Limits of China’s online education boom start to show

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Kelly Kang, a Beijing mother, learned some lessons when she signed up her seven-year-old to online English tuition with a teacher in Canada.

Her daughter did not like the teaching and suffered from the lack of classroom pressure to learn. Ms Kang, meanwhile, found herself pestered by “annoying” salespeople, keen for her to recommend the service. In the end, she stopped the classes after a year.

Over the past decade, online learning has become big business in China, with 200m users and $36.5bn in sales last year, according to the China Internet Network Information Center, a government agency.

Companies such as VIPKID, the biggest player in the field, and DaDa hire English teachers from the US and elsewhere and connect them over the internet to Chinese kids.

They have raised hundreds of millions of dollars from blue-chip investors such as Tencent, Sequoia and Tiger Global on the promise of selling education to the millions of Chinese ” Tiger Moms” like Ms Kang who want to give their kids a head start over their peers.

But the limits of the model are beginning to show. With no barriers to entry, a number of competitors including Gogokid, backed by tech giant ByteDance, and Hujiang Education & Technology, have flooded into the market, forcing older companies to play a familiar game in Chinese tech – burning cash to win market share with only sketchy paths to profitability.

Meanwhile, existing customers are feeling harassed by aggressive sales tactics while investors are reassessing how big they think the market really is.

The biggest flaw in the business model is the high cost of customer acquisition, according to former executives at education technology companies and investors.

According to one former DaDa executive, the average spend by a family at one of the big firms is Rmb10,000 ($1,400), one year after sign-up. But the companies typically spend between Rmb8,000 and Rmb15,000 on each family on trial classes, referral bonuses for parents and teachers and commission for salespeople.

The cost of acquiring customers is outweighing the revenues generated, leaving companies struggling to make profits. “Their ability to scale customers over time has already dropped significantly,” said Toby Mather, co-founder and chief executive of Lingumi, who researched the sector in China before setting up his own company.

One major problem is that edtech services, according to one tech investor in Beijing, “are really expensive for most average Chinese”. This is a particularly pressing concern in the less affluent parts of the country that are now being targeted by the companies in a bid to broaden the market.

In Shijiazhuang, Wendiah Yang’s son studied with VIPKID for a year when he was 10 years old. She paid about Rmb170 for a 25-minute class, putting down an upfront payment of Rmb21,760 for 128 classes – an amount roughly equivalent to 10 months’ disposable income for an average person in her city. “It’s quite expensive for children in Shijiazhuang, though we could afford that,” said Ms Yang.

But like other users, she found she was corralled by aggressive salesmen into “pushing their ads”, and promoting VIPKID to her friends. “[Edtech company salesmen] put more pressure on existing customers to refer new customers, but if you offer big incentives – as is common in China – the chance of getting bad quality leads [clients who are unlikely to become customers] increases a lot,” said Mr Mather.

Ms Kang was also persuaded by the salespeople to spread a promotional QR code on the WeChat messaging app, and was offered 10 free lessons for every new client who signed up via her code.

“Pushy sales has always been an issue – all the companies have the same strategy,” said Wei Ding, a former teacher recruiter for DaDa.

Other efforts to improve affordability include tie-ups with finance groups such as Ant Financial to offer loans to potential customers and small group classes – although perhaps unsurprisingly, given the young age of some of the children, “retention rates on small group classes are less good”, said Mr Mather.

Even as companies rush to sign up new students, regulations are squeezing the supply of teachers. At the end of last year, a rule was introduced that required teachers, many of whom are stay-at-home mothers or recent graduates, to hold a TEFL (Teaching English as a Foreign Language) or TESOL (Teachers of English to Speakers of Other Languages) qualification, making their recruitment more difficult.

VIPKID has a partnership with TESOL but declined to say whether or not it pays for the certificates.

Some industry professionals speculated that other changes could come further down the line, including capping upfront payments – a move that could cut the working capital available to the firms.

Meanwhile given tensions between the US and China, some also flagged a potential risk that Washington may complain at US teachers’ data being stored in China. VIPKID said its privacy policy, updated in January, has always been publicly available.

“It’s a massive risk if lawmakers decide to focus on it,” said one industry professional, noting that US concerns over data killed Ant Financial’s acquisition of MoneyGram and brought about the retroactive unwinding of Chinese gaming and tech company Kunlun’s acquisition of gay dating app Grindr.

But a more immediate issue is profitability – and the former DaDa executive, for one, thinks she has found the answer: back in a bricks-and-mortar classroom, where she is championing a blended online and offline model that uses web classes to supplement traditional learning in schools.

“I think there will be one or two very big companies in this industry in . . . the next three years,” she said.

Additional reporting by Xueqiao Wang in Shanghai