Business cycles: China bike-sharing start-ups

Nothing screams sustainability in a cut-throat battle for market share like a new PE commitment. This kind of tit-for-tat was apparent in China’s ride-hailing app space when Didi Dache and Kuadi Dache (now happily merged as Didi Chuxing) were vying for supremacy. Over the last 12 months it has moved from four wheels to two as private capital fuels the expansion ambitions of bicycle-sharing start-ups.

Towards the end of February, Mobike announced a strategic investment from Singapore’s Temasek Holdings and a re-up by Hillhouse Capital. It followed a $215 million Series D round of funding in January led by Tencent Holdings and Warburg Pincus, and then a commitment from Foxconn Technology Group. Within a week, Ofo confirmed its own Series D round – worth $450 million and led by DST Global.

The two companies’ Series C rounds were also announced within days of each other in October 2016: Ofo received $130 million across two tranches, one of them led by Didi; and Mobike raised in excess of $100 million, led by Hillhouse, Warburg Pincus and Tencent.

This all-too-familiar arms race has seen Mobike enter 21 cities, with more than 100,000 bikes in each of Beijing, Shanghai, Guangzhou and Shenzhen. It claims to have served over 10 million users, who have completed in excess of 200 million paid rides. Ofo, meanwhile, now provides over one million bikes across 40 cities in China, Singapore, the UK and the US, with about 20 million registered users.

Comparisons are difficult based on disclosed data, but iResearch Consulting has Mobike as the China market leader, with 5.85 million active users in the first week of 2017, four times more than second-placed Ofo. They are not the only bike-sharing start-ups to receive VC funding. In the past three months the likes of Ubike and Bluegogo have closed funding rounds, but they can’t match the big two for scale.

Bike-sharing schemes entered Western markets as government-backed urban development initiatives and China has seen similar activity: the Hangzhou program is the largest globally, with 66,500 bicycles for hire. However, state-run systems are said to be inefficient and the bicycles often unreliable. This and increasing smart phone penetration have created an opening for start-ups.

There is little differentiation in business models. An 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 app records how far the user has ridden. The service costs RMB1 per half hour, although – much like the subsidies offered to drivers and passengers as inducements to use ride-hailing apps – this fee is reportedly being waived at certain times.

Scale is said to be especially important in the bike-sharing space because in most cities the average frequency of use per vehicle is lower than for ride-hailing. Ofo initially focused on university campuses, where usage density is relatively high, but it remains to be seen if the company can achieve scale and sustainability in other markets – domestically and overseas – where user tastes and habits differ. This question is already being asked in China amid reports of bikes being vandalized, stolen, or simply standing unused. Needless to say, costs of upkeep must also be factored into the equation.

For now, though, profitability doesn’t appear to be a priority. Investors are happy to bankroll the battle for market share, presumably in the expectation that a) Mobike and Ofo will eventually merge, creating a single dominant player able to pursue a sustainable economic model; b) these companies will prove they can serve as platforms for a range of other services, thereby achieving critical mass; or c) a bit of both.

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• Topics
• Greater China
• Expansion
• Technology
• China
• Venture
• Transportation
• TMT