Breaking the Bike Bubble

Willa Sun

June 18th, 2018

 

 

In recent years, the demand for shareable transportation services has grown tremendously. This is none truer than in China, where the popularity of dockless bike sharing grew at a phenomenal rate upon its introduction to the growing, and increasingly urban, nation. However, the story is a classic example of runaway supply and holds key lessons for investors seeking to enter the tech space. Over the course of 9 months, the dockless bike sharing industry grew far too quickly. By June of 2017, players started to drop out of the race due to drained funding and an oversaturated market. This article looks at the factors that prompted the emergence of the bike-sharing bubble and the aftermath of industry-wide bankruptcies.

 

Source: Reuters

Source: Reuters

When analyzing the major players in the dockless bike sharing industry to see where things went wrong, one of the first data points to observe is their funding sources. Some of the largest players, Mobike and Ofo differ greatly in this regard. Mobike is backed by the Chinese tech giant Tencent while Ofo has e-commerce heavyweight Alibaba on its side. These sponsors guarantee Mobike and Ofo prime access to the two main payment apps in China, Wechat wallet and Alipay respectively. Although other smaller players eventually gained access to these payment platforms, Mobike and Ofo were able to secure their position as market leaders through earning support from these corporate sponsors early on.

 

Mobike declared its decision to introduce its services to Beijing on September 1st, 2016. Shortly after, Ofo concluded its $130 million series C funding by Didi Chuxing and announced its expansion out of college campuses on October 10th to compete head-on with Mobike. The concept of dockless bike sharing was soon covered by the press intensively. Start-ups such as U-bicycle, Mingbike, Bluegogo soon entered the game and more than $1.6 billion worth of capital was poured into the industry over the span of 18 days. The main sources of funding for these smaller start-ups include private equity firms, venture capitalists and even angel investors at very early stages.

 

Thousands of unused bikes. Source: Yibo Wang - Shutterstock

Thousands of unused bikes. Source: Yibo Wang - Shutterstock

Unsurprisingly, rapid growth of supply soon outpaced demand. By August 2017, Shanghai Municipal Transporation Committee reported a total of 1.5 million bikes deployed by 12 different companies while the demand for bikes remained around 500,000 to 600,000. Out of the 1.5 million bikes deployed, 700,000 were owned by Ofo, followed by Mobike’s 500,000. With little brand differentiation and far less market power than the big players, other start-ups stood no chance against Mobike and Ofo. However, even some of the bigger players were toppled by the biting competition. Bluegogo, once the third largest player in the industry with over 20 million users and over 600,000 bikes at its peak, handed over its operations to a rival firm in November 2017 due to lack of funding. Its CEO, Li Gang, branded Bluegogo as a company that prioritizes user experience and bike performance. Despite its initial success, Bluegogo declared its failure to raise a $400 million fund as its series B funding that resulted in a massive capital chain rupture.

 

An additional problem faced by the industry is the mismatch between the surge in the number of bikes and sluggish increase in maintenance efforts. After the initial deployment of the bikes, these companies oftentimes neglect to repair broken bikes due to insufficient manpower and a general oversupply of bikes. Most of these broken bikes, along with those that previously belonged to companies that have now declared bankruptcy and ceased their operations, are carelessly disposed of. Mountains of discarded bikes can now be found blocking once major roads in multiple major cities in China.

 

Source: Reuters

Source: Reuters

Setting the promising bike-sharing model aside, the industry remains a cash-burn at the present moment. Customers are charged pennies per 30-minute ride. These companies’ operating income mainly comes from the security deposits customers put in when they start using the bike service. This poses a major challenge for these companies. Revenue growth is entirely dependent on a steady growth rate of new customers. Additionally, Mingbike’s bankruptcy in July 2017 was accompanied by lawsuits against its failure to refund deposits. Before Mingbike’s case was closed, more bike-sharing startups declared bankruptcy and their users were also unable to get their security deposits back. This wave of events pushed consumers further towards the seemingly safer players Mobike and Ofo, which now control a combined 95% of the market.

 

It is important to note the undeniably significant role the Chinese government played in facilitating the rapid overheating of the industry. China’s President Xi Jinping has repeatedly praised the sharing revolution as China’s gift to the world and grants the industry with tax breaks and free office space. These perks, alongside the low barriers of entry, and growth of the tech sector, prompted close to 60 startups to jump into the bike-sharing bubble.  This overwhelmed Chinese cities where infrastructure and regulations were unprepared to handle the sudden flood of millions of bikes. The lesson to be learned from an investing standpoint is simple, understand the risks and how the market operates. Too frequently are investors attracted by trending market themes, especially in the tech space. In these high-risk environments, get in early, diversify or stay out.