The casualties of China’s education crackdown – TechCrunch

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Once the darlings of Wall Street and venture capital as recently as the beginning of this year, China’s edtech firms are now wondering if they will be able to remain solvent long enough to see the beginning of the next.

In a series of sweeping regulations, the central government has taken a wrecking ball to an education and test-prep industry worth billions, the collective value of both the schedules and wallets of the country’s urban, middle-class families.

The most impactful policies were introduced in July, and they include a ban on any for-profit tutoring services focused on the country’s core public school curriculum, oriented around the make-or-break high school and university entrance exams. Limits were also set on the times during which students could attend classes, restricting class schedules to no later than 9pm on weekdays, and allowing only extracurricular courses on weekends.

The regulations have been catastrophic for leading Chinese edtech companies. The stock of New Oriental Education and Technology Group (NYSE: EDU) is down 86% on the year, while that of rival TAL Education Group (NYSE: TAL) has seen over 93% of its value wiped out since hitting its all-time peak as recently as February. As much as 50 to 80% of such firms’ revenue came from tutoring — activities that have now been banned. Their executives are faced with the unpleasant task of turning around billion-dollar Titanics before they sink.

Though July’s ban on for-profit tutoring has rightly received much of the attention, there has been a consistent deluge of policies meant to restructure what it means to receive an education in the world’s most populous nation. English education, once highly prioritized, is now taking a back seat in the state curriculum, and a ban on hiring online foreign teachers has left some of the country’s most popular edtech firms wondering how they will survive. In case parents and tutors try to circumvent the rules by working with one another directly, regulators have also outlawed private tutoring online, or at unregistered venues such as hotels, cafes, or private homes.

What we are seeing now is widespread scrambling for all involved: parents re-drafting their plans for their children’s educational futures, educators moving underground, and edtech entrepreneurs trying desperately to overhaul their firms’ business models before burning through their limited time and capital. The economic forces of supply and demand around education have changed little. The question now is how regulation is redirecting those forces.

Of the seemingly infinite number of idiomatic couplets in the Chinese language, there are few that more consistently apply to discussions of political economy than “上有政策,下有对策 (shàng yǒu zhèng cè , xià yǒu duì cè),” loosely translated as “the rulers make the rules, while their subjects find loopholes.” As recent regulations have turned the country’s education industry on its head, the question so many are asking now is how and where the loopholes can be found.

The competitive crisis for the children of China

Though crackdowns, repression, and regulatory overhauls are an ongoing theme throughout today’s China, much of the recent education policy can be understood through the lens of the country’s demographic crisis. In May, the release of 2020’s census data revealed a birth rate slowdown more severe than even many pessimists anticipated, prompting what appears to be a greater sense of urgency from officials to remove burdens on families and encourage a baby boom.

In an intensely competitive system in which not all children can succeed, and yet are expected to support their parents and often two sets of grandparents into old age, many families have grown to feel trapped, obligated to invest ever-increasing time and money just so their children can keep pace. As a Beijing-based mother surnamed Yi explained, “I am one of millions of parents who has spent so much money for extra training for my child, in the hope that it will help them be outstanding. But the result is that if everyone takes this training, it is not different than before, except that the family has greater financial burden, and the child suffers from greater stress … thus, I support the government’s decision to close these schools.”

China’s demographic crunch also presents the country’s leaders with a potential shortage in vocational and technical skilled labor, threatening the long-term viability of the world’s dominant manufacturing superpower. As education policymakers seek to ease pressure on parents and children fighting to get one of the precious few spots at the country’s elite universities, they also aim to increase the appeal of vocational training and careers through greater emphasis and reform of that oft-overlooked part of the education system.

Picking up the pieces after edtech’s collapse

With U.S.-listed edtech giants seeing their value evaporate overnight, the U.S. financial media has understandably focused its questions on the industry’s future. Yet the fates of such firms and their remaining employees still looks rosier than those of others.

For smaller players unable to access a liquidity lifeline to keep themselves afloat, bankruptcy has been the only option. That’s the case with China’s subsidiary of Wall Street English, the high-end language-training centers which were once mainstays of Beijing and Shanghai’s upscale shopping malls. Rocked by consecutive shockwaves from the COVID-19 outbreak and travel restrictions that have complicated the recruitment and retention of native English speakers, these new regulations have scared off both customers as well as investors who could provide rescue capital. In the aftermath, the company abruptly closed its doors.

Such a sudden closing can be particularly hard on employees, especially if bankruptcy is involved. In China’s white-collar industries, layoffs can actually be tantamount to a small windfall for an exiting employee due to the country’s labor laws. In most situations, an employee will receive a severance package equal to one month’s salary, plus a month’s salary for each year that the employee worked for the company. It is not uncommon for companies to offer even more generous packages in an attempt to shed staff expeditiously and with minimal conflict.

Yet when companies face sudden demises, both employees and customers alike are often left holding the bag. For one woman who worked in sales for Wall Street English for over a decade explained, “when the ship is sinking slowly, there are many lifeboats available. But sometimes the boat sinks too quickly to even get in a lifeboat.” In her case, she is hoping her tenure at the company may place her towards the front of the line for a modest payout as the company’s bankruptcy proceedings moves forward. However, she says she will consider herself lucky to even receive the back pay she is owed, as one U.S.-listed edtech firm is rumored to be paying out severance packages worth only 2,000RMB (or roughly $300).

For Western-based educators who had been teaching virtually, confusion seems to be a dominant theme. One British teacher (we’ll call him “Ed”) who had worked for Beijing-based online education startup Whales English, the end came in the form of a roughly three-week whirlwind of anxiety. One of a number of firms who hired freelance overseas teachers to deliver remote English classes to children in China, July’s regulations meant its was no longer legally compliant.

According to Ed’s account of events, the company was continuing to expand, advertise, and hire until July 28, when management announced that they would be suspending all hiring of new teachers. By August 7, teachers were informed that Whales English would be cancelling all new courses, yet those which had already begun and been paid for would be allowed to finish. Teachers were also encouraged to free up as much of their schedules as possible, as parents scrambled to use their pre-paid classes while they still could.

Around this time, Ed says, rumors began to circulate that the company had laid off as much as two thirds of its workforce at its Beijing headquarters, and parents and teachers began to organize contingency plans for circumventing Whales’ online platform, against the company’s wishes. On August 18, Ed and the rest of the teaching staff were informed that all classes were to be immediately suspended, in response to what Ed suspects were updated orders from authorities.

Though frustrated with the company’s inconsistent communication, Ed counts his blessings. He reports that he has received full and timely payment for his work, and has already moved on, having accepted a teaching position at a school in Japan.

In the 14,000-plus member Facebook group for teachers of VIPKid, one of China’s most well-known edtech companies, stories like Ed’s are commonplace. Yet for many teachers, the flexibility and regularity offered by Chinese edtech platforms are not easily replaced. As the pandemic has placed additional childcare pressure on parents, many with education and teaching backgrounds have used these platforms to make ends meet while being able to remain at home with their children and limit their exposure to the virus. Equivalent work may prove difficult to find.

That doesn’t mean teachers aren’t trying. Loopholes and inconsistent enforcement are creating a grey market for tutoring and other teaching services, not dissimilar to that of the illegal sex trade or undocumented migrant labor. Demand hasn’t changed, but regulations have forced large corporate entities to avoid direct involvement with such business. Due to this, the trade will move underground and thus workers (in this case, teachers) have little option other than to freelance without protection of the law.

Parents, the state, and the Chinese Dream

For parents, responses to the education crackdown have been driven along lines of wealth and class. Reports have already begun to circulate of in-home “nannies” with teaching skills and qualifications, paid as much as 30,000RMB (roughly $4,600) per month, so as to be officially compliant with regulations while still receiving similar after-school tutoring as before. As always, new loopholes are just waiting to be found.

For many of China’s wealthiest and most well-connected families, the new regulations change little of their plans for their children’s education. For several parents spoken to for this article, circumventing the Chinese education system has long been a primary objective. For some, this has been achievable through acceptance into one of China’s many international schools, whose international baccalaureate (IB) curriculum prepares students for attending university overseas while also avoiding the country’s grueling entrance exams.

For others, success and privilege have afforded them the opportunity to send their children to school abroad. In some cases, this has meant moving themselves and their wealth out as well. “For more and more parents, studying overseas seems to be the best, or only option,” explained a retired executive surnamed Gao, who now lives in the U.S., where her daughter also studies.

From the wealthiest elite to the middle class, there appears to be a shared theme: for parents who came of age during China’s historic economic miracle, both social and economic advancement were not just seen as possible, but expected in order to simply keep pace with one’s peers. And if advancement is expected, stagnation is failure. If stagnation is failure, moving backward is disastrous.

As economic growth slows, Chinese president Xi Jinping calls for “common prosperity,” and vocational and industrial training are emphasized over higher education, some parents are finding that their dreams are at odds with the country’s new strategy. “Despite the state’s broader goal, would it be okay with me if my daughter couldn’t receive higher education? I think the answer is no,” a Shanghai mother surnamed Li shared bluntly. “The mindset change will take time. Maybe it’s a bit selfish, but it’s true. I’m very supportive of education equality, but only if my kid is one of the lucky ones.”

For all the talk of money, what many parents worry about their children missing out on is something less tangible: “suzhi (素质),” a term loosely translated as “human quality,” encompassing ethics, ambition, education, and social class. For a Beijing teacher surnamed Guo, it is this element that he worries about for his daughter. “I know that society needs vocational workers, and that they can even make more money than those who attend university. But even if she makes less money, I will still want her to attend a university.” To him, the education his child receives and the future salary she will earn are secondary in importance to the social circles she develops. “[Vocational school students] have a reputation for being lazy, for smoking and drinking, and misbehaving. The friends she’ll make in school are friends she’ll have her whole life. I want her to have high-quality friends,” he said.

As China’s regulators overhaul not just education but many of the country’s most central institutions in an attempt to address its most daunting challenges, many are finding that the expectations which they once held must now radically change. Yet amidst all the uncertainty, what is unlikely to change is the drive and ingenuity to advance one’s self, family, and ambitions. After all, the authorities will always have their rules, and the people will always find their loopholes.

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