Internet & Tech

New business cycle

Shared-bike firms fight for dominance on Chinese streets

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The distinctive ofo yellow and black bikes are now in 22 Chinese cities

Think of the British university city of Cambridge, and images of students and dons on bicycles spring to mind. In fact, with one-in-three residents pedalling between home and work, Cambridge is said to lead the UK in per capita cycling. That might explain why a fast-growing Chinese bike rental firm has chosen to kick off its European expansion there.

This month Ofo delivered 500 of its distinctive yellow-and-black hire bikes. “We chose Cambridge because it is so bike-friendly,” Angela Cai, head of communications, told China Daily. The bikes can be hired with a smartphone app that uses GPS to find the nearest available one. Unlike the ‘Boris Bikes’ of London fame, they don’t require docking stations and they are unlocked using the app, which deducts payment in a similar fashion to Uber.

In fact, one of Ofo’s backers is Didi Chuxing, China’s version of Uber. Lei Jun of Xiaomi is another supporter and Ofo now offers its services in 22 Chinese cities.

WiC first mentioned bike-sharing apps in WiC339, focusing on market leader Mobike. As of January, Mobike had 978,000 daily active users, while Ofo claimed 486,000. They are the two dominant players, but competition is intense. According to FinanceAsia, there are now at least 24 bicycle sharing companies in China. That partly explains why Mobike and Ofo are looking to export their services (more on which later).

As popular as the shared bicycle concept has become, the business model also has plenty of detractors. One complaint is that the sudden surge in public bicycles has caused chaos on roads (and pavements). A picture from Shanghai recently went viral, showing more than 4,000 rental bikes that had been impounded after they were improperly parked. This creates tension between operators and the local authorities, as the latter is often having to clean up after the former.

Thin margins on rentals mean that the providers are minimally staffed. According to the general secretary of the Shanghai Bike Industry Association, one of the rental companies in the city operates over 100,000 bikes, but only has 50 staff to manage its fleet. “This of course causes troubles,” he says. Local governments have responded by bolstering the regulations on the industry. Shanghai officials are demanding that the major operators in their municipality stop supplying additional units while the new rules are finalised.

Among the suggested amendments is a clause that requires firms to return customer deposits within seven days of request (Mobike charges a Rmb299 deposit, Ofo asks for Rmb99). A number of customers have reported delays in retrieving their cash, fuelling the industry’s critics. Indeed, an article on Huxiu suggests there are more than Rmb4 billion ($579 million) of deposits in the industry’s bank accounts. One Mobike investor told FinanceAsia that the bike-hire firms aren’t allowed to use the cash to make investments or offer high-interest loans, but the fact that deposits are not being returned more readily has been a source of customer frustration.

Never far from any of the newer technology trends in China, Alibaba has arrived on the scene, offering a workaround to the deposit dilemma. Ant Financial, Alibaba’s affiliate, has partnered with Ofo and another bike sharing firm, Youon, to offer deposit exemptions to customers who have over 600 “Sesame Credits” (for more on Ant Financial’s credit system, see WiC352) – i.e. are considered trustworthy.

In another move typical to China’s tech industry, Tencent has invested in Mobike, a rival to Alibaba’s new ally, Ofo.

Both of the industry leaders completed fundraising rounds recently (Ofo attracted $450 million this month, while Mobike got $215 million in January). The capital raisings value the duo at over $1 billion each, the Wall Street Journal says (although neither are profitable).

Meanwhile, as Ofo counts on Cambridge to trigger its European growth, the Wall Street Journal says the bigger priority is in the US, where Ofo wants to introduce a fleet of 50,000 shared bikes in 10 cities by July. (Perhaps why Apple boss Tim Cook dropped in at Ofo’s HQ in Beijing last week.)

Of course, that’s small beer by Chinese standards: Ofo has amassed a fleet of more than 1.5 million bikes in its home market, mostly over the past year (it was founded in 2014 on a Beijing university campus).

Mobike also has ambitious plans for the US, and showed off its bikes at this year’s South by Southwest festival in Austin, Texas. The Shanghai-based firm is in expansion mode too, claiming that customers have taken 400 million rides since it launched 11 months ago.

The company also told China Daily that it believes its major competitive advantage is its bike manufacturing plant in the city of Wuxi. A year ago this was just a two-storey factory, but the fundraising rounds have boosted output to 14,000 bikes a day. The general manager of the factory told China Daily that the model of bike is constantly being improved. For instance, the most recent models – just released on Shanghai’s streets – are 3kg lighter and each fleet of bikes is customised for the climatic conditions of the cities in which they are expected to operate. Beijing, for instance, gets bikes with cold-resistant batteries and tyres with a deeper tread to give better grip in wintry months. Extended mud guards are more of a priority for rain-prone Wuxi, the newspaper points out.

In fact, the growth in bike-sharing start-ups has been a boon to the bicycle-making industry in general. According to Xinhua, Tianjin Flying Pigeon – one of the oldest Chinese brands in the field – will deliver 450,000 bikes to the rental start-ups this year and the China Bicycle Association estimates the new hire firms could buy 20 million bikes this year.

Of course, this sort of expansion also explains why local authorities are rushing to roll out regulations before things get out of control.

And for the shareholders in most of the new ventures there will inevitably be questions about the path to profitability, particularly with so many competitors in the field.

The stage is set for a price war – particularly between the cashed-up market leaders. In fact, the first volley was fired over the Chinese New Year, when Ofo offered its bikes for free. Mobike quickly responded by waiving fees for a day as well. According to Finance Daily, both companies have wooed customers with other money-burning offers too, such as “if you recharge Rmb100, get another Rmb100 of credits for free”.

The price wars in car ride-sharing and between food delivery apps persisted for months before the market leaders sued for peace or decided to merge. Mobike and Ofo now seem set for a race of their own, but whose to say they won’t opt to operate in tandem in the future?


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