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Chinese EdTech Startups With Tremendous Growth Potential

Last updated on May 24th, 2020 at 04:49 am

Chinese edtech startups accounted for 50% of all global VC investment in edtech, during the period 2016-2018 according to market research firm HolonIQ.

Chinese have traditionally placed tremendous importance on education. The gaokao, China’s notoriously tough entrance examination, is known as one of the toughest exams in the world, and gaokao scores are now being increasingly accepted in universities worldwide for admissions purposes. The sheer competition for top schools, and jobs, is driving demand for tutoring Chinese parents spare no expense so it is not surprising that education is big business in China.

However, the distribution of quality educational resources to match demand for such resources is inconsistent; urban students generally have greater access to top-notch educational resources while their rural peers often do not.
Experienced, highly qualified teachers also tend to teach in urban schools while schools in lower tier cities generally grapple with lesser-experienced teachers, and some schools suffer shortages. But the problem is not just limited to urban vs rural educational resource distribution. Even within urban cities, the distribution of English teachers for instance is inconsistent, with some cities and schools being able to hire native English teachers while others struggle.

Online education is a feasible solution to these problems. Online education offers numerous other benefits as well. Lesson schedules can be made flexible, lessons can be customized to suit the student’s learning pace and existing knowledge, artificial intelligence and other technologies can be utilized to make the learning experience more fun,
and parents can be given updates on the child’s progress, and areas that need to be improved. VIPKid for instance, a leading platform connecting Chinese children with English tutors from North America provides progress data to parents such as what the child has learnt, and what needs to be improved.

With, more and more Chinese students having access to the internet, mostly through smartphones, and some others through desktop devices such as laptops and PCs, long-sighted edtech startups have been quick to capitalize on the opportunity of using the internet to bring forth a more even and equitable distribution of online resources to match demand which has been growing along with rising disposable incomes which enable a growing number of China’s ambitious tiger parents to shell out top dollar for online after-school supplemental education resources.
China’s after-school tutoring revenue has grown from RMB 2 billion in 2011, to RMB 3.9 billion in 2017, representing a CAGR of 11.6% according to figures from research firm Frost & Sullivan. The market is expected to reach RMB 5.6 billion by 2021, representing a CAGR of about 9% during 2017-2021.

This has helped spawn a vibrant edtech market, which has emerged to be one of the biggest in the world. Of the 14 leading global edtech unicorns, 8 are from China (five from the United States, and one from India).

Bar chart showing leading edtech unicorns worldwide in 2020, by valuation, (in US$ billions). The startups are ByJu’s (from India) valued at US$ 5.8 billion, VIPKid (from China) valued at US$ 4.5 billion, Yuanfudao (from China) valued at US$ 3 billion, Duolingo (from the United States) valued at US$ 1.5 billion, Udacity (from United States) valued at US$ 1.1 billion, and iTutorGroup (from China), Guild Education (from United States), HuJiang (from China), Huike (from China), 17zuoye (from China), Zhangmen (from China), Knowbox (from China), Age of Learning (from United States), and Coursera (from United States) valued at US$ 1 billion each.

Online education accounts for just about 10% of China’s overall education market according to Deloitte. However, as online learning gains acceptance, this share is expected to climb in the years ahead. The number of online education users in China is expected to climb to 263 million by 2022, up from 42 million in 2012 according to research from iResearch.

Column chart and line graph showing the number of online education users in China, 2012-2022 (estimate), (in millions of people). The number of online education users in China is expected to reach 263.7 million people in 2022, up from 42 million in 2012. Data from iResearch.

Here are some notable startups poised to grow along with China’s online learning opportunity.

VIPKid

Backed by tech giant Tencent (HKG:0700), VIPKid connects Chinese students (aged 4-15) and English teachers from around the world (predominantly North America). VIPKid has been a notable beneficiary of China’s demand for English language training for children; in 2018 the market was valued at RMB 21.3 billion (approximately US$ 3 billion), registering a 104% growth year-on-year. The number of users jumped a whopping 168% from 5.7 million in 2017 to US$ 15.3 million in 2018 according to a 2019 report from data monitoring firm Trustdata.

Founded in 2013, and launched in 2014, the startup was one of the first to capitalize on the shortage of native English speakers in China at the time. While taking advantage of what seems to be very strategic timing, VIPKid also established a strong brand for itself by building a reputation for maintaining high quality standards with all tutors undergoing a rigorous assessment before being accepted as VIPKid teachers (the startup reportedly receives about 20,000-30,000 teacher applications per month, and 90% of them are rejected).

This focus on quality, as well as its first-mover advantage, among other reasons helped VIPKid’s meteoric rise to unicorn status in less than five years. VIPKid boasts 700,000 students, 100,000 teachers, a student retention rate of 95%, and according to data in a 2018 Chinese Online Youth English Education white paper published by the Chinese Academy of Sciences, VIPKid has been noted as a market leader with a market share of 67.2%. According to a report by Trustdata, VIPKid held a market share of 68.4%, followed by 51Talk (11.6%), Da Da English (7.8%), and vipJr (5.7%) as of 2018.

Pie chart showing leading online English education platforms in China by market share (%) in 2018. VIPKid led the market with a market share of 68.4%, followed by 51Talk (11.6%), DaDa English (7.8%), vipJr (5.7%) and others (6.5%) according to figures from market research firm Trustdata.

English language training (ELT) is still very much in demand by parents of school-aged children in China; the ELT market is expected to grow from US$ 41.51 billion in 2017 to US$ US$ 75 billion in 2022, representing a CAGR of 12.56% according to Statista with much of that being driven by the online English education segment as noted in a research report by research firm Global Information Inc.

While demand is growing, the supply side on the other hand is not expected to keep pace. China has tightened regulations on teachers’ backgrounds and qualifications which may have the effect of smaller language schools struggling to recruit qualified foreign teachers.

This suggests plenty of runway left for VIPKid’s growth story. However, competition is increasing, particularly with online learning giants such as TAL Education and New Oriental Education rolling out their own online English education courses. Furthermore, VIPKid’s one-on-one classes are generally not as profitable as group classes so VIPKid, which has so far yet to turn a profit, may find itself struggling with greater losses as it fights for market share.

However, VIPKid has made efforts to differentiate itself, for instance all of VIPKid’s teachers are from North America ; by comparison, 69% of 51talk’s teachers are from Southeast Asia. Additionally, VIPKid is working to increase the efficacy of its teaching materials (such as syntax, vocabulary, accents etc) by utilizing its vast trove of data from the more than 2 million English classes it offers monthly. VIPKid has also taken its global model a step further by aiming to bring quality native speaking Chinese teachers to students overseas where demand for Chinese language education is growing in leaps and bounds. VIPKid has already gained some ground as an education platform in North America so the startup may find it easier to enroll overseas students compared to most of its rivals who have a very limited presence beyond China’s boundaries.

Makeblock

STEM education and robotics startup Makeblock develops hardware, software, and robotics hardware targeted at schools, educational institutions, hobbyists, children, and families. With a userbase of more than 10 million, Makeblock are sold in more than 140 countries, and its products are used in more than 25,000 schools around the world. The robotics education market is expected to witness tremendous growth in the coming years driven in part by schools’ continuing emphasis on STEM (Science, Technology, Engineering, and Mathematics) education. Market research firm HolonIQ foresees the global robotics education market to nearly triple to US$ 3.1 billion by 2025, from US$ 1.3 billion in 2019.

The market is riding on the back of a large and fast-growing robotics market in the Middle Kindgom; Chinese companies installed 154,000 industrial robots in 2018, more than double that of Japan’s 55,200 and more than triple that of the United States’s 40,400 according to the International Federation of Robotics. This strong performance helped China maintain its position as the world’s largest industrial robot maker for the sixth consecutive year, accounting for 36% of global robot installations. By value, China’s robot installations grew 21% year-on-year to reach US$ 5.4 billion in 2018. China’s robot density (the number of robots per 10,000 persons used in the manufacturing industry) has also been on an uptrend, growing from 68 in 2016, 97 in 2017, and 140 in 2018.

Bar chart showing the number of installed industrial robots per 10,000 employees in the manufacturing industry in 2016, by leading countries. At 631 industrial robot installations per 10,000 manufacturing sector employees, the Republic of Korea had the highest robot density in the world, followed by Singapore 488, Germany 309, Japan 303, Sweden 223, Denmark 211, United States 189, Italy 185, Belgium 184, Chinese Taipei 177, Spain 160, Netherlands 153, Canada 145, Austria 144, Finland 138, Slovenia 137, Slovakia 135, France 132, Switzerland 128, Czech Republic 101, Australia 83, United Kingdom 71, China 68, Portugal 58, Hungary 57. Data from the International Federation of Robotics.
Bar chart showing the number of installed industrial robots per 10,000 employees in the manufacturing industry, 2017. At 710 installed industrial robots per 10,000 manufacturing sector employees, the Republic of Korea had the highest robot density in the world in 2017, followed by Singapore (658), Germany (322), Japan (308), Sweden (240), Denmark (230), United States (200), Chinese Taipei (197), Belgium (192), Italy (190), Netherlands (172), Austria (167), Canada (161), Spain (157), Slovakia (151), Slovenia (144), Finland (139), France (137), Switzerland (129), Czech Republic (119), China (97). Data from the International Federation of Robotics.
Bar chart showing the number of installed industrial robots per 10,000 employees in the manufacturing industry, 2018. At 831 installed industrial robots per 10,000 manufacturing sector employees, Singapore had the highest robot density in the world in 2017, followed by the Republic of Korea (774), Germany (338), Japan (327), Sweden (247), Denmark (240), Chinese Taipei (221), United States (217), Italy (200). Belgium (188), Netherlands (182), Austria (175), Slovenia (174), Canada (172), Spain (168), Slovakia (165), France (154), Switzerland (146), China (140), Finland (140),Czech Republic (135). Data from the International Federation of Robotics.

Since 2017, China’s robot density has exceeded the world average.

Column chart showing China’s robot density (number of industrial robots per 10,000 employees in the manufacturing sector) vs world average. In 2016,2017, and 2018, China’s robot density was 68, 97 and 140, respectively while the world average was 74, 85, and 99 respectively. Data from the International Federation of Robotics.

China’s robot density is expected to continue its upward march in the years to come. With China’s robotics industry growing at a rapid clip, the need for skilled robotics professionals and talent will no doubt increase in the future, suggesting bright prospects for Makeblock.