Communism is about sharing. So no wonder that the concept of a ‘sharing economy’ has caught on in China so quickly. In fact Chinese media described 2017 as the booming sector’s “epoch year”.
Private equity investors seem more than happy to pump money into concepts that range from sharing car rides and phone chargers to practically anything one can imagine (yes, including basketballs – as WiC has earlier reported). According to the State Information Centre, transactions in the sharing market grew about 40% to top Rmb4.5 trillion ($714.47 billion) last year.
Ironically 2017 might also go down as the year that the Chinese sharing boom began to bust. At least 19 start-ups have gone under, seven of them bicycle-sharing firms. Mangled piles of dockless bikes in major cities, or “bicycle graveyards” as these dump pits are called, now serve as a visual reminder for investors of the risks in this overheating sector.
The warning signals, mind you, have not stopped the country’s internet titans from upping their stakes in lossmaking start-ups. Alibaba has reportedly just splashed $3 billion for a stake in Ofo, a bike-sharing app that has been in a cut-throat battle with the Tencent-backed Mobike.
The deal values Ofo at $10 billion but intriguingly, Alibaba is buying the stake from Zhu Xiaohu, a maverick investor in the sharing economy sector, who had earlier been a strong advocate for a merger between Ofo and Mobike.
Zhu’s exit now has Chinese private equity investors buzzing over what the future holds for the likes of Ofo, and whether other parts of the sharing economy are heading towards boom or bust.
Who is Zhu Xiaohu?
Also known as Allen Zhu, the 44 year-old is a managing director with Chinese fund house GSR Ventures. According to Jiemian, a tech-focused portal, the Shanghai native was the son of a university professor. He has also worked as a consultant for McKinsey in China.
Tiger Finance, a zimeiti active on Sohu, describes Zhu as a “legend” among Chinese private equity investors. Why? because since 2008 almost every start-up he has invested in has turned out to be a unicorn (i.e. with a valuation higher than $1 billion). Forbes magazine also put him on its “Midas List” in 2016. (Zimeiti is the Chinese term for a popular or influential blogger – many of them are ex-journalists or from the tech sector.)
Zhu owes much of his stellar rise to the sharing economy and e-commerce in general. GSR’s website says the company was one of the first to invest in Didi Chuxing, China’s dominant car-hailing app, food delivery firm Ele.me, travel ticketing site Qunar, and last but not least, Ofo.
Private equity firms typically work behind the scenes. You won’t often see a manager from KKR publicly criticising Blackstone’s projects, for instance. Zhu, on the contrary, has thrived on being a loud-mouthed opinion leader in China’s investment and media circles. “Zhu Xiaohu knows very well entertainment comes first in the internet era. He knows how to use his influence to turn a company he has invested in into a star,” Tiger Finance noted, adding that he has a prolific record for attacking the rivals of his portfolio companies such as Meituan (which competes with Ele.me).
As a result Zhu often finds himself at the focus of social media discussions. In a controversial episode in December, for example, Zhu was widely ridiculed for suggesting that he would never invest in start-ups in which the founders were born before the 1970s (this was according to a 52 year-old company boss, who claimed Zhu said this to him).
Another of his widely shared investment principles: “We as investors always pick companies which allow us to take profit within a year. Any business model requiring more than two years to break even is a Ponzi Scheme.”
Why is Zhu in the news?
Zhu’s flamboyant style has even irked Pony Ma, the otherwise low-key founder of internet giant Tencent. After a slew of public attacks on Mobike, in which Ma is an investor, the Tencent boss cited data from WeChat Pay and wrote on his WeChat account in June that Mobike’s active users were more than double Ofo’s.
Zhu then took on Ma in a widely publicised online argument. “Let the market data speak after one year,” Zhu wrote at the end of the pair’s debate, adding that there was “no chance” of a truce between Ofo and Mobike.
For onlookers Zhu’s opinions carried considerable weight – and not only because GSR was a major shareholder in Ofo. He was also one of the driving forces behind the landmark merger between Didi Dache and archrival Kuaidi Dache in 2015 to create today’s Didi Chuxing (and also drove its subsequent acquisition of Uber’s China unit).
However, after several bike-sharing firms went bust, Zhu made a remarkable U-turn on his earlier statement dismissing a merger. At a financial forum in September, the investor suggested Ofo and Mobike had taken over 95% of the bike-sharing market but the duo was still burning money every month so as to compete with each other. “The duo could only be profitable if they merge,” Zhu said.
Speaking at another conference on December 9, Zhu reiterated that an “attritional war” between the bike-sharing duo is “totally senseless”.
Hopes for a Mobike-Ofo merger, however, were dashed in that same month when reports began to make the rounds that GSR had exited Ofo.
The speculation began with a speech by Zhu’s brother-in-law, who suggested Zhu had sold off GSR’s Ofo stake to Alibaba for $3 billion. China Entrepreneur, a reliable source of business news, also cited “investors close to Ofo” and reported this week that Zhu had signed off the sale in early December.
“With Zhu’s exit, the talk of an Ofo-Mobike merger also comes to a full stop,” the magazine concluded.
What is GSR’s exit strategy?
So far GSR has yet to officially confirm its exit from Ofo. But a recent comment by Zhu has gone viral on Chinese social media: “After taking profit, I don’t give a damn if there is a flood.”
According to the tech-focused website Huxiu, the statement (inspired by the French expression “Après moi, le deluge” attributed to King Louis XV’s lover) actually points to another of Zhu’s investment principles: he couldn’t care less how disastrous a portfolio company or its respective sector does after he exits.
The sharing economy is meant to eliminate waste and improve efficiency. But Huxiu describes private equity investors like GSR as “bad money” (invoking the concept of Gresham’s Law that “bad money drives out good”). Indeed, the widely-followed website believes the short-termism of China’s cash-rich private equity financiers has proven to be a disruptive force.
“We have no problem about investing in bike-sharing. But not in this resources-wasteful way. They should first give Ofo and Mobike a small amount of money – and let them trial for a couple of years in Beijing and Shanghai before rolling out big time across the country,” the portal wrote, adding that Chinese bike-sharing firms have raised no less than $3 billion in the past two years, of which one third had already been buried in the “bicycle graveyards”.
Then again, bike-sharing is not the only sector awash with speculative money. The booming sharing economy has seen investors chasing one hyped idea after another.
Some of the concepts are barely plausible. According to newspaper CBN, investors poured Rmb1.2 billion in May last year into the phone charger-sharing industry, when 35 start-ups were fighting to be the next big thing (see WiC366).
Although seven of the charger rental firms didn’t even survive to see out the “epoch year”, investments in the sharing phenomenon have since caught on in other categories, such as umbrellas. (The latest examples are apps that allow travellers in China to share a hotel room. Some of these apps even have an option for a man and a woman to share a room – suggesting it might not just be about reducing cost.)
For private equity firms, the returns from just one successful project can be worth all the risks. For instance, GSR initially invested about $7.5 million in Didi Dache, and that stake is now worth at least $800 million.
Before an exit window appears, these young sharing firms have to compete mercilessly with each other – using the cash provided by their financial backers to build market share. Ofo is reportedly spending more than Rmb200 million a month.
Venture capitalists always hope to pick winners, but in some cases they are selling at a profit even before the sector consolidates. A rival private equity firm might buy. Better still, the M&A teams of China’s internet leaders – Tencent and Alibaba – often come knocking.
“Simply put all they [private equity firms] need is to create an ‘unreal frenzy’ for a sector by capturing everyone’s imagination, splash the cash to keep operations going, until the day Alibaba and Tencent arrive and take over,” Huxiu comments.
Why would Alibaba take the bait?
In aggregate Ofo and Mobike provide more than 50 million daily bike rides. The market is expected to grow to 200 million rides a day by 2020. For major payment operators such as Alibaba-backed Alipay and Tencent’s WeChat Pay, this is one of the busiest transaction platforms in the world (hence their interest).
It’s also particularly important for Alipay, given its offline usage (i.e. paying for things in a bricks-and-mortar environment with a smartphone app) has been lagging behind that of Tencent.
“Bike-sharing is a tiny business itself but its high usage could still have a big impact on the mobile payment and other O2O markets,” Securities Times noted. “Alibaba needs to make sure it has the right chips to keep the gambling going.”
New avenues in the sharing sector could also allow aspiring newcomers, such as the TMD (Toutiao, Meituan-Dianping and Didi, see WiC394), to take on the BAT troika.
Didi’s car-hailing app has more than 450 million users and it was responsible for around 7.3 billion journeys in 2017. Riding on these users, Didi itself has invested in Ofo too, positioning bike-sharing as a natural “last mile” extension to its core car-booking operation.
Didi is also testing a wide range of retailing services. The latest innovation turns a vehicle into a ‘mobile convenience store’. A Didi driver might, for instance, get a hot coffee from Starbucks for a passenger that pre-ordered it on the app.
The latter initiative might even see Didi competing head-to-head with Meituan, which is likewise the result of an earlier game-changing merger of two archrivals.
The company started out as China’s answer to Groupon, but it morphed into restaurant bookings and meal delivery. With its Big Data to back it, Meituan now sells restaurant owners and food chains crucial intelligence including where to open their new outlets and advice on their most popular dishes.
Earlier this month, Meituan launched its inaugural Black Pearl Restaurant Guide. Leveraging on its popular food rating system, the internet app has compiled a list of 330 recommended restaurants in 27 Chinese cities. Of these 28 have been awarded “three diamonds”, a status that the guide implies puts them on a par with the likes of Robuchon or The French Laundry.
This Black Pearl list, obviously, is an attempt to rival the Michelin Guide. But Meituan’s interest in car tyres doesn’t end here. More interestingly, Meituan has also expanded into Didi’s car-booking territory. Caixin Weekly reported last month that Meituan plans to roll out its ride-hailing service in seven Chinese cities this year. So just when onlookers were convinced that Didi had become China’s undisputed leader in the sector, onlookers now wonder if Meituan’s move will revive the price wars of old. (Meituan is part of the Tencent ecosystem, see WiC391).
Geely, the high-flying carmaker from Zhejiang, has also entered the frame – in its case drivers booked via its app will be behind the wheel of a new Geely electric car.
Will a ceasefire ever be agreed?
An important precondition for peace talks is that the warring parties have fought to a standstill.
“When both sides come to the conclusion that they cannot kill each other off, their shareholders will stop providing capital and instead swap into each other’s shares. In this way both sides are happy,” Securities Times observed.
This happened with Didi and Meituan – plus in an even earlier truce that saw video streaming firms Youku and Tudou merge.
Nevertheless Alibaba’s latest investment in Ofo has signalled the arms race might heat up in the bike-sharing market. Tencent, after all, led a $600 million funding round in Mobike just six months ago. To complicate the situation further, Didi said last month it would take over the failed bike-sharing firm Bluegogo and create a third force in the sector (intriguing given it’s 25% stake in Ofo).
So Allen Zhu might be right: a conclusive consolidation in the bike-sharing sphere could be another costly price war away.
Meanwhile watch closely for what Zhu invests in next…
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