For Chinese K12 online education companies, this June has been unnervingly quiet. In usual times, the months before summer break are the busiest as companies enter a fierce battle to recruit customers. However, tightening regulation targeting the online education industry since early this year has led to layoffs and a fall in share prices of leading K12 companies. On social media, entering the online education industry in 2021 is teased as “Joining KMT in 1949” – a reference to entering the soon-to-be-defeated Kuomintang at the end of the civil war – suggesting concerns over the looming industry slump.
However, a closer examination of the crackdown suggests that there are multiple considerations behind tightened policies: the move came as a necessary step to regulate a market trapped in vicious competition, a response to negative public opinion, as well as an attempt to boost births. As a result, the future may not be as gloomy as expected.
The Chinese online education industry took off with the development of 4G and live streaming technology on mobile devices. In 2014, Internet giants including Alibaba, Baidu, and Tencent entered the market one after another. In the following five years or so, Tencent invested in more than twenty online education startups, including the unicorns-to-be VIPKid and Yuanfudao, while Baidu-backed Zuoyebang grew into one of the largest K12 online tutoring platforms in the country.
The COVID-19 pandemic and the ensuing lockdown that lasted for almost the entire first half of 2020 pushed the industry into a fast lane. Online education companies raised as much as $11.7 billion in 2020, surpassing the total amount raised in the past decade, although 80% of the capital had flowed to the top five players in the industry.
Trapped in a vicious cycle
With the influx of hot money, online education companies began a fierce race for market share, with most of the funding being spent on advertising instead of product research and development. A report by Questmobile estimates that at its peak in the summer of 2020, ad placements in the online education industry could reach $10-12 million a day. Top players fell into a cash-burning competition.
“I don’t think the current business model is sustainable. You have to spend two bucks before you can earn a dime, and once the capital flow stops, few in the industry would stand it,” Michael Yu, founder of New Oriental said on the 2020 China Entrepreneurs Forum.
Yet there seems to be no exit. Companies compete to see who raises and spends more money, only to gain a very small advantage. To some extent, Chinese online education companies fell into a similar situation in which their customers — Chinese students — are trapped: if you do not go to after-school tutoring when everyone else is, you will fall behind. If you do not raise money and spend it on marketing when everyone else is, you will lose the customer. Surges in capital flows to the sector eventually led to a backlash against the industry itself.
Tao Chenyi, a former K12 online educator, said on a podcast last week that the industry had followed a relatively healthy path in its early days. “There weren’t that many KPIs for teachers to finish, and companies were willing to invest in products to win customers.” Things changed in recent years with the massive flow of capital into the industry. “Leading companies seem not to care about what happens next after students have paid their course fee. Everyone’s focus is on how to get more market share.”
Zhang just quit her job as a course designer at Aixuexi, a relatively small online education provider with Beijing students as its major target group. She pointed out the struggle small companies experienced. “To be honest, many companies were trying hard to make awesome products. The problem is, as you sit there improving product quality, others have already captured the market.”
When asked about her opinion of the industry, Zhang noted that firms tend to market their products so as to make them appear indispensable or advantageous for children – an irresistible bait for parents.
“If there is a piece of trash on the floor, normally we would ask the kid to just pick it up so the floor gets clean. Internet education companies would tell you that the kid must develop the so-called ‘telescope mindset’, or the ability to look ahead and plan ahead, to be able to pick that trash up, instead of kicking it aside.”
Zhang thinks these fancy concepts not only make things unnecessarily complicated for pupils, but they also create anxiety among parents, luring — if not threatening — them to buy more courses.
Such sales strategies create anxieties and may bring more customers, but some less sophisticated tactics only anger customers. Sun Jing, the mother of a 7-year- old, complained to Pandaily that after purchasing a trial course with only 9.9 yuan from Zuoyebang, she received endless calls urging her to buy more. “They are the most dedicated salesmen I have ever met”, teased Sun. After about a month, she had had enough, and blocked the number.
According to Beijing Sunshine Big-data Research Institute, in 2020, negative feedback about online education counted for more than 70% of all education-related feedback.
As someone who genuinely loves teaching, but experienced huge disillusion after entering the industry, Tao Chenyi sensed the upcoming industry storm long before her peers.
“Promoting courses for higher student retention rate is fine. After all, the commercialization of education is the hard fact now. What I can’t accept is the way they do it”. She then referred to a widely criticized scandal where a sales manager encouraged a low-income parent from rural Guizhou to apply for personal loans. It is behavior like this, Tao added, that will inevitably ignite public discontent and lead to tougher regulations.
The storm came as the Chinese government finally decided to tighten the screws on an e-learning market that had gone too far with its cash-burning race and increasing customer complaints.
In January 2021, China’s Central Commission for Discipline Inspection published an article titled “Online Education at the Vortex of Capital“, pointing to the rapid influx of capital into the industry and accusing online-education companies of false advertising and fomenting anxiety through excessive ad placement. This move might also have been a response to a scandal where four top K12 companies, Yuanfudao, Zuoyebang, Gaotu, and Qingbei, were found to have hired the same actor — as a math teacher, English teacher, and university professor respectively — to promote their products. Even so, a month later, Yuanfudao still made its way to the Chinese New Year’s Gala, and the frequent appearance of online-education ads on CCTV (China Central Television) as part of the “Brand Strengthen Nation Project” (品牌强国) remained untouched.
A teacher at a leading K12 company told Pandaily that few of her colleagues had anticipated the crackdown until March 2021, when rumors about a government ban on pre-school tutoring began to circulate, leading to shocks in the stock market.
The rumor did not just come out of thin air. Early that month, in a meeting during the “two sessions”, President Xi Jinping himself referred to the online education industry as a “social problem”, and called for related departments to take action. A few representatives from the education sector also raised similar concerns.
On May 10, the State Administration for Market Supervision fined Zuoyebang and Yuanfudao $390,000 each for false advertising. Immediately afterward, the regulatory authority in Beijing’s Haidian District, an area notorious for intense competition among school children, issued a list of new rules to rectify online education companies’ advertising activities. Content that may cause anxiety was banned, including topics such as “changes in examination syllabus” and “increased difficulty of exams”; terms including “enrolment rate”, “distinguished teachers”，and “elite schools”, are banned too.
On June 1, the newly-revised Minors Protection Law came into effect. New regulations prohibited all tutoring institutions from teaching preschoolers elementary courses, confirming the previous rumor.
K12 companies reacted fast. U.S.-listed online education company Gaotu (previously known as GSX) cut its Early Head Start project for children aged 3 – 6. The company’s CEO Larry Chen said in an internal meeting that “with the new Minors Protection Law, we have just woken up to the fact that what we are doing is illegal.” Sources say Chen was optimistic about the market when the project was launched in October 2020.
More than mere market regulation
The release of a guideline known as “shuangjian”, or “dual burden reduction”, on May 22 suggests the crackdown is not going to end with mere market regulation.
“Shuangjian” aims to reduce the dual burden Chinese students face from both schools and after-school tutoring institutions. New rules forbid the latter from assigning homework to students, and all classes must end by 9 p.m.
As a matter of fact, in the past four decades since the reform and opening process began, the Chinese government issued 42 policies regarding students’ academic pressure. An average of one burden-reduction campaign each year also indicates the short-lived nature of such policies.
Referring to the local high school admission rate (a brutal 50%), middle-school student Wang Xuejie expressed her doubts about burden-reduction policies. “Even if the government closed all tutoring institutions, studyholics would find ways to study more and harder”.
Man Hui, a teacher from Nanjing, is also pessimistic about the clampdown in terms of its effectiveness. “So long as the exam-oriented system exists, there will always be demand.”
“When public opinion becomes negative as people voice their unhappiness about students’ heavy workload, the authority will come up with a policy to appease the public. But no one cares how effective the policy is”, commented Chu Zhaohui, a researcher at the National Institute of Education Sciences.
Indeed, the current clampdown on online education was launched precisely in the context of heated public discussion about the phenomenon known as “neijuan” (involution), a term Chinese young people use to describe the hyper-competitive atmosphere found almost everywhere in China, from classrooms to offices.
In a popular TV drama A Love For Dilemma, a parent describes the way he sees “neijuan”. Imagine a theatre where everyone is watching a show. Suddenly, one person stands up. Others also stand up in order to see the stage, and those sitting behind them stand up too until in the end everyone is still watching the same show, but standing. No one is willing, or dares to sit down, but everyone is exhausted.
Ironically, the TV drama was in fact sponsored by Zuoyebang, an online education company promising to help students to win in the endless race.
The “neijuan” phenomenon, coupled with the high cost of raising a child, has deterred many Chinese couples from having babies. Against the backdrop of the recent “three-child policy”, tightened regulation of after-school tutoring institutions in general reflects the authorities’ attempt to reduce the cost of having offspring. But with the college entrance exam remaining in place, and few other options available for middle-class students — not to mention those from rural areas — such an attempt is likely to be futile.
What the future holds
In retrospect, the Chinese government’s approach to online education has been supportive for the most part since the beginning of the industry.
For one, online education is taken as part of China’s modernization project. In 2010, the Ministry of Education published a ten-year plan aiming to promote the “Internet + Education” model. In 2014, State Council simplified the administrative procedure for higher education institutions to provide distance learning services. In April 2018, MOE issued yet another document in support of the online education sector.
For another, at least in its early days, online education carried the hope of bridging the rural-urban gap in educational resources, a long-standing social problem in China. In 2018, China Youth Daily reported the significant difference distance learning had made for students in rural areas. The article soon went viral on Chinese social media, and triggered public discussion about the role of the Internet in improving educational equality.
But the high hopes laid on Internet education by the state as well as the public were predicated on the premise that online education would remain a social benefit and within the scope of government regulation.
Early signs of state intervention came in July 2019, with the release of an “Opinion on the Regulation of Online Tutoring Platforms”. It states that online education companies must not employ teachers from public schools, and all employees must have teaching credentials. Although, in September 2019, another document explicitly encourages online-education companies to “expand financial channels”, and strengthen industry self-regulation.
COVID-19 pandemic accelerated the growth of the Chinese online education market; it also interrupted the slowly proceeding state regulation of an emerging industry. When the inevitable intervention came, it came fast and fiercely.
Online educators are cautious when making predictions. Zhao, a former employee of Yuanfudao, holds that state intervention might help drag the industry out of the current vicious cycle. “Those in the industry always hope for the best. But there is the possibility that the crackdown will continue, and with the increasing customer acquisition cost but reduced capital inflow, there might be little room for survival. ”
Having faith in the combination of new technology and education, Zhang believes that there is still a vast market for online education, and the industry can’t just collapse all at once. “But the policy may need to be more specific than simply banning ‘distinguished teachers’ in advertisements. We need people who understand education to provide more insightful guidance here.”