Edutainment. An example of Education Technology in China.

EdTech: solving the bottlenecks in the Chinese education system.

March 12, 2020

Dr. Kirill Pyshkin

Fund Manager, Credit Suisse Asset Management

Costs go up with the lack of innovation

Education has been one of the most traditional sectors where the “service” has been delivered in almost the same way for centuries. There has been very little innovation and the penetration of digital technologies is low, at only 2-3%1. This penetration is materially lower than practically every other sector today and stands in stark contrast with a number of other sectors, which are currently being disrupted to their core by technology-based innovations. Examples of this type of disruption include the hospitality sector where Airbnb and HomeAway are causing issues for hotel operators, the media sector where Netflix and Hulu are disrupting traditional cable or satellite pay-TV services, and the retail sector where Amazon, e-Bay and Alibaba have made a very large impact on traditional retailers globally.

Such a low level of adoption of technological innovation in the education sector is one of the reasons why the costs of teaching have spiraled out of control. The cost of education in the US education has, according to the Bureau of Labor Statistics2, risen by more than 12x over the last 40 years. This cost inflation is approximately 4x greater than the overall rate of inflation and 2x greater than the inflation experienced in the healthcare sector in the US (another notoriously inefficient sector).

Students are not transistors

Technological innovation has delivered economies of scale and scope to many other industries. For example in semiconductors, Moore’s Law predicted with prescient accuracy that the number of transistors, and hence the functionality of our electronic devices, would double every two years, without any price inflationary impact. In Education however, packing more and more transistors into a chip is a difficult concept to replicate, because the quality of education tends to deteriorate as more students are put into a classroom. This is why private schools typically have fewer pupils per class than state-run schools, and this, in turn, is one of the reasons why they are more expensive. In the most extreme case of private individual education, the costs are prohibitively expensive for most bar the royals. However, individual education uniquely offers the opportunity to tailor the content exactly to the level of the student.

"You don’t have to spend more to do better"

OECD secretary-general, Angel Gurría, at a Paris press conferernce after the announcement of the latest PISA results where Chinese students topped all the rankings.3

Access to education is the UN’s fourth Sustainable Development Goal

Such an escalation in the cost of education is highly unfortunate, since education is the very foundation of socio-economic development and contributes to the elimination of poverty and inequality. Education can be directly linked to prosperity, health, satisfaction and quality of life in general. Conversely, low levels of education are linked with lower earnings, unemployment, even mental illness and homelessness. This is why access to quality education is the UN’s fourth Sustainable Development Goal.

Access to education is particularly important in developing economies where every USD 1 invested in education delivers USD 10 of economic return4. Typically, education is more highly valued in the developing countries because there are fewer people there with advanced degrees than in OECD countries. Graduates earn more in general, but in societies with greater inequality, the difference in earning power is magnified.

China is a good example

The World Bank’s “Gini coefficient” is a well-established measure of inequality in an economy. It shows a score for China higher than most OECD countries, with the notable exception of the US5. China has one of the lowest percentages of university degree holders in their adult population in the world. According to the OECD, that percentage was less than 10% in 2015 and that compares with more than 30% for the EU, more than 40% for the US and the UK, and more than 50% for Russia and Canada6. China has a target to reach the 20% level by the end of 2020, but even if that is achieved, China would still rank below 80% of the countries in the world. Nevertheless, according to McKinsey Global Institute, growing spend on education contributes 13% to China’s consumption growth7.

Despite the low percentage of university graduates in the Chinese society, the absolute numbers are staggering. According to the WEF and UNESCO, in 2016 there were 78 million degree holders in China and this compared to 67 million in the US and 29 million in Russia8. China’s degree holders account for approximately 12% of the world total and if current trends persist, by 2030 they will account for over a quarter of the total. The pace of growth is also impressive as there are a further 43 million students currently at university9.

Gaokao is the chance for a better life

While the number of students in China is huge and education offers real benefit, there are simply not enough university places available for everyone. Every year around 10 million Chinese students take the public “Gaokao” exam at the age of 18, but according to Frost & Sullivan there are only places at university for 40% of them, fewer than 10% are accepted into the top 150 universities and fewer than 1% into the highest ranking universities like Peking and Tsinghua10. The competition is therefore extreme, because in a country with great inequality, the Gaokao may be one of few truly egalitarian opportunities to climb up the ladder to a better future.

Preparing for these tests is therefore extremely important and parents often spend a disproportionate amount of money on after-school tutoring. Approximately 10% of all Chinese household income is spent on education according to the Chinese National Bureau of Statistics, compared to just 2% in the US11. In a country with relatively few private schools (only 6% of primary and 10% of secondary schools are private according to OECD) most of this spending is likely to be spent on supplementary tuition.

Filling the gap

After-school tutoring in particular has seen an explosive growth. There are two market leaders – New Oriental Education and TAL Education. Revenues at these two companies have grown 3x and 8x respectively, over the last 5 years. Today they are a similar size, each with around USD 3.5 billion (RMB 25 billion) in annual revenue12. There are also two pure-online publicly listed companies with revenues above USD 100 million in 2019: GSX Techedu and YouDao. Revenue at these companies is growing at above 100% each year.

This type of after-school tutoring, paid for by the parents and filling the gap left by state education, are clearly proliferating. According to the Chinese National Bureau of Statistics, China spends just over 5% on education as a percentage of GDP, only slightly below the US, UK and other high-income countries (this figures is typically 3-4% for low-income countries)13. However, on a per capita basis China spends less than USD 500, compared to more than USD 3000 in the US and UK14.

As a result, class sizes in China are typically twice as large. The national standard in China is 45 students, which compares to just over 20 pupils in the average OECD class. A 2017 study found a primary school in Henan with 113 pupils per class15. In 27 provinces, the average high school classes were larger than the national standard and in 12 provinces the average was more than 55 students16. The Chinese government has set a goal of classes no larger than 56 students by 2020. It is not a surprise therefore that the quality of education still has room for improvement, especially in the rural areas. In the meantime, Chinese students today receive around 20 hours of extra tuition per week. Far higher than children in most other countries.

Both New Oriental and TAL started out offering after-school tutoring in a traditional class environment. They started in “tier 1” cities, such as Beijing and Shanghai, and now that the larger cities are well penetrated, the growth opportunity is in smaller towns and cities. However, this is not without challenges. Lower tier cities are often rural and remote and it is more difficult to recruit good quality tutors. This is a tough and unfortunate reality, because children from remote areas need to pass the Gaokao, like everyone else, to win their ticket to a better life.

Technology to the rescue

Technology is helping to solve the issue. Thanks to digital technologies, online after school tutoring services can be delivered to the most remote areas at an affordable price and deal with larger number of students. Pure online players such as GSX Techedu and YouDao have been specifically targeting lower tier cities as they recognize the opportunity presented by lower penetration rates. As a result, they have enjoyed sales growth rates in excess of 100%. However, they also deliver an important socio-economic benefit to remote areas, where children may not have another opportunity to access quality tutoring and thus prepare for the exams. Technology is therefore directly improving the access to education and contributing to the UN’s fourth Sustainable Development Goal.

Although the penetration of online tutoring is only 15-25%, it is proving to be increasingly popular. According to Frost & Sullivan, in 2019 Chinese families spent an estimated RMB 64 billion on online tutoring and this is projected to grow at an annual rate of 65% to 2023.17

Online has also appeared to have solved the scale issue with a dual-teacher model. In this model the main tutor delivers a lesson online to a class of several thousand students. The class is then split into smaller groups each with a teaching assistant. This way, the delivery of information is separated from checking the assignments and dealing with individual questions, in order to “industrialize the process” and allow for greater economies of scale. As a result, after-school tutoring can be delivered at the affordable price of less than USD 10 per hour, while the main tutors can earn a very attractive salary (e.g. average in excess of USD 150,000 per year working for GSX Techedu). This ensures recruitment and retainment of the best talent in the industry. The online model also allows for the main tutor to be based in a location of his choosing.

Another benefit of the use of technology is adaptive learning. This means tailoring the complexity of the material and speed of its delivery to the level of each individual student in a manner similar to individual tuition, which is extremely expensive. YouDao’s online courses, for example, come with a “Smart Pen” used for exercises. This pen transmits the results back to the company allowing quick feedback and grading, and the system can even suggest additional exercises for each pupil based on the level of their progress. Students in turn, like the pen because Chinese tests are paper-based so the use of pens allow for an experience very similar to the actual exam. According to the company, there are now 30,000 Smart Pens in daily use and they are working on further improving connectivity between the smart pen and the course content.

It is worth noting that YouDao’s “Dictionary Pen”, which was released in August 2019, is currently the best-selling hardware device sold on Chinese internet sites. YouDao sells it for USD 100 and generates a 50% gross margin.

Technology can also be used to improve the engagement of students. In particular, facial recognition algorithms can ensure that students are paying attention and can warn tutors if they are losing their audience.

China is leading in Education Technology investments

In these ways, the use of technology can improve both efficiency and effectiveness of education while making it more affordable and accessible. Education technology has been recognized as the solution for China’s specific problems, which is why the country has seen the largest inflow of venture capital investments into the “EdTech” field. According to EdTechX Global, China received half of the USD 8.1 billion global venture capital investments into EdTech in 2018, and around 200 Chinese online education companies raised capital in 2018. This amount is 2.5x more than was invested in the US, which traditionally dominates the tech scene18.


China is leading in key student assessments

An even more encouraging sign for the future is that despite relatively low per capita government spending on education, Chinese students are amongst the best performers in the world. In the most recent Program for International Student Assessments (PISA), Chinese students topped the ranking in all the categories of reading, math and science. Regions of Beijing, Shanghai, Jiangsu and Zhejiang with a combined population of 180 million participating as a single region came first among 37 OECD and 42 partner countries. For comparison, in reading, which OECD considers the primary indicator, Singapore came 2nd, Macao (China) 3rd, Hong Kong (China) 4th, the US 13th, the UK 14th, Japan 15th, Germany 20th, France 23rd, and Switzerland 28th. Moreover, the 10% most socio-economically disadvantaged students in those four Chinese regions showed better reading skills than those of the average student in OECD countries, and in fact, skills similar to the 10% most advantaged students in some of the OECD countries19. “You don’t have to spend more to do better, that is one conclusion”, said the OECD secretary general, Angel Gurría, at a Paris news conference after the results were announced3.



Fund Risks
Credit Suisse (Lux) Edutainment Equity Fund

  • No capital protection: investors may lose part or all of their investment in this product.
  • Political developments concerning the education industry could have a significant adverse impact on the edutainment sector.
  • Exposure to smaller companies can result in elevated short-term volatility and may carry liquidity risk.
  • A higher concentration in specific sectors may fall out of investor favor at certain points in time.
  • There are risks arising from a factor bias toward a growth investment style with a particular overweight in small- and mid-cap stocks.
  • Since the fund focuses on highly innovative companies, volatility can be significantly elevated. Exposure to emerging markets may result in even higher volatility.

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1 Thematic Investing – Let’s Get Smart – Global Education Primer, BoAML 2016, p214
2 Credit Suisse based on Bureau of Labor Statistics data
3 PISA 2018 Results International Launch 12” 9.01.2020
4 WPF (2016): Cost-Benefit Analysis School Feeding Investment Case, p1, URL:; last accessed on January 30, 2019
5 World Bank, 9.01.2020
6 Thematic Investing – Let’s Get Smart – Global Education Primer, BoAML 2016, p24
7 Thematic Investing – Let’s Get Smart – Global Education Primer, BoAML 2016, p73
8 Thematic Investing – Let’s Get Smart – Global Education Primer, BoAML 2016, p25
9 Chinese Government Statistcis, 9.01.2020
10 Fu, Y. (2013 June 19). China’s Unfair College Admissions System. The Atlantic.
Retrieved from:
11 Education; Back to Basics – Citi GPS, 2017 p133
12 Credit Suisse based on Bloomberg data
13 Education; Back to Basics – Citi GPS, 2017 p136
14 Education; Back to Basics – Citi GPS, 2017 p11
15 Sixth Tone, 9.01.2020
16 Brookings Institute, 9.01.2020
17 Frost & Sullivan data from the GSX Techedu IPO Prospectus p.95
18 Learning is the new Tech, EdTechX Global presentation
19 OECD, 09.01.2020
20 Learning is the new Tech, EdTechX Global

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