No Choice but a Sharp Turn – New Directions for China’s Training Conglomerates
Published April 2022
After months of anxious speculation, the final hammer came down in July 2021 far more ruthlessly than expected: it was “Black Monday” for China’s after-school training sector. According to Qi Chacha, China’s authoritative company registration platform, 70,000 enterprises with a scope of business that included curriculum training deregistered themselves within 150 days of the “Shuangjian” policy being issued. That is an average of 465 businesses closing their doors each day.
The “Shuangjian” (Double Reduction Policy) is supposed to reduce students’ study burden for students at both K-12 schools and the vast majority of urban students who attend after-school training. The Chinese Ministry of Education (MoE) hopes implementing this policy will allow students more free time for sports and leisure and reduce the financial burden of pricey after-school programs on families. Ultimately, the MoE seeks to create greater equality in education. This policy leaves the training providers with two options:
- Convert to not-for-profit status, accepting new rules such as price and payment terms determined by the government, no foreign capital involvement, no foreign teaching and no curriculum training for preschool children (including English language); or
- Abandon the curriculum training business by converting the entire business to provide education in areas not covered by school curricula.
In this feature, we look at the steps now being taken by three conglomerates: New Oriental, TAL and Gaotu.
a) New Oriental was forced to evolve after HKD200 billion (USD26 billion) of its income evaporated in the second half of 2021 and closing down 1,500 New Oriental training centres around China, resulting in the loss of 90% of its market value. New Oriental established 90 new subsidiaries in the last six months – one new company every second day. The 59-year-old president and founder of New Oriental YU Minhong (Michael Yu) announced that the group hopes to utilise its brand and customer base to enter live-stream E-commerce marketing agricultural food products and stationery. New Oriental also plans to provide after-school care, HR services (focusing on overseas educated talent), serving university students and teaching Chinese language abroad.
b) TAL’s market value surpassed New Oriental in 2020 to become the largest education training provider in China; it had four million students studying offline and 35 million studying online. However, TAL suffered a 17% gross revenue decrease (around USD500m) in 2021, losing USD99 million. According to an internal briefing by TAL’s co-founder and CEO ZHANG Bangxin, TAL will stick with the same demographic group, aged 2-18, but is switching to non-curriculum training such as soft skills improvement instead of exam preparation. TAL is particularly interested in providing services in science, music, arts and sport. TAL also announced in late 2021 that it would upgrade its 2B services to provide education providers with livestream platforms, research and teaching support, and AI solutions to move its training capacity to the “EduTech” area.
c) GOTO (Gaotu), founded in 2014 by CHEN Xiangdong, former CEO of New Oriental, is the youngest of the three K-12 curriculum training specialists. GOTO was described as the “most miserable performer among listed companies in 2021” – at one point, it lost 98% of its market value. Its share price has dropped from USD149 to less than two dollars. Despite an overall loss of USD480m in 2021, GOTO miraculously earned a profit of USD44 million in Q4 last year, benefitting from the adult education course it started offering six years ago. It is too early to tell whether this can provide a soft landing for its transition under the Shuangjian Policy, where GOTO plans to provide support services to domestic postgraduate exams, VET studies, public servant exams and study-abroad agency services.
The conglomerates’ shares are only worth 10% or less of what they once were; each was forced to lay off tens of thousands of employees. Netease reported that New Oriental spent RMB20 billion (USD3 billion) to compensate 60,000 dismissed employees and donated its furniture from closed classrooms to village schools. The players are eager to continue to find new directions in business despite the difficulties of late entry, whether it be in non-curriculum training, VET, student services or EduTech. One can only hope that their dedication to keeping their companies going will pay off. What awaits them is a hard race in fields with many established competitors.