China: Education on the move
By Josep M Mas, Partner APAC at EDT&Partners.
In the past couple of months, some information has emerged about an impending change of policy concerning non-compulsory education and young learners in China.
On March 3rd, The Fly quoted Bloomberg and commented on New Oriental Education & Technology Group shares falling “following a report that some local governments in China are carrying out inspections of after-school tutoring institutions and have suspended offline classes until further notice”. This news affected other online learning companies, such as TAL. Despite downgrading, the shares of both companies have held with minor losses.
On March 26th, investment bank Jeffries reported that China may ban the use of online education for students below seven years of age “and may also ban online education companies from advertising in Chinese state-owned media” (see the source here).
Little is known about the extent of these potential changes. What is well known to all operators is that educational authorities are pursuing enforcement of existing regulations for online tutoring organisations. For example, government inspections have been occurring to ensure all teachers have government-required qualifications irrespective of their location (in China or overseas).
Having said this, a change in policy may be in the making if we take into consideration other news released in recent weeks. We refer, in particular, to an article in The Global Times (April 1st) about the MoE discontinuing “the Main Suite Exams (MSE), a worldwide recognised English qualification designed by Cambridge Assessment English”. This news adds to the stance defended by some lawmakers that English should be removed as a core subject from the Chinese curriculum (see here for the latest on this reoccurring saga).
It is too early to say how new policy and other changes will affect the public and private education segments. As market players in China understand, new government policies and pronouncements have an unpredictable impact until provincial and district-level authorities interpret and attempt enforcement in line with the perceived urgency of the Ministry of Education and other central government policy makers. What seems clear at this stage is that the new policies will affect the entire non-compulsory education sector (whether offline or online).
We understand that some of these changes are welcomed by families especially as they choose from a flooded market of sometimes dubious educational offerings. The MoE is adamant about reducing the pressure on students (for example, secondary schools are no longer allowed to recruit students based on competition results and certificates). The government also wants to ensure that private institutions comply with policies around providing quality education (the drive for adequately qualified teachers has been going on for some time). Another macro policy goal is an attempt to level the playing field between the top middle and high schools and the rest (the recently implemented admissions for both private and public schools based on a lottery rather than one’s home location or student ability).
Whether there is also an interest in regulating the emergence of new market entrants — and the massive investment that is going into mature startups and listed companies — remains to be seen. Across many education sub-sectors, customer acquisition costs are reaching thousands of yuan with some companies spending 2–3x their revenue on advertising. Competition among online tutoring centres is fierce, as we know, and it may well lead to a situation where equity capital to fuel advertising and market share grabs runs dry and only the fittest survive via mergers and acquisitions. This impression is reinforced by recent news released by South China Morning Post about the authorities fining some operators for “false or misleading pricing methods”. Again, this is not the first time that we see companies penalised in this respect.
Leaving aside the need to regulate the space, It is EDT’s impression that the Government is primarily interested in consolidating quality in private education offerings. Families spend a considerable amount of their disposable income on supplementing the education of their children. It is only natural that the authorities concentrate on safeguarding standards and favouring compliance across the different operators. In this context, solid programmes, sound technology and optimal instruction will continue to make a difference for all the agents in the education value chain.
At the end of the day, we may also be talking about changes that affect how Chinese society perceives education. The administrations of other Confucian countries in the region have tried to alleviate the pressure exerted by some parents on children. In countries like Korea or Singapore, change is slowly happening. It remains to be seen how operators and families will adapt to a similar push in China.