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The Company Making Billions Off China’s Worried Parents

Here’re the biggest anxieties of middle-class families in the test-based world of Chinese education.

The Company Making Billions Off China’s Worried Parents
A young boy covers his face with a Chinese national flag at Tiananmen Square in Beijing, China. (Photographer: Qilai Shen/Bloomberg)

(Bloomberg Businessweek) -- The weekend ritual for many American kids includes hanging out with friends, sports, cruising the mall, or honing their online gaming skills in Fortnite. Steven, a serious-looking 9-year-old public school student in Beijing, spent a recent Friday evening in a classroom at a tutoring center operated by TAL Education Group, cramming mathematics drills. On Saturday he was back for extra instruction in English and Chinese. “He likes the environment at TAL, where classes are lively and students get to play little games while learning,” says his mother, Zhao Liu, a nurse in a Beijing military hospital. “His father and I would never force him to study.”

No one has to, because even elementary school students in testing-obsessed China know the importance of doing well on the dreaded national exams. Those who do poorly can end up in dead-end livelihoods with no chance of college admission. That’s why many parents are gladly willing to make the investment in time and money—Steven’s folks spend about 20,000 yuan ($3,124) a year for his tutoring—to guarantee a bright future for their offspring. That desire has also turned TAL, the nation’s largest tutoring outfit, into a major money spinner. But that position has been put at risk by the Chinese government’s crusade to cut back on academic stress and foster childhood creativity. A primary target: the kind of extracurricular drilling TAL provides.

TAL’s initials stand for Tomorrow Advancing Life, a none-too-subtle nod to one of the biggest anxieties of middle-class families in the test-based world of Chinese education. Combining in-person coaching and online instruction that lets teachers lecture across the country to multiple classrooms equipped with large video monitors, TAL expects this year to tutor 1.9 million students—double the enrollment of the New York City public school system.

The company operates 600 sites, and its online and in-person enrollment has been rising at a 49 percent annual clip. It had revenue of $1.72 billion in its fiscal year ended February 2018. By June 12, TAL’s stock had soared 27-fold since its October 2010 initial public offering, giving it a market value of $25 billion. That was more than three times that of London-based Pearson Plc, the world’s largest education services company. Its fortunes shifted on June 13, when Muddy Waters Research co-founder Carson Block, whose firm in the past has wagered against the value of several Chinese companies, said TAL’s profits weren’t as strong as reported. TAL called the allegations erroneous and deceptive.

No one had profited from the stock’s rise more than Zhang Bangxin, TAL’s co-founder, a 37-year-old former math tutor who’s become one of China’s richest people: His TAL shares are worth about $7 billion. Zhang’s parents ran a noodle and dumpling-wrapping shop in rural Jiangsu province. He was a stellar student, enrolling in a life-sciences doctoral program at prestigious Peking University. He started tutoring to ease his parents’ financial burden, then dropped out to build a tutoring business. Zhang now presides over his testing empire from an office tower in Beijing’s Zhongguancun district, home to tech startups.

The Company Making Billions Off China’s Worried Parents

Ivy League strivers in the U.S. may think they have it tough with their Advanced Placement tests and résumé-polishing community service. But they have nothing on the offspring of China, where a ticket to prosperity boils down to a couple of exams that have been known to induce breakdowns or even suicides: a high school entrance exam, the Zhongkao, and a college test, the Gaokao. These rites of passage determine not only the schools that students will attend but also whether they’ll go to college or vocational school.

To woo customers, Zhang has taken a classic marketing approach: an unconditional money-back guarantee. Parents can audit the sessions freely and get refunds anytime they aren’t satisfied. “We wanted to make sure customers always hold the knife handle and can force us, from teachers to management, to act with extreme caution,” he says in an interview in April.

TAL’s tutoring encourages students to practice the kinds of questions they’ll face on China’s exams. On a Friday evening in April, for instance, 8- and 9-year-olds descend on a 16-story Beijing apartment building where numerous units have been turned into tutoring spaces. A teacher delivers her math lecture online via life-size video screens. “Did you watch the Winter Olympics?” the bespectacled instructor asks. “What is the average if three divers received a 10, and two a 9?” Fidgeting students, dragged here by mothers and fathers and the occasional grandparent, shout out their answers, even though the teacher can’t hear them.

China’s Communist Party leaders, including President Xi Jinping, worry that the nation’s testing obsession is crushing the creativity that could yield China’s own Steve Jobs. Leaders also say they want to keep wealthier families from gaining an edge through after-school enrichment. In February the Ministry of Education tightened tutoring licensing, banned privately operated ranking tests and competitions, and prohibited courses considered overly advanced for lower grade levels.

The measures aimed to eliminate one of TAL’s profit centers: training for the Mathematical Olympiad, an intense competition for students up to age 20. Victories helped students gain admission to coveted secondary schools. They were so central to TAL’s success that the company promoted them in its IPO prospectus.

At the time of the antitutoring edict, Nicky Ge, an analyst with China Renaissance Group, said the initiative could lower demand for TAL’s services, especially in math, which made up more than 60 percent of the company’s revenue last year. Even so, TAL shares are up more than 30 percent this year—even after the Muddy Waters challenge. Investors may be agreeing with Zhang, who says the government intervention could help TAL as tighter regulation drives smaller companies out of the market.

Many within China’s educational community say parents are unlikely to abandon a hard-charging academic culture that dates to China’s 1,300-year-old civil service system, in which officials are chosen based on competitive exams. “I provide high-quality education to people who demand it,” Zhang says. “I don’t create the demand.”

Besides, despite all the rhetoric about reducing student stress, so far the government hasn’t eliminated the main source of parental anxiety—the high-stakes exams for high school and college. Says Otis Shi, an education consultant and a director at Gaosi Education, a Beijing-based tutoring company: “The reality is that scores are all the yardstick.” 

To contact the editor responsible for this story: James Ellis at jellis27@bloomberg.net, John HechingerEric Gelman

©2018 Bloomberg L.P.