Didi gets on its bike in deal with bust Bluegogo

China's dominant ride-hailing app swaps four wheels for two as it eyes a niche in the crowded bike-sharing market. Here's what it means for Didi, its rivals and their investors.

Ride-hailing giant Didi Chuxing is defying warnings of a bubble in China's bike rental market, revealing plans to add a bike-sharing platform to its app which will incorporate bicycles from a range of companies.

The announcement came as Didi Chuxing confirmed a tie-up with Bluegogo, which was China’s third-largest dockless bike-sharing service operator until it went bust in November. While terms of the deal were not disclosed, Didi said it would offer Bluegogo's bikes on its app, and would also offer  Bluegogo customers the option of converting credit they haven't been able to redeem  for Didi bike and car ride coupons of the same value.

The deal, which follows hot on the heels of Didi's first outright purchase of a foreign peer, Brazil's 99, further clouds the picture for China's already overheated bike-sharing sector even as major players Ofo and Mobike seemed to be on the cusp of fighting off their smaller rivals. The pair own over 90% of the market, but the deal with Bluegogo has the potential to revive a company that was winning fans among Chinese cyclists for the smooth rental experience it offered. What's more, Didi is offering Bluegogo riders the chance to hire a bike without additional deposit.

Adding intrigue is the fact Didi is planning its own service despite being a major shareholder in Ofo. What's more, Mobike recently launched its own car-sharing unit Mobike Chuxing, of which FAW Car, a Chinese state owned auto maker will buy a 10% stake.

It was not immediately clear whether any form of cash injection is involved in the deal. But under the arrangements reached between the two, Bluegogo would retain the brand name, user deposits, debts and other related properties.

Current Bluegogo users will have the option to convert their deposits, privileges and top-up values into Didi bike and car ride coupons of equivalent value, according to the announcement. As for unpaid employee salaries and debts to suppliers, Bluegogo would start the settlement before Chinese Lunar New Year on February 16, according to an open letter by its CEO Li Gang on Tuesday. He said this would come from his personal efforts to raise money from various channels.

Bluegogo effectively went out of business on November 20 in bankruptcy, by far the biggest collapse yet in an industry which has built a massive customer base in large Chinese cities, where riders typically rent a bike for a journey of up to three kilometres. As FinanceAsia reported in June, the proportion of Chinese commuters opting for a bike over taxis, driving or public transport had doubled from 5.5% to 11.6% in the previous year. iResearch Consulting Group forecasts the market will be worth Rmb23.68 billion ($3.63 billion) by 2019.

Didi is also working on it own-branded bike-sharing service, it said; and the bike-sharing platform it plans to launch would integrate Ofo, Bluegogo, and other potential bike-sharing partners, as well as its own brand.

Didi will now have access to Bluegogo’s entire fleet, a valuable asset in the face of restrictions on new bikes for rent in many Chinese cities. At its peak, Bluegogo had a fleet of more than 600,000 bikes, 20 million registered users and a daily order of 3 million rides. Bluegogo has permits to distribute bikes in Beijing, Guangzhou, Shenzhen, Nanjing and Chengdu, for example, opening the door for Didi to launch its bike-sharing services in these markets.

Merger becomes less likely

Investors and observers believe the move casts doubt on a widely-rumoured merger between two bike-sharing frontrunners, Ofo and Mobike.

Although Didi is Ofo’s largest institutional investor via four rounds of consecutive investments, follow-on money from China’s e-commerce giant Alibaba has diluted Didi's influence on Ofo. Ofo reportedly completed a new round of at least $1 billion fundraising from investors including Alibaba in December. 

In a sign of the tricky relationship between Didi and Ofo, some senior executives Didi sent to Ofo have reportedly returned to the strategic backer.

One investor, whom FinanceAsia agreed not to name due to the complex nature of the situation, said Didi's move to carve its own slice of the bike-share market meant it was no longer relying on Ofo for a stake in the crowded sector, which would have a deterrent effect on Ofo. More importantly, it meant the battle among the sector's leading players had some distance left to run.

And rivals will note that Didi has deep pockets – having raised another $4 billion from Japan’s Softbank and the Abu Dhabi government in late December, valuing it at over $50 billion.

Besides supporting Ofo, Alibaba has also joined a $350 million fundraising round in December for Hellobike, another bike-sharing services provider behind Ofo and Mobike, via its finance affiliate Ant Financial. And Mobike counts Tencent, Hillhouse Capital, Warburg Pincus, Sequoia China and Temasek among its backers.

For the ride market leader Didi, the race continues…

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