What Does China’s Fine on Online Education Firms Mean for the Industry?

“Bigger firms will likely get the most attention from regulators, so their expansion plans will probably move much slower than previously expected given that this crackdown event stopped a bunch of IPO’s plans in their tracks.”

Martin McLaughlin, University Counselor and Teacher at Shanghai LiaoYuan Bilingual School

Online education is booming, and it’s no secret that China is a massive market for the industry, from established companies to up-and-coming startups. Recently, however, the Chinese government fined online education firms for misleading customers.

We spoke with an expert knowledgeable on Chinese business and education to learn what this might mean for micro and macro implications on students as well as edtech’s plans and operations within the country.

Martin McLaughlin, University Counselor and Teacher at Shanghai LiaoYuan Bilingual School

Martin McLaughlin is a university counselor and teacher at Shanghai LiaoYuan Bilingual School, a specialized bilingual school that provides IB (international baccalaureate) continuum education for K-12 students and their families in Shanghai. McLaughlin has extensive experience in education and university counseling connecting Chinese and international learning communities, backed by a deep understanding of how education markets interplay with Chinese and American cultures to impact learning opportunities for students.

McLaughlin holds master’s degrees in international studies from Johns Hopkins and Nanjing University, as well as bachelor’s degrees in economics, Chinese and international studies from the University of Wisconsin, Milwaukee. He has extensive research and work experience in East Asia with a primary emphasis on China and has spoken at conferences across the country, including the American Chamber of Commerce in Shanghai’s April 2021 Education Fair.

Educational technology is an often overlooked global phenomenon, but the numbers show it is the iceberg beneath the surface. Investors are pouring billions of dollars into the industry both in the U.S. and abroad, with the global market projected to grow at approximately 20 percent annually to $318.8 billion in 2027.

While the United States was leading global investment into education technology from 2010 through to 2015, after that, the situation changed. From 2015 to 2020, China took over as a global leader in investment to the point that in 2018, China was out-investing the U.S. 3-to-1. The total investment that year globally was around $8 billion—and China spent between $4 and $5 billion, accounting for more than half of global spending.

Over the past few years, China’s investments have been larger than those in the U.S. market. This has been reflected in the size of the individual investments that are going into companies. For example, the largest investment in a U.S. company in 2020 was $130 million into Coursera, and the largest investment in China this year was $1 billion into Yuanfudao.

But following the most recent surge in edtech investments and expansion plans, some firms have come under fire from Chinese authorities, with the course of their development now drastically altered.

Over the past year, edtech has seen a windfall in investment. China’s tech industry alone pulled in more than $10 billion of venture funding last year from tech giants including Alibaba Group Holding Ltd., Tencent Holdings Ltd., and SoftBank Group Corp. But edtech’s boom came to a sudden halt when these companies’ activities came under the scrutiny of Chinese authorities this past spring.

In May 2021, China’s market regulators announced that it fined online education startups Yuanfudao and Zuoyebang 2.5 million yuan ($388,754) each for misleading consumers. According to Chinese regulators, the edtech companies were using misleading pricing and false advertising, respectively. Both companies accepted the penalty and stated that they would be conducting self-reviews on their products moving forward.

The fines came after President Xi Jinping suggested in March that the surge in after-school tutoring via digital platforms was increasing the already immense pressure on China’s students. The personal interest of the country’s leader in the issue resulted in warnings via state-owned media towards the edtech sector and penalties designed to curb predatory practices profiting off of the nation’s high value of academic achievement.

As of July 2021, the country’s education ministry has created a new, dedicated division to oversee all private education platforms. The move arguably threatens the growth of the edtech industry in the country as companies within the sector emerge from their nascent stages of development.

And with this government campaign, several potential mega-IPOs have come to a halt. Tencent-backed VIPKid and Huohua Siwei have delayed U.S. listings despite dealings with banks over the past several months.

Meanwhile, Alibaba-invested Zuoyebang is expected to miss its goal to debut this year and Tencent-backed competitor Yuanfudao—valued at $15.5 billion— has also frozen IPO preparations and does not plan to proceed any time soon.

Chinese education and country expert, Martin McLaughlin, who serves as a university counselor and teacher at Shanghai LiaoYuan Bilingual School, shared his insight on the evolving situations.

OnlineEducation.com: How prevalent is the use of online education in China and how have you seen it used by students and families with whom you work?

McLaughlin: I would say that online education in China has become very prevalent as a result of Covid because all in-person classes were locked down and international travel became unfeasible.

A lot of students that I work with will take summer camp programs online like the SpaceX program, and Elon Musk also has an entrepreneurial one. There are various online summer camps students can take virtually from inside China just on Zoom. So I would say it has become a lot more prevalent as a result of Covid because it is still difficult to travel.

Whether it’s using company services from Yuanfudao or Zuoyebang for just daily homework, or for summer camp programs put on by prestigious universities in the United States, a lot of training centers use online education just so that students don’t have to commute there after school.

OnlineEducation.com: Why do you think China is cracking down on the edtech and online education sector now?

McLaughlin: As for why I think China is cracking down on edtech and the online education sector, I would say that because it’s gotten so big the government has kind of realized that it lacks good regulation.

There are a lot of people in the media talking about how it also fits into the Chinese government’s ideas about family planning. Because it has become so expensive to have children and educate children in China, they want to reign in this sector that might prevent people from having kids because education services are so expensive.

OnlineEducation.com: How do you think the evolving situation will impact smaller versus online education companies, as well as families and students that use their services?

McLaughlin: I think that this crackdown will have a really large impact on smaller online education companies because it might be very difficult for them to show that their teachers are qualified enough to be teaching. It will be interesting to see how China implements its teaching regulation with regard to online teaching. Many online education companies often hire teachers that are abroad, so they might not have any teaching credentials, but maybe they have some experience and then you can make money on the side. I know some people that teach for VIP Kids and the like, so for the smaller ones I think it is going to be tough.

For the larger online education companies, I think that as we get more clarity as to what these new regulations are and how they will be implemented, they will probably organize mass trainings of teachers to get a TOEFL or TEFL (Teaching of English as a Foreign Language) certificates so that they can come into the fold properly and with regard to the law.

Bigger firms will also likely get the most attention from regulators, so their expansion plans will probably move much slower than previously expected given that this crackdown event stopped a bunch of IPO’s plans in their tracks. It is also interesting to understand this issue within the broader context of increasing tech regulation affecting Alibaba, Meituan, Tencent, and so on.

Now, part of the rationale for this crackdown is to prevent the overwork of students, which is a huge issue for students in China. Students work longer days than almost anyone in the country, or in the world, really. So it might reduce the workload for students.

But it really is a double-edged sword because companies [will] exit this industry because of this crackdown, especially the smaller ones. Families might find themselves in a position where they already paid a lot of money for the next year of classes and then the small online companies will be unable to provide those classes because they are not legal. So we do not yet know how the regulators are going to deal with that issue.