China’s sharing economy – business models based on sharing certain commodities is growing rapidly. While ridesharing and home-sharing probably sound more familiar to people with the likes of Uber and Airbnb, in China bike-sharing has exploded and new concepts such as power bank sharing, umbrella sharing and napping pods sharing surfaced.
Uber, despite its recent controversy and turmoils, has undoubtedly revolutionized the transportation industry. In China, Didi Chuxing [滴滴出行], or Didi dominates the market.
The Didi-Kuaidi merger was a milestone in Didi’s history. At the time, Tencent-backed Didi and Alibaba-backed Kuaidi [快的] were both burning cash fast with heavy subsidies to drivers and customers. On a side note, Tencent vs. Alibaba is a recurring theme in many industry verticals and I am sure we will only see more of it as time goes by. Eventually, a merger happened and the combined entity captured more than 90% of the market share1.
The story did not end there. In a year and a half, Didi Chuxing acquired/merged with Uber China and thereafter no competitor has the scale to pose a real threat to Didi. Officially entered China in March 2014, Uber China never really got close to Didi’s market share (the two companies had their own versions of each other’s market share and Uber claimed to reach approximately 35% of market share in China at the end of 2015). However, given Uber’s success in the U.S., no one would take Uber China lightly.
The news that Didi would acquire/merge with Uber China surprised many people. I wouldn’t go into details as you can read about it on WSJ and Bloomberg. One thing to note, back in February 2016, Uber CEO Travis Kalanick mentioned that the company was profitable in the U.S. but was burning over $1 billion a year in China.
While Didi has secured its leading position in China’s ridesharing market, I want to spend more chapters on bike-sharing as this is a soaring sector in China and nowhere else in the world rivals in activity and funding.
Bike-sharing is a mind-blowing sector in China in many ways. Some people know The Four Great Inventions of ancient China are compass, gunpowder, papermaking and printing. Now some (tourists or non-Chinese living in China) are calling bike-sharing, mobile payment, high-speed rails and e-commerce China’s Four Great Inventions of the 21st century.
There are a lot of companies competing in this space. Mobike [摩拜] and ofo (yes, no capitalization on the letter “o” as the company’s name symbolizes a bike) are the market leaders and I will focus more on them.
1. Fundraising – Mobike + Tencent vs. ofo + Alibaba
A look at the two companies’ fundraising gives an idea how hot the market is.
Mobike was founded in January 2015 and ofo was founded in 2014. Both companies have raised nearly $1 billion or more. They raised a billion dollars in 2 years and more accurately in 1 year as funding really escalated since last fall. The two companies did not officially disclose their valuations but were both rumored to be valued at around $2 to $3 billion.
Both have some prominent backers. Tencent led the latest round for Mobike and Alibaba led the latest round for ofo. Tencent also led the January 2017 round for Mobike and Alibaba affiliate Ant Financial invested an undisclosed amount in ofo back in April.
Tencent or Alibaba investment is usually worth noting for many reasons and one of them being that each firm has one of China’s most-used applications, WeChat [微信] and Alipay [支付宝], respectively. WeChat is known for messaging and social networking while Alipay is known for payment. Overtime, the two applications have evolved significantly beyond the original capabilities. The two applications are “gateway” applications (WeChat is probably even more so than Alipay) that integrating 3rd party applications with them can often get those applications a lot of traction. Tencent and Alibaba certainly don’t always do this for their invested companies. In the case of bike-sharing, they did.
WeChat’s integrated 3rd party applications are included in the “wallet” tab where users can see Mobike (as well as Didi Chuxing). Users can also access Mobike within WeChat through Mobike’s mini program. Alipay integrated ofo as well as a few other ride-sharing applications. Users scan the QR codes of shared bikes through the applications to unlock and ride. Such integration helps to accelerate adoption and also enhances user experience as users can scan and ride the bikes while staying within WeChat/Alipay.
2. Overview: how bike-sharing works and the differences between Mobike and ofo
Let’s take a step back and look at the bike-sharing business. Bike-sharing companies provide bikes to users who as mentioned before, scan the bikes’ QR codes and ride. Bike-sharing companies charge a one-time initial deposit upon registration and an hourly rate each time a user rides a bike. For example, Mobike charges a 299 CNY deposit and ofo charges 99 CNY. Bike-sharing companies generally charge 1 CNY to 2 CNY per hour but companies have been offering a variety of promotions and subsidies that the rides are mostly free to users.
It remains to be seen how much revenue bike-sharing companies can generate when subsidies eventually go away. On the other hand, it is not clear how bike-sharing companies handle the deposits. One natural thought is that they put the money in a segregated account and earn interest on it, but bike-sharing companies have not really disclosed this information. The government has begun to look at this issue too as bike-sharing companies’ hold more and more deposits. One thing to note on this front is ofo had partnered with Ant Financial where users in a few cities with a 650+ sesame credit score [芝麻信用分] – Ant Financial’s credit scoring system, can ride ofo without a deposit.
I mentioned before that users can scan the QR codes on the bikes and ride. There are some differences when it comes to the locks on these bikes. Mobike uses “smart” locks that unlock and lock when you scan the QR codes on their bikes. ofo originally had mechanical locks and when users scanned a bike’s QR code, they received a four-digit password to unlock the bike. The problem with mechanical locks is that the password is fixed and many issues such as theft and underpayment occurred as people memorized those passwords. ofo later introduced a new version where the passwords were randomized and recently rolled out bikes with smart locks and plans to recall all bikes with mechanical locks by October.
Mobike’s bikes are also equipped with GPS which is not found in ofo bikes. ofo uses location-based services (LBS) to locate bikes. Because LBS relies on users’ mobile phones and they need to mark a trip as “complete” in the ofo app in order for ofo to get the accurate location of the bike, Mobike has a better handle on where their bikes are. On the internet you can find tips on where best to find ofo bikes – sidewalks of main roads, malls and college campuses for example.
It might sound like Mobike has superior bikes than ofo, but ofo has its advantages too. For one, some people say that ofo has a better riding experience, partially because its bikes are light. Mobike’s 1st generation bikes were heavy due to a few factors including carrying a mini motor used to generate electricity upon riding. Mobike then introduced Mobike Lite that made the riding experience better. Mobike Lite replaced the mini motor with a lighter solar panel. Mobike bikes need mini motors or solar panels to charge the lithium-ion batteries for the smart locks while ofo’s lithium-ion batteries are non-rechargeable.
Many of the differences between Mobike and ofo are driven by the different paths they took. Mobike bikes are sturdy and are equipped with smart locks and GPS among other things. Therefore, the bikes cost more. ofo bikes on the other hand, are less durable and pack fewer technologies. The bikes are cheaper accordingly. It is probably related to the fact that ofo originally started in college campuses and became popular among college students. For them, good-looking bikes with good riding experience and a lower deposit are great value propositions. While ofo bikes have a shorter lifespan than Mobike, the lower production cost allows ofo to reach more geographies quickly. ofo reportedly had entered 50% more cities than Mobike as of Q1 20172.
ofo said publicly that the company is/plans to be a platform connecting bikes and end users and will not manufacture bikes. It seems like the bikes on ofo’s platform will come from existing ofo bikes and bike manufacturers. ofo bikes need to be custom-made by bike manufacturers so my view is ofo probably still needs to procure and retain the ownership of the bikes. Meanwhile, Mobike looks pretty focused on building its bikes, especially after forging a strategic partnership with Foxconn in January.
This is an area bike-sharing differs from ridesharing. A company like Uber would be much more asset-light. If ofo somehow manages to only be a connecting platform, it would be so too so I am curious to see how things play out. Bike-sharing does not have to and will not be ridesharing for bikes though. It is not about idle cars’ excess capacity but a more convenient and cheaper way for short-distance trips or the so-called “last-mile” issue. If you need to go to a place 1 to 2 miles away and you can easily access a bike (thanks to the millions of bikes deployed by bike-sharing companies) and just need to pay a minimal fee (let’s say 50 cents), that is a strong value proposition especially given how congested many places are.
The downside is parking. Convenience helps drive user adoption and demand as people find bikes and ride to their destinations. In most cases, users would leave the bikes there and not all places have parking docks or designated bike parking areas. Even if there are, it is easy to overflow particularly in popular places like malls and subway stations. Places flooded with randomly parked bikes can be quite chaotic and this is bike-sharing’s biggest problem and growing pain. To tackle this, all parties include bike-sharing companies, users and the government need to work together.
While the Chinese bike-sharing market remains highly competitive, Mobike and ofo have begun to expand overseas. Since March, Mobike entered into Singapore, UK, Japan and Italy. ofo has also entered Singapore, UK and Kazakhstan. It will not be easy for the 2 companies as they need to cope with new regulation and consumer behaviors. Chinese people are very used to scanning QR codes and bikes are a common means of transportation. So it is almost certain that user adoption will take longer overseas and bike-sharing is not likely to reach the scale seen in China anytime soon.
In addition to cars and bikes, we are seeing more sharing businesses for power bank, umbrella and a few other things such as napping pod and basketball.
Power bank sharing and more
It is no secret that battery is one of the most critical components of a cell phone. While battery has been lasting longer over time, so does daily usage of the cell phone and improving battery life remains a technical challenge. This has given rise to power banks, devices that store electrical energy to charge cell phones, tablets and etc.
Power banks are popular in China. High cell phone usage rate is a key contributor. According to Statista, China has the 2nd highest “hours spent per day on mobile devices per user”, just behind Brazil. As an example of power banks’ popularity, if you have been to a Chinese airport, you will see that power bank is specifically called out and included in the prohibited list to check in.
Similar to bike-sharing, when you open power bank sharing companies’ apps, you can see the locations of the available power banks. The power banks are deployed at locations including malls, restaurants and bars. Some are portable – you get one from a power bank vending machine and can return at another location while others are stationary – you can only charge at that location, say on a coffee shop table.
Customers again scan QR quotes to pay to use the shared power bank. Laidian [来电] for example, requires a 100 CNY deposit but the deposit is waived for people with a 600+ sesame credit score and paying with Alipay. In addition, Laidian charges 1 CNY per hour with the first hour free. Laidian does not provide data cable but sells it for 10 CNY if you need one. AnkerBox [街电] pricing is essentially the same as Laidian but provides data cable. Both supply portable power banks. Xiaodian [小电] charges 1 CNY per hour without deposits. The company’s power banks are stationary.
The need for power bank in China is real, the need for shared power banks will depend on the experience. Granted there are cases where a person’s phone is dead and that person absolutely needs to bring the phone back to life, from my view it ultimately depends on how smooth and easy the experience is. Bike-sharing makes it easy for short-distance trips. Even though it remains a problem to be solved, the lack of parking restrictions did help accelerate adoption.
Portable power banks tactically choose locations like malls. High foot traffic and the good amount of time people spend at malls lift the utilization level of powers banks in the vending machines. If portable power bank companies can cast a net of heavily connected locations, then the positive effect of portability can be maximized. Meanwhile, stationary power banks could be a good way to give the battery a short boost at locations like restaurants and coffee shops as customers dine or hang out.
Most of the businesses also had no problem attracting investors and capital. Xiaodian and Laidian both raised $20M+ in 2017 and AnkerBox was acquired by JuMei [NYSE: JMEI] in May, an online retailer of beauty products.
Besides bike and power bank, companies are being formed to build similar sharing businesses with umbrella, napping pod and even basketball. If bike-sharing and power bank sharing already sound like rental businesses versus sharing, these newer things are even more so. I cannot predict whether these businesses will boom or are a fad, but to me a business is created to solve a problem. If sharing is an efficient business model for solving that problem, that sharing business is likely to last. In contrast, if a business is created by thinking what else I can share now that the sharing model has been validated, I think it will be much harder for this business.
(1) Based on data provided by Chinese IT information and solution provider YiGuanGuoJi, Didi and Kuaidi had a combined market share of more than 99% as of the end of 2014. (2) Source: Q1 2017 China bike-sharing market research from iiMedia Research