Chinese ride-hailing company Didi offers cars for guests of the Annual Meeting of the New Champions 2017 (World Economic Forum’s Summer Davos session) on June 27, 2017, in Dalian, Liaoning Province of China.
VCG | Visual China Group | Getty Images
BEIJING — As overseas investors reel from Beijing’s regulatory crackdown, the rapid fallout in an industry like after-school tutoring can be a guide to what went wrong, and where future opportunities lie in China.
Before China cracked down on tutoring schools this summer, major investment firms like SoftBank were pouring billions of dollars into Chinese education companies, many of which were publicly traded in the U.S. or on their way to listing there.
The strategy was one of burning cash to fund exponential user growth, with hopes of profit in the future. For the strategy to work, investors aimed for a “winner takes all” approach that they’d used with other Chinese start-ups such as coffee chain Luckin Coffee and ride-hailing company Didi.
Didi essentially paid Chinese consumers to take cheap rides through its app, beating out Uber to dominate about 90% of the mainland market, and went on to raise more than $4 billion in a New York IPO on June 30.
But it soon became clear that investment strategy might no longer work. Just days after Didi’s IPO, Chinese authorities ordered app stores to remove Didi’s app and began investigations into data security — effectively shutting down the business’s growth prospects in the near term.
It came months after Beijing’s efforts to tackle alleged monopolistic practices by the country’s internet technology giants like Alibaba and Tencent.
By late July, the education sector was clearly Beijing’s next target.
Crackdown on after-school tutoring
In October 2020, online tutoring start-up Yuanfudao said it raised a total of $2.2 billion from Tencent, Hillhouse Capital, Temasek and many other investors — for a valuation of $15.5 billion.
Two months later, competitor Zuoyebang raised $1.6 billion from investors including SoftBank’s Vision Fund 1, Sequoia China, Tiger Global and Alibaba.
“They were hoping to create another oligopoly like Didi” with market pricing power, said an investor and co-founder of one of the largest U.S.-listed Chinese education companies, according to a CNBC translation of his Mandarin-language interview. He requested anonymity because of the sensitivity of the matter.
However, the education industry already had several major market players, he pointed out, and “it turned out that no business could really beat the other before the crackdown.”
Building a dominant market leader in after-school tutoring was a lucrative prospect. The opportunity was enormous given China’s population of 1.4 billion people and a culture in which parents prize their children’s education.
Early industry players like New Oriental got their start with physically leased locations and in-person classrooms. But the coronavirus pandemic in 2020 accelerated the tutoring industry’s shift online, and the cash-burning fights of China’s internet world was in full play.
Chinese after-school tutoring companies began to spend heavily last year on advertising to attract new students.
U.S.-listed Gaotu spent more than 50