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[Original Research] Is bike sharing another capital bubble?

Date: 2017-07-27
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Introduction

Following the rapid development of mobile internet, more than twenty bike sharing enterprises led by ofo and mobike have gained great favor from the public and brought convenience to people’s life by virtue of their low cost, availability upon instant unlocking, smoothing the “last mile” of public transportation and other advantages. Having perceived the huge development space of bike sharing, investors ceaselessly inject capitals to these enterprises, making their estimated value skyrocketing. The financing scales of mobike and ofo only exceed RMB 17.34 billion Yuan. As a new being, the development track of bike sharing remains to be proved. The most important part—the profit model is, as we think, not that explicit. Additionally, there exist a lot of issues relating to their operation and maintenance, large consumption of public resources, opaque “deposit pool”, etc. In our view, for the purpose of opening the huge development space of bike sharing, these enterprises must improve their core technologies, innovation and profit models constantly and regularize bike management through cooperation with governmental departments.

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 [Original Research] Is bike sharing another capital bubble?

As every knows, traffic jam is getting more and more serious in China’s first and second tiered cities. Taking public transportation has become people’s preferred choice. The thing is, the “last mile” of public transportation can be quite troublesome. “Last mile” refers to a mile or so between subway stations and half mile between bus stations. Generally, there is no direct service along the way from a station to the next one. For office workers and students, such distance is neither too long nor that short, which put them in an awkward situation: it may take some time (say 10-30 minutes) on foot, while taking a cab could take longer than it actually takes to get to the destination, not to mention that there may be no cab available during rush hours. In this case, bike sharing becomes the best solution: it can realize seamless transition from public transportation.
 [Original Research] Is bike sharing another capital bubble?The government began to vigorously develop public bike (i.e. the “docked” bike) system in Hangzhou as a pilot project in 2008. After several years of expansion and development, such system became a great success. Thereafter, public bike projects were launched in Chongqing, Ji’nan, Kunming and other second- and third-tier cities successively. By the end of 2016, over 400 cities in China implemented the public bike system after years of exploration and development. However, “docked” bikes require bus card and should be parked in designated docking stations, which, in some way, is inconvenient.
 [Original Research] Is bike sharing another capital bubble?Along with the rapid development of mobile internet and increasing number of mobile netizens, a whole lot of shared bikes led by ofo and mobike have merged into the public consciousness since 2016, replacing gradually the “docked” bikes by their superiorities like availability upon instant unlocking, low cost and environment friendly.
 [Original Research] Is bike sharing another capital bubble?    

[Original Research] Is bike sharing another capital bubble?

  共享单车引领新的出行潮流,双寡头格局逐渐形成

Bike sharing sets a new trend of transportation, duopoly is coming into being
 
Bike sharing, by right of its simplicity, low cost and convenience, has caused “low-end disruption” to travel by taxi and private bike, bringing sound and positive social effect. In addition to advocating intensely the lifestyle of green travel, bike sharing also compliments the public bike system initiated by the government to some extent.
 
After the emerging of shared bikes, the ratio of travel by bike has doubled, namely increased to 11.6% from 5.5% (Figure 1), while that by car decreased by 12%. In terms of the time period, most of the users choose shared bikes during rush hours: 45.6% of users use shared bikes during 7:00~9:00 and 44.7% during 17:00~19:00 (Figure 2). The “shared bike + bus + metro line” mode has been highly received by the public, which also proves the great convenience contributed by bike sharing.

 [Original Research] Is bike sharing another capital bubble?

At present, bike sharing market still remains in the stage of habit formation. The requirement for shared bike will be elevated after such habit is formed. According to data, the domestic market size of bike sharing in 2016 reached RMB 1.23 billion Yuan, which might reach RMB 10.28 billion Yuan in 2017, with a year-on-year growth of 735.8%; by 2019, it is expected to increase to RMB 23.68 billion Yuan (Figure 3). In respect of the scale of users, the number ballooned to 28 million in 2016, which was estimated to exceed 200 million in 2017. By 2019, such number should be 376 million (Figure 4). With such a big potential market, the value of industry chain could reach nearly a hundred billion yuan if value-added service domains such as upstream bikes and lock manufacturing and downstream big data and guide are included.

[Original Research] Is bike sharing another capital bubble? 

      巨额资本拥抱共享单车

Huge capitals supports bike sharing
 
The year 2016 is the beginning year of bike sharing. According to incomplete statistics, over 20 enterprises including ofo, mobike, U-Bicycle, mingbikes and Qibei entered the bike sharing market. Various bikes sprung up in all corners of the city almost overnight.
 [Original Research] Is bike sharing another capital bubble?The vigorously growing market attracts huge amounts of capital ceaselessly. These investors can be categorized into internet giant, traditional industry leader, investment institution and individual. Among them, the internet giant occupies large quantities of resources and is deemed to be the most influential investor. In June 2017, mobike announced its successful “E round” of financing of RMB 600 million Yuan from its investors including Tencent, Hillhouse Capital, Sequoia Capital and other investment moguls. Later on July 6th, ofo declared a successful new round of financing of RMB 700 million Yuan primarily from Alibaba, Hony Capital and CITICPE (Table 1), setting a record of single financing since the birth of bike sharing industry. By far, the financing scales of mobike and ofo only have exceeded RMB 17.34 billion Yuan.
 
The increasing number of bike sharing enterprises leads to extremely fierce market competition. Of all these enterprises, ofo and mobike are the two strongest competitors (since ofo and mobike are the first to enter the market): 40.8% of uses prefer ofo while 36.5% the mobike. On the top are ofo and mobike, followed by mingbikes, U-Bicycle and bluegogo who rank the third to the fifth. The rest small and medium-sized projects are struggling, with two of them having already exited the market. As of April 2017, mobike had delivered 3.65 million bikes in 52 cities and ofo 2.50 million bikes in 46 cities.
 
Apart from the extensive layout in domestic market, China’s bike sharing enterprises are dedicating to the international market. In 2016, ofo launched its global strategy and initiated its operation in Singapore, Silicon Valley (USA), Manchester (UK), etc. with the first delivery of 20,000 bikes. Now, ofo branded bikes are available in the Harvard campus in Boston, Silicon Valley in CA and New York, USA.  
 
      盈利模式仍不清晰

Profit model is still unclear
 
There are two major profit models of bike sharing at present: rental income and capital amount and bank interest generated by huge deposits. Although bike sharing enterprises have never disclosed their specific operational and financial data, we can assume that it’s not easy for them to make profits under current operation level. Tencent once mentioned that frequency of use of shared bikes dropped to twice a day. Without considering other factors, the unit price per user ranges from RMB 0.5 Yuan to RMB 1 Yuan and each bike earns RMB 2 Yuan a day at most. Taking one year as the review period (excluding winter days, rainy days and dog days), the effective days of cycling add up to 270 or so. Multiplied by RMB 2 Yuan a day, one bike can make a total of RMB 500 Yuan or so a year, which can only cover the single cost of an ofo bike without intelligent lock. Assuming that the designed service life of a shared bike is approximately 3 years on average, the income created by one shared bike after two years almost equals to the net profit.
 
Bike sharing must be quite profitable based on this calculation, while none of these enterprises have been making profits by far actually. A significant factor in this calculation has been neglected—the operation maintenance. Methods to lower the bike damage rate and the cost of maintenance and personnel deployment, intelligent lock and GPS module required for operation are the hidden variable in this business model. Additionally, according to the estimation of personnel from the supply chain, the purchase price per bike is mostly between RMB 300 Yuan to RMB 500 Yuan current. The intelligent lock quite costly, pushing the total cost up to almost a thousand yuan.
 
According to data released by BDR (a third party agency in China), users of the two leading bike sharing platforms mobike and ofo both surpass 10 million. Base on this figure, ofo is able to accumulate a total deposit of up to RMB 990 million Yuan from its users who should paid a deposit of RMB 99 Yuan each; while mobike collects a deposit of RMB 299 Yuan from each of its users, which adds up to RMB 2.99 billion Yuan base on the same. The annual interest of RMB 2.99 billion Yuan can be up to tens of millions yuan based on the current demand deposit interest rate of 0.35%. If such amount of money is deposited in Yu’E Bao, the annual income can reach RMB 80 million Yuan based on the annual yield rate of 3%. Furthermore, if such money is invested or used to purchase bank finance products, the earnings can be quite handsome.


Following the competition evolution, the deposit mode is being challenged. For instance, Alibaba is getting into the bike sharing market indirectly by its Zhima Credit. As shown on Alipay’s credit biking page, ofo, youon, U-Bicycle, etc. all support the auto-scan function of Alipay. The deposit can be free if the credit point is above 600, 650 or higher. Mingbikes and bluegogo will also be available according to the page. By Zhima Credit (equivalent to a third party guarantee), the highly questioned deposit issue of bike sharing can be settled. Once the deposit is replaced by credit, bike sharing will make profits from rents more likely.   
 
More importantly, many problems have been exposed along with the explosive development of bike sharing in a short period:

 

      1、车辆运营维护有困难

1. Difficult bike operation and maintenance

Many shared bikes adopt manual coded lock and simpler intelligent lock at present, resulting in inaccurate GPS positioning, which further leads to bad user experience as well as belated maintenance. What’s more, they might be damaged or become one’s private possession. On June 13th, wukongbike became the first bike sharing operator announcing its exit from the market due to the outrageous damage rate. It invested over RMB 3 million Yuan on these bikes, while only dozens of bike were retrieved (below 10%). According to the bike sharing industry, the conservative damage rate is 20% to 30% and it will be deemed as a big probability event if the rate is over 30%. Once the damage rate reaches 30%, the time for recovering cost could be extended by 50% as estimated by the industry under the ideal state of a single variable.   
 
      2、占用大量公共资源

2. Large consumption of public resources

No relevant policy has been introduced to regulate the specific parking area presently. As we all can see, various shared bikes are being parked haphazardly by the roadsides, blocking the subway entrances, bus stations and intersections and bringing troubles to pedestrians. Meanwhile, it is time and energy consuming for law enforcers and other personnel to sort them.


      3、投放不均不能足够满足需求

3. Inadequate to satisfy all the needs due to uneven distribution

Many enterprises distribute lots of bikes around office buildings, large communities and subway stations, resulting in unbalanced distributions in different areas. Moreover, the management of shared bikes is poor. Third party freight service companies hired by bike sharing enterprise usually charge RMB 3 Yuan or so for one single time of bike deployment. In order to overcome the “subway passenger flow” by bike deployment, bike sharing enterprise should a heavy price. What’s more awkward, it takes higher price to make the bike distribution more satisfactory and it is quite uncertain whether the bike use charges after deployment could balance out the deployment fee.
 
      4、“押金池”不透明性

4. Opaque “deposit pool”

The “disposition of deposit” has been intensely questioned. As for the disposition of such huge amount of funds, all bike sharing enterprises declare that they have opened separate accounts for deposit and balance. These funds will be used for fixed purposes only and so will the deposit. They even introduce third-party supervision for such funds. However, some legal professional did point out that the “deposit pool” of bike sharing was suspected of taking up funds and raising funds improperly.
 
      5、价格竞争

5. Price competition

Just like what Didi Taxi and Kuaidadi have done previously, ofo and mobike have formed the duopoly in bike sharing market. In order to strive for rapid expansion of market share, ofo and mobike repeat the “subsidy battle” once unleashed by Didi Taxi, Kuaidadi and Uber, throwing themselves in the price battle in 2017. They insanely seize the market share and improve user stickiness through free ride for limited time, cash return upon top-up and other marketing methods. Small sized enterprises who enter the market late, by contrast, are struggling for their shares in first- and second-tier cities owing to limited capital, fewer quantities of bikes and weak marketing methods.
 
      未来趋势

Future Trend
 
After a period of development, huge amount of capitals have flown into the bike market. At present, there are over 20 bike sharing enterprises in China. Enterprises in the first and second echelons of the industry have taken up the most of the market share, while those who enter the market late with insufficient capital accumulation are facing even more severe competition. For survival, these companies may seek differential development to build their future in unoccupied markets in third- and fourth-tier cities, or be acquired by leading companies. For this reason, the waves of M&A and integration may sweep over the bike sharing marketing in the future.
 
Incomes of bike sharing mainly come from rents and deposits at the moment. We believe the profit model of bike sharing in the future can be perfected and diversified. They can increase the advertising revenue and income from sale of big data. Unlike the “docked” bikes, who have fixed parking sites to put up advertisements, shared bikes basically bear advertisements on their bodies. The body design of shared bikes has the function of advertising and highlighting brand features. Therefore, it is possible for bike sharing companies to increase their incomes through advertisement on bike bodies, APP ads, ads push and other means.    
 
In addition, big data service of bike sharing can be another payoff point. Mobike launched the “mobike +” open platform strategy to accommodate “life circle”, “big data” and “IoT” platforms in May 2017. China Unicom, China Merchants Bank, China UnionPay, Baidu Map, etc. are the first strategic partners of “life circle”. Apps of these companies will increase mobike app and cooperation in various aspects will be initiated deeply in the future. At the same time, ofo also released its online “ofo open platform”, opening API interface to global partners. Its partners can integrate ofo’s short-distance cycling service into their own apps based on this interface, allowing users to use ofo service directly in third-party apps.    
 
Capturing entrances through open platforms has enlarged the space for bike sharing, and IoT is a promising way. In February this year, ofo cooperated with China Telecom and Huawei to develop a new generation intelligent bike sharing solution based on NB-IoT technology jointly. It also declares that it will create the IoT ecosystem with global seamless connection, be the first to apply NB-IoT technology and establish the largest mobile IoT platform in the world by working with China Mobile, Vodafone, Ericsson, Huawei, etc. The operation mode of “bike sharing + IoT” will form the large database of public commuting during the operation process. These data, on one hand, can be used to create transportation big data by the government to serve the construction of public facilities and public services; on the other hand, they can provide service for advertising agencies to deliver advertisement precisely, like analyzing time periods of use and frequent routes of users by big data, offering special discounts for nearby commercial activities with merchants by virtue of LBS or sketching users (Figure 5) and analyzing their ages, areas of activities, identities and occupations, consumption capacities and other information. For example, ofo can push cosmetic urges while mobike the financial information.
 
In terms of regulation, the government and bike sharing enterprises are collaborating with each other. At present, a series of management methods have been taken by various cities including Beijing, Shenzhen and Shanghai (Table 2). These regulating rules are mainly focused on bike quality, maintenance requirement and parking capacity improvement in centralized parking areas, etc. Introducing these rules, to some extent, helps to standardize the development of bike sharing industry. At the same time, for normalizing the parking of shared bikes, mobike also launched the “electronic fence” project composed of intelligent parking docks and parking areas marked out by ground parking fence line, which are energized by integrated solar power system. We expect that more detailed and unified management method can be carried out in the future, so that the development of bike sharing industry can be further optimized and regularized.
  

Therefore, we firmly believe that bike sharing enterprises with financial supports fighting each other by all sorts of marketing methods will come to an end. With improved core technology, development of innovative profit model and standardized management by cooperation with governmental departments, the bike sharing industry will advance toward a better future.

 

    (供稿:浙江天堂硅谷金融研究院)

(By Zhejiang TTGG Financial Research Institute)


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