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Ed tech: China’s runaway growth story

Ed tech in China is one of the most talked-about global investment opportunities, but customer motivation and future growth outlook remain little understood. Anip Sharma, Kaushik Mohan and Mary Abdo of L.E.K. Consulting’s global education practice share the results of a new study that shines a light on the sector’s workings and future direction

The rapid growth of the Chinese ed tech sector is one of the most exciting stories in global education investment. With $4.5 billion invested in the sector in 2018 alone, analysts predict that it will out-invest the US ed tech sector by a ratio of 3:1 this year. Just 10 companies have absorbed half of this funding and, at a recent education conference in Beijing, the chief executives of China’s ed tech unicorns were greeted like rock stars.

Yet breathless coverage can obscure market realities, and strong investment is not always a sign of viable business models. L.E.K. Consulting’s global education practice sought to go beyond the hype to understand the realities of Chinese ed tech, particularly B2C-driven supplementary education. 

We know investors take them seriously, but are China’s ed tech companies generating value for consumers, and what implications does this have for the sustainability of their growth and the prevalent business models? We investigate these questions, leveraging the results of a new study, which includes a representative survey of more than 2,000 Chinese parents across income groups, children’s age and city tier. The analysis reveals how technology in Chinese supplementary education is no longer a question of adoption, but one of monetization. 

The horse has bolted
Accessing education online is now mainstream in China. The country has 250 million children, with an internet penetration level of almost 60%. L.E.K. estimates that these children collectively use nearly 280 million hours of screen time daily and, of this, almost 45% – or 120 million hours a day – is educational. 

We identify four main consumer segments for supplementary ed tech:
  1. The “untapped”: 75% of the total population, or 180 million children, still do not access formal, organized after-school tutoring. They are largely from lower-income households, are younger or live in lower-tier cities. While they may access tutoring, this is largely informal.
  2. Bricks and mortar traditionalists: 20% of the school-going population, or 55 million children, access traditional centre-based setups in more affluent towns and cities. These children also tend to be in higher grades.
  3. “Do-it-alls”: Three to 5 million consumers now access both online and offline supplementary education. There is a greater concentration of these consumers in higher-tier cities and higher-income households.
  4. “Logged on” learners: Four to 5 million consumers of supplementary education now access online-only supplementary education. This includes two distinctive groups: sophisticated urban learners (typically in tier 1 and 2 cities) who have migrated to purely online delivery modes from being educational “do-it-alls”, and first-time samplers in tier 3 and 4 cities, who may be moving directly from informal or unorganized tutoring to online.

Both online education consumers and non-consumers are enthusiastic about ed tech, with 60% of all consumers believing that it has a strong positive impact on learning outcomes. Among consumers of online education, this figure rises to about 70% (see Figure 1). 

Spend is growing
Moreover, the value proposition for online education is distinctive. More than 85% of relevant consumers are willing to expand their wallet to spend more online (typically 20-25% more), rather than cut offline spending (see Figure 2). 

This finding is all the more compelling when one looks to comparisons abroad. The size of the US K-12 content market has remained static, at $8 billion since 2007, with spending shifting to digital. While there are significantly more products on offer, unlike Chinese supplementary providers, US K-12 content players have not managed to increase spend by going digital. 

Chinese consumer willingness to pay for online in addition to offline indicates that there is a compelling value proposition perceived for each. The fear of missing out may be driving parents to supplement children’s education to get an edge. This is likely exacerbated by weaker English language provision or demand for more specialist training, alongside the ongoing pressures of high-stakes exams.

Different segments, different drivers
Our analysis also reveals that consumer choice in Chinese ed tech varies by subsegment, with different drivers for consumers of online English language training (ELT) versus online tutoring.
  • ELT: There are 4-5 million online ELT students in China. They typically access one-to-one or small-group sessions online with Western native speakers. The most commonly cited reason for choosing online ELT is better quality of teachers, followed by interactivity and fun, and then individualized attention. These responses reflect the fact that the online ELT offer can connect students with teachers who are typically superior to those in their local bricks and mortar centres. This is especially true in lower-tier cities. Parents are choosing online ELT because its value proposition is distinctive from the offline experience.
  • Tutoring: There are 8-10 million online tutoring students in China. When asked about their primary motivation for choosing online, parents note that time and convenience is the most important factor, with cost the second most important, followed by individualized attention. Parents want their children to have extra study support, especially in advance of the intensive national higher education entrance exam or gaokao, but going to tutoring centres adds hours to days that are already long and, for less affluent consumers, the cost of extra tutoring adds up. Online allows parents to support their children while avoiding some of the cost and inconvenience downsides of bricks and mortar centres. 

There is headroom for growth
Our study also reveals four key opportunities for ed tech players to target consumers and achieve growth:
  1. Go mainstream – We estimate that there is a $10-15 billion opportunity in moving beyond early adopters to mainstream consumers. Our research finds that among bricks and mortar traditionalists (offline-only consumers), 75% are not aware of any online offerings, but of these, roughly 60% have a highly positive impression of the educational impact of online provision. The current online products could therefore attract these consumers by building awareness. 
  2. Onboard them early – Sixty percent of parents who are in the untapped segment (not consuming online or offline) cite the child’s young age as the key reason. Expanding product offerings – potentially into “edutainment”, while positioning online products as effective and delivered safely at home – could bring more of these consumers to online, with a potential for $1 billion to $3 billion in revenue.
  3. Upsell the online cohort – $1 billion in growth could be achieved by increasing the spend of logged on learners (online-only consumers) and shifting more of the spending of do-it-alls (online and offline consumers) to ed tech products from centre-based ones.
  4. Expand offerings to broader enrichment – Finally, new market opportunities exist in adjacencies in other subject areas including music, coding and other enrichment activities. Successful providers could expand their portfolio of offerings to tap into unmet demand for these services.
An innovation imperative
Many companies have ridden the recent surge in demand: For example, ELT providers have grown since 2006, when there were only two players of note in the market (see Figure 3). There are now more than 10 times that number, with nearly 30 active companies. 

While some aspects of market evolution remain uncertain, what is clear is that the Chinese ed tech sector is poised for further growth. There are implications for both offline and online providers:

Centre-based businesses must reinvent or perish
Offline supplementary education is still a viable business, but for offline-only providers, a credible online offering is an imperative. This can be a build-your-own option or (more likely) a B2B solution. At best, without an online strategy, offline providers are leaving revenue on the table and risking disruption by competitors. At worst, these providers may become obsolete – with regional ELT players most at risk of being replaced by fully online provision.

Online providers must get there first with better products
For online providers, there are two key imperatives:
  • First, they need to expand products, services and engagement models to tap into key customer segments – in particular, younger users 
  • Second, the vast majority of consumers are still offline, and the opportunity for online providers is to use their head start to beat offline providers in tapping into these consumer groups 
What remains to be seen is whether those that have the customers (i.e., offline providers) will lose them to those that have the products (i.e., online providers). 

In most online businesses, the key battle is to drive adoption. In Chinese ed tech, adoption may have been a relatively low hurdle, with rapid capital deployment enabling promotional marketing, coupled with a consumer base already comfortable in a “digital first,” hyper-connected ecosystem.

The longer-term challenge for China’s ed tech companies will be to deliver strong, long-term customer engagement that outlives the current influx of capital. Education is not like other internet businesses in terms of product or delivery engine; it requires consistent quality at scale and at a reasonable price point, with strong student retention and results. Where platforms leverage foreign teachers and tutors, operational complexity will be further complicated by different working and management styles. 

The rapid growth of ed tech has rightly generated tremendous optimism. Our research shows that consumers in China also have a strong positive impression of ed tech’s impact. It is vitally important for the sector to learn to manage operational complexity, build the right products and sustain consumer trust in order to ultimately outlast the current hype.

Anip Sharma is partner, Kaushik Mohan is principal and Mary Abdo is senior manager in L.E.K.’s global education practice. The research team also included Shravya Aggarwal, Yash Bajaj, Abhishek Bansal and Justin Koh, with input from Sudeep Laad. 

L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. The L.E.K. global education practice is a specialist international team of 60 consultants and four partners and principals who have completed more than 650 education sector engagements across more than 90 countries, serving CXOs and boards of some of the world’s largest education businesses. Our experts bring insights on education businesses, investment opportunities, market dynamics and impact across segments from K-12 to ed tech. The global education practice leaders have advised on the majority of global education sector deals over $200 million since 2010. For feedback or comment on The Horse Has Bolted, please contact Anip Sharma at

Posted on: 19/12/2018

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