In Depth: New Business Comes With Old Risks for China’s Struggling Tutoring Industry

By Guan Cong and Wang Bowen

Sales of ‘learning tablets’ helped keep companies going after the crackdown on for-profit education.

China’s after-school education industry was caught flat-footed after Beijing rolled out a policy in mid-2021 that outlawed most after-school classes for K-12 students in an effort to reduce inequality in education.

The ban — which covered both online and in-person instruction — effectively sent the industry into survival mode as companies sought to replace the revenue they lost from classes they were no longer allowed to offer. E-commerce offered one potential path. Last year, New Oriental Education & Technology Group Inc., once a heavyweight in English language education in China, made headlines when it began running live-streaming sessions in English to hawk products like books and food. Other private education companies started taking their own products right to the consumer. In the year and a half since the industry shake-up, most companies that once specialized in K-12 tutoring began selling items like smart table lamps and e-printers, with many offering a line of devices called “learning tablets.”

Beyond just another revenue source, these premium-priced devices have provided companies like Shanghai Liulishuo Information Technology Co. Ltd., Gaotu Techedu Inc. and Youdao Inc. a way to deliver course work to their customers without violating the government’s restrictions on offering after-school classes for K-12 students.

In the third quarter of 2021 — in the wake of the clampdown on such classes — shipments of education-oriented tablets rose 6.9%, ending a streak of declines that had lasted four straight quarters, according to research firm IDC. For the entire year, sales grew 3% to 12.9 billion yuan ($5 billion), according to data from another research firm Frost & Sullivan.

And the outlook looks promising for the immediate future, with IDC predicting that China’s education-oriented tablet market will grow rapidly over the next few years. The company forecast that shipments this year will grow 7.7% to 3.82 million.

For the education companies, however, selling tablets and other hardware is far from a panacea. Although they have good reasons for getting into the business, it remains unclear whether sales will be lucrative enough to replace the revenue that the education companies lost from the education business. Meanwhile, competition in the learning tablet segment is growing as one of the main selling points of the devices — artificial intelligence-driven features — has attracted a host of big-name tech companies with far more expertise in the field. And then there are the regulators, who may not look favorably on a pricy education product that could exacerbate the very problem they are trying to solve.

Turning to tablets

The education companies were able to shift into the device business despite their lack of experience because of China’s highly developed ecosystem for manufacturing electronics, said an engineer who works for an internet firm with an education hardware business. That made it easy to find suppliers that could produce a finished product at a low cost.

Companies like Liulishuo and Gaotu began launching their learning tablets in late 2021 at prices that analysts said were easily double those of most equivalent products. Liulishuo, which had once offered English language lessons through an app, sent its tablet to market with a price tag as high as 4,000 yuan, while Gaotu, a former purveyor of online lessons on a wider range of subjects, priced its device at almost 5,000 yuan.

In exchange for the higher price, these companies packed their devices with education content that had amassed from their years in the after-school tutoring industry, giving them some advantage over other electronic hardware manufacturers, said an industry source who previously worked for an online tutoring firm.

Liulishuo’s management believe its product will cater to parents who value its education content, according to a source familiar to with the company’s business strategy.

The content loaded into learning tablets usually incudes exam prep and other subjects that the companies had been barred from offering in classes to the public after the government crackdown. This helped meet some of the demand for after-school lesson that had been left unfilled, analyst said.

It remains unclear just how much of a revenue generator learning tablets can be, especially considering that the size of China's K12 tutoring industry was 168.7 billion yuan in 2020, the year before the crackdown, according to research firm Frost & Sullivan.

For Youdao, the online learning and dictionary service company, hardware sales made up about 27% of its total net revenue in the fourth quarter of 2022, which was up 38.6% year-year to 1.5 billion yuan, according to its quarterly earnings report.

For Gaotu, it’s murkier. Its latest quarterly report didn’t break out hardware sales as a share of net revenue, which was down 50.6% from the fourth quarter of 2021, according to the report.

Last May, Liulishuo was forced to delist from the New York Stock Exchange after failing to meet the listing requirements due to its low valuation. In November, Gaotu received its own delisting warning from the exchange.

Competitive space

The tutoring companies have faced competition in the education hardware segment from the early entrants to the business, such as BBK Education Electronics Co. Ltd. and Readboy Education Technology Co. Ltd. Both founded in the late 1990s, the companies started out selling traditional hardware such as electronic dictionaries before adding the learning tablet to their product line-up in recent years.

However, the competition doesn’t end there. One of the ways that the tutoring companies have justified the high prices of their devices is by touting their advanced artificial intelligence (AI) features. For example, Youdao has hyped its tablet’s ability to check and grade homework. In addition, the tablet’s software can also craft content precisely tailored to the user, according to a company marketing statement.

These kinds of capabilities have apparently resonated with parents. During the final quarter of last year, sales of Youdao’s smart devices rose 28% to a 407 million yuan.

Still, these AI features has been way overhyped, said Zhang Jidong, vice president at the education unit of Iflytek Co. Ltd., a leading Chinese AI firm that has expanded its lineup of education hardware products in recent years. To truly provide such tailored services requires immense set of data that can deployed to train an AI model, and companies like that are few and far between, Zhang said. And most of the private tutoring companies remain focused more on shoring up their education content than on AI research and development.

Still, all the attention has drawn bigger technology firms with a lot more experience with developing AI, such as Alibaba Group Holding Ltd., Tencent Holdings Ltd., Baidu Inc. and Bytedance Ltd. Companies that have gotten into the education hardware game since 2021 also include Huawei Technologies Co. Ltd., smartphone-maker Oppo Co. Ltd., home appliance heavyweight Haier Group Corp., and TV manufacturer Skyworth Group Ltd.

Regulatory risk

Over the past three years, the government has turned a blind eye to the development of the education hardware business because officials believed it played a positive role in supporting online classes that became more prevalent in China during the pandemic, a Ministry of Education official told Caixin.

But the government could tighten regulation on the use of education hardware, now that the pandemic is over, the official said.

However, with the end of the strict zero-Covid policy in December, it seems unlikely that schools will again be required to move all classes online again.

Consequently, concerns have resurfaced about how pricy instructional products can leave poorer families at a disadvantage, potentially widening the inequality gap that had led the government to crack down on the after-school education business in the first place.

There have been signs that another round of regulatory tighten is on the way. Late last year, the Communist Youth League of China added learning tablets to a list of “new types of connected devices” that should be restricted for use by minors.

And in September, an article written by Yu Weiyue, the head of the Ministry of Education department charged with overseeing after-school education attracted widespread attention. In the article, Yu didn’t explicitly mention education hardware, but wrote that “after-school instruction is a matter of national security that need to be tightly regulated.”