Why China's crackdown on edtech companies augurs well for Indian startups

China wants its online tutoring companies to go non-profit. This drastic move could not only destroy its $100-billion edtech market but also benefit countries like India as foreign capital earmarked for China could flow into domestic edtech startups.
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Over the weekend, China cracked down on online tutoring companies in the country, leaving shares of edtech majors like TAL Education Group, New Oriental Education & Technology Group, and Gaotu Techedu in a freefall on the US and Hong Kong stock exchanges.

In a bunch of new regulations, State Council — China's highest governing body — has mandated after school tutoring companies to go non-profit, and banned them from going public or raising foreign capital, a move that could effectively destroy the country's $100-billion edtech industry.

Additionally, Chinese authorities have put caps on tutoring hours during weekends and vacations, in a bid to reduce the learning burden on young students. Even listed entities in the sector have been barred from investing in or acquiring online education firms engaged in out-of-school teaching, Bloomberg reported.

This regulatory move is said to be a part of China's larger crackdown on large consumer tech companies that wield immense power. However, Chinese investors and consultants reckon the main motive behind this drastic decision is the country's stated national objective of improving birth rates.

China believes that high private tutoring fees are a huge burden on young families, thus discouraging them from having children and impeding population growth. It recently revised its two-children policy to three children per family.

"The implicit rules of China are that the government sets goals for the country and inverts back to key objectives that the country should be attaining," Lillian Li, a Chinese investor, strategy consultant and development economist, wrote in her now-viral Twitter thread.

She further elaborated,

"China's biggest woes in the future are its ageing demographic and lack of children. Advertisements selling status anxieties to get kids into after schools are rife. Whenever I chat to parents they all tell me they can't afford kids given the cost of schooling and tutoring. This is also just in the Tier-I cities. These kinds of resources aren't even available in Tier-III and lower cities. If continued, this will increase inequality in educational attainment and therefore, income in China going forward."

Given lowering inequality is one of China's key OKRs, education tech companies are in trouble in the foreseeable future. "Also given the lagging regulatory environment in China, education is a public good and shouldn't be overtly privatised. That's also coming into play here," Lillian added.

As a result, giant investors like Tiger Global, SoftBank, Temasek, among others, who are deeply entrenched in the Chinese education ecosystem have been left high and dry.

This could, however, benefit Indian edtech startups. Founders and investors reckon that India is going to be among the beneficiaries of events unfolding in China, at least in the short run.

How this impacts Indian edtech

An early-stage investor who oversees edtech investments at a VC fund tells YourStory,

"In the short term, it will be good for India. Some of that [VC] money has to go somewhere. India will look a little more attractive now. For the first time, large edtech companies are beginning to hire public policy executives. So, they are paying attention to what is happening in China. In the long run, no one really knows."

The aforementioned investor notes India can expect more public-private partnerships in education in the days to come. "Similar to what Unacademy announced with the Government of Karnataka," he says.

Last week, Unacademy signed an MoU with the Government of Karnataka to provide free training to 4,500 students aspiring for competitive examinations. The three-year programme will be a part of its CSR initiatives, during which eligible students would be chosen through online tests, and offered free tuition, scholarships, and complimentary Unacademy Plus memberships.

"There will be a lot more of these partnerships as edtech companies in India get a bit more cautious about being seen negatively. They want to now be seen positively by the government," adds the investor.

Some edtech founders believe that a chunk of the foreign capital earmarked for China will start flowing to India.

Gaurav Perti, Founder and CEO, PurpleTutor tells YourStory,

"Ultimately, it's about the demand and supply of capital. Edtech investors earlier had an option to choose between India and China. They would put disproportionate amount of investments in China. They'll hopefully now give much more weightage to India, and this should help edtech entrepreneurs in the country."

PurpleTutor is an IvyCap Ventures-backed startup in the K-12 education segment.

Outlining the differences between China's and India's education landscape, Gaurav adds, "In order to encourage people to have more kids, China is trying to come up with policies that show that raising kids is not costly. India, on the other hand, has a different issue. We have far too many people graduating but unfortunately, they are unemployable. Edtech companies are actually helping in making people employable so that India can fulfil its promise to be the service centre for the world."

Other edtech founders like LeverageEdu's Akshay Chaturvedi believes the ongoing developments in China pose a "fantastic opportunity for India and its education apparatus".

"What has happened there is a pure-play subsequence to their internal growth plan, given where they are at in their nation’s journey. That is very different from where we are headed as India. Our strength has always been the ability to submerge into global conscience as an English-speaking free-market superpower, and education is going to help us get closer to that goal," he tells YourStory.

Considering the fourth or fifth largest edtech company in China is bigger than BYJU'S (India's largest edtech player), the opportunity for India to make the most of China's education troubles is immense.

Only time will tell.

Edited by Saheli Sen Gupta