China transport start-ups: Hot wheels

Technology-enabled disruption of transportation in China has moved from four wheels to two with a spate of fundraising activity by bicycle-sharing start-ups.

Early starter Ofo originated as a student project at Peking University in 2015. It now covers campuses across 20 cities. A student ID is required to access a smart phone app, and the user then enters the code on a nearby bike in order to receive instructions on how to unlock it. Pricing is based on a combination of distance and time, and payment can be made via Tencent Holdings' WeChat service.

Shanghai-based Mobike - which offers orange bicycles to Ofo's yellow - was co-founded by an ex-Uber China executive early last year. The company's app displays each available bicycle in the vicinity of the user and allows a 15-minute pick-up window after booking. A bike is unlocked by scanning its QR code and the charge is RMB1 per half hour. The app records how far a user has ridden and how many calories they have burned.

Both companies have closed funding rounds of more than $100 million in the last fortnight, backed by the likes of Warburg Pincus, Tencent, Hillhouse Capital, and ride-hailing platform Didi Chuxing, operating in conjunction with its own investors.

The business model contrasts that of the bicycle-sharing systems seen in Western cities, which are typically run by local governments. It raises the question of whether China's private sector-driven approach is truly sustainable, particularly given the need for investment in operations, infrastructure and effective control systems.

"There is a real demand for bike-riding services, but can they be monetized across different seasons, when it's either very hot or very cold?" says Jixun Foo, managing partner at GGV Capital, an investor in Didi Chuxing. "Also, I don't think people fully appreciated the costs of maintaining and managing the bikes. People probably won't use the same bike for consecutive trips, so why bother?"

Rolling out

Following the introduction of Vélib in Paris nearly 10 years ago, various cities - including London and New York - have rolled out similar bicycle-sharing programs in order to promote healthy living and a clean environment. The local authority owns the bikes and is responsible for system upkeep. In some cases, corporate sponsorship is used to offset some of these costs.

In China, the Hangzhou government's program is now the largest globally, with 66,500 bicycles for hire. Journeys begin at one of 27,000 stations across the city and end at another. Last year, it recorded 150 million rides out of a population of nine million, with 400,000 rides on average per day. Other Chinese cities have launched similar initiatives and there are more than 400,000 bikes available nationwide, according to bikesharingworld.com. However, this stock isn't fully utilized and systems are said to be inefficient, with some bicycles malfunctioning due to a lack of maintenance.

Increasing smart phone penetration has paved the way for start-ups to participate in this traditional industry, introducing competitive pricing per ride and higher quality vehicles. All bikes provided by Ofo and Mobike are self-developed, although Mobike's cost 10 times more to produce due to the inclusion of GPS units. This means the bikes can be left anywhere in Shanghai rather than be returned to a station. Each one weighs more than 20 kilograms, so they are only suitable for short distance travel.

"They are extremely innovative," says J.P. Gan, managing partner at Qiming Venture Partners, an investor in Mobike. "In New York, the government has to buy the bikes and then find a sponsor to operate them. Every year, it spend tens of millions of dollars not only purchasing vehicles but also repairing them. And then they have to move bikes from one station to another - it can't be a self-sustaining business. With Mobike, users can ride wherever they want."

The key to all online-to-offline services is frequency of use. As such, Ofo concentrates on China's 25 million university students, who are estimated to ride a bicycles between three and four times per day. In a city like Shanghai, the percentage of the population using bikes and the frequency of use is much lower, explains Yiran Liu, a partner Vision Plus Capital, who invested in Didi Chuxing when he was at Temasek Holdings.

"Bike-sharing platforms are different from ride-hailing apps," Liu adds. "With Didi Chuxing, the cars and passengers all are moving around, and that's why the usage density need for ride-hailing is actually lower than for bicycle sharing. In the bike business, only the passengers move, so you need a high density of usage to achieve scale."

Who wins?

The upfront investment for the bikes is also meaningful and the amortization period is long because the maintenance cost per machine per day is high. In this context, the low cost-high turnover rate-fast payback that characterizes the Ofo model (estimated turnaround time: 2-3 months) might be preferable to Mobike (2-3 years). In addition, the latter requires higher initial investment to build its supply chain because the bikes feature more sophisticated components that are harder to repair.

However, Arthur Zhang, vice president of investment at ZhenFund - an investor in Ofo - warns against running to fast conclusions about which model is more sustainable because privately-run bike-sharing businesses are still at an early stage of development.

While Mobike is expanding beyond Shanghai, Ofo has launched citywide, rather than campus-wide, services in Shanghai and Beijing, which puts it in direct competition with its counterpart. Ofo also plans to upgrade its bike fleet through a partnership with smart phone maker Xiaomi and incorporate its service into Didi's ride-hailing platform.

Ultimately, sustainability is all about optimizing the utilization. There are various environments in which the rate might become significant - including campuses, high-density cities, industrial parks, amusement parks and second-tier cities - and they have two common characteristics: the cost of driving a car is far higher than riding a bike; and it only takes about half an hour to finish a five-kilometer journey.

"This is a game of how you allocate your resources - the bikes - effectively, during the operation, and then achieve profitability," Zhang adds.

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• Topics
• Greater China
• Consumer
• Technology
• GPs
• Early-stage
• China
• ZhenFund
• Qiming Venture Partners
• GGV Capital
• TMT
• Transportation
• Venture