Chinese tycoons lose $20 billion as company's student refund policy backfires

The promise of refunding candidates who fail the government examination turned out to be the greatest undoing of a Chinese ed-tech firm.

Offcn Education Technology Co built a fortune helping Chinese students prepare for the tough examination to join several government department, which is considered among the toughest in the world, with a success rate of about less than 1.5 percent.

Things were going great for Lu Zhongfang and her son Li Yongxin, the ed-tech company's founders. Their combined fortune reached $21 billion dollars at one point of time.

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But Covid-19 and its economic consequences played spoilsport. The rising uncertainty around private jobs led to the Chinese looking for more stable career options. Bureaucracy is considered one such career option, where people have lifetime job security.

Consider these numbers: in November 2019, 1 million Chinese citizens appeared for filling 24,000 jobs. Three years later, nearly 2.6 million candidates sat for the examinations to secure 37,000 jobs.

This was a classic case of high demand and low supply. Initially, this conundrum worked well for the company. The company's policy of ensuring up to 100 percent fee refund to subscribers who fail the examination helped it woo more customers.

But refund policy also triggered the company's downfall. The average fee refund rate in 2019 stood at 44 percent, which rose to 70 percent by 2022, as per a Bloomberg report.

The business losses of the last two years have impacted the billionaire duo's net worth. From a peak of $21 billion, it has now fallen to less than $1 billion. The billionaire duo have also started selling their shares, in a bid to raise cash and keep the company operations running. Their company reported a loss of $346 million in 2021 and of $158 million last year, media reports said.

The situation may worsen for the ed-tech company. As per reports, over 11 million Chinese students are expected to graduate and enter the jobmarket this year. Given the uncertain economic situation in China, many of them may probably sit for the exam to enter government services.