Posted by Jeremy Goldkorn on Tuesday, March 16, 2010 at 6:38 PM
TV presenter Al Roker studying Chinese at WLE in happier times
When Danwei started in 2003, our mission was to fill in the gaps in English language coverage of China by extensively translating and commenting on Chinese writings in the media and Internet. Back then, the only other website that was doing something similar was ESWN.
But now, those gaps are far fewer: blogs and websites as different as China Digital Times and China Smack focus on many topics that were once invisible on the English Internet, and every day seems to bring a new translation blog, or a comprehensive China section of a large news website, as diverse as the Wall Street Journal's China Real Time or the English language Global Times.
At Danwei, we are not going to stop our translations: there remains a deficit of information in English about China and Chinese people, and especially information about China as seen from a Chinese point of view.
But we are also going to start publishing stories that concern other information gaps about China. One such lacuna in traditional media coverage is news that is of great concern to people who live in China but which is neglected by the English mainstream media because it does not fit a broader narrative about China that suits the news agenda of the Western press.
We commissioned our first such story from Tessa Thorniley, a freelance business and travel writer based in Shanghai. She writes for newspapers, magazines and websites including The Daily Mail, the South China Morning Post, the Guardian, The Daily Telegraph and Wallpaper.
We asked her to answer the question: Why are so many foreigners fleeing China in the wake of language school bankruptcies?
Language schools and carpetbaggersby Tessa Thorniley
Learning English has never been more popular in China, so why are so many English language schools going out of business?
In the last six months, four of the longest-running schools have suddenly collapsed, one day signing up new students and outlining expansion plans and the next day bolting their doors.
They have left chaos in their wake: students have been evicted from their digs and lost their course fees while teachers have been left unpaid and unemployed.
Joint venture partners and joint licensees are furious and in some cases being pursued by the authorities. Landlords are disgruntled and debt collectors are beginning to circle ominously.
In Shanghai, Kai En went under in December, shutting its five schools. In Beijing, World Link Education's Real Life English closed in October. The China franchisee of the UK group Linguaphone closed its six branches one-by-one last year and Genowledge, founded a decade ago, failed last Christmas.
In almost every case the founders and owners of the schools were foreigners who had been in China for over a decade, building up their businesses. They were not cowboy operators, but entrepreneurs who had based their lives in the country, owning property and sending their children to local schools. Now they have had to flee China abruptly, never to return.
Ken Carroll, Steve Williams and Brian McCloskey of Kai En left behind millions of renminbi of unpaid wages and unreimbursed tuition fees, as did Anders and Amy Johnson of World Link. Just one of Linguaphone's six training centres had 4 million yuan of outstanding tuition on its books.
China has been seized with “English fever”, as the phenomenon is known in Chinese, ever since it started to open up its economy to the outside world in the late 1970s. Today, linguists put the number of Chinese now studying or speaking English at between 200 million and 350 million. English is the only foreign language tested in school, and the Chinese are unified in their belief that a good command of the language can have a transformative effect on your career, catapulting you towards wealth. One of the largest school systems with significant revenues from English learning, New Oriental, is traded on the New York Stock Exchange.
However, despite the phenomenal popularity of English lessons, the buzz inside the industry is over which school will be the next to go bust. Since the financial crisis, young workers have lacked cash for English lessons, and an increasing number may be wondering if it is worth reaching out to the West when China's domestic market is booming.
Meanwhile, the number of schools continues to proliferate, and some of the most established English schools are finding themselves undercut in prices and outgunned by more modern teaching methods.
After Kai En suddenly closed its doors, the rumor mill went into overdrive. Carroll and Williams were blamed for neglecting the school as they concentrated on ChinesePod, a Mandarin-learning podcast run by Praxis Language, while McCloskey, who was in charge of day-to-day management, was labeled “a better teacher than a businessman”. Alex Wee, who arrived just as the financial crisis struck to be the managing director, was criticized for failing to deliver on the promises he made to the board.
None of the senior management have responded to emails and telephone calls. But several former teachers and two potential investors who had access at one point to some of the company's financial information have come forward to piece together what was happening behind the scenes.
They describe a company that was showing signs of strain as early as the middle of 2008, well before the financial crisis struck. It was around this point that Carroll and Williams quit the full-time management of Kai En to focus on Praxis Language, although they both remained on the board.
Kris Fedorak, a former Kai En teacher who worked at the school for four years until July 2009 said that the loss of Carroll in particular – a charismatic front man who appeared regularly on Chinese television – had hurt the company's visibility to prospective Chinese students at a time when larger competitors were ramping up their marketing campaigns. “Brian McCloskey was a good teacher but he was not an obvious business man or front man,” Fedorak said.
A member of Kai En's Human Resources staff, who asked not to be named, said that Kai En began delaying payments to its teachers in November 2008. With salaries being delayed and contracts being cut back, Kai En began to struggle to attract good staff.
However, Iain Manley, who taught full-time at the Pudong branch of Kai En for 18 months, said the school's decline was precipitated by “suicidal mis-management” rather than by anything more sinister.
“As the school expanded, costs became very high and in the end it was too big and too wasteful. There were too many managers and trainers. When budget cuts needed to be made, they did ridiculous things like cutting the supply of toilet paper in the schools and giving us marker pens that could barely write,” he said.
As the financial crisis bit during the winter of 2008-9, Kai En's classrooms fell empty, remembered Fedorak. “The school made it through the SARS crisis, but after the Spring Festival in 2009, when people returned from home, things didn't really pick up,” he said. The students who did have money to spend were attracted by other schools. “I think the massive advertisements for English First and other schools was finally wearing through Kai En's little word-of-mouth network,” he said.
Meanwhile, Kai En's joint venture partner, a training school affiliated with the giant state-owned Shanghai Construction group (SCG), had stopped McCloskey from implementing any radical changes. “Early on, Brian McCloskey wanted to expand and change things, but he said the JV partner was resistant. Kai En was authorized by the Shanghai education authorities, so it was restricted in what it could do and how it could raise money” said Fedorak.
In order to turn the situation around, McCloskey hired Alex Wee towards the end of 2008. The arrival of Wee, a Singaporean who is alleged to have worked at another failed language center, Informatics China, prompted the resignation of several senior Kai En managers, who had little faith in his proposals for the business.
One potential investor in Kai En said Wee had promised to invest in the business and bring with him government connections who could help with a potential roll out of the franchise in Sichuan province among other ventures." “As far as I could tell, Brian McCloskey brought Alex Wee onto the board because he agreed to invest. Then, when it became clear that he could not deliver on his promises [about government connections], Brian could not fire him,” he said.
“Brian let slip to me that the schools were only earning 400,000 yuan a month, which is not enough to even run the main office. They had been bleeding money for more than a year. What the management should have been doing was scaling back, not looking to expand further,” he added.
The school continued to promise its teachers that it was close to securing new funds, but investors shied away. “Towards the end we were told that a Chinese investor had been found, so we were still selling courses to prospective students right up until mid-December 2009,” said Manley.
When Kai En finally closed, more than 100 students who had paid between 7,000 to 10,000 yuan for classes well into 2010, came forward. In the aftermath of the collapse, the local government told SCG to sort the mess out, even though the joint venture agreement had expired at the end of 2008.
SCG agreed to honour the salaries of all foreign full-time staff with proper visas and has reopened the school's Xujiahui site to continue classes for students who had already paid. No new students are being enrolled. The school's Chinese teachers, meanwhile, have been paid by the Labour board. No one at SCG who was prepared to talk about Kai En could be contacted for a comment.
The owners are unlikely to ever set foot in China again. Hank Horkoff, the chief executive of Praxis Language, the owners of ChinesePod, confirmed that neither Carroll or Williams are now working for the company.
He said: “They remain minority shareholders in ChinesePod. In terms of what happened, I think the English language sector is very low margin, with low barriers to entry. Traditional schools have inflexible, fixed costs with teacher contracts and expensive leases. This is compounded by fierce competition in first-tier cities, typically where foreign-run schools enter the market. When the financial crisis struck, demand dropped and costs remained the same. Schools resorted to drastic measures to pull in pupils to cover costs. Smaller schools, without deep pockets, were hit hardest.”
According to financial analysts tracking the industry, there are now around 30,000 organizations or companies that offer private English lessons in China and the size of the market has doubled in the last five years to around $3.5bn (£2.1bn).
Many of the problems that hit Kai En were also behind the collapse of World Link Education, a company with offices in Seattle and Beijing. Its three branches of Real Life English and two branches of the Academy of Chinese Language Studies (ACLS) were run by Anders and Amy Lim Johnson, a husband-and-wife team.
The group had been in business for 11 years, and counted Al Roker, the weather and news anchor on NBC, the US network, among its alumni. It padlocked its classrooms on October 15 last year and posted a notice saying that classes would shortly resume. Soon after that, many of the foreign students who were lodging in Beijing were evicted because World Link had failed to make their rent payment.
The owners, who had taken their three children out of school and decamped to Sweden in June, were still denying in late October that there were serious problems. In a series of emails to teachers, some of whom had not been paid for several months, Anders Johnson insisted that there was no cause for alarm.
He blamed a 40 per cent drop in enrollment on the H1N1 virus and on China's new labor laws which he said had made staff contracts more costly. And one missive sent privately to a student on October 14 stated that the company's revenues “were at $4.7m with operational losses running at $451,000 for the last 12 months”.
However one source, who asked not to be named, described the state of the school's accounts as “farcical.” He said: “They couldn't produce any real numbers, they had no systems and they were not accounting properly or using GAAP [the US accounting standard]. In the end, Anders wanted us to go in and do his due diligence for him, to find figures and documents.”
He added: “He was committed to running the schools but he had been too ambitious in opening new sites. When the revenues then dried up, that had proved fatal.”
When World Link closed, almost 70 foreign students, some paying $18,000 for a year's tuition and board, and 700 to 800 Chinese students, were affected. Johnson asked them for their personal bank account details, to enable World Link to refund them, but the funds never arrived. Johnson stopped responding to emails late last year. “In the end he was very unprofessional,” said Matt Pillar, a former student at ACLS and a Harvard MBA graduate.
After he then failed to make good his promises to re-start classes or find the students an alternative school, a group of students filed a complaint with the Economic Crime Investigation Unit of the Chaoyang Public Security Bureau. The Education Ministry declined to comment on the case, but the PSB agreed to launch an investigation. World Link's Chinese students have now retained a lawyer and are pursuing Johnson's legal representative in China, Professor Wang Jian at the Beijing University of International Business and Economics. He did not respond to a request for a comment.
Fleeing overseas is a common tactic for foreigners facing financial ruin, who rarely opt to test China's bankruptcy laws, according to Steve Dickinson, a Qingdao-based lawyer who co-authors the China Law Blog.
“China has a bankruptcy law but is almost universally not used. All company owners believe at any moment the Government could seize their business so they take everything out of the company every day. When trouble comes, it's easy to bail out. They've taken everything out already. Usually at the end there is no money or barely enough even to pay for a plane ticket out,” he said.
Linguaphone, which was founded in 1901 and has more than 200 training centers around the world, locked more than 1,500 students out of lessons when its franchise partner closed its six schools after it ran into “financial difficulties”. Linguaphone China Education Holdings, the local franchisee said its shareholders had decided not to invest further in the business, and a lawyer in Shanghai, who gave his surname as Luan, confirmed that he was “working out the insolvency” for three of LCEH's sites in the city.
The schools in Shenzhen, Wuhan and Guangzhou closed one after the other. When 41 staff from the Shenzhen branch stormed the office in Futian two days after it closed in August last year, they claimed the company owned them 400,000 yuan in salaries for the previous two months. LCEH had also enrolled more than 400 students, paying a total of 4 million yuan, for summer classes, despite the fact it was unlicensed to provide tuition.
Unlike the other three institutions, Genowledge was a corporate training centre that offered business English language classes from offices in Beijing and Shanghai. However, Cristoph Worschech, the German owner, joined the crowd of fleeing owners at the end of last year. Mr Worschech did not return any emails or phone calls to discuss what had happened.
At all four companies, a combination of the financial crisis, poor management and an evolving marketplace seems to have spelt ruin. As the English education sector has grown, competition has grown fierce between major players such as English First, Disney and Wall Street English, recently bought by Pearson, the owners of the Financial Times, and Carlyle Group.
Smaller and nimbler players have also stepped forward with classes over Skype, podcasts and even English lectures in public stadiums.
To try to compete and gain scale, Kai En and World Link spent the money they were receiving upfront from students on expansion, but when the financial crisis struck, the flow of cash dried up. One rival said: “Running one school successfully is not particularly difficult. Running five or six is considerably tougher and requires a high degree of professionalism and the careful control of costs. I think that is what many of the schools today lack.”
Or, as Manley put it: “15 years ago schools didn't have to be exceptional to do well, they just had to be in the right place at the right time. All that has changed.”
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