The magical year of 2020 brought upheaval across almost all industries in China.
The education market, in particular, has witnessed dramatic changes with respect to its competitive landscape. With gigantic financing, the edtech giants consolidated their positions through digital marketing across all major platforms. However, many small edtech companies and the majority of local learning centres failed to keep up with the growth rate.
Industry Leaders: A Feast of Money
Revealed by the public numbers, the four market leaders in K12 tutoring, namely TAL Education (NYSE: TAL), Yuanfudao, Genshuixue (NYSE: GSX) Zuoyebang, were busy preparing for the online tutoring battle in the past year. In the last four business days of 2020, TAL raised 3.3 billion USD from Silver Lake Capital, and Zuoyebang closed its E+ round with over 1.6 billion USD. Though Yuanfudao "only" announced a 300 million USD financing by the end of the year, the 8-year-old edtech company collectively raised over 3.5 billion USD in the past 12 months.
China's primary education market received over 10 billion USD in 2020, overseeing a 150% increase from the previous year and taking up 63% of the global education venture capital funding. The industry players also showed strong performance in the stock market. While the stock prices of the long-standing leaders, TAL education and New Oriental, increased by 40% and 50%, respectively. Those of the newcomers, Youdao (NYSE: DAO) and the controversial Genshuixue (NYSE: GSX), were up by 90% and 300%.
The reasons for all the attention that the edtech industry has drawn are threefold.
1. The pandemic catalyzes the demand for online education solutions.
While the investors started eyeing on the sector as early as 2013-2014, as a group of future unicorn edtech companies, such as Yuanfudao and VIPKID, emerged in the market, it was not until 2020 that the entire society acknowledged the value of online education.
During the first half of the year, K12 students isolated at home had to rely on virtual learning platforms to continue their schooling. When teachers in public schools fumbled for a 'glitchless' online lecture, parents and students realized that online education companies' courses were more efficient if knowledge delivery became the only thing that matters during school time.
As with the rest of the world, adult learning in China also boomed in the time of extreme uncertainty during Covid-19. Across all subjects, exam preparation (CFA, CPA, Jurisdiction Exams) and financial knowledge (personal financing, stock investment, etc.) are the leaders on the growth list.
2. The online education business model evolves to have a higher profit margin.
The big-class and small-class tutoring models generate the success of New Oriental (NYSE: EDU) and TAL Education (NYSE: TAL). Online education, however, always suffered from scepticism on its profitability, considering the ever-growing marketing cost. Yet, in 2019 and 2020, the online dual-teacher classroom and interactive AI-class had matured to a point where both practitioners and investors started to see the monetization prospect.
An online dual-teacher classroom consists of one main teacher on the stage, TAs off the stage, and as many as 3000+ students at the same time. The teacher, usually super charismatic, is in charge of imparting the knowledge and building trust between the company and the students. The TAs, mostly fresh graduates from colleges, are in charge of answering basic questions, monitoring students' learning process, and most importantly, persuading parents to purchase the long-term course of the next level in WeChat groups.
The AI-class is a gamified cartoon lesson powered by artificial intelligence without requiring teachers' live presence. The interactive setups in the cartoon allow students to communicate with the screen directly. The AI can also answer students' questions verbally and provide prompt feedback, while the TAs monitor students' progress in the WeChat groups. We see an interesting blend of game, cartoon, lessons, and even some companionship in this new creature. It was reported that the trailblazer of AI-class, Zebra AI (Yuanfudao), generated over 3 billion USD revenue in 2020.
Both models have been proved profitable, and the gross profit margin can be as high as 60%. Most online K12 giants and some front runners of other subjects like drawing and coding pivoted to these two product types.
3. The competition for growth requires an enormous amount of funding.
In early February, when families received notification that campuses wouldn't be open in the foreseeable future, worried parents started looking for online education resources. The online K12 leaders such as Xue'ersi(TAL), Yuanfudao, Zuoyebang, Genshuixue(GSX), and Youdao (DAO) unanimously brought out free live-streamed and pre-recorded courses and distributed them across almost all Internet platforms such as Bytedance(Toutiao, Douyin, Watermelon Video), Kuaishou, Bilibili, etc.
The "free traffic" from the early months encouraged these key players to invest heavily on the Internet and offline channels. In the second half of 2020, online education companies' commercials can be found on social media, video and short video platforms, reality shows, online communities, TV channels, bus stops, subway stations, and even in the elevators. Most notably, Yuanfudao became the sponsor of the 2022 Beijing Winter Olympics.
Using free or cheap trial lessons to attract target customers. Convert them to regular paid courses. These two steps have always been the go-to strategy in the online education market. However, the cost of advertising those short-term lessons skyrocketed when it became the only drive for further growth. Companies sought help from advertisement agents regarding commercial clip-making and target customer optimization. Simultaneously, tech giants like Bytedance and Tencent sent those commercials to the users via their intricate algorithms. It was reported that in the last few months of 2020, a company had to spend over 2000 RMB (300 USD) marketing fee to acquire one K12 user for a 9.9 RMB (1.5USD) trial lesson. According to both companies latest quarterly reports, TAL education spent 421 million USD, while Genshuixue spent 2.05 billion RMB. In 2020, both companies reported consecutive net-loss quarters due to the escalated battle for growth.
