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[Report] The meteoric rise of China’s education industry: long-term growth or bubble? | Periscope Volume 2

Written by KrASIA Periscope Published on 

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The pandemic has undeniably brought about multifold growth for China’s education industry. Can this growth be sustained or is it a bubble waiting to burst?

This is a preview of Periscope — KrASIA’s new weekly report, offering you a probe into China’s industries. We delve into a different space each week. If you would like to read the report in full, click here to read the report in full. 

2020 has undeniably been a year of tumult, but one sector has shined bright through and through. Stocks of China’s online education companies, such as Tomorrow Advancing Life Education Group (NYSE: TAL) and NetEase Youdao (NYSE: DAO), have risen at breakneck speed.

The question now is: can the education industry’s growth be sustained or is it a bubble waiting to burst?

Fast and furious

As much as COVID-19 was a disastrous event for most of the economy, the online education sector thrived precisely because it forced much of society to familiarize themselves with new tools which were not priority to adopt pre-pandemic.

Thanks to formidable efforts by product developers in the field, educators no longer regard online education outlets as substandard substitutes to classroom learning. Rather they are now seen as unique experiences with specific tools that are not only functional, but enhances their students’ learning experience. According to Forbes, the worldwide e-learning market is expected to be worth worth USD 325 billion by 2025, representing a Compound Annual Growth Rate (CAGR) of 7% from a decade ago.

Will breakeven point be near?

Despite this rosy picture of growth in revenue and customer acquisition, companies are still losing money when it comes to the bottom line. What’s more, losses are increasing. This is largely because companies have been dedicating large amount of resources to operational expansion in the face of a sudden surge in traffic.

For instance, NetEase Youdao’s net losses in Q2 this year have more than doubled year-on-year, growing from RMB 88 million (USD 13.1 million) to RMB 258 million (USD 38.4 million) in losses.  Over the same period, its sales and marketing expenses also increased 264% year-on-year to RMB 445.2 million (USD 66.2 million) from RMB 122.2 million (USD 18.1 million).

A growing market inclined to larger players

There is no doubt that the online education market has grown and even matured over the course of COVID-19. What’s more, this momentum is expected to continue. According to the Chinese Academy of Sciences (CAS), the value of the domestic online education industry is forecasted to exceed RMB 540 billion (USD 80.4 billion) in 2022. Within this figure, the K-12 education market — comprising kindergarten to 12th grade — is expected to exceed RMB 150 billion (USD 22.3 billion) in value, by 2022.

According to a recent report by Minsheng Securities, it is optimistic about the maturation of the industry brought about by increasing competition for consumer demand. On the supply side, COVID-19 has resulted in a culling of market players due to intense competition; only top players with sufficient capital reserves and a commitment to customer conversion have been able to sustain growth. On the demand side, the rigorous academic requirements of China’s notorious university entrance exams suggests that demand for K-12 education will only grow. Companies with a good footing in the industry and the ability to integrate both online and offline channels stand to win big.

What’s next?

Still, be warned, as this is not a market to be toyed with. Although COVID-19 has been a huge impetus for growth, health authorities are are gaining control over the pandemic and the start of the new school term marks the end of summer holidays, suggesting that user traffic may ebb. This will pose new challenges to the online education industry, which had benefitted from the earlier disruptions to regular school programming in 2020.

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