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Who will become the winner in the online education field?

Aug 29, 2018 by A. Alfaro
Who will become the winner in the online education field?

It’s a busy time for the major players in the online education industry in China.

With the sector showing signs of reviving from the hard times it faced in 2015, companies are now busy trying to gain market supremacy. In the first half of 2018, the online education companies completed 182 financing rounds that raised a total amount of USD 2.2 billion, almost the same figure raised over the entire year in 2017, a Chinese e-commerce Research Institute report revealed.

With funds raining back on them, players are trying to make the most of the good days. Currently, Hujiang, the first Chinese online education company, is preparing to go public in Hong Kong. Its preparation has not been easy for its founder, Fu Cairui. The company which first considered an IPO back in 2012, had to abort the idea due to a strategic adjustment and waited for the internet wave to kick in.

If the IPO succeeds with its reattempted listing this year, it will become the first online education company to be listed at the Hong Kong stock market.

In June, VIPKID, the online English learning platform, raised USD 500 million from such big names as Tencent, Sequoia Capital and YF Capital. The financing round catapulted VIPKID's valuation to USD 2 billion, the highest among its peers.

For the Chinese online education industry, 2014 was a milestone year. On an average, close to three new companies hit the market every day.

Yu Minhong, founder of New Oriental, one of the leading providers of private educational services in China suddenly began to feel the heat as the new entrants began to find ways to topple it. Yu Minhong realized that the game had changed forever.

However, four years down the line, many of those new challengers have disappeared, and many of those still around are struggling. But the competition hasn’t eased for the likes of Minhong.

VIPKID founder Mi Wenjuan is one of the most ambitious contenders. She had predicted that VIPKID's revenue in 2017 would surpass CNY 5 billion (USD 734 million), a claim many consider unrealistic for an education company.

Traditional rivals like New Oriental and TAL Education Group reaped USD 1.8 billion and USD 1 billion worth of revenue that year. Interestingly, VIPKID was founded only four years ago while New Oriental and TAL have been around for 24 and 14 years respectively. Although VIPKID has kept its actual revenue report a secret, popular perception in the country is of the opinion that she may have achieved the feat.

Mi Wenjuan was a nobody in 2014. The market was dominated by three people from Jiangsu province: Yu Minhong, Fu Cairui and Zhang Bangxin, founder of TAL.

Yu Minhong was born in the 60's and founded New Oriental in 1993, initially assisting Chinese students to study abroad. In 2001, Zhang Bangxin graduated from Sichuan University and moved to Beijing, where he became friends with Yu Minhong. During the next years, Zhang disrupted the market of extracurricular classes and training with his company, TAL Education Group. In 2010, it got listed in New York.

Fu Cairui grew up in a county close to Zhang Bangxin's. In 2001, Fu established a foreign language study forum, which later evolved into Hujiang Network, an important online education platform.

When Mi Wenjuan's VIPKID entered the market in 2013, Zhang and Fu felt threatened. The industry was changing and everyone was unsure about its potentials. Reacting quickly, Zhang transformed his company into a modern internet-based organization.

The year 2015 was a difficult year for all entrepreneurs. For the edutech sector, the capital was scarce and many of their O2O projects were limping. Companies established their offline tutoring services, but once the teachers met in person with the students, none needed the application anymore.

One of the few companies that still conserve this offline class model is Changing Edu. Its founder, Liu Changke, has a 20-year experience in the education field. His company received investment from TAL Education Group four times.

Those companies which survived 2015 were hoping for a new spring in the industry. On May 2017, Yuan Fudao, another online education company, announced that it had completed a USD 120 million financing round. This announcement was considered as the rebirth of the industry. This was the largest financing round ever conducted in this field and Yuan Fudao emerged as one of the unicorns.

Three months later, VIPKID announced that it had secured USD 200 million in its fourth financing round. During the event, big investors such as Shen Nanpeng, Zhang Ying or Xu Xiaoping. Since then, financing rounds have not stopped in the industry and many have reached USD 100 million.

The industry’s resurrection can be linked to technological improvement. Better hardware and bandwidth and mobile payments have made the online class more enjoyable and convenient and users are becoming more used to it.

Six years ago, most parents thought online classes were unthinkable but since then a big shift has taken place. According to the China Online Education Industry Report 2017, 66% of parents were willing to accept online education for their kids in 2017, while only 10% of parents completely rejected it.

Even the slowing Chinese economy can be an advantage for the industry. According to Yu Hong, executive at GGV Capital: [pullquote]“As the economic situation gets worse, parents are more willing to invest in education and healthcare.”[/pullquote]

BAT (Baidu, Alibaba and Tencent) have also been paying attention to online education. Tencent has acquired Ke QQ, Fudao QQ and other online classes or tutoring services. Baidu has launched Zuoyebang, a homework assistance platform and Alibaba has Taobao Education.

Thanks to vast capital resources, they have penetrated the market through investment. Both Yuan Fudao and VIPKID have received investment from Tencent. Hujiang is a Baidu investee while Alibaba has invested in iTutorGroup. Jinritoutiao, one of the tech “small giants”, has also invested in 17Zuoye’s fourth investment round and in Gogokid, a direct competitor of VIPKID.

So far, BAT companies have limited their cooperation in technological aspects. For example, VIPKID signed a strategic partnership with Tencent in cloud services, artificial intelligence and Internet education.

New Oriental also received investment from Tencent. Both parties have been exploring the possibility of cooperation, but they have not yet reached an agreement. New Oriental's CEO Sun Chang hopes Tencent can help New Oriental in audiovisual aspects and cloud services.

Despite the new optimism and IPO plans, the industry still has not solved the problem of profitability. 51Talk, a US-listed company, and VIPKID are confident they can find a profitable model with the one-to-one and one-to-many approaches. As for the offline models, they still have to find a way to make teachers and students more dependant on the applications.

51Talk had to suffer USD 78 million in losses in 2017. In 2019, the online education market is expected to reach USD 39 billion. In 2016, Zhang Bangxin had predicted that TAL Education Group's revenue would reach USD 14 billion by 2026.

It remains to be seen who emerges the winner in this game.

A. Alfaro

A. Alfaro is a Beijing-based freelance reporter. He focuses on China's politics, culture and society. He can be reached at varofaro@gmail.com. 

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