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2017-11-22 04:17:06 Commentary

There was a time only a few months ago when industry analysts were predicting that Mobike and Ofo, China’s two largest bike-sharing companies, would buy up all of their smaller competitors. They should have saved their breath, as the duo instead look intent on completely squeezing out the sector’s also-rans.

That seems to be the case with China’s third-largest bike-sharing service, Bluegogo. Facing a dire shortage of capital and a tide of employee departures, Bluegogo is now all but bankrupt. Yet the failure of the Bluegogo model should serve as a cautionary tale not only for smaller companies, but also for the sector’s biggest hitters, who structure their businesses in similarly fragile ways.

Bike-sharing companies fill a niche opened by urbanization. China’s cities have expanded, with millions of people migrating from the countryside. At first, a major consequence of urban expansion was the spread of subway networks as the predominant means of getting from A to B. Subway stations, however, are often located comparatively far from urban residents’ homes and workplaces. This phenomenon has become known as the “last mile” problem: How should commuters cover the last mile or so of their journey once they exit the subway?

Online bike-sharing platforms offer an effective solution to this problem, allowing app users to conveniently rent a bike anytime, anywhere. At the peak of the craze, there were more than 70 bike-sharing services nationwide, all competing for the patronage of Chinese consumers. A year later, the industry is already in decline. Since August, there has been a steady stream of reports of bike-sharing bankruptcies.

The high frequency with which consumers use shared bikes shows that companies have indeed addressed the last mile problem for a significant number of people. Yet that doesn’t mean they can fully resolve it, let alone make that solution profitable.

The failure of the Bluegogo model should serve as a cautionary tale not only for smaller companies, but also for the sector’s biggest hitters.

There are slim odds that bike-sharing companies will ever be able to make a substantial profit from renting two-wheelers alone. While manufacturing expenses vary by company, the majority of shared bikes cost 300 to 2,000 yuan ($45 to $300) to make. There is an inverse relationship between manufacturing costs and maintenance costs: Cheaper bikes break more easily, and repairing them often costs more than simply making a new bike. As a result, operational costs in the shared bike industry are high and unlikely to fall anytime soon.

The unprofitability of shared bikes has not deterred investors, however. Financiers aren’t stupid: They know that the industry hemorrhages cash. From the very beginning, they have had different plans in mind for bike-sharing services.

From the beginning, financiers have been lured by the deposits that bike-sharing services collect every time a new customer registers. Mobike, for example, held around 900 million yuan in customer deposits at the end of last year. With a vast pool of idle funds at their disposal, companies make money from interest paid on the deposits they hold, and use the funds to further develop their services or invest in new ones. Users tend to be unwilling to pay multiple deposits; once they choose a bike-sharing service, they typically remain loyal to it. Therefore, the industry’s real battle is the fight to register new users.

In recent months, the government has begun regulating the industry more tightly. As part of this push, companies are now required to hold users’ deposits in custodial bank accounts. These rules are only partially implemented, however, and certain companies are willing to run the risks involved in skirting them.

Another tempting feature of the industry is its potential for big data applications. Many enterprises fervently subscribe to the belief that the company that accumulates the most data will come to dominate its industry. Bike-sharing is no exception: By using apps to collect user data and establishing data-sharing programs with other companies, bike-sharing services hope to accurately predict consumer habits and expand their businesses accordingly.

The big data dream is ultimately a futile one, however. For highly targeted industries like shared bikes, the gains to be had from big data analysis are practically indistinguishable from traditional statistics. Many companies end up spending vast sums of money on data-backed conclusions that merely reflect human intuition.

The very form of ownership that makes shared bikes unique worsens the urban environment they require to operate.

The potential profits to be had from deposits and big data have not only swelled the confidence of investors and entrepreneurs, but also weakened their ability to judge risk. Despite the fact that some companies, such as Bluegogo, still fail to turn a profit domestically, they have already announced that they plan to expand their operations overseas.

A rule of thumb in the early days of the industry was that each new bike in a company’s inventory would bring in between six and 10 new users. This rate has dropped, however, as more and more bikes have flooded city streets. In order to maintain high growth rates, bike-sharing companies must constantly expand to new areas. But they have failed to comprehend the huge burden their need for growth places on China’s cities.

Bikes require highly developed urban infrastructure to be successful, yet over the past 20 years Chinese cities have consistently reduced the amount of road space and resources dedicated to bikes in order to better accommodate the growing ranks of car owners. The piles of bikes strewn across city sidewalks serve to highlight the lack of available parking spaces for two-wheeled vehicles.

The very form of ownership that makes shared bikes unique worsens the urban environment they require to operate. Users of Mobike, Ofo, or Bluegogo do not own the bikes, meaning they can essentially park them wherever they please and not worry about the consequences. This is anathema to city management officials, who have started to restrict where bikes can be left and want companies to take a more active role in unclogging public roads. Bike-sharing firms are left with no choice but to hire people whose sole role is to collect bikes and repark them in an orderly fashion — something that further ramps up operational costs.

But companies are reluctant to pass on spiraling costs to consumers because a minor rise in rental prices or one-off deposits could send them running into the arms of a competitor. Instead, managers attempt to eke more money from their investors — at least until said investors lose patience and pull out. Bluegogo’s fate shows that this model is inherently unsustainable, and it’s one that will inexorably catch up even with heavy-hitters Mobike and Ofo.

Translator: Kilian O’Donnell; editors: Lu Hongyong and Matthew Walsh.

(Header image: A worker looks at rows of Bluegogo shared bikes in Beijing, June 1, 2017. Xue Wei/VCG)