BEIJING — As overseas investors reel from Beijing’s regulatory crackdown, the rapid fallout in an industry like after-school tutoring can be a guide to what went wrong, and where future opportunities lie in China.

Major investment companies like SoftBank had been pouring billions into Chinese education businesses before China clamped down this summer. Many of these were either publicly traded or close to being listed in the U.S.

With the hope that future profit, this strategy involved burning cash to support exponential user growth. For the strategy to work, investors aimed for a “winner takes all” approach that they’d used with other Chinese start-ups such as coffee chain Luckin Coffee and ride-hailing company Didi.

Didi essentially paid Chinese consumers to take cheap rides through its app, beating out Uber to dominate about 90% of the mainland market, and went on to raise more than $4 billion in a New York IPO on June 30.

But it soon became clear that investment strategy might no longer work. Just days after Didi’s IPO, Chinese authorities ordered app stores to remove Didi’s app and began investigations into data security — effectively shutting down the business’s growth prospects in the near term.

It came months after Beijing’s efforts to tackle alleged monopolistic practices by the country’s internet technology giants like Alibaba and Tencent.

Beijing was clear in its target for the future, with education clearly being Beijing’s top priority by July.

In October 2020, online tutoring start-up Yuanfudao said it raised a total of $2.2 billion from Tencent, Hillhouse Capital, Temasek and many other investors — for a valuation of $15.5 billion.

Two months later, competitor Zuoyebang raised $1.6 billion from investors including SoftBank’s Vision Fund 1, Sequoia China, Tiger Global and Alibaba.

According to CNBC’s translation of the interview in Mandarin, an investor who was also co-founder of one U.S.-listed Chinese educational company said that they were trying to establish another “oligopoly” like Didi. Due to the sensitive subject matter, the man requested anonymity.

However, education already had major market leaders, he said, adding that it turned out no one could truly beat each other prior to the crackdown.

It was an attractive prospect to become a market leader in tutoring after school. China is home to 1.4billion people, and the country’s culture of education-focused parents.

New Oriental was one of the first to enter this industry. They started their careers in physically leased classrooms and in-person classes. But the coronavirus pandemic in 2020 accelerated the tutoring industry’s shift online, and the cash-burning fights of China’s internet world was in full play.

Both companies reported a net loss in the quarter, as did another industry player, OneSmart International Education Group, which disclosed a 47% year-on-year surge in selling and marketing expenses to 288.8 million yuan.

OneSmart went public in the U.S. on a 2018 IPO that was underwritten and sponsored by Morgan Stanley, Deutsche Bank, UBS. The education company later acquired Juren in China, one the most established tutoring businesses.

The new regulations after school struck the company, which was 27 years old. About a month after the new rules were released, Juren collapsed, just one day before public schools opened on Sept. 1.

OneSmart could be delisted from the New York Stock Exchange since its shares have remained below $1 since July.

Others U.S.-listed Chinese shares are also in trouble. New Oriental didn’t report any net loss in the quarter that ended February 28th, but it revealed $156.1million on sales and marketing during that period. That is 32% less than last year.

The increase in advertising spending to boost student enrollment was due to investors investing heavily and increasing competition, which led customers acquisition costs to soar.

In addition to the crackdown on internet companies and after-school tutoring centers, authorities have  ordered online video game companies to restrict children to playing three hours a week.

Speeches by President Xi Jinping have emphasized the goal is “common prosperity,” or moderate wealth for all, rather than some.

Chinese authorities have a number of mountains to tackle, including education. Other two mountains are health care and real estate, both areas where hundreds of millions have expressed concern about high prices.

Liao explained that in recent years corporate profits have mostly gone to developers of property and businesses based on the internet.

In light of new policy priorities, he said, it’s important for investors to distinguish between internet-based businesses and those developing more tangible kinds of technology like hardware — even if both kinds of companies are loosely referred to as “tech” businesses in English.

With the U.S. now under President Joe Biden and bent on competing with China, Beijing is increasing investing in an ambitious multi-year plan to build up its domestic technology ranging from semiconductors to quantum computing.

The “China market can still offer attractive investment returns for global investors, and the challenge lies in identifying the potential future winners amid China’s rebalancing,” Bank of America Securities analysts wrote in a Sept. 10 report.

They pointed to a shift over the last two decades in the largest Chinese companies by market capitalization — from telecommunications, to banks, to internet stocks. They expect more regulation of the internet and property industry, while advanced manufacturing and technology will be encouraged.

A few potential “future winners” were listed by the bank.

• Sportswear: Anta
• Health care: Wuxi Bio
• Electric vehicles and and EV battery: BYD
• Lithium in new materials: Ganfeng
• Renewable energy: Long Yuan
• Tech hardware: Flat Glass

“Certain industrials sectors that we currently do not cover could also have promising opportunities,” the analysts said.

For Chinese after-school tutoring companies that once attracted billions of dollars, they’re now trying to survive by building up courses in non-academic areas like art or adult education. Those in the industry say it’s an uncertain path that has a market only a fraction of what the companies used to operate in.

SoftBank is waiting for clarity on the regulatory front before resuming “active investment in China,” its Chief Executive Masayoshi Son said in an earnings call on Aug. 10.

“We have no doubts about the future possibilities of China. According to FactSet transcript, Son stated that things would be clearer in one or two years, depending on the changes and the orders.

When contacted by CNBC last week about its investment plans for China, Softbank pointed to how it led investment rounds in the last few weeks in Agile Robots, a Chinese-German industrial robotics company, and Ekuaibao, a Beijing-based enterprise reimbursement software company.

Our commitment to China remains unchanged. SoftBank stated in a statement that they will invest again in the dynamic Chinese market to help entrepreneurs create a new wave of innovation.

However, investors who are looking to make bets in the Asia education sector have chosen to go elsewhere.

After raising $350m from UBS and Zoom founder Eric Yuan, Blackstone, and other investors, Byju, a Bangalore-based online learning company, became India’s most valuable startup. Byju valued at $16.5 billion, according to CB Insights.