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Almost 20% of businesses in the booming education sector are in critical condition, says report

Written by Song Jingli Published on     3 mins read

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2020 has overall been a banner year for the educational sector in China.

In the first ten months of this year, a total of 47,600 educational firms have been set up in China, with almost 20% of them offering their services online, said Cui Mengling of the corporate intelligence company Tianyancha at 36Kr’s WISE New Economy conference this week.

“2020 could be the worst year in the past decade, but for the educational sector, it might be the best,” she said, quoting from her recent report. The entry barrier into the market is relatively low, starting a business in the sector doesn’t require a lot of capital, she added. Cui mentioned, however, that almost a fifth of companies in the booming sector are in a somewhat critical condition.

China currently counts around 20 major players, 100,000 medium-sized enterprises, and about 1.2 million smaller firms in the education business, which include training for pre-school kids, K12 students, and adults seeking vocational skills, according to Shi Zhiguo, founder of Xiaohe Technology. “The 20 top companies account for less than 5% of the entire market now,” he said, comparing it to the e-commerce and real estate industry where the leaders are taking a much larger share of the market.

Shi believes that some medium-sized companies could grow to become market leaders in the future and a market consolidation could change the industry aspect from a “tack shape” to a “dumbbell shape” with a few heavyweights. He added for those to thrive, offering local service, as well as the convergence of online and offline business are the key factors. Shi’s company Xiaohe offers a software to manage different campuses and another solution for teachers to prepare their coursework.

“In 2014, when Meituan and Tmall’s platform model were popular, we thought there should also be platforms in the online education sector,” recalled Luo Bin, co-founder of GSX Techedu, one of the main players offering K12 large-class after-school tutoring services online. Luo admitted that management later realized that companies in this sector cannot simply build a platform to allow teachers to offer their work online.

The GSX model

GSX started in 2017 to recruit its own teachers, to design its own courses, and to learn how to serve its clients—the parents—as well as its users—the students—pursuing a different growth path. This resource-heavy model is posing a great challenge for the corporate organization of a company which offers its service exclusively online, said the GSX co-founder, adding that the number of employees in top companies in the sector can be above 100,000. In general, a teacher offers guidance to up to 300 students, according to Luo.

“We have maintained a very steep growth curve from the first quarter in 2018 to 2020,” said Luo. He pointed out that this led peers to study the company and speculators to short GSX, suspecting that the company faked its data. “We stopped responding to such allegations as it didn’t help our business to grow, nor to serve parents and students any better,” Luo added.

Good cash flow but with risks

Luo and Yu Dachuan, founder and president of VIPThink, which offers small-class online math courses, both agree that there is healthy cash flow in the educational sector.

Yu mentioned that the “leverage” for these companies is actually the deposits from parents which pay for courses lasting for months or even years. “It is very dangerous to squander this money,” Yu warned. “If there is a black-swan event, you don’t want to be found as the one swimming naked when the wave ebbs.”

English training company Webi went bust last year, leaving thousands of students with no classes to attend but loans to pay back. “Since our company’s launch, we have always reserved enough money to repay all students’ tuition fees,” Yu said, revealing that a lot of companies have spent such funds on advertising in order to gain growth.

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