Coronavirus May Lift Education Firms’ Stocks — But Strategic Loss Remains a Long-term Challenge for Online Players
Coronavirus crisis has put the spotlight on China’s online education market as remote learning seems to be the most efficient way to avoid large offline school gatherings for containing the spread of the epidemic. Benefiting from users’ surging demand and policy support, online education has been favored by the capitals which is reflected by the share prices.
According to National Business Daily’s previous news, apart from Koolearn’s (HK: 01797) rise on Jan 28th, the first day of trading in Hong Kong after the Chinese new year, leading China-based education companies have all outperformed at the close that TAL Education Group and New Oriental witnessed an increase of 5.33% and 5.85% respectively, and NetEase Youdao just slightly decreased 0.06% to $16.13 per share.
Despite the seemingly prosperous capital market in the education industry, “how to survive under coronavirus’ impact” needs to be considered by all the players involved. In this piece, JMDedu aims to analyze the industry trends in China that EdTech firms will be embracing during or even a long term after the Covid-19 outbreak.
Coronavirus prompts education companies to offer free online services
On Jan 24th, NetEase Youdao announced to offer free high-quality online courses to primary and secondary students in Wuhan. As the first education company that helps alleviate the frontline shortages amid the outbreak, Youdao has gradually provided free online resources for users across the whole country. Subsequently, leading companies like TAL and New Oriental, as well as a large number of education institutions including educational SaaS (Software as a Service) providers covering all the tracks: K-12, language training, vocational education and educational informatization have started to provide students with free access to their products.
In the online business battlefield at the initial stage, most of the players regard providing long-term free products or courses at a very low price as the main approach to acquire more consumers, aiming to build up a large traffic pool then seek to monetize. However, due to the attribute of education business which emphasizes on the quality of service, the online market is not likely to scale and directly adopt internet business strategies. For the online education companies who already provided free services to combat coronavirus outbreak, the winning strategy in the second round of competition entails a different approach beyond simply free offerings.
Firstly, the players remaining in this round are those who directly offer educational content and service instead of platform providers. And compared with the previous long-term free strategy that companies have to follow in order to vie for more market shares, the free courses provided to aid virus battle could be considered as education companies’ initiative to open free access for parents and students to find suitable products.
Also, the government’s support on “cloud class” policy sparks an immediate increase in the number of parents and students embracing online education. “At the current stage, the outbreak of epidemic has become an expected boon for online education and actually save nearly 240 billion yuan in promotional costs for this entire industry.” Said Chen Xiangdong, the founder of Genshuixue(NYSE: GSX), whose share price climbed 18% on Feb. 20th with the market value exceeding $ 10 billion.
Strategic loss has become a major way for business expansion
No matter whether the education companies take the initiative to offer free service or not, the coronavirus crisis has pushed them to pivot. With high operation costs but limited income, a large number of companies need to think of a path to survive. Not only for online education start-ups who always suffer financial loss and rely on financing to grow, but also for those traditional education companies migrating offline business to online such as New Oriental and TAL, strategic loss becomes a common choice for business expansion. 
Listed in March 2019, Koolearn, a subsidiary under the New Oriental Group, has become the first online education service provider to IPO in HK stocks, and it also has been considered as one of the few online education companies that make profits. But now we can see that Koolearn has been unprofitable in light of its first annual report after listing. “With that being said, I can still guarantee that we could get profits at any time if we want to.” Said Yu Minhong, founder of New Oriental. Obviously, for Koolearn, accelerating the business expansion comes first, and then the profits.
Similarly, after making great efforts to developing K12 online business since its fiscal year of 2019, TAL underwent its first time of loss in Q1 2020FY since the group has been listed. It is also reported that Zhang Bangxin, the founder of TAL, said at an executive meeting last summer after the raging advertising war: “Our online training business could have been profitable this year, but we chose to stay at the strategic loss.”  However, amid such a market environment, how long the “strategy” will last is still unpredictable.
According to JMDedu’s survey on operating conditions covering 1,726 educational institutions, 39.4% of the online companies and 28.6% of the companies operating both online and offline business are poised to see an increase in staff in the year of 2020 while there are still more than 15% online institutions who will face mass layoffs. When talking about the reason, parents and students can compare different products and there is no doubt that whichever provides better online content and service can attract more users. Therefore, for small- and medium-sized institutions, more talents need to be recruited for R&D of products. But they are likely to crash when grappling with the challenges regarding high operation cost as well as intensified competition in this market where a large number of free courses have been provided by leading education companies.
For companies that both operate online and offline business, the outbreak undoubtedly accelerates their OMO push. Offline education companies’ online business has been triggered off while leading players also begin to vie for more offline opportunities by acquiring more local small- and medium-sized companies with excellent teaching faculty and channels for consumer acquisition. And education giants like New Oriental and TAL have already started their layout.
Technology empowering education, key to success in future competition
No matter how education companies change their business strategies, success will always lie in high quality of teaching content and services, as well as the efficacy of delivery. Coronavirus outbreak forces online education practitioners to enhance their capabilities to provide a stable learning environment for users, under which, internet giants combining education and technology stand out.
Apart from Tencent, Alibaba and NetEase, an increasing number of internet companies are tapping into education industry amid the pandemic crisis. A few days ago, video platforms like Kuaishou and Bilibili (NASDAQ: BILI) have unveiled their partnership with online education companies for building an educational ecosystem.
Compared with top educational players, newcomers have more distinctive features that they are focusing on the market outside the first-tier cities and excel in getting traffic flows, which is the biggest challenge for the whole online education track. “The internet industry has the incomparable capability of capital intensity and technological innovation. If players in this track can spare no efforts to investing in China’s online education market especially the K-12 stage, we will embrace a brilliant industrial prospect in the future.” Said Ding Lei, the founder of NetEase.