Looking back at 2020, China’s educationindustry is undoubtedly one of the industries most affected by the pandemic. Itaccelerated the rapid development of online education, but also made it moredifficult to compete in a crowded market.

As online education became mandatory duringearly lock down, all kinds of players jumped into the market. Venturecapitalists invested in online education leaders while Chinese tech giantssolidified their bets on online education.

Some online education institutions raisedfunds and offline training institutions closed offline schools. Some collapsedas offline education came to a halt during lock down.

In early February, the requirement ofsuspension of classes forced primary and middle school students across thecountry to take online classes at home. The data released by Dingding showsthat schools in more than 300 cities in more than 30 provinces, includingGuangdong, Jiangsu, Henan, Hebei, Shaanxi, and Heilongjiang, were driving the“stay at home classes” program.

Investors saw the opportunity on this trackand invested in online education. Yuanfudao, Huohua Siwei, and other onlineeducation leaders frequently received financing.

According to iResearch, the scale ofChina’s online education market has expanded year by year since 2016, but thegrowth rate has slowed down. Considering the industry growth pattern of onlineeducation and the impact of the pandemic in 2020, China’s online educationmarket will grow by about 9.61% in 2020, and the market size will reach RMB453.8billion yuan.

Over 70% of institutions expect theirrevenue in the first half of 2020 to decrease by no less than 30% over the sameperiod a year ago, of which nearly half of offline institutions expect theirrevenue to fall by more than 50% during the same period. This led to some highprofile failures of offline education firms.

Yousheng Education, an established traininginstitution that has been operating for nearly 20 years and claims to have1,000 campuses across the country, was one that collapsed overnight.Headquarters became empty buildings and its management were suspected to havedisappeared. Parents from various campuses in Beijing gathered at the company’soffices to demand refunds, leading to chaos.

Some analysts believe the company may haveexpanded too rapidly while lacking effective management of its finances.

For the major adult English traininginstitutions, Midland English, Wall Street English, and EF Education allselectively closed some campuses during the pandemic to try to alleviate thelosses caused by Covid.

After the pandemic was put under control inearly spring, even when offline schools reopened, there were fewer courses andfewer students attending classes. It was difficult to restore the classatmosphere to pre-pandemic levels and students’ class experience was greatlyreduced.

Online education companies were doingbetter, but competition was increasingly brutal. Technology giants includingAlibaba, Tencent, and ByteDance want to cash in on their online traffic in theeducation industry.

ByteDance entered the education sector viaacquisitions and self-incubation in English language training, K12, highereducation, and education hardware segments. It launched two educational apps,"Xuelang" and "Qingbei Xiaoban" as well as acquiringmathematical thinking product "You Paiyi".

Tencent’s investment arm has made 34investments in education with a total investment of RMB11.71 billion yuan. Itinvested in K12, quality education, preschool education, and exam prepsegments.

Following the introduction of DingTalk’seducation function, Alibaba has successively launched independent education products"Bangbangda", a Q&A app.

Covid has impacted offline education moredirectly but it also means online education has become more crowded and harderto compete. Only leaders and tech giants are capable of sector consolidationthat many analysts believe will reshape the sector.

After the pandemic drove demand for remoteservices of all kinds, Chinese online education companies are building theirwar chests for another round of fierce competition, which investors say willlikely continue until one emerges as the industry's dominant player.

After-school tutoring startup Yuanfudaotold Caixin it had secured $300 million in a December financing round, on theeve of Chinese schools' one-month winter holiday, when demand for onlineeducation spikes.

The latest funding comes just two monthsafter its valuation hit $1.5 billion in the wake of a $2.2 billion series Ground. That valuation was more than twice the figure from a year earlier andmade it the world's most valuable education unicorn, as investors bet on theBeijing-based operator of live tutoring and online homework platforms.

U.S.-listed rivals such as GSX Techedu andTAL Education Group are also rushing to raise fresh cash, even as therequirement to spend big on marketing means any chance of a profit remainsremote -- indeed losses are widening.

"You have to spend two bucks beforeyou earn a dime," Michael Yu, founder and president of the after-schooltutoring agency New Oriental Education and Technology Group, said in a speechlast month. The sector saw $15 billion of investment last year but only hadrevenue of a few billion dollars, he said.

If you don't raise money when everyone elseis, you'll fall behind, said Liu Zhanxiang, an education analyst at investmentbank China Renaissance Holdings. "Even though there is abundant moneycoming into the online education sector from investors, the strong players arelikely to get stronger, and the weaker ones will get weaker," he said.

Online education companies often spend 1.5times their sales revenue on reaching new customers and managing theiroperations, according to Yu Jinyong, the co-founder of education-focusedinvestment firm Z-Edu.

All e-learning companies' marketing costsmake up more than half of total spending, and profits will only come when thisfalls under half, Yu said. However, a constant supply of new customers isnecessary as student retention remains a problem, with less than a thirdsticking with an online education provider for over a year.

The companies are mostly reporting strongsales growth. The online school unit of TAL Education, Xueersi Online Schoolreported over 2.9 million classes "without discount" were sold duringthe 2019 summer holiday from June to August, up about 100% from the yearearlier. Middle- and elementary-school tutoring platform Mishumao.com said itsaw 350% growth over the same period, selling 1.7 million classes.

But it can be difficult to gauge how manystudents these numbers represent, as the companies only release data about thenumber of classes sold. This is likely significantly higher than actual studentnumbers as people tend to attend multiple classes.

Also, the key metric is not how manyclasses are sold, but how many are sold at normal prices. Sales figures aresubject to manipulation as companies often sell them at a significant discount.GSX Techedu counts all classes sold for over 99 yuan ($15.33), a far lowerthreshold than most other companies, industry players said.

Student numbers have also been subject tofraud allegations, with short-seller Muddy Waters claiming in August last yearthat some 80% of GSX Techedu users were bots and it was vastly overstating itsrevenue. Those allegations led to a probe from the U.S. regulator.

GSX's third-quarter revenue of 1.99 billionyuan represented a deceleration of year-on-year growth to 252.9%, compared with461.5% growth in the third quarter in 2019. It reported a 933 million yuan lossthat quarter, down from a small profit the year earlier. In the followingfourth quarter of 2020, it said profits grew 658.7% to 175 million yuan onrevenue of 935 million yuan

Xueersi also posted weaker-than-expectedrevenue growth last year, recording its smallest expansion of just 87% in thethird quarter. It had hoped for triple-digit growth, Chief Financial OfficerLuo Rong said in July.

Youdao, an online education subsidiary ofinternet giant NetEase, experienced a loss of 878 million yuan in the thirdquarter, widening from a 242 million yuan shortfall the previous year. NewOriental saw its loss increase more than 10 times to 758 million yuan.

Despite these losses, the sector is stillflush with cash as school closures due to the COVID-19 pandemic have driveninvestor enthusiasm.

Out of the 10 education service companiesthat secured the most investment in the first half of 2020, nine are onlineeducation agencies, according to data provider Beijing Tianyancha Technology.

More than three quarters of the new fundingfor Chinese e-learning companies last year went to Yuanfudao and Mishumao.com,according to Tianyancha.

In 2020, Yuanfudao took in $3.5 billion.Mishumao.com planning a new round of financing that will be announced soon,inside sources told Caixin, Mishumao.com's last valuation was $6.5 billionafter a $750 million series E round in June last year.

U.S.-listed TAL Education said in Novemberthat it would sell $1.5 billion of yuan-denominated shares to an investmentfirm. GSX announced in December that a group of investors would buy $870million of new shares in the company, which it would spend on developingclasses and technology, as well as hiring more teachers.

However, people at a leading company saidthat most of the cash these companies are raising is not going to improve thequality of their services but instead is being spent on marketing.

GSX, which has previously claimed to spendless money on marketing than its peers, increased its spending to 2.06 billionyuan in the third quarter, up from 330 million in the same period a yearearlier. Youdou's spending in the third quarter of 2020 was four times largerthan in 2019, hitting 1.15 billion yuan.

"It is not normal to do business whileburning through money, but my idea has changed now that the market is beingrestructured, so much capital flowing in," GSX founder Chen Xiangdong saidin December. "The company can tolerate losses at this stage of expansionand we need to focus on the life cycle of our customer base, instead of aimingto make a profit from the first order."

Competition in the online space is likelyto get fiercer as traditionally offline-focused players increasingly look tomove online to offset a drop-off in demand at their brick-and-mortar locations.

Online education institutions also need tolook out for challenges from offline competitors, if they are to survive,according to Z-Edu's Yu.

Even though China has mostly gotten itsdomestic COVID-19 epidemic under control, fear of returning to classes meansparents are leaning more on online extracurriculars.

U.S.-listed English tutoring company RiseEducation Cayman saw its revenue for the first three quarters of last yearplunge 46.6% to 594 million yuan as its physical classrooms were shut. That sawit go from a 97 million yuan profit over the first three quarters of 2019 to a134 million yuan loss in the same period last year.

Even though 90% of its offline courses wentonline, the company took on fewer students due to weaker learning outcomes ininternet classes, the company's third-quarter financial report said.

Offline education specialist New Orientalsaid it is pursuing an "online-merge-offline" strategy, in which ithas invested $39 million. Chief Financial Officer Yang Zhihui said this pivothas already seen its student numbers spike after rolling out online classes inover 20 cities. Yang said the company plans to expand its geographical rangewith further investment.

But it is not easy to bring offline coursesonline, Liu Zhanxiang at China Renaissance said. "Small-to-medium offlinetutoring agencies without an existing online course system would havedifficulties building digital infrastructure. It would be easier for biginstitutions to do so, but it still takes time," Liu said.