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What's Really Driving China's $1 Billion Bike-Sharing Boom?

2017-06-20 00:00:00.0

The Ofo bicycle-sharing app is seen on a smartphone in front of the company's bikes parked on a sidewalk in Shanghai.(Photo by Qilai Shen/Bloomberg)

Over the past year, several Chinese startups have deployed tens of millions of colorful bikes in cities across the country that can be rented cheaply on a smartphone. And it’s going down with urbanites fed up with congested and polluted streets.

Ofo and Mobike are the most successful of the bike-sharing companies to date and are now valued at more than $1 billion. They offer rides costing as little as 15 cents for 30 minutes. Users can also park the bikes anywhere they want, meaning they don’t need to look for designated docking stations – a criticism of similar services in cities elsewhere in the world.

The low cost and flexibility is attracting tens of millions of rides every day, as people look for alternatives in China’s traffic-clogged cities. And customers come from all walks of life – laborers to young tech professionals. “I use the bikes to go to supermarkets because it is a bit far to walk there and takes too long to wait for a bus,” said Jacky He, a 28-year-old marketing manager at an Internet startup, “I can find a bike whenever I want and I don’t have to worry about parking.”

Companies like Chinese e-commerce giant Alibaba, whose financial affiliate Ant Financial is an Ofo investor, see the opportunity to deliver other products and services such as payment apps. They’re also keen to access valuable data on users’ commuting habits and rental history, says Zhou Wei, founder of China Creation Ventures.Another use can be for gaining a better picture of a person’s credit history.

Read More: China's Innovative Smartbike Sharing Startups Are Hitting Obstacles At Home And Abroad

Unlike the U.S., China doesn’t have reliable credit score providers such as Experian and Equifax. It is up to the Internet companies to develop their own services -- like Ant Financial’s Sesame Credit -- often with unconventional data sources such as online shopping habits and social media behavior.

“These bike services are of high strategic importance to Alibaba and Tencent,” Zhou said, “It is an indispensable way to get data on frequent users.”

Growth potential

The projected growth of operators like Ofo is equally attractive when so many other industries are finding market conditions so challenging.

“It is very difficult to find companies of such explosive growth now. The growth is even faster than online ride-sharing and food delivery platforms in their early days,” said Helen Wong, an investor at Qiming Venture Partners, which backs Mobike.

According to iiMedia Research, a Guangdong-based consultancy, the bike-sharing market is projected to be worth 10.3 billion yuan ($1.5 billion) by end of this year and 23.7 billion yuan ($3.5 billion) by 2019. As the market grows, the companies can easily provide more than 100 million rides every day, said Cheng Tian, an investor at Shunwei Capital, the venture firm co-founded by Xiaomi’s billionaire founder Lei Jun. Shunwei is a backer of Ofo.

But not everyone is convinced.

In a column published by Chinese consultancy iResearch, Wang Yijian, a prominent online commentator, questioned how these startups can build a sustainable business out of 15 cents rides -- sometimes even free rides when the companies attempt to woo new customers. He pointed out that each bicycle costs up to 3,000 yuan ($440) to manufacture. Adding to the challenges are frequent instances of misuse and vandalism, meaning the bikes often don’t last more than six months and require an ever expanding team to maintain and repair, said Ken Xu, a partner at venture capital firm Gobi Partners.

An employee of a parking firm put bicycles for Mobike and Ofo onto a truck for repair in Shanghai. (Photo by JOHANNES EISELE/AFP/Getty Images)

What’s more, the bikes are shaping up to be an urban problem. They have clogged sidewalks because they don’t require any designated docking station, prompting several municipal governments to issue fresh guidelines on parking and maintenance.

Shunwei’s Cheng acknowledged that there is an oversupply of bikes in some areas. The companies have to flood China’s busiest streets with bikes to raise brand awareness and outshine competitors, despite knowing that people are unlikely to need all of them.

“If competition isn’t so fierce, the companies can definitely recoup the manufacturing costs in no more than a year,” he said. “Now we’d have to wait for another one to two years for the war to cool down a bit.”

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