May 17, 2017

Bicycle-sharing apps are a hit among China’s urban commuters: 80.5 per cent of first-tier city respondents in an FTCR survey had used them in the past month.Mobike and Ofo dominate this niche market, with a rivalry that has echoes of the earlier battle for market share between car-hailing apps Didi Chuxing and Uber.We do not expect this fight to drag out. The economics of bike-sharing, the intervention of local governments and the involvement of powerful shareholders mean this looks more like a short-term scramble for turf ahead of a merger.

China’s bicycle-sharing services are a hit among urban commuters, but high cash-burn rates are likely to push consolidation and an end to the bruising fight between the two market leaders.

In our latest consumer survey, 66.6 per cent of respondents had used a bike-sharing service in the past month, an average of 7.5 times, with the share rising to 80.5 per cent in first-tier cities. Unsurprisingly, young people are using them most. Among 18-35 year olds, 72.9 per cent said they had used a bike-sharing service in the past month — despite most having access to a car — compared with 47.6 per cent among over-35s. 

Costing as little as Rmb0.5 ($0.07) per ride, the bike-sharing model solves the “last mile” problem for China’s commuters; 69.4 per cent of respondents said they use the bikes for less than half an hour per trip. Users can cycle to work or home from the bus stop or subway station and leave the bike on the pavement. Unlike comparable schemes in London and New York, these GPS-enabled bikes do not need to be returned to a docking station.

Fighting for market share

Mobike and Ofo dominate the market. Mobike was cited by 54.2 per cent of respondents while 50.3 per cent said they used Ofo in the past month. Bluegogo came a distant third among brands, cited by 17.1 per cent of users. The intense rivalry between these market leaders has fuelled a stunning proliferation of shared bikes on China’s streets: Mobike alone reportedly has more than a million bikes across 33 cities.

As is often the case in China’s online service industry, the current development phase is all about buying market share. Some bikes offer the chance to win cash prizes while the two market leaders offer free rides. Pay Rmb100 into your Mobike account and the company will add another Rmb110. Ofo exempts users with high credit ratings from Sesame Credit, part of Alibaba’s Ant Financial, from having to put down deposits.

However, winning on price is not quite as important as it is for car hailing. Users will not walk the extra distance to a different bicycle service for the sake of a couple of renminbi. Survey respondents cited comfort (52.1 per cent) and availability (51.2 per cent) as the key factors in choosing which service to use, with cost a consideration for only 36.3 per cent. As such, companies will struggle to create brand loyalty.

There can be only one

This is a war that requires major capital investment, Mobike and Ofo have disclosed nearly $1bn of fundraising so far, and one from which only a single service is likely to emerge intact. The most probable outcome will be a merger.

Players need to invest heavily in sourcing and deploying bikes: Mobike has deployed more than 3.65m bicycles since it was established. Add in maintenance costs and attrition rates and the operational challenges become clear. This is a key difference with the 18-month struggle between Uber and Didi Chuxing for market share; those companies burnt cash to subsidise rides but did not have to buy and maintain fleets of cars.

Assuming 3m bikes in service, that the average bicycle costs Rmb500 and that there are 20m users a month — as per an estimate by iResearch, a Beijing-based research company — we believe each bike will need to be in service for at least 10 months to pay for itself. This conservative estimate does not take into account maintenance costs, damage and theft — reaching break-even will in reality take even longer.

Public anger over congested pavements also threatens these services, with eight local governments recently announcing rules on where bikes can be left outside subway stations, for example. More local regulation will follow.

Furthermore, powerful investors in both services, Tencent in particular, are unlikely to sanction protracted cash-burn in pursuit of market primacy. Tencent is Mobike’s major shareholder but is also invested in Didi Chuxing, Ofo’s biggest shareholder. Alibaba has also invested in Ofo. After the car-hailing app war, we do not believe Tencent wants another costly fight. Given the ugly economies involved in this particular struggle for market share, resistance to a tie-up is weak and a merger is likely sooner rather than later.

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