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    Why China’s Shared Bikes Are Locked in a Race to the Bottom

    In an industry stacked in favor of the wealthiest companies, big hitters are using sheer force of numbers to overwhelm all competition.

    The rapid spread of bike-sharing services across China has brought with it many benefits for citizens looking for ways to cover the last kilometer between public transit and their final destinations. Users are no longer required to go to a set location to rent a bike; instead, all they need to do is open an app on their phone, find a nearby bike, ride it to their destination, and lock it when they are finished.

    The potential of this model has aroused the interest of venture capitalists, who have set the stage for the industry’s rapid expansion by pouring in money. With many users ditching their own cars and mopeds in favor of biking, bike-sharing services suit China’s new emphasis on environmental protection, earning them government support.

    However, the rapid expansion of bike-sharing services across the country has already led to problems. Take Shenzhen for example: As of March 2017, the seven bike-sharing services operating in the city have flooded the streets with 531,000 bikes. As the number of bikes available has increased, the average daily usage of individual bikes has dropped from 7.3 rides per bike in the early stages of the industry to 5.4 today. This is a clear sign that Shenzhen’s bike-sharing market is nearing its saturation point.

    Still, industry players have continued to carry out plans for rapid, large-scale expansion. The only logical end point of this is complete market saturation, as daily per-bike ridership numbers continue to fall. From an industry standpoint, however, this expansion isn’t being carried out blindly. In fact, the players involved see it as highly rational. In their view, it is purely the result of market forces. These days, the key to winning the battle for market share, building brand loyalty, and attracting outside investment isn’t satisfying customer demand. Instead, the focus has shifted to overwhelming the competition.

    Step one in this process is having the most bikes. When customers need a bike, it is important that your company’s bikes are closer to them than anyone else’s. And if there are multiple bikes near their location, you want more of them to belong to your company than to your competitors. Chinese bike-sharing services are differentiated by color scheme, with different services offering different-colored bikes. This means that the goal of most of these companies is to use color to blot out their rivals. If your company’s colors outnumber the competition, then your bikes have a better chance of catching the attention of potential customers.

    Given the competitive pressures within the industry and the data-driven approaches taken by financial investors, once one industry player adopts this way of thinking, starts putting it into action, and gains an advantage by doing so, the rest of the industry follows suit. What is for one company a rational course of action suddenly becomes irrational, as the entire industry rushes to catch up with a perceived winner-takes-all scenario. In the end, by exceeding consumer demand, companies end up with surplus bikes on the streets, which can constitute a real misuse of public space.

    The more bikes there are in circulation, the more bikes will be abandoned. Whether they will be recycled comes down to two factors: the salvage value of the bike and the costs involved in the recycling process itself. When a bike’s production cost is low and the cost of recycling it is greater than its salvage value, abandoning it is actually a rational choice. When this happens, the legwork of recycling abandoned bikes is left to the government. Of course, by passing these costs on to the government, the industry is in reality passing them on to the public. This is quite obviously unfair.

    Bike-sharing services have already separated themselves from their internet-based peers, such as the ride-hailing app Didi Chuxing and the food delivery app The competition for market share has become increasingly capital-intensive and hardware-focused. Once a bike is produced, it instantly comes to represent a significant sunk cost that cannot be recovered. These bikes are also hard to upgrade, making it difficult homogenize different companies’ services once they have unloaded their bikes on the streets.

    At the same time, patent issues arise because of similarities between models and their technologies. An industry should be defined by who has the best hardware, the best technology, the best patents, the best business model, and the safest products. Those services with poor technology and safety records, and which copy their business model from other companies, should in theory be weeded out, while those with good business models and safety records survive. However, in China, competition within the bike-sharing industry has become a contest of who has the most capital. There is no clearer sign of this shift than the oversupply of bikes on China’s streets.

    In a sense, this situation is caused by the Chinese internet industry’s own path dependence, a term that refers to the ways past choices and prior knowledge play a significant role in the decisions we face today. In the past, whenever an app developer hit upon a successful model, their competitors would quickly replicate new versions, until they were successfully able to copy the innovation, restoring the market to a state of homogenized competition. This meant that previous battles for market share were not decided by having the most innovative model, but by having the best operations capabilities, market practices, and most available capital. Bike-sharing services are no exception, as they have settled into the familiar model of whoever has the most money also has the most bikes.

    Questions of which service has the best model and the most comprehensive collection of patents have traditionally been decided by the legal system, either in patent courts or in civil and class action suits filed by users who have suffered injury due to unsafe practices. However, this requires the support of a solid system of rule of law, including stricter patent protection and greater legal rights for consumers. Currently, even though all bike-sharing companies use similar smart lock systems, there have been few patent disputes. And while there have been a number of accidents involving bike-sharing services, there have not been any particularly large legal settlements awarded as yet, and consumers have not organized to make their voices heard.

    Shared bikes are an extremely important component of China’s overall shared economy. Premier Li Keqiang’s policy call for more widespread entrepreneurship and innovation already seems to be bearing fruit; the growing tide of the shared economy not only brings convenience to the lives of those in China, but also places the country on the front line of innovation.

    Translator: Kilian O’Donnell; editors: Wu Haiyun and Matthew Walsh.

    (Header image: A young woman rides a shared bike by the riverside in Shenzhen, Guangdong province, Dec. 30, 2016. VCG)