China is stepping up its crackdown on the online education industry, forcing once-popular startups to shelve plans for multi-billion-dollar initial public offerings this year.
Just a few months ago, education technology companies were one of the hottest investments in China’s post-Covid Internet industry. Last year they received more than $10 billion in risks from giants such as Alibaba Group Holdings Co., Ltd., Tencent Holdings Co., Ltd. and Softbank Group. investment. Then Beijing stepped in.
President Xi Jinping stated in March that the surge in extracurricular tutoring has put tremendous pressure on Chinese children, indicating that he is interested in curbing excessive tutoring. This has led to warnings from the state media and penalties for predatory practices that exploit the state’s obsession with academic achievements. According to people familiar with the matter, the Ministry of Education of the country now plans to set up a special department to oversee all private education platforms.
The government’s election campaign brought several potentially large IPOs to a halt. People familiar with the matter said that despite months of cooperation with banks, Tencent-backed VIPKid and Spark Think Micro have postponed their listing in the United States. One of them said that Alibaba invested in the Zuoye Gang may miss the goal of making its debut as early as this year. They said that Tencent-backed competitor Yuan Fudao-worth $15.5 billion and the most valuable of them-would not start IPO preparations in the short term, and they asked to be named when discussing internal affairs.
Beijing set its sights on tutoring startups that thrive when schools sent students home, and then launched a free marketing campaign. Regulators said that guiding millions of children into numbing virtual courses would not benefit. determine. Their worries are not only focused on reckless pricing or advertising, but also on the widening gap between the rich and the poor—those who can afford additional courses. To this end, the authorities formulated a number of restrictions this month, including restricting the after-school tuition that companies can charge, and fines Far Fukushima and Zuoye Gang on the grounds of false advertising.
Chinese media have reported more recently, from banning online courses for children 6 years of age or younger to restricting homework and compulsory permission for all teachers. Reuters reported that the new policy may include suspension of weekend classes, which, according to Bloomberg, account for more than one-third of private tuition in the country.
“This may reduce revenue for the entire industry,” Bloomberg Intelligence analyst Catherine Lim said, referring to a comprehensive weekend ban.
Yuan Fudao declined to comment, while Zuoye Gang and Huohua Siwei did not respond to requests for comment.
A VIPKid spokesperson declined to comment on any IPO plans, but said the company is closely monitoring the latest developments in the education industry.
Even before Covid 19 cancelled face-to-face classes, home tutoring was gaining popularity all over the world, especially in Asia. But it is in China that the industry has its own life. The company claims that at least 50 million students (equivalent to the entire population of Spain) can use Zuoyebang’s platform on any given day.
According to data from research firm Preqin, such a large scale is why China’s online education startups have become one of the most valuable companies in the world after attracting $10.5 billion in funding last year, surpassing the total financing of the past three years. According to data from Statista, a global market data tracking agency, China’s online learning market is expected to reach 315 billion yuan (US$49.5 billion) in 2020, almost three times the amount it was five years ago.
This also helps explain why the Xi Jinping government is taking unusual direct measures to influence the development of this industry in China. In general, his government is keen to curb the growing influence of Internet giants such as Tencent and Alibaba, which are the biggest supporters of the industry, through a series of regulatory investigations and record fines.
Officials are also worried that hundreds of millions of parents will invest their savings in online courses, while at the same time letting children take on more and more heavier workloads. As with past booms built on shaky foundations—for example, in P2P lending or unauthorized wealth management products—Beijing quickly stepped in to resolve what it considered a potential time bomb.
The consequences are swift. Since the beginning of March, GSX, New Oriental Education Technology Group and Hao Future Education Group—mainly operating physical schools but serving as a barometer of industry sentiment—have lost $55 billion. Investors from SoftBank and Sequoia to Hillhouse Capital and Tiger Global, one of the largest preachers in the past few years, have been swayed by the fierce regulatory suppression, and in many cases have been forced to withdraw from lucrative exits.
However, others are still not worried. The head education company that applied for the US IPO on May 19 plans to test investor confidence in the face of regulatory uncertainty. According to a person familiar with the matter, the e-learning upstart backed by Warburg Pincus and SoftBank has not yet withdrawn its listing plan. On May 25th, Jiayi, a Beijing company that operates online and offline tutoring centers, also applied for an IPO in Hong Kong. However, both cited increasing competition and new regulatory requirements in their risk factors.
The head did not immediately comment.
This fierce competition occurs in unexpected and sometimes ominous ways.
According to local media reports, in January this year, after the education departments of companies such as Yuanfudao, Job Gang and ByteDance hired the same actress as a teacher on their platform, there was an uproar on social media. The same woman wearing glasses presented herself as an English and math teacher in different promotional materials.
In one of the promotional videos posted online, she directly targeted the paranoia of her parents-which is exactly what the regulators oppose. The actress whipped up a 33-hour live course package for only $8, warning that there would be consequences if missed.
“It may be that the parents themselves destroyed their children,” she said.