Online Education a New Frontier in China

July 11, 2013, 12:56 p.m. ET

Online Education a New Frontier in China

WEI GU

In a country as obsessed with education as China, it makes sense that online teaching has huge potential.

Wealthy Chinese spend hundreds of thousands of dollars to send their children abroad for what they perceive as a better education. And China’s scale means online-education companies can serve vast audiences, justifying up-front investments. There is a history of private-education companies in China, and for years the business of preparing students for exams using traditional study centers grew dramatically. About eight Chinese education companies with combined revenue of $1.5 billion last year have listed their shares in the U.S.“Everyone is looking at education as the next frontier,” said Yat Siu, chief executive at Outblaze, a Hong Kong-based mobile games and animation company. “The challenge is how do we get people to transfer to the digital side. China is not quite there yet, but it will come.”

Online education has been slow to catch on in China even though the country has the world’s largest Internet user base and is the world’s largest smartphone market. Listed educational companies, facing pressure to generate steady cash flows, have been slow to invest in their online operations.

Private capital investment in online education has been slow as well. Before 2010, few online-education companies received investments in China. Since 2011, with the explosion of the U.S. online-education market, about 10 Chinese online-education companies have received angel investments. But the amount is insignificant compared with the investment in their U.S. peers, which easily exceeded $1 billion in the same period, according to Deloitte.

Another reason is China’s education system itself. The country’s focus on tests means there is less need for interactive learning than in the U.S. system, which cultivates a wide range of interests and often seeks to accommodate different learning styles. In China, traditional programs that help with exams and job searches are still the most popular. At YY Inc., YY +11.08% an online entertainment company that is branching out into education, the most expensive classes are for interviews to become Chinese civil servants.

And there is a shortage of up-to-date technology. Relatively few teachers in China have access to technology necessary for online, interactive education programs.

Unlike in the U.S., a clear business model hasn’t emerged in China’s online education. Eric He, chief financial officer at YY, says people should be more willing to pay if education companies offer more than just lectures. Mr. He said an education-content provider on its site raked in $10 million in revenue last year, but YY hasn’t started taking a cut from content providers.

Chinese Internet and education companies can’t afford to miss out on this trend. Internet companies are building platforms. Netease Inc., NTES +0.06% a Chinese Internet company, opened an online classroom, which, like Coursera in the U.S., provides users with free classroom courses. Shanghai Taomi Network Technology offers educational online books and videos for children.

Traditional education companies have to adapt to the change, whether they like it or not. Yu Minhong, chairman of New Oriental Education & Technology Group Inc., said recently at a forum that online education will account for 40% of the private education market in three to five years, from 10% now, and the company is positioning itself as a content provider.

Attention needs to be shifted from offline to online development, otherwise New Oriental won’t survive, Mr. Yu said.

Changing views of education in China make a shift to more online education inevitable. Chinese students are becoming less fixated on tests. Parents are increasingly sending their children to English-immersion camps abroad rather than classrooms. Today’s children are more comfortable with e-learning.

Although Chinese consumers are often reluctant to pay for things on the Internet, there appears to be a higher willingness to pay for tools, education and efficiency-improvement apps, judging by the top 100 apps in the paid categories for the iPhone and iPad.

“Once you put a device into a child’s hand, the ability to learn from it is very strong,” said Outblaze’s Mr. Sui, who has donated tablets to schools in Nepal. “Lectures are still most the most popular way of learning, but the system is now more about explanation and self-learning.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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