A look at China's bike-sharing hopefuls

Chinese technology companies are frequently defined by their US counterparts.

Youku is called ‘China’s YouTube’. Renren is ‘China’s Facebook’. Baidu, a search engine, is usually explained to foreigners as ‘the mainland Google’. Alibaba has been compared to eBay, Amazon and PayPal.

But there is at least one industry where Chinese entrepreneurs are setting trends for the rest of the world to follow.

Two Chinese bicycle-sharing companies, Ofo and Mobike, have managed to pull in as much as $1 billion of investment between them, according to FinanceAsia’s calculations. They have also inspired imitators in the United States.

On March 15, California-based bike-sharing start-up LimeBike announced it had raised $12 million in venture funding from investors including Andreessen Horowitz, IDG Ventures and DCM Ventures.

Toby Sun, co-founder and CEO of LimeBike, explained fairly clearly how the business works. “Users will be able to identify a bike on the street or on our app and with just two taps, will have access to $1 rides, with the ease of parking the bike at their destination,” he wrote on LinkedIn. “No more hunting for a distant docking station”.

If you think that seems remarkably similar to Mobike, which uses GPS-enabled smart-bikes and a self-locking mechanism, you're not the only one. Jeff Jordan, a general partner at Andreessen Horowitz, said that “LimeBike is uniquely positioned to take the best insights and lessons learned from the China bike phenomenon”.

LimeBike’s successful fund-raising should not be overlooked. But the real action in the sector is happening in China. The biggest players are attracting plenty of money from a who's who of investors — and countless rivals are emerging to nip at their heels.

On the shoulders of giants

Although bike-sharing only emerged in China in 2015, the sector has already enjoyed a flood of investment. More than 30 institutional investors have backed one firm or another — and there are at least 24 bike-sharing start-ups in China, according to a calculation by FinanceAsia.

The business is simple. After registering an account and making a refundable deposit, wannabe cyclists can pay Rmb1 ($0.14) for a 30-minute ride.

Although an old-fashioned bicycle might not seem a likely candidate for heavy investment by technology companies, some of China’s highest-profile tech firms have backed horses in the race.

Chinese ride-sharing unicorn Didi Chuxing has invested in Ofo, the biggest player with a 51.2% market share in 2016, according to BigData Research. Tencent is one of the more than a dozen of investors in Mobike, which occupied 40.1% of the market last year.

Through its finance affiliate, Ant Financial, Alibaba in February invested in Youon, a bike-sharing platform requiring no cash deposit but referencing a user’s personal credit records on Alipay.

Baidu, the only name from the “BAT” trio that is not a participant yet, is also talking to bike sharing start-ups at the moment, an investment manager at the firm told FinanceAsia. He did not give details about the targets.

Better together?

Among the players, Ofo and Mobike form the premier league, having collected around $1 billion between them from investors. Beijing-based Ofo is valued at around Rmb13.8 billion while Shanghai-based Mobike is worth Rmb10.5 billion, according to an annual start-up report by Chinese media Jiemian.

The impressive fund-raising binge has provided the two companies with adequate war chests for market expansion — and competition.

During the Chinese Spring Festival, Ofo rolled out a free-ride campaign nationwide. Shanghai-based Mobike quickly responded by allowing its users to ride the bikes for free on February 20 in Shanghai.

After both completed their D-round fundraising, the duo accelerated cash burning by offering “recharge Rmb100 and get another Rmb100 credits for free” schemes and similar incentives to their users.

All of this may seem familiar to tech investors who watched Tencent-invested Didi Dache and Alibaba-controlled Kuaidi Dache burn billions of dollars in a subsidy war before they merged. After the merger, Didi got into a subsidy war once again with Uber. Didi Chuxing eventually bought UberChina in an exchange for the latter’s exit.

Although there is no foreign player at the moment in China’s bike-sharing industry, an obvious question strikes investors: will Mobike and Ofo end the war through a merger, just like Didi Dache and Kuaidi Dache?

Fu Jun, president of one of Ofo’s institutional investors, Macrolink Group, thinks not. He said during China’s Two Sessions that “there should be competition in the bike-sharing space” and that as a shareholder, he wouldn’t agree with a merger between Ofo and Mobike.

Davis Wang, co-founder and CEO of Mobike, also told a domestic television station that there is unlikely to be a merger in the bike-sharing industry. 

A Shanghai-based buyout fund manager echoed the view, telling FinanceAsia “the duo will keep fighting” and that “neither of the two can kill the other”.

The business model

Ofo and Mobike certainly don’t appear to have much trouble convincing investors that they can make ends meet. “The model works,” said one investor, who declined to be named but whose organisation invested in Mobike.

On a per bike basis, assuming the cost of producing a bike is Rmb2,000 and it can be used for two years, all it takes is 1000 rides per year for the firm to break even, he said. And as long as two users are registered to share a bike, and each take two rides — on their way to work and back home — every day, the math would work.

Some Chinese consumer industry analysts put the time for the firms to break even on a per bike basis at three months.

Mobike designs and manufactures its bikes, adding digital locks, while Ofo focuses on less flashy models from external suppliers. Mobike’s cost per bike is reportedly Rmb3,000 and Ofo's Rmb300, while the average life cycle per bike is four years for Mobike and one year for Ofo.

What gets investors excited about these companies is that so much of China's public transport leaves people with long walks after work or when heading back from an evening out. This is the so-called “last-mile” of day-to-day travel. “Bikes are the best replacement,” an investor said.

Although in some cities, there are public bikes that one can rent, they are placed at fixed docking lots, which are not widely available. They also require the user to return them at the specific places. Mobike’s GPS-enabled docking-free bikes, however, allow users to find and park the bikes at their convenience, and lock — or unlock — the bikes using their mobile phones.

Another notable feature of their platform is the need to put down a deposit. Ofo requires Rmb99 while Mobike Rmb299. Although users can withdraw their deposits, most of them don’t. Some estimate that Ofo and Mobike have together collected Rmb4 billion in cash deposits.

The Mobike investor confirmed to FinanceAsia that bike-sharing platforms can make some interest income on the deposit, although the government does not let them spend the money on dicey investments, such as wealth management products.

The future looks bright for China’s bike-sharing industry. The capital is coming in quickly — and it doesn’t hurt to inspire a few copycats overseas. But there are some questions about how much the business model will evolve.

Pony Ma, the founder of Mobike-investor Tencent, voiced his concern over the industry during the Two Sessions. “Amid such fierce competition, now some bike-sharing firms are moving towards the free-rides direction…in the future, will they pay for their users to ride the bikes?”