Escape velocipede

China’s bicycle-sharing giants are still trying to make money

One answer would be for Ofo and Mobike to merge

Nov. 2017

STEVE JOBS liked to describe computers as “bicycles for the mind”—tools that let humans do things faster and more efficiently than their bodies would allow. The internet-connected bikes flooding the streets of urban China could be called“computers for the road”. Networked, trackable and data-generating, they are ones and zeros in aluminium form.

The cycles belong to Ofo and Mobike, two startups that, taken together, have raised $2.2bn of capital and are valued at more than $4bn. Each has between 7m and 10m bikes in China, averages 30m-35m rides a day and, having entered more than100 Chinese cities, is expanding abroad. At the start of 2016 neither firm had a single bike on a public road. Ofo’s canary-yellow cycles and Mobike’s silver-and-orange ones can now be found in cities from Adelaide to London and Singapore to Seattle.

Most city bike-sharing systems, such as the Vélib scheme in Paris, depend on fixed docks in which cycles must be parked. Ofo and Mobike instead pioneered a “dockless” bike secured with a smart lock that can be released with a smartphone app.They charge much less than public programmes. In London it costs £2 ($2.66), and typically lots of poking at an unresponsive kiosk-mounted screen, just to unlock a city-run shared bike. The equivalent with an Ofo, after an initial deposit, is 50 pence every half an hour and a few seconds to get going. In China rides cost between 0.50 and 1 yuan ($0.08-0.15) for 30 minutes.

It helps that the firms save on physical infrastructure such as docks. But the main reason they can afford such low fees is because they have abundant funding: in June Mobike raised $600m, much of it from Tencent, a messaging, gaming andpayments giant. (Qualcomm, an American chipmaker, made a smaller investment this month.) In July Ofo raised $700m in a funding round led by Alibaba, an e-commerce and payments company.

Many smaller, copycat bike-share startups have gone under. Last week it emerged that Bluegogo, a distant third in China’s bike-sharing wars, had gone bust. Its puny $90m in funding and 700,000 bikes were no match for the market leaders.Another operator shut down after 90% of its 1,200 bikes were stolen six months after launch. Many schemes have been funded with scant financial analysis by investors.

Nor are Ofo and Mobike profitable, though not for want of growth. China’s bike-sharing market grew from 33m yuan in the third quarter of 2016 to 3.9bn yuan in the second quarter of 2017, says iResearch, a market-research firm. Zhang Yanqi, an Ofo co-founder, thinks China could support 300m rides a day, up from 50m-60m today. Both firms believe rental fees alone could make them profitable businesses if they stopped spending on expansion at home and abroad.

Analysts reckon the real money may be in other sources of revenue. The firms hold hundreds of millions worth of yuan in deposits collected from users. For now this money lies unutilised—Chinese law is unclear about how, if at all, it can be used.But firms hope that will change. Lending it would be one possibility. Another idea is a sort of crowdsourced logistics, asking riders to carry along packages in exchange for free rides or a small payment. Mobike already incentivises users to move its bikes around to high-demand areas by offering “red envelopes” worth a few yuan. Advertising on “billboards” within wheels is also a promising avenue. And the firms can agree with brands to offer digital coupons for shops on a rider’s route. Mobikeworks with McDonald’s and JD.com, an e-commerce company, to do just that.

But most value could come from data, especially used in partnership with Alibaba and Tencent. The bike-sharing firms are already becoming part of their strategic investors’ business models. Ofo uses Alibaba’s credit-rating system to allow users torent bikes with no deposit, for example. More data could be shared. As Mr Zhang puts it, the firm’s main investor, Alibaba, “already knows how much [users] spend, where they spend it and what they spend it on. But with us they have a very strong idea of people’s total activity.” Mobike says it does not share data on a commercial basis with any firm.

The bike wars recall the one between ride-hailing firms in China, which ended with mergers that left one player, Didi Chuxing. Rumours of a possible merger between Ofo and Mobike have been swirling for weeks. Allen Zhu, an early investor in Ofowho is pushing for a merger, says making money is terrifically hard with so much competition. But neither Ofo nor Mobike is willing publicly to admit it. “In my entire career at Ofo I have spent less than five minutes talking about a merger with Mobike,” says Mr Zhang. “I don’t see any point or meaning in merging,” maintains Mobike’s president, Hu Weiwei.

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