spin off their subject tutoring operations and become non-profit organisations, while activities focusing on teaching non-school subjects could continue as assets of the companies as long as they are managed separately in accordance with the laws.

Under the latest interpretation by the Ministry of Education, school subject tutoring refers to all off-campus classes on ethics, Chinese, history, geography, math, foreign languages, physics, chemistry and biology.

For publicly traded companies, adopting a hybrid business model could win them more time to expand into non-school subject training and retain their status as listed companies, but it is inevitable that their size will shrink sharply. For major tutoring companies, such as New Oriental, TAL and Gaotu, the school-subject tutoring business can account for 50% to 80% of total revenue.

Some US-traded Chinese education companies are prepared for delisting and privatisation. OneSmart International Education Group Ltd. said on 4 August that it received a letter from the New York Stock Exchange saying it is below compliance criteria as its stock price was less than US$1 over 30 consecutive days. The company has six months to bring up its share price to avoid delisting. More than a dozen US-listed Chinese education stocks are trading close to US$1.

Among major players, only Gaotu has made clear plans to switch to vocational education. The company is shutting 10 of 13 offline tutoring centres across the country and idling more than 10,000 people, about a third of its staff. New Oriental, Tal, Tencent-backed homework tutoring app Yuanfudao and Alibaba-backed Baidu edtech spinoff Zuoyebang have signalled business scope expansions or launched new products, but they haven't made major shifts.

"Nobody has a clear idea how to transform," an executive at an online education enterprise said. "We are trying all-round education, after-school care, collaboration with public schools and vocational education, but their sizes are all far from becoming the core business."

Without tutoring in compulsory school subjects, scheduled classes across the tutoring industry will decline 61%, according to a report by China International Capital Corp. Revenues of New Oriental will drop 43% and of TAL, 67%, the report estimated.

Tutoring companies can still offer classes during school days, but all classes have to end by 9 pm "If students finish their homework at 8:30 pm, it leaves them not that much time to take after-school classes," said an executive at a regional after-school training company. "We used to schedule eight classes on weekends, now on weekdays we can schedule only five." He estimated the company's revenue would fall by 60%.

For online education companies, the major compliance change will be switching from live online classes to recorded courses. Zuoyebang and TAL started to take pre-emptive steps in June to switch to recorded courses. But the Beijing education commission warned companies that in the future, recorded courses could be defined as educational publications, subject to licensing requirements.

Industry giants with large physical campus assets, such as TAL and New Oriental, are also exploring the after-school care business. The Ministry of Education encouraged public primary and middle schools in urban areas to provide two-hour after-school programs in line with parents' working hours as well as summer programs. Such programs, run by schoolteachers, should help students with homework and conduct activities such as reading, sports and interest groups, but they can't teach school syllabus content.

Parents have complained that such programs run by schools can't meet their educational needs. A primary schooler's parent said no one in his child's class has enrolled in the school's summer program. "Kids have nothing to do there," the parent said. "They can't learn anything."

The head of a public school in Beijing told Caixin that the school programs charge only a minimal fee and provide just basic care. "Kids are summoned to classrooms to sit for a whole day," he said. "Kids are not happy. Teachers are not happy. And parents are not satisfied either."

While the change of policy brings chaos to the industry, it also presents new opportunities. The crackdown on after-school tutoring aims to bring the focus of education back to school campuses. Some companies are turning their focus to providing complementary services to schools. The government has also given a green light for public schools to purchase such after-class services from third parties using government subsidies.

Beijing Lanxum Technology Co. Ltd., which focuses on Chinese language teaching, recently said it is expanding services into drama and arts appreciation classes provided as part of on-campus after-class programs.

Shenzhen Dianmao Technology Co. Ltd. has been providing coding courses, teaching materials and teacher training for schools since 2019. The company works with more than 21,000 schools in China. But compared with its core business directly facing consumers, the profit margin on school services is relatively thin. Dianmao said it uses school entry as a way to popularise coding education and nurture the market rather than as a focus on profitability.

Li Tianchi, founder and CEO of Dianmao, said he expects more competitors will enter the school service market under the new policy. Dianmao aims to increase the share of school services in its total revenue, but this will require an accurate understanding of schools' needs and the policy environment, Li said.

Another service that schools need is in the building of information-based platforms. For example, Singapore's Temasek-backed Yiqizuoye Corp. since 2011 has been providing free services to public primary and middle schools, including a platform to help teachers prepare their courses, assign homework and review students. As the service is free, the company's revenue relies on its K-12 online tutoring courses.

At the request of the interviewees, the names of parents, teachers, employees and schoolmasters are all aliases.

This article was first published by Caixin Global as "Cover Story: What's Next for China's After-School Tutoring Industry?". Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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