What’s the next evolution of the car? In China, it’s not the self-driving car. It’s the bike. In an unexpected cycle of events 2017 is the year of the humble two-wheeled push bike.

Nimble, young, agile. Bike-sharing companies are jostling for market-position, aggressively seeking to raise capital in a way reminiscent of the ride-hailing app companies back in the heyday of 2015. Of this new pack of young frontrunners hitting the road, who will be the next Didi?

 

Bike-sharing companies target the “last one mile” where the metro and bus routes are unable to reach, the last home-stretch back from work.

 

An indicator of the popularity of the bike-sharing market can be seen in the success of their fundraising efforts. Mobike, the industry leader, has recently announced a US$300 million investment from Tencent, Warbug Pincus and Temasek.

 

Slightly behind the leader of the pack, Ofo also announced its completion of a US$450 million series D fundraising on March 1 from a few investors including Didi, Xiaomi, Coatue and Atomico.  According to e-commerce research firm iResearch, currently 11 bike-sharing companies have announced their fundraising plans. Six billion yuan (US$872 million) has been invested into the industry.

 

Even though each ride charges as little as one yuan, sometimes even less, robust cash flows are expected to be generated from the high number of potential users. A research report from Citic Securities estimated that by the end of 2017, the total number of bike-sharing users will grow to over 50 million, and the market size of the whole bike-sharing market will exceed 50 billion yuan by the end of 2020. The report also highlighted that the income generated from back-end services and big data services by bike-sharing companies could double the size of its bike rental business.

 

For now, despite some ambiguity as to the sources of income for bike-sharing firms, investors still view the industry as one with much potential. “They (bike-sharing companies) have their own user base. They do not need BAT (Baidu, Alibaba, Tencent) to help them get users,” says Roger Shi, senior investment manager of Infinity, an Israel-based private equity company, in an interview with The Asset. “That is important because as you can see, the internet dividend is disappearing as it is getting more difficult to get your own users.”

 

User base is seen as the most essential factor in determining the valuation of a technology or internet company. “For instance, if you are a game maker and you talk to Tencent, they would probably ask for a 90-10 profit-sharing scheme. Your game is excellent, but sorry, Tencent has the say over the distribution,” says Shi.

 

Then the question will be how to obtain new customers. Without an apparent distinction in appearance between each brand – except for the colour, Ofo is yellow, Mobike is red, Bluegogo is blue – it is not an easy decision for new customers to pick one from a number of bikes on the street.

 

“Share bicycles are basically transportation tools, taking people from one place to another,” Yufei Hu, vice president of Bluegogo, the third largest Chinese bike-sharing company, tells The Asset in an interview.“How ever beautiful you make the bicycle look, the core is still the product itself.”

 

Bikes and the smart locks, as The Asset understands, are the key differentiators of share-bikes in China. The craftsmanship and technology to make these two key elements have raised the barrier to entry for new competitors in a new market despite a lack of protection over intellectual property.

 

“The main problem is how they can use patents to set a (higher) entry barrier to potential players,” says Dong Lin, partner at Borsam Intellectual Property, a law firm specializing in intellectual property issues. “Although you invent new things, other players can also make similar things with existing technology. You cannot restrict others in this sense.”

 

“In the US, over-protection in patents can be a hurdle for innovation. But in China, the issue is that the existing patent system cannot provide enough protection for innovators. That is the real constraint for startups, if their core competence is too easy to copy,” says Lin.

 

Burning cash
A common and effective weapon to stand out in the Chinese internet industry is to make a large capital expenditure, usually financed by strategic investors, to grab a larger share of the market. Major share-bike providers such as Mobike, Ofo and Bluegogo, have been aggressively manufacturing and deploying new bikes, while giving large subsidies to their customers at the same time. “The only objective of these companies is to survive,” says Lin.

 

Noticeably, a portion of the budget of these bike-sharing companies is being allocated to overseas markets. In line with China’s “go global” strategy, Chinese bike-sharing companies are also seeking overseas opportunities. For instance, Mobike entered the Singapore market on March 21, while Ofo introduced its bikes to Singapore in the same month. In January, Bluegogo chose to expand its footprint to San Francisco.

 

While share-bikes themselves are not a novelty in Western countries, such as the UK, they are mostly owned by the government – for instance, London’s famous blue “Boris bikes”, named after Boris Johnson, the charismatic London mayor who introduced them. In comparison, China is the first country where this bike-sharing business model is adopted by corporates on the back of a surging technology sector.

 

“In the past, we have seen China learning from other countries. Chinese companies are known to be good at copying and making better products based on the original ones,” says Hu, “but now we are seeing Chinese companies inventing new things and bringing them to other countries. That is definitely a good thing as it demonstrates China’s innovation capability to the rest of the world.”

 

Out of the bike-sharing companies, it is still too early to predict the final winner of the race. However, the experience of ride hailers such as Didi and Uber which fought for market share by aggressively offering subsidies may provide some clues. 

 

“The Chinese bike sharing market is currently in the middle of a price war – similar to the price wars in the past between taxi apps Didi Chuxing and Kuaidi Dache,” says Mirjam Meissner, head of the research programme of economy & technology at MERICS. “Whoever wins in China is likely to shake up the global bike-sharing market in the future.”

 

From the investors’ perspective, the investment is just a pure bet with a small possibility to win. “It’s like calling all-in. Regardless of whether the target is overvalued or not, if the company survives, you will win,” says Infinity’s Shi. “The company that survives in this industry will become a monopoly. You will always benefit from investing in this type of companies.”

 

Data from iResearch shows that as of February, Mobike had a penetration rate of 13.9% while the penetration rate of Ofo was just 6.7%. It is likely that the cash-burning activities will persist, at least, for the duration of 2017.

 

“When an industry enters a stage where major players have already completed their series D fundraising, basically the startups are pushed by their investors to move ahead,” says Shi. “A war can start whenever you want, but it won’t stop whenever you want.”