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Bankrupt schools and their fleeing foreign bosses

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 carpetbaggers

by 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. 
At the same time, it introduced a new bonus system that gave commission to teachers for signing up new students. A letter signed by the board and circulated among the staff on November 18 2008 said the move was necessary to improve cash flow.  

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.  
A lawyer for LCEH's owner, Li Qitai, denied that Li had fled the country but confirmed that Linguaphone Shenzhen had not been authorised to provide language training. Meanwhile a spokesman for the Lingaphone Group said that it had changed partners on the mainland and was expecting to restart language classes for all students in the "very near term". 

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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There are currently 18 Comments for Bankrupt schools and their fleeing foreign bosses.

Comments on Bankrupt schools and their fleeing foreign bosses

Excellent reporting!

This is fantastic reporting. This is what I was suggesting to Goldkorn as a good industry to look at. The reporter of this story should contact me, if she can, so that I can offer her some leads on some other stories in Chinese education that need to be broken open and reviewed.

Great stuff.

Very interesting article. I used to be a part of the language training industry in Beijing as a teacher. I'm sure glad I'm out of it now.

You should also add Vivid English to this list as well. I never worked there, but they also closed down suddenly due to poor sales and the owners have never been heard from since.

Kai-en and Real Life English took a big gamble opening centers in big cities. When you have high end training centers like Wall Street and English First they are going to have the big advantage over the smaller centers because they have a boat load of money, they are well established world-wide and they have better connections within the government. It would have been better for them to operate out of the second-tier cities. It's still a risk, but you wouldn't have to worry so much about the competition because WSE and EF are only focused in the larger markets.

Anyway, the true losers in all of this mess are the teachers who were left stranded, the students who paid the fees and are not getting lessons and the Chinese staff who are in the same boat as the teachers.

What can you do now except for trying to find out where these idiots live now and extradite them back to China?

And another thing, if you want to learn Chinese it's best to learn either at a quality university in the country or hire a qualified, licensed tutor. Don't ever trust the language training schools unless you check them out thoroughly first.

Wonderful article, and a great idea for differentiating Danwei from the translation blogs.

ah, the more things change the more they stay the same..EF shut down their China operations two or three times before it stuck, as did a bunch of others. English Schools...the only business model in China possibly more problematic than media!

Very much like to see the update!

So this is what happened to Ken Carroll... I've wondered about his sudden absence from ChinesePod. What a shame, and a loss of a good Chinese teacher.

Insightful post. Nice to see Tessa putting all the pieces together.

So many systemic problems in the way English is taught and studied in China.

How's the guy from Crazy English holding up these days?

Great article, superbly researched... thank you

Quotes from the above:

"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."

"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."

Don't make it sound as if this is just something that foreign language mill owners are doing, that is patently false, and it panders to an anti-foreigner sentiment. This article seems well-researched but in fact it isn't; only a few years ago Shanghai Daily and China Daily both had articles in their English AND Chinese language editions that detailed the difficulty students were having getting monies back from school owners who cheated them. At the time most ESOL Institutes were locally owned, and outside the top 10 cities in China, does anyone want to pretend that most ESOL schools are foreign owned? Does anyone want to pretend that the majority of schools aren't in second and third tier cities?

I don't suggest foreigners aren't doing it now, but they certainly don't make up the lion's share of the owners of failed schools that flee. I am certain that anyone who has spent more than 3 or 4 years in the ESOL Industry in China knows about this, so certainly this "reporter" should.

I used to work for Canilx, and the owners of our branch - formerly in Pudong, closed in 2005 - were Chinese. There were many other branches that closed around the same time, and they were Chinese owned as well. There were public protests by students and staff in front of their Shanghai HQ, and it was front page news. For every foreign owned school, I promise you there are many more Chinese owned schools that close and the owners simply disappear with the money. They don't disapppear overseas, either: I know of one owner of a school in Pudong who still lives in Pudong, and he is a native Shanghainese who sends his kids to a nearby public school, drives around in a car paid for with profits gained by cheating students, etc.

Perhaps good reporting might be to ask why school's are allowed to take such large deposits upfront and why the Chinese government continues to look the other way while people fleece those caught up in English mania. Did the "reporter" limit her reporting to the English language media available? That is the only way I can fathom her coming up with such a slanted article.

What a joke to suggest that Chinese might not "reach out to the west" because several ESOL institutes closed abruptly. Do you have any idea how often this happens, not just in China, but all over the world, even in more devloped markets like Korea, Japan, and in the west as well? If a few dozen KFC's in Shanghai, Nanjing, etc, went under, would you suggest that Chinese would reconsider being a global participant?

School owners - be they foreign or Chinese - who cash in and flee are crooks and opportunists, full stop. I don't defend them at all. But what I strongly dislike is this poorly researched and baldly slanted writing that makes it seem as if the gullible and naieve Chinese have been hoodwinked by greedy foreigners.

Do ESOL, the biggest job industry in China (at least for foreigners) a favor and dispense with the shoddy writing.

James G:

The only shoddy thing on this page so far is your fake name.

As editor of this website, I posed a question, which you can find in the introduction at the top of the article. Perhaps you did not read it very carefully; the question was:

"Why are so many foreigners fleeing China in the wake of language school bankruptcies?"

If you don't find the answer to that question interesting, then please do find another website to read, you won't like much that you find on Danwei.

The name's real, as am I. I stand by my critique of the article, and if you care to point out what I've said that is wrong or a mis-interpretation, I'd be interested to read it.

If it soothes your ego any, I generally find the writing on this site to be good.

James G

One correction to the story, many of the expats who arrived to set up small businesses are indeed cowboys and hooligans.

It is also common practice for all expat owners/managers to not just skim but carve out revenue for their own pockets. So an expat business, whether "China consulting" or "english" going belly up is not surprising.

Additionally, many of these businesses, especially english training courses that appear out of the blue don't have the proper visas. China Law Blog has had several articles about China cracking down on visa fraud by foreigners.

Down with the China expat community!!!!!!!

Interesting article - but in relation to the question - "Why are so many foreigners fleeing China in the wake of language school bankruptcies?"

Firstly from what is written it seems that only 6 foreigners have fled, 3 from kaien, 2 from worldlink and 1 from genowledge. Not a lot. The other company was a local franchise.

Why are they fleeing? Well that is simple, the businesses for a variety of reasons went bad, (having a foreign student arrive with H1N1 does not help business) so they had two options firstly to stay and wind up the business according to Chinese Bankruptcy Law, facing angry students and other creditors with no money or return home?

They just picked the logical route. Did they take carpet bags full of cash home, I doubt it.

A fascinating, well-researched article. Could be a strong start to a longer series of articles on educational issues in China.

I also like this new direction, described by Jeremy in his intro:

"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."

Strange that the writer thinks that staying in China 10 years means you are no longer a cowboy. I worked with Brian Mckloskey 20 years ago in ELSI Taiwan and saw him come to China to set up Kaien, in between propping up the long bar and posing in the original Judy's. He was a cowboy through and through.

Very interesting info thank you

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