Who'll stumble first in China's bike-share race?

China's bike-sharing hopefuls continue to race for capital, but there are growing fears of a bubble.

Chinese venture capital investors could be forgiven for feeling a sense of déjà vu.

Last year, they saw taxi-hailing app Didi Chuxing win a protracted battle with UberChina, after generous subsidies cost the two companies billions of dollars. In 2017, a similar battle for market share is taking place with another group of transportation start-ups — bike-sharing companies.

Bike-sharing is hardly a new concept. In December 2016, roughly 1000 cities worldwide had a bike-sharing programme. But by adding a dose of technology to the mix, a handful of Chinese start-ups have re-invented the model, creating a whole new sector that GSR Ventures’ Robin Luo says leaves investors “plenty of room for imagination”.

The biggest players have already raised more than a billion dollars of capital, getting money from technology giants such as Alibaba, Tencent, and Didi itself. They have also brought in cash from a smorgasbord of foreign and domestic funds, such as DST, Warburg Pincus, Hillhouse Capital and Temasek.

Ofo and Mobike, the two biggest Chinese bike-sharing companies, are now worth around $2 billion each, despite only being a few years old.  Their success has attracted a flood of competitors riding in the slipstream. More than 30 Chinese bike-sharing start-ups are now jostling for position, and the trend has also spread to Hong Kong.

But although China’s bike-sharing companies are benefitting from the race for capital and market share, there are some fears that the nascent sector has already gone too far. 

Wheel of fortune

It is only two years since Ofo rolled out the first Chinese dock-free bike-sharing programme and a year since Mobike launched its GPS-enhanced service. The sector has experienced a clear boom since.

The flow of money into what outwardly appears a rather niche sector is eye-popping. Ofo has already collected $650 million from investors. Mobike has raised more than $450 million from its disclosed funding terms. Since the beginning of last year, a flood of investors have poured into the sector, investing a total amount of less than $1.5 billion into around 30 start-ups, according to FinanceAsia’s calculations.

It is not hard to see why investors are excited. The proportion of commuters who chose riding a bicycle over taking a taxi, driving, or riding trains or buses has doubled from 5.5% to 11.6% over the past year, according to a report co-published by a Tsinghua research house and Mobike, which can take credit for some of this shift.

Tim Cook, the CEO of Apple, added some star power to the nascent sector on March 21, when he visited Ofo’s Beijing office in a meeting publicised on Weibo, the Chinese social media platform.

The biggest draw of the public transport sector is the hallowed “last mile” that Chinese bike-sharing start-up investors often refer to. The idea is to help Chinese citizens overcome long walks they are left with after using conventional transport options. “Bikes are the best replacement,” an investor at Mobike said.

The business is simple. After registering an account and making a refundable deposit, wannabe cyclists pay just several cents for a 30-minute ride. Mobike charges Rmb1 ($0.15) per 30 minutes but has rolled out some “lite” models which charge half  that rate. Ofo’s rate is Rmb0.5 per 30 minutes for riders on university campuses, where it has until recently concentrated its efforts.

Although there are public bike-rental services in some Chinese cities, users must find and return them at fixed docking stations, which are not widely available. Start-ups like Mobike bring a mobile technology twist to the model, rolling out GPS-enabled bikes for users to locate and park them anywhere and pay with their mobile phones. Its rival Ofo, while having less flashy models, also does not require users to lock the bikes at any fixed station.

Robin Luo, a partner at Ofo’s early investor GSR Ventures, reckons that bike-sharing could also replace some demand for the much more expensive taxi service or even owning a car, especially in many urban centres where four-wheel vehicles are subject to heavy traffic jams.

Timeline: Click for full view

The market is niche enough, too. Arthur Zhang, principal of Ofo’s early investor ZhenFund who focuses on auto and travel investment, told FinanceAsia that short-distance travel was an underserved sector where he saw rigid demand. The seed fund became Ofo’s A+ round investor in early 2016, according to Zhang. At that time, China’s travel industry was centred on a taxi-hailing money-burning competition.

Bike-sharing companies have been helped by the buoyant liquidity available for Chinese private investors. Fundraising by private equity, angel and venture capital investors jumped to nearly Rmb1.4 trillion in 2016, up around 70% from 2015, according to Zero2IPO Research. Bike-sharing is just the latest hot sector to attract these funds.

“When seeing an opportunity, it’s no surprise that everyone jumps right on for ‘a slice of the cake’,” Luo said, referring to the rise of both copycats and money.

The bike-sharing concept also fits the nation’s broader theme of cutting carbon emissions, something that Chinese President Xi Jinping is putting increasing emphasis on.

This is helping inspire a rapid jump in valuations.

Valuation hike

GSR Ventures signed the term sheet to inject Rmb10 million ($1.5 million) into Ofo in the last week of January 2016, according to Luo, valuing the start-up at Rmb60 million post-investment. Ofo’s co-founder and CEO Dai Wei told CNBC on April 17 it was worth “more than $2 billion” — just two months after a $1 billion valuation annoucement.

Bloomberg on June 9 reported Ofo was now seeking roughly $500 million at a valuation of about $3 billion, citing people familiar with the deal.

Mobike stated it was worth over $1 billion after the completion of its $215 million D-round fundraising on January 4. It has not provided any update to the valuation, although Foxconn, Temasek and Hillhouse Capital have since injected capital. But a Mobike investor whose firm is on the board confirmed to FinanceAsia on April 25 that "for the current round Mobike was contemplating, it was valued at around $2 billion".

Rumours emerged online on June 2 that Mobike had finished the round of financing sized between $800 million and $1 billion and it was worth around $3 billion post the investment. A spokesperson at Mobike did not respond to a request for confirmation. An investor at Mobike told FinanceAsia on June 9 the company had commpleted the financing round, but declined to comment on the size and the valuation.

“Even reaching a valuation of $20 billion is possible,” said Luo when asked about Ofo’s valuation.

These ballooning valuations are being helped by Chinese tech companies that have already experienced the growth Ofo, Mobike and others are hoping to achieve.

Chinese ride-sharing unicorn Didi Chuxing has invested in Ofo, which had a 51.2% market share in 2016 according to BigData Research. It is the largest institutional shareholder in Ofo now with an approximately 30% stake and two board seats, according to Caijing magazine. Didi declined to comment.

Tencent is one of more than a dozen of investors in Mobike, which occupied 40.1% of the market last year, according to BigData. It is now the largest institutional investor in Mobike, with a stake of between 10% and 15% and one board seat, according to Caijing.

(Note that these market share numbers are open to dispute — or rapidly changing. Sootoo Institute, the research arm of a social media site, said on April 27 that Mobike had around 56.56% market share, compared to Ofo’s 29.77% share.)

Tencent did not respond to a request for comment, but FinanceAsia confirmed the claim with a person working on the deal. The tech giant was a lead investor in Mobike’s $215 Series D funding round together with Warburg Pincus, and a participant in the Series C round.

Alibaba’s finance affiliate Ant Financial made a strategic investment in Ofo for an undisclosed amount in April, the latter announced.

Bike-sharing business “carries some strategic properties in connecting mobile payment, Internet of Things, digital mapping and data generation…which no major tech companies want to risk missing,” a Shanghai-based executive director at a China-focused foreign private equity house told FinanceAsia.

Tencent has introduced Mobike to its flagship Wechat portal. Ant Financial is allowing six start-ups including Ofo, Youon Bike, Bluegogo, Hellobike, Funbike, and Ubike to use its credit-rating system, called Sesame Credit, and users with qualifying credit scores can rent bikes without deposit. Alipay’s “scan and ride” function now also connects to the six brands, which means users don’t need to download additional apps.

It is clear that the sector is heating up. But as the growth story takes hold in China’s bike-sharing sector, another familiar story is quietly gaining credence — the old story of boom and bust.

Competition

Pony Ma, founder of Mobike-investor Tencent, voiced his concern over the industry during the Two Sessions in early March, annual meetings held by the nation’s legislature and top political advisory body and attended by a who’s-who of Chinese business and politics.

“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?”

Less than three weeks after he asked the question, they did just that. Mobike and Ofo, responding to heavy domestic competition, are now offering free rides and costly subsidies.

Ofo started its free-ride campaign during the Chinese Spring Festival. Caijing calculated Ofo had burned Rmb200 million of cash on its free-rides campaign as of March 30 — although that figure could not be verified by FinanceAsia. Mobike quickly followed with its own free rides. And another bike-sharing player Bluegogo, a late rival who claims to be the third largest now, said that “shared bikes are meant to be free” when launching its free ride campaigns on March 22.

But “the real race will begin in July,” Ofo’s Dai said on March 1 when announcing the completion of a $450 million fresh round of funding. Now bike-sharing start-ups are just “testing the water” to figure out a specific market’s demand, he said.

Summer is an obvious period for the bike-sharing companies to boost their business, offering Mobike and Ofo what their investors call a “golden time” to squeeze out smaller players and accelerate the customer acquisition race between them.

“The market is big, but there will be only one to two players in the end…To get there, a war is unavoidable,” GSR’s Luo said.

Zhang added ultimately it would be a “capital game”, and only the venture capital darlings who can provide the most efficient solution to meet market demand would survive.

Some smaller local players are already failing. Kala Bike, for example, launched its bike-sharing platform in the Putian city of China’s Fujian province in January, but had to recall its bikes in February after an investment dropout, which happened as Kala failed to meet the targets set in their agreement.

According to its statement on February 16, the company lost 76.5% of the 667 bikes it placed in the city in January and February due to theft and “recycling”, and investors decided to pull out seeing the result.

Already a bubble?

Kala Bike is a case in point that a bubble is already mounting in China’s bike-sharing phenomenon. Even those who stand to benefit from the expansion drive are speaking openly about the potential fall-out.

Robert Wu, chairman of one of the world’s largest roller chain manufacturers KMC Chain, told an investment forum run by Taiwan Stock Exchange in April that the huge bike production numbers destined for China’s bike-sharing battlefield were now leading to parts shortages, the Taipei Times reported.

“Instead of building sustainable profitability, Chinese operators are fixated on rapid growth in a bid to absorb [their] rivals, adding doubt to long-term prospects,” Wu said.

“I am expecting the bubble to collapse this year or next year, but that is not necessarily a bad thing in the long term,” he said, adding it would take some time for the players to find an “optimal and sustainable business model”.

A Shanghai-based director whose firm has been investing in Asia-Pacific for over 20 years echoed the view. “I agree there’s market demand for short-distance travel…and using bikes is a good idea…but the problem is they are overstating that demand for bikes,” he told FinanceAsia.

The fear of a bubble in the sector has been acknowledged by Zhang Siding, co-founder of Ofo.

“I think there are definitely bubbles in the bike-sharing market,” he said in a Bloomberg TV interview on April 22. “There are three phases for the players in this business to evolve: fighting to put more bikes on the street, competing to make bikes easier to ride, and battling to have a better maintenance system. Almost all the bike-sharing companies are still at the first phase at the moment. That’s why we see bubbles.”

Investor: Pony Ma

Based on the already announced expansion plan by players including Ofo and Mobike, the number of shared bikes in China will top 30 million by the end of the year, and 50 million registered users. That means among every 45 people in China, there would be one shared bike; or about among every five registered users three shared bikes.

“How’s that looking for a country [that has] so many bikes already? There are tons of people that have their own bikes, and public bike rental systems too,” said the Shanghai-based private equity executive, arguing the current expansion plans of bike sharing start-ups already deviated from a demand-driven business model and that there should be a ceiling for their valuations. “And I don’t think [they] should be high ones,” he said.

China makes around 80 million bicycles every year, but a major amount of that goes to export. Domestic consumption only takes approximately 25 million, according to China Bicycle Association.

The issue with this business model, he said, was the short and fragmented time that a user actually spends on a bike-sharing app.

According to Jiguang, a research and data service provider specialising in mobile data monitoring, Mobike added more than 9 million new users in 2017 by March 21, and Ofo more than 15 million. The active daily users are 3.205 million and 2.073 million for Mobike and Ofo, respectively.

While acknowledging the success of user adoption, the private equity investor argued the true commercial value of these users was dependent on the active user time per session. “I spend like what, 10 seconds, locking and unlocking a bike. Are you going to sell me an ad or product within 10 seconds?”

The start-ups can monitor their users’ commuting data, but other than using it to better map their bike distribution plans, the options are hardly endless. “They’ll have to get more creative to commercialise the data, or feed it to someone that knows how to,” he said.

Perhaps of more concern for investors is the chance that China’s government will get involved in response to the chaotic competition in the sector. On April 22, Liu Xing, a partner of Mobike-backer Sequoia Capital China, told Chuangye Zone’s DEMO China conference that “the last thing we want to see” was government intervention amid messy competition.

There are signs that is happening already. On April 20, the Beijing government issued a consultation paper proposing to limit the total number of bikes distributed in the city and mandating a more orderly placement of bikes, among other requirements. It remains to be seen whether the local government will decide to push ahead with this plan, but it will clearly damage a sector that allows users to drop — and pick up — bikes at their leisure.

The regulatory risk around China’s bike-sharing sector is another thing that may remind investors of the taxi-hailing companies. Like the bike-sharing hopefuls, Didi Chuxing and UberChina went to war over subsidies. But after winning that war, Didi also had to deal with increasingly tough regulations from local authorities.

This is all in the future for an industry that still appears to have more room to grow, despite understandable concerns about a bubble. The competition looks set to continue gaining pace, and the capital to keep coming in.

It is uncertain quite how far this sector can grow,  but one thing is clear — it’s going to be a ride.

An original version of the story appeared in the May/June print edition.

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