The evolution of free-floating bike-sharing in China

Authors: Sebastian Ibold, Dr. Christoph Nedopil
Review: Sandra Retzer, Tina Huang, Florian Ibold

Since the explosive growth of free-floating bike-sharing in China starting in 2016, it has been described as one of the country’s hottest industries. China’s official state-run press agency Xinhua called it one of the “four great new inventions” in modern times (the other three being e-commerce, high-speed rail and mobile-payment). The bike-sharing industry was praised for providing a healthy lifestyle and a key to achieve more sustainable urban transport systems, with the potential to reduce greenhouse gas emissions and air pollution significantly. The expectations put on free-floating bike-sharing were no less than reviving the “kingdom of bicycles”.

But instead of a smooth bike-ride, the bike sharing industry in China has experienced nothing short of a roller-coaster ride: From 2016 onwards, a growing number of start-ups entered the bike-sharing market, resulting in more than 80 domestic companies fighting for market share and new customers by mid-2017. By the end of 2017, about 16 million bikes “floated” on China’s streets to transport about 130 million registered users. The growth came to a sudden halt at the end of 2017 with the bankruptcy of Bluegogo, which at that time was the third biggest player in China’s bike-sharing market. Since then, many more operators met the same fate, as they were not able to cope with the fierce price war, increased governmental regulations, and lack of innovation and funding supply. This allowed surviving players to consolidate the market. But the industry is far from settled and the roller-coaster continues. What are the key drivers of this roller-coaster ride and which course will it take in the near future?

This article tries to shed light on the development of free-floating bike-sharing in China and to predict what the future of the industry and its role in urban transport systems could look like.

Background

Since China’s policy of reform and opening-up in the 1980s, not only did the country’s economy grow rapidly but its built environment also went through a period of drastic changes. Rapid urbanization and a massive socio-economic transformation led to a growth of China’s urban population along with newly built cities, urban redevelopment and the expansion of road transport infrastructures for a car-oriented future: Expressways, large-scale traffic grids and massive fly-overs were transforming the former “kingdom of bicycles” into a “kingdom of cars”. With increased purchasing power and the rising role of the car as a status symbol, the four-wheelers became the dominating mode of transport in China, while the use of bicycles declined: In 1986, the mode share of the bicycle in Beijing was at about 65 percent, this number dropped to about 15 percent in 2015 (see Figure 1). This decline of the bicycle happened in almost all major Chinese cities.

Mode share in Beijing 1986-2014

Figure 2- Own graphic based on Beijing Transport Annual Report 2015, Beijing Transport Institute
To counter that trend, the city of Hangzhou initiated a public station-based bike-sharing (PBS) scheme in 2008 for its 4.8 million inhabitants. The number of public bikes in the city grew from only 2,000 in 2008 to about 84,100 in 2016, with a total of 3,572 stations. In comparison, the biggest public bike-sharing scheme outside of China, Vélib in Paris, operates a total of 1,751 stations and 23,900 bicycles. Funded by the local government, run by a government-owned company, and claiming to be self-sufficient, the PBS scheme in Hangzhou still represents the best case study for public bike-sharing in China, which model has since then been replicated in other cities such as Beijing or Shanghai. (1),(2)

However, the most visible change of cities and travel behavior of people in China happened with the introduction of free-floating shared bikes in 2016. Following ofo and Mobike, the first and largest Chinese free-floating bike-sharing companies, many more operators popped up all over China, placing millions of bikes on the cities’ sidewalks. Their success can be attributed to the bicycles’ ubiquity and their ease of use, allowing customers to unlock a bicycle using their smartphone to scan the QR code attached to the bike, ride it around town, and then leave it at their destination for a very low price.

Even if free-floating bike-sharing itself is nothing new outside of China (Germany, for example, introduced free-floating bike-sharing in 2000), the Chinese operators were able to grow to an unprecedented level. The reasons for the immense growth are the availability of large-scale venture capital investments, as well as the smart use of a combination of GPS-based, decentral Internet of Things (IoT) assets (the bikes) and the lever of economy of scale. Users appreciated the convenience of leaving the bikes along the pavement at their destinations, which allowed them to connect more easily to, for example, subway stations as an effective first and last mile solution from home and to work. Also, the fact that bike-sharing provided an alternative to congested roads, often irregular bus schedules, crowded subways or simply bike theft, contributed significantly to the success of bike-sharing. Last but not least Mobike, ofo and the other operators created a new lifestyle and a “We-Feeling” when users unlocked the smart locks of the bikes with their smartphones and rode along with the endless stream of colorful bicycles.

Yet, with the success of free-floating bike-sharing came challenges. In China, it is not unusual for new industries to first start operating without real permits or a legal foundation, while the city, provincial and national governments wait and see to issue follow-up regulations and policies. But, the municipalities were not prepared for the massive deployment of millions of bicycles on the streets. There were no proper regulations in place to ensure a guided and orderly integration of the schemes into urban transport and mobility systems. Rather than sustainably complementing existing public transport systems, the immense competition between bike-sharing operators for market shares led to an oversupply of bicycles, clogged walkways and colorful mountains of thousands of bikes piled on top of each other, dumped on landfills of which pictures made it into the news around the globe.

Shared bicycles are clogging the sidewalks of Beijing

Three phases of free-floating bike-sharing development in China

The development of free-floating bike-sharing in China continues to go through dynamic changes. Nobody knows what the market will look like tomorrow. For now, three phases of free-floating bike-sharing in China can be identified:

Phase 1 – Investment-led growth – Who has the longest runway? (2016/2017)

The first phase of free-floating bike-sharing in China was characterized by rapid growth of the number of bike-sharing companies, billions of dollars of venture capital injections and an uncoordinated, “wild” deployment of bicycles in Chinese cities. Between December 2016 and July 2017, the bike-sharing business grew at triple digit growth rates. By August 2017, a total of about 16 million shared bikes were in operation, covering more than 50 percent of prefecture-level cities. Particularly the cities of Beijing, Shanghai, Guangzhou and Shenzhen saw a massive influx of operators, having to cope with about 35 percent of the total bikes deployed. By September 2017, Beijing’s streets alone were home to about 2.35 million shared bikes from 15 different operators.

Intense price wars and market expansion

Since Mobike and ofo entered the free-floating bike-sharing market in 2016, the streets of Chinese cities have not looked the same. Within months, the cities turned into colorful battlefields of a heavy fought price war with mostly free-of-charge rides for the users. This price battle was mainly fueled by injected venture capital and customers’ deposits, aiming at getting market share while trying to have a longer landing runway than their competitors, following a “the winner-takes-all” approach, creating a more lucrative monopoly once the battle is over. Fighting heavy price wars to obtain the largest market share is not new in China’s mobility sector. Before the American ride-hailing company Uber sold its China operations to its Chinese rival Didi Chuxing in 2016, both companies fought an intense and cash burning price battle, which cost Uber about EUR 850 million a year – financed by venture capital. Similarly, the bike-sharing industry attracted heavy venture capital investments in a relatively short period of time. By the end of 2017, within 18 funding rounds, the two leading market players Mobike and ofo alone raised a total of EUR 2.65 billion (see Figure 3).

Total funding raised by selected free-floating bike-sharing companies (as of July 2018)

The key investors behind Chinas shared biking start-ups were, as so often in the Chinese tech-scene, domestic tech giants such as Baidu, Alibaba and Tencent: While various capital groups and holdings such as Panda Capital, Hillhouse Capital Group or Sequoia Investment have put money into these companies, the leading investors to date are Alibaba Group Holding Limited and Tencent Holdings. Alibaba directly invested EUR 1.329 billion in ofo and Tencent directly invested EUR 692 million in Mobike. The bike-sharing companies used the invested capital and user deposits to expand their market and to offer free rides, aiming to gain new customers and higher market shares. The pricy competition, which was mainly focused on Tier 1 and Tier 2 cities, did not allow the operators to raise service fees and to come even close to profitable business models. At the same time, more and more operators entered the market, swamping the cities with bicycles far exceeding demand, unable to create profits. No wonder that pundits described the industry as just the latest in a string of Chinese tech bubbles.

Increased pressure through governmental regulation

The new and fast growing free-floating bike-sharing industry had been flooding the Chinese cities without binding regulations in place to ensure an orderly and controlled deployment and integration into public transport systems. This changed in the second half of 2017: On August 3rd, 2017, the country’s first national guidelines for online bike rental, the ‘Guiding Opinions on Encouraging and Regulating the Development of Internet Bicycle Rental‘ has been jointly released by ten Chinese governmental authorities, including the Chinese Ministry of Transport (MoT) and the National Development and Reform Commission (NDRC). The guideline states that municipal authorities are responsible for the management of internet-based bike-sharing and that local authorities should establish management mechanisms to determine the appropriate number and location of dock-less (free-floating) shared bikes to be put into city streets. In addition, the municipalities were instructed to establish own guidelines for planning parking areas and regulating the parking of bicycles. Furthermore, the guideline requires bike-sharing companies to separate customers’ deposits and advance payments from their budgets to prevent abuse of customers’ deposits. The guidelines led to an increased pressure on local authorities to ensure a guided development of bike-sharing in their cities and to reign in the uncontrolled growth of the market.

Based on the national guidelines, several cities such as Shanghai, Hangzhou and Xi’an issued their own guidelines, aiming to regulate production, operation, service levels and maintenance. For example, Shanghai’s guideline (which the city already drafted in April 2017 and published in October of the same year) requires bike-sharing companies to put customers’ deposits in designated bank accounts, to register bike plates with authorities, to integrate bike parking with city planning requirements and to buy insurance for clients. In order to regulate parking, many of the local guidelines require companies to use web mapping and electronic fencing (geo-fencing) systems, combined with measures such as credit rating systems to regulate the behavior of clients.

Even if the regulations are often non-binding and enforcement is lacking, they put bike-sharing operators under additional pressure undermining their strategy of (in most cases non-demand-driven) ubiquity of bikes to foster market expansion. To support a more orderly development of free-floating bike-sharing, by mid of 2017, some operators such as Mobike started to intensify their cooperation with local governments, sharing their operation data for evidence-based urban planning, to fill in public transit gaps, and facilitate intelligent transport dispatch.

China’s bike-sharing companies start to internationalize

As competition in the Chinese market was heating up but also internationalizing, some of the Chinese bike-sharing companies were increasingly seeking opportunities for further growth abroad. Characteristic for the first phase of free-floating bike-sharing in China was the expansion of the big bike-sharing players, in particular Mobike and ofo, into overseas markets. Mobike started to introduce its service in Singapore in March 2017 and reached 1,000 bikes in Manchester and Salford in June of the same year. By the end of 2017, ofo operated over 8 million shared bikes in more than 200 cities in 12 countries, including China, Singapore, the United Kingdom, Italy, Japan, the U.S. and Thailand. ofo by then had launched in 20 countries (250+ cities). This came as the total number of shared bike users around the globe was expected to grow from 227 million in 2017 to 306 million by 2019, according to the research institution Cheetah Lab. The export of China’s internet based free-floating bike-sharing should also be seen as an example for the country’s shared economy going global.

Mobike’s decision to enter the UK market was made just a week before an executive meeting of the State Council, China’s cabinet, approved guidelines on boosting China’s sharing economy. Premier Li Keqiang who chaired the meeting said that during his visits to several countries, leaders had welcomed Chinese bike-sharing companies exploring local markets. However, bike-sharing operators may not enjoy the same favourable policy support which they get in China, and bike-sharing service providers may need special authorisation before their bikes can be deployed in cities. Facing these conditions, Mobike had agreed to cooperate with the city councils of Manchester and Salford, as well as Transport for Greater Manchester to share data of users’ travel patterns for better urban planning, which was described as the only way for smart shared bikes to prove their worth. At the same time, Chinese bike-sharing companies are not only providers of first and last mile mobility solutions, but also underscoring the significance of Internet Plus-based innovations such as mobile payment and GPS and data collecting chips equipped to the bikes.

Sustainability issues of free-floating bike-sharing

A challenge for the bike-sharing operators in phase 1 was (and still is) the changing public perception of the industry. Initially, the new form of bike-sharing was seen as a trendy lifestyle, bringing the bicycle back to China’s cities and offering a convenient, easy and cheap way to travel. However, as the success of free-floating bike-sharing in China was accompanied by severe challenges, such as clogged walkways and thousands of bikes dumped into so-called “bike graveyards”, the discussion about the sustainability of bike-sharing gained momentum in mid-2017. The key issues of free-floating bike-sharing in China concern public space, the environment, and profitability:

1. Public space issues

The increasing number of bikes on the roads, lack of redistribution and improper parking by customers led to clogged public spaces and walkways, harming pedestrians in particular in areas around public transportation hubs and places of interest such as universities, nightlife hotspots and shopping malls. To tackle these issues, some companies such as Mobike introduced point systems (“Mobike Score”) to punish misbehaviors like random parking. Since mid-2017, some local governments started to establish bike-parking restrictions, especially along crowded streets.

2. Environmental problems

Due to low production costs, many companies produced more bicycles to address simple maintenance issues, as it would cost more to fix a bike than to replace it with a new one. Due to oversupply, lack of operational management (such as effective redistribution or maintenance) and negative impacts on public spaces, many local governments took action and removed bikes from their cities and deposited them in landfills starting mid-2017. The pictures of these colorful mountains of bikes went viral and led to a discussion about the sustainability and the ecological footprint of free-floating bike-sharing. At the same time, the operators tried to focus public attention on the overall perception of bike-sharing as a climate- and eco-friendly mode of transportation and lifestyle, able to positively transform the cities.

On May 19, 2017, Mobike published its first white paper, titled “Bike-Share in the City”, which stated that bike-sharing has more than doubled the usage of bicycles and that all Mobikers in China combined have travelled more than 2.5 billion kilometers equal to saving 550,000 tonnes of carbon dioxide emissions (3). On December 5, 2017, Mobike was named the 2017 “UN Environment Champion of the Earth for Entrepreneurial Vision” for exploring market-driven solutions to air pollution and climate change. The award honours the company’s transformative contribution to the advancement of low carbon public transport by avoiding 4.4 million tonnes of carbon dioxide emissions, equivalent to taking 1.24 million cars off the road for a year.

This award led not only to applause for Mobike’s achievements, but also to criticism: the German dealer cooperative ZEG (Europe’s largest bicycle dealers cooperative) renounced its membership of the UN Global Compact with immediate effect, stressing the negative environmental consequences of the enormous quantities of aluminum required to produce huge amounts of cheap bikes which are not needed and pushed onto the market. In July, 2018, Mobike addressed this issue when they released a lifecycle plan based on “3R” – Reduce, Reuse, Recycle.

3. Economic struggles

Due to the ongoing price-war, free-floating bike-sharing operators were not able to develop profitable business models and thus relied on further massive venture capital injections. This led to the question if the bike-sharing schemes are just an economic bubble, which once exploded, will leave nothing but piles of broken bikes and customers without their deposits.

Reasons for the fast growth of free-floating bike-sharing in Phase 1

The main reasons for the success of bike sharing in China are essentially a mixture of the real need for innovative mobility solutions, an internet-savvy and lifestyle-focused society, the characteristics of the shared-economy ecosystem in China, the availability of sufficient venture capital and inadequate regulation:

1. Convenience and high availability rate

Free-floating bike-sharing is convenient due to the fact that customers can leave the bikes at their destination without searching for a nearby docking station and can just as easily pick them up. This convenience is based on a large number of bikes on the market and thus high availability rates, but also on in-app registration, deposit payment, GPS based bike spotting and reservation.

2. Last mile solution and transport alternative

Free-floating bike-sharing offers an alternative to often insufficient public transport systems, crowded streets and traffic jams. It is also a great opportunity for people to cover the last mile from subway or bus stops to the final destination. According to a Tencent Penguin Intelligence survey in December 2016, 62.9 percent of customers are typically using shared bikes on the last mile.

3. Low service-fees

Free-floating bike-sharing is offered for very low service fees, ranging from free rides to EUR 0.13 per hour (ofo in 2017) to later EUR 2.7 per month (Mobike 2018). Even if the price is less important for the consideration of if and when to use a shared bike, the low fares make bike-sharing very attractive for young customers, such as students, who want to avoid (often crowded) public transport and cannot afford ride-hailing services for short or medium distances.

4. “Theft security”

Bike theft is a reason for many people not to use their private bike for commuting from home to the next subway station or simply cycling around to explore the city. The idea of using a shared bike instead of a private one successfully addressed this issue and was one of the motivations for Dai Wei, co-founder and CEO of ofo to develop smart lock based free-floating bike-sharing.

5. Lifestyle, health and environmental awareness

The colored and often well-designed bicycles are appealing to customers. The cycling movement created a bike sharing lifestyle and contributed to the awareness for cycling as a healthy and environmental friendly mode of transport. According to the Tencent Penguin Intelligence survey, 20.4 percent of customers in China are typically using shared bikes for fitness and exercise.

6. Digital integration

Free-floating internet-based bike-sharing was also highly welcomed by Chinese customers as because of its innovative character. Being integrated into mobile payment platforms such as Tencent’s WechatPay and offering e-coupons for free rides, the bikes serve the expectations of Chinese customers on “mobile and online convenience” of lifestyle products and related applications.

7. Promising business models

Similar to car-sharing, the single bikes with their GPS and internet based smart locks are decentral assets. Once put on the street, they ideally operate autonomously. Even if there is a need for controlled redistribution and maintenance, the bikes are relatively independent revenue generators. Additionally, bike-sharing as a low entry barrier-, lifestyle- and location-based service offers the collection of user and ridership data, promising exploitation of additional revenue streams such as credit services or advertisement. This led to massive investments in free-floating bike-sharing and to a bike-sharing eldorado in China. After Mobike and ofo raised their first large scale capital injections (Mobike EUR 89 million in Series C in September 30, 2016 and ofo EUR 112 million in Series C in October 10, 2016), the investment craze started, and more and more providers entered the market, trying to get their share of the cake and to attract funding.

8. Lack of regulation and governmental support

Lastly, when free-floating bike-sharing hit the streets of Chinese cities, municipalities did not have any regulations in place to ensure a guided and coordinated development of the market, which would limit the companies on the deployment of bikes. Additionally, local governments generally welcomed the bike-sharing operators as they promised to contribute to more sustainable transport but also as internet-based free-floating bike-sharing is in line with China’s “Internet-Plus Policy”.

Phase 2 – Market consolidation – Hope over strategy? (2017/2018)

The turning point in China’s free-floating bike-sharing industry and the end of phase 1 of China’s bike-sharing craze was the bankruptcy of the country’s third biggest player in the game, Tianjin based Bluegogo. The company, with a total of 600,000 bicycles and over 20 million registered users went bankrupt in November 2017 after not being able to raise further funds. When collapsing, the company had already raised a total EUR 79.57 million, of which EUR 53 million were collected in the last of three series A funding rounds in February, 2017, led by Black Hole Capital Ltd.. In November 2017, Bluegogo founder and chief executive Li Gang wrote in a letter released to media: “In a cutthroat market like bike-sharing, I am too naive and so far, no progress has been made on fundraising.” The bankruptcy of Bluegogo also caused problems in the supply chain. For example, its bike supplier Chen Anqiao was left with unpaid bills of EUR 1.31 million.

After a period of uncertainty about the future of Bluegogo, Didi Chuxing (China’s leading ride hailing company, which took over the operations of Uber Technologies in China in 2016), at that time the biggest investor in Bluegogo’s competitor ofo (with a 25 per cent stake), announced in January 2017 to acquire the remains of Bluegogo. The failure of Bluegogo raised the question: is this the end of the price war and are we reaching a market consolidation?

Slowing down of the market

The second phase of free-floating bike-sharing development in China was characterized by the transition from rapid expansion to a more steady growth and a changing industry landscape. Since the bankruptcy of Bluegogo, a significant number of bike-sharing companies such as Coolqi, Chongqing-based Wukong Bike, DingDing, 3vBike or Xiaoming disappeared from the market. According to the Ministry of Transport (MoT), more than 20 start-ups, a fourth of all players, seized operations as of February 2018, marking a consolidation of the bike sharing market in China. The decline of operators came along with the concentration of market power and dominance of the big players. According to PEdaily, a venture capital and private equity web portal, by beginning of 2018, ofo and Mobike together accounted for about 95 percent of the market. Another indicator for the consolidation of the market in phase 2 is the reduced production of new bicycles. According to Technode, ofo only ordered over 80 thousand bicycles from its manufacturing partner Shanghai Phoenix in 2017. This is far short of the 5 million bikes, which ofo and Mobike together planned one year earlier.

But even if in its second phase of slowing down and market consolidation, the competition and run for funding in the bike-sharing industry is far from over: Particularly in Chinese Tier 3 and Tier 4 cities, where local bike-sharing markets are not yet saturated and governmental regulations still allow significant business expansion new players are still emerging. One example for the continuous intense competition is the Shanghai-based company Hellobike, which merged with Youon Bike in 2017, in order to compete against Mobike and ofo. By the end of 2017, Hellobike operated in more than 100 second- and third-tier cities in China with over 30 million registered users and more than 7 million daily orders. Despite Hellobike’s meagre revenues of EUR 16.8 million in 2017 and net loss of EUR 64 million, in June 2018, Hellobike, in its latest funding round, raised a total of EUR 275.4 million from Ant Financial, Alibaba’s financial service arm.

Selected Chinese bike-sharing operators and their decline

International backlash

Despite the ambitions of Mobike and ofo to expand their businesses into markets outside of China, both were facing strong setbacks in 2018. In July, it was reported that after scaling down its business and firing employees in India, ofo decided to close its operations in the country, a market, which the company entered with high ambitions end of 2017. It was reported that the move was due to a lack of infrastructure, a tepid response from investors and the lack of proper planning or executing of bike-sharing mapping in congested traffic networks. Besides India, ofo has fired over 50 per cent of their employees in Singapore, shut down operations in Germany, Israel, and Australia. They announced to lay off 70 per cent of U.S. workforce along with shutting down operations in multiple U.S. cities, after having released about 40,000 bicycles onto the market. On its website, ofo declared its decision to move out of the city of Chicago, as restrictive regulations made it impossible for the company to continue its free-floating bike-sharing service.

Increased pressure to merge

After the merger between Hellobike and Youon Bike, the first in China’s bike-sharing industry, rumors circulated that both bike-sharing behemoths Mobike and ofo could not continue to proceed with their unprofitable and costly price war, but would need to merge. A merger was seen as the only way for the companies to raise prices and to achieve significant cost reductions when i.e. jointly managing and operating the redistribution of bicycles. This was supported by ofo investor Allen Zhu, who said that ofo and Mobike could only be profitable if they merge. At that time, both companies’ combined valuation likely exceeded EUR 3.3 billion. The idea received support, as analysts saw the global bike-sharing market (different from China’s ride-hailing market) far from being saturated. A peaceful domestic bike-sharing market would allow the merged single dominant player to go for a more aggressive going global strategy.

Many analysts assumed this strategy to be in the interest of the lead investors of Mobike and ofo, Alibaba and Tencent. However, as the merger did not happen, it rather seems that both Tencent and Alibaba want to dominate the industry, and neither is willing to let the other own a larger share in the Chinese bike sharing market. For Tencent and Alibaba, each with a valuation of about EUR 420 billion, bike sharing as part of mobility services will continue to be a critical venue for promoting their mobile payment services and an important entry point to access user data. This reflects the challenging situation for both major bike-sharing operators to act strategically, while being the proxy in the war between Tencent and Alibaba. Following the speculations, both ofo and Mobike stated that neither is contemplating a merger and instead highlighted their unique strengths as a successful global player in the bike-sharing business.

Tightening governmental regulations

The second phase of bike-sharing in China was characterized by an intensified enforcement of regulations. Many cities are setting limiting caps to the deployment of new bicycles and are reducing the number of existing bikes on the road. Hangzhou was the first city to set up a bike-sharing monitoring platform and set the goal to reduce the amount of free-floating bikes from 770,000 in March 2018 down to 500,000 by the end of 2018. Many other cities have also banned operators from deploying more bikes and required them to cut the number of existing bikes. In the beginning of 2018, the city of Xiamen brought in plans to cut the total number of shared bikes from more than 400,000 to 150,000. On January 22, 2018, Shenzhen’s traffic management bureau told Didi Chuxing not to place bikes in the city under the Bluegogo brand, because management of both the bikes and the user deposits were not “up to standard”.

Service expansion, cross-industry alliances and platform integration take place

The continuing competition between ofo and Mobike prevented service fees from rising to a level at which they could produce much needed revenue. Speculations arose in early March 2018 that Mobike is running out of money. It was reportedly seeking a new round of financing from Beijing-based food delivery and online services group giant Meituan Dianping. Meituan Dianping, a company that grew to a recent valuation of EUR 25.7 billion, had entered the Chinese mobility market through ride-hailing only in early 2018, aiming to set Didi Chuxing, China’s undisputed ride-hailing king under pressure and to take customers from Didi onto its own platform. So, rather than investing, in April 2018, Meituan acquired Mobike for EUR 2.344 billion. When commenting on the deal, many local media argued that it is difficult for bike rental firms to develop a business independently, but with an in-depth integration with existing tech powerhouses, a better growth model could be developed. Thus, Meituan’s acquisition of Mobike is possibly part of a larger strategic move aiming to expand the company’s on-demand service and delivery platform app to further exploit synergies between different location based service industries, which include ride-hailing, bike-sharing, food delivery and others (see figure 2). Another interpretation is that the acquisition of Mobike was supporting Meituan’s Initial Public Offering (IPO), which is scheduled for mid of 2018, aiming for a EUR 51.5 billion valuation. The importance of the deal for Meituan and Tencent was underlined as directly brokered by Tencent CEO Pony Ma himself.

Meituan Dianping’s app, offering services such as food delivery, film tickets, hotel reservations, flight and train tickets and ride-hailing

However, when looking at it in more detail, this in-depth integration of different services is rather a complex entanglement between the tech-players, as can be seen in Figure 3: Meituan’s main investor is the tech giant Tencent, which itself also invested in Mobike. On the other side is Alibaba, which is also an investor in Meituan and thus also partly owns Mobike. Alibaba itself heavily invested in Mobike’s main competitor ofo as well as China’s number one ride-hailing platform Didi Chuxing (in which Tencent is invested as well) and Ele.me, the EUR 8.3 billion valuated food delivery competitor of Meituan.

The war around China’s food delivery and shared mobility industry

Another important player in the consolidation of China’s bike-sharing market is ride-hailing giant Didi Chuxing. Didi, which acquired Bluegogo in January 2018, invested in ofo with a 25 per cent stake and started its own electric bike-sharing (pedelec) service at the beginning of the same year. Since then, these three bike-sharing services have been integrated into Didi’s ride-sharing app, which has about 450 million users in China. Offering Bluegogo’s and ofo’s services unbranded inside the app gives users less reason to open, or even install, any other bike-sharing app. As all bikes of the different service providers appear as grey bike icons on Didi’s app, their own branding is obscured. By this unbranded integration, Didi strengthens its position as a bike-sharing platform gatekeeper and ensures that ofo exists as a feature inside its own app, rather than developing a more popular and independent service that could challenge Didi’s dominance in the bike-sharing market. The motivation of Didi to keep control over bike-sharing makes sense when considering the fact that in China, ride-hailing is a very cheap transport alternative, in particular on the short distance of up to 5km (a 3km ride in Beijing with Didi costs about EUR 2).

Average costs for mobility solutions in Beijing – The graph shows the average cost at daytime (non-peak hour) for a 3km ride

3km is the typical distance for free-floating bike-sharing users, making Mobike and ofo direct competitors to Didi by offering their services almost free. As Mobike and ofo together have a customer base of more than 100 million users, Didi is aware of the risk that the bike-sharing operators could jump into other shared mobility services such as ride-hailing (which Mobike already tested), offering integrated mobility solutions and own Mobility as a Service (MaaS) -Platforms, severely challenging the ride-hailing king.

Both the cases of Meituan acquiring Mobike and Didi pushing for platform integration represent the fierce competition in China’s shared mobility market, but also the competition between different platform providers, aiming to integrate as many relevant services and related customers as possible into their platforms. The cross-industry alliances and acquisitions (mainly of location-based service providers such as food delivery and shared-mobility services) are indicators for the increasing dynamic of China’s sharing economy.

Reasons for the consolidation of the bike-sharing market in China are:

1. Intense competition

ofo and Mobike together dominate China’s free-floating bike-sharing market with a total share of more than 95 percent, making it hard for smaller companies to compete for new customers and market share.

2. Uncertain and unprofitable business models

Bike-sharing companies highly depend on the infusion of venture capital to finance their operation. According to Technode, service fees only cover maintenance costs and as the price war is still ongoing, it is not possible for the different operators to significantly raise service fees and to reduce operational costs e.g. by jointly organizing the redistribution of bikes.

3. Cooling of the availability of funding

Even if heavy funding rounds in the bike-sharing industry still take place, due to the high market concentration on ofo and Mobike and the market saturation in particular in the first-tier and second-tier cities, the funding craze cooled significantly since mid-2017. According to IT Juzu, compared to the first half of 2017, when the average number of financing deals per month was 3.7, the third quarter of the year saw an average number of 1.3 deals per month.

4. Increasingly saturating local markets and tightening governmental regulations

Most of China’s bike-sharing companies focused their business on first-tier and second-tier cities. With industry growth in these cities, the shared bike market is mostly saturated. At the same time, third- and fourth-tier cities still have large market potentials.

5. Tightening governmental regulations

Tightened governmental regulations make it impossible for companies to further expand into cities like Shanghai or Beijing, where local authorities stopped the further deployment of bikes. The regulations also require the operators to ensure certain service levels, orderly bike redistribution, as well as to provide accident insurance, which increases operational costs. This set many companies under additional pressure, leading to a further slowing of the market. In addition, the regulations limit operators from using user deposits as interest-free loans for the expansion of their businesses.

6. Insufficient innovation

Facing intense pricing pressure and the need to invest into the market expansion, most companies were not able to develop or deploy innovative solutions and to explore additional revenue streams in an effort to afford the ongoing price war.

Phase 3 – Cross-industry integration – Exploring new business models and revenue streams? (2018-???)

Phase 3 of free-floating bike-sharing in China will be characterized by the exploitation of further revenue streams and the continued integration of bike-sharing companies into bigger shared mobility and service platforms. To finally become profitable and to dive into a next phase of real market consolidation, free-floating bike-sharing companies need to diversify their business models and exploit additional revenue streams. Such revenue streams could include:

• Service fees – Once the intense price wars fought through zero-fee subsidy schemes are “over”, the operators could make revenue from the service fees;
• Utilization of user data – User and ridership data can be further utilized, including the commercialization of trip and travel data (this utilization of user data has to be in line with the highest possible levels of privacy protection);
• Advertisement – Advertisement on billboards at the operator’s local bike-parking stations or on the bicycle (the wheels);
• Smart discounts and feed-in business partnerships – Bike-sharing operators can sign contracts with retail shops, cafés or restaurants to offer in-app based digital coupons and discounts, setting incentives to feed riders into their businesses. Membership credits and advanced loyalty point systems could ensure the bondage of customers to the operator’s platform;
• Public transport feed in subsidies – If bike-sharing operators actively feed in passengers to the public transport systems by offering first and last mile solutions, subsidizing schemes could support the bike-sharing business models. Either public transport operators or local governments could pay subsidies. The schemes would need to take into consideration that bike-sharing can also pull passengers away from public transport (public bus systems, in particular). Mechanism to monitor and to evaluate the passenger streams of public transport-bike sharing need to be developed. A subsidization of free-floating bike-sharing in China is in principle conceivable, but in its current phase not likely;
• Crowdsourced logistics – Bike-sharing operators could sign contracts with logistics and delivery service firms and set incentives for riders to carry parcels from micro parcel storages to their destinations if on their way. This could reduce transport costs of delivery service operators and could save greenhouse gas emissions. Even carbon certificates or delivery service related government subsidies could potentially play a role. Since professional (urban) delivery services in China are well established and highly cost effective, crowdsourced logistics solutions in combination with free-floating bike-sharing are in principle conceivable, but currently not likely;
• Service expansion – Bike-sharing is just a part of the mobility mix and feeds in users to possibly more lucrative mobility services. Not only Didi is following this strategy, Mobike has also tested its own new energy vehicle ride-hailing service and launched electric motorcycle services in Shaoxing, Zhejiang Province, targeting users who need to travel distances of 3km to 10km;
• Platform cooperations and cross-industry alliances – Looking at the bigger picture with the dominating “platform operators” (i.e. Tencent, Alibaba) and main shareholders in mind, bike-sharing offers high-frequency interactions with consumers – not only for renting a bike or to feed customers into other services on the platform, but also to use related mobile payment services such as Alipay (Alibaba) or WeChatPay (Tencent). Even if the user-fees for bike-sharing itself are not making the business model profitable, free-floating bike-sharing is a significantly important facilitator to bring and keep users to the ever-more integrated platforms of Alibaba, Tencent, Didi Chuxing or Meituan Dianping. This together with the branding effect of millions of bikes on China’s streets could ensure the survival of unprofitable bike-sharing operators, which are subsidized by their mother platforms.

Summary

Nobody can predict the future of China’s bike-sharing market and its role in the battle for customers between the platform behemoths Tencent and Alibaba. Unique in its scale of expansion, free-floating bike-sharing represents the business dynamics of China’s platform based sharing-economy. The environment based on fierce competition does not allow a shortage of ideas on how to continuously attract new and to keep existing customers. We may see more of the existing bike-sharing companies running out of money, collapsing or being swallowed up by bigger players in the game, and we may see new companies emerge with innovative business models. However, one trend is clear: The functional integration of shared mobility and thus free-floating bike-sharing- as well as other online- and location-based services into larger platforms will continue. It remains to be seen if the bike-sharing operators can exploit some of the described additional revenue streams and can become finally profitable, or if they will simply serve as customer feeding services, subsidized and incorporated within the bigger shared mobility and shared economy environment. The deployment of decentralized and autonomous micro-scale IoT assets such as shared bikes and their integration into holistic service platforms is unique in its China-scale, but at the same time indicates a dynamic of new type of business models of which we will see more in the future – not only in China.

Bike-sharing provides Chinese cities a unique chance to rethink their current, often car-centric urban development models. Even though the uncontrolled deployment of colorful bikes on China’s streets caused chaos and led partly to the perception of the business as an unsustainable one, but the bikes already contributed significantly to the revival of the former kingdom of bicycle – simply by putting a mirror in the face of the cities and their inhabitants. This mirror reflects the reality of car friendly urban environments, leaving no infrastructures such as proper walkways, cycling paths or public spaces for the citizens without a car. Cities need to provide suitable infrastructures such as cycling lanes and designated parking spaces for bicycles, but they also need to integrate cycling into their urban mobility strategies and planning schemes.

The future of free-floating bike-sharing in China is unknown, but after all, one thing is for sure: Cycling is a sustainable means of transportation and contributes significantly to healthy, low-carbon, pollution and noise emission free urban mobility. It is the responsibility of governments, companies with corporate responsibility, urban planners and designers, but also of the civil society to push for a holistic change of our urban environment. With proper regulations in place to promote public transport, walking and cycling and thus (free-floating) bike-sharing is a central part of the vision of human scale and livable cities.

References & Footnotes

(1) Shaheen, Susan, Hua Zhang, Elliot Martin, and Stacey Guzman. “China’s Hangzhou Public Bicycle: Understanding Early Adoption and Behavioral Response to Bikesharing.” Transportation Research Record: Journal of the Transportation Research Board, no. 2247 (2011): 33–41.

(2) Chen, Mengwei, Dianhai Wang, Yilin Sun, Chengxi Liu, and Zhen Bai. “Service Evaluation of Public Bicycle Scheme from a User Perspective: A Case Study in Hangzhou, China.” Transportation Research Record: Journal of the Transportation Research Board, no. 2634 (2017): 28–34.

(3) Mobike assumed that in China, 15 per cent of Mobike trips replaced car trips. We cannot verify these assumptions but according to an evaluation of internet-based bike-sharing in Shenzhen, which was commissioned by the Transport Commission of Shenzhen Municipality, Shenzhen Urban Transport Planning Center in 2017, 9.8 per cent of free-floating bike-sharing trips in Shenzhen (7 operators) replaced car trips.