China’s $100 billion education sector fights for survival after suppression

China Business and Finance Update

At the huge Beijing headquarters of Gaotu Technology, one of the world’s largest online education companies, employees are preparing for the worst, as the group’s market value has shrunk by more than 90% in just a few months.

“They have been layoffs in recent days,” an employee said this week when he left the building after being laid off. “Everyone is worried,” another said. “It’s not our turn yet, but I think we are just waiting.”

Upheaval for engineers and teachers Gaotu listed in the U.S. Prior to this, regulators last weekend comprehensively suppressed China’s US$100 billion education industry.

The company can no longer profit by selling core tutoring services for children. This model has supported explosive growth for years and attracted Billions of dollars from U.S. investors The new rules prohibit participation in the industry.

Industry leaders including New Oriental and Good Future Education are busy repositioning their business models after their main source of income, the main source of income for middle-class parents to buy tuition to help their children pass China’s competitive public examinations, was cut off. Goldman Sachs estimates that regulatory attacks will shrink the industry to a quarter of its present value.

In February, before billions of dollars Erased by their stock priceThe total market value of New Oriental, Good Future and Gaotu exceeds US$110 billion. The online tutoring company Homework and Yuanfudao each raised billions of dollars in financing last year.

Gaotu, New Oriental, Good Future Education and Zuo Yebang did not immediately respond to requests for comment.

According to the new regulations, groups teaching Chinese school courses must be registered as non-profit organizations, aiming to “relieve the burden of compulsory education students.”

Anita Chu, an analyst at CCB International, said that in the “worst case”, companies need to divest their tutoring business. For New Oriental, she estimates that this will affect its revenue 60-70% and a good future 80-90%.

Venture capital companies that have entered the industry hope that loosely worded regulations, and prohibiting initial public offerings and foreign investment in schools teaching groups, will leave room for these companies to continue to operate.

Gaotu Technology Education App on the China App Store page © Bloomberg

“Because the IPO route is banned, we are looking for other exit options including mergers and acquisitions,” said an investor in an education technology company that has raised more than $1 billion.

In Zuoyebang, Softbank supports $100 billion Vision FundEmployees said that benefits have been cut and the company’s future is uncertain. “Obviously, the company cannot go public now,” said a product developer. “We will see what is allowed in the next few weeks,” another said.

Yuanfudao, an education company backed by Yuri Milner’s investment group DST Global, is trying to readjust. It is now promoting its “hands-on” online learning application, which aims to develop children’s “scientific character” rather than delving into facts for exams.

The ability to make these plans work will depend on how the lower-level government implements Beijing’s orders. Jiangsu province near Shanghai said on Wednesday that it will limit the ability of educational apps to charge students and parents.

Jon Santangelo, a Guangzhou consultant for the Beijing Overseas Study Service Association, who works with educational technology companies to recruit foreign teachers, said the industry may shift to non-core disciplines such as art and sports.

“I don’t think this industry will disappear. Working parents need a place to take their children,” he said. “Everyone is analyzing the policy and looking for a way to reshuffle the cards.”

The owner of a tuition company in the southern city of Hangzhou said that a new business is the sale of daycare services to public schools, despite the government’s restrictions on how much it charges.

Zhang Zhen is a parent in Shanghai. She has purchased English tutoring for her second-grade children since kindergarten. She said that so far, the services she has received have not been affected. Another parent said that they believe that “as long as the test-oriented education still determines the child’s future”, the counseling service will not end.

“At least you can supervise and tax New Oriental, you can see what they are doing… If you completely separate the market and it does not disappear, you will create all of this [tutors] Freelancers,” said Julian Fisher, co-founder of Venture Education, a Beijing Education Consulting Company. He added that some parents are already setting up “mentoring cooperatives.”

In Beijing, an employee of Gaotu’s human resources department confirmed that the company is “optimizing” its workforce, but said it also plans to switch to adult education services.

“Anything that requires a certificate or an exam, from delivery workers to civil service exams, we can prepare for you,” he said, but declined to give his name.

Nian Liu and Christian Shepherd in Beijing and Wang Xueqiao in Shanghai

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