China's EdTech Space: Opportunities And Strategies

A Fresh Start

After the Chinese government's 'Double Reduction' policy implemented last year which aimed to reduce the burden on both school children (who were often overworked with after-school tutoring lessons), and parents (who spent exorbitant amounts on their children's after-school education), K-12 private tutoring players such as New Oriental, TAL Education, and Gaoto Techedu were forced to restructure their businesses to comply with China's new regulations. Although it resulted in substantial financial losses as well as market value declines (a number of listed companies saw their stock prices whipsawed), the industry has largely left these challenges behind and players have suscessfully transformed their business to capitalize on new opportunities.

Opportunities

Vocational Training

Although the Chinese government imposed restrictions on the country's K-12 after-school tutoring industry, the government has a favorable stance towards professional development and is ramping up efforts to develop the country's vocational education system in an effort to produce much needed talent, particularly in high-tech industries and the industrial sector to help propel the country's economic transformation as well as boost per capita incomes which still lag developed markets (at USD 12,500 in 2021, China's per capita income is about a fifth that of America's, and about a third of neighboring Japan).

With a massive workforce of around 900 million people, China already has the world's biggest vocational education system, and is expecting its vocational system to be ranked among the most competitive globally by 2035.

Moreover, reports seem to suggest a growing mismatch between jobs and available skills in China. According to China's Ministry of Education, about 10.76 million college students are expected to graduate in 2022, the largest group of graduates in China's history, and 1.76 million more than last year. Official data show that the number of Chinese graduates looking for jobs is expected to continue rising by more than 1.1 million annually. Not only does this mismatch present a bottleneck to China's economic growth, it could also give rise to social problems such as rising unemployment.

These factors suggest a fundamental growth opportunity for China's professional and vocational education system. Data from China's Ministry of Education and consultancy firm Sullivan Consulting projects China's vocational training market to grow to CNY 1.2 trillion by 2024, from CNY 1.06 trillion in 2022, representing a CAGR of around 6%.

Enrichment Education

Apart from alleviating burdens placed on school children and their parents, China's 'Double Reduction' policy was also aimed at overhauling their education system, from one based on books and scores, to one that offered a "rounded" education combining academic development with qualitative development through extra-curricular activities. As a result, demand has increased for non-academic subjects such as music, sports, nature education, soft skills (such as public speaking) and games (such as chess), opening a business opportunity.

Overseas Study Consulting Services

Studying overseas is very popular among Chinese students and parents, and prospects are bright as rising incomes enables a greater proportion of parents to afford overseas study programs for their children. Although geopolitcal tensions are impacting Chinese student numbers in countries such as the U.S. (which saw its first decline in the number of Chinese students for the first time in a decade according to report released by a Chinese think tank in September 2022) and Australia, other countries such as France and Germany in Europe and Japan and Singapore in Asia are seeing strong interest from Chinese students.

Internationalization Of Domestic Education

China is becoming increasingly popular as a destination for international students (international students from 195 countries and regions studied in China during academic year 2020-2021 with 76% of them pursuing academic degrees, 35% increase compared to a decade earlier in 2012).

To capitalize on this growing demand, China has been looking at better integrating their education system with the world. Towards this end, workshops, institutes, and partnerships are being forged worldwide, and domestic private education providers are expanding their schools overseas.

Education Hardware

Hardware related to enhancing students' education is becoming increasingly popular in China, and companies have already launched a slew of gadgets such as learning lamps, dictionary pens, and reading devices. The opportunity here however lies not just in the hardware market itself, but in creating an entire ecosystem combining hardware with software/online offerings which could help companies differentiate themselves through enhanced learning experiences and thereby increase user stickiness.

Strategies

New Oriental Education

One of China's leading K-12 education players, Hong Kong Stock Exchange-listed New Oriental Education (HKG:9901) has managed to restructure their business and expects to return to the black in terms of operating profit in FY 2023. The restructured business currently focuses on the following four operating business segments:

(i) Educational services and test preparation services

(ii) Online education and other services

(iii) Overseas study consulting services

(iv) Educational materials and distribution

Going forward, the company's expansion strategy focuses on scaling the above business segments. Educational services and test preparation services, New Oriental's biggest segment by revenues which covers non-academic educational programs including enrichment programs, language courses, and test preparation courses is poised to benefit from growing demand for test preparation and language exams as more students seek entrance in universities overseas.

Online education and other services which covers its online learning subsidiary Koolearn Technology's online education platform as well as Koolearn's eCommerce platform "Oriental Selection" (东方甄选), has so far seen very strong traction despite being a latecomer in China's extremely competitive livestream eCommerce space. The platform which focuses on selling agricultural products through livestream shows primarily on short video platforms such as Douyin (TikTok's Chinese version) relied on a solid differentiation strategy to stand out;

• Leveraging on their existing human capital resources, Oriental Selection's livestream hosts feature Koolearn's highly knowledgeable teachers rather than celebrities and KOLs (as is typical for a number of China's livestream eCommerce shows). Teachers had the appeal of being more 'relatable' than celebrities helping the platform gather a considerable audience.

• Livestream shows 'content based' meaning they were rich with content and information (such as nutrition content, historical and cultural significance) and were bilingual (often conducted in Chinese and English). This content-based video strategy was more entertaining and educative compared to China's more common livestream eCommerce shows which were often 'sales-based' helping their shows notch considerably higher viewer metrics; for instance average livestream videos on Douyin have an average view duration of around 40 seconds, considerably shorter than Oriental Selection whose average viewer duration is as long as two and a half minutes.

Aiming to scale their new eCommerce business, the company has already made investments in supply chain management systems and has begun offering private label products as well.

Following on the channel's success, New Oriental set up another livestream eCommerce channel - 'New Oriental Live Room' (新东方直播间) - which would follow a similar knowledge-based livestream eCommerce strategy, but would focus on educational products such as books, education-related hardware, software, and stationery.

TAL Education

Another leading K-12 private tutoring player, TAL Education, listed on the New York Stock Exchange (NYSE:TAL), has been restructuring their business towards non-academic areas (such as enrichment education, and overseas education) as well as relatively unrelated areas such as eCommerce (which is currently focused on selling educational products such as stationery and textbooks).

Their business currently focuses on three main segments:

(i) Learning services

(ii) Learning content solutions

(iii) Learning technology solutions

The company's long term growth ambitions will focus on scaling the above business segments, based on combining technology with appealing educational content, a strategy aptly described as looking to "empower lifelong growth with love and technology". Towards this end, the company recently launched a slew of immersive learning products based on the metaverse including "Dinosaur World", and "Undersea Paradise" etc.

TAL's eCommerce strategy is similar to that of New Oriental in that livestream anchors are comprised of teachers.