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Wait, Chinese Bike-Sharing Doesn’t Make Any Sense

Mar 21, 2017

Apple CEO Tim Cook made news in Beijing Tuesday, when he paid a visit to the bike-sharing company Ofo, one of the 30 or so Chinese start-ups that are aggressively competing for bike-sharing market share and investor cash.

Cook took a ride on one of the firm's signature yellow bikes, met its founders, including CEO Dai Wei, and posted congratulations in an official Sina Weibo post: "Thanks for welcoming me today, Ofo team! Great energy behind your mission to make commuting greener, more efficient and fun!"

The question is whether Ofo—which raised $450 million earlier this month and reached "Unicorn" status with a valuation above $1 billion—and its competitors make any economic sense.

More than a decade after the numbers of bike riders began declining thanks to new subway lines and an explosion of private cars, China's streets are again awash in riders. Bike-sharing startups have flooded China’s major cities with hundreds of thousands of starkly-colored branded bikes—in yellow, orange, blue—after receiving hundreds of millions of dollars in venture capital fundraising from notable investors including Sequoia Capital and Warburg Pincus . Just today Mobike, the biggest Chinese company according to rides, opened for business in Singapore.

Users love the services. They can leave bikes anywhere. GPS on the bike or smartphone locations allow the next users to find them on the app.

But economists say there’s a reason the phenomenon hasn't come to the U.S.: it doesn’t make any financial sense for the bike companies.

The 30 or so bike sharing companies in China today envision becoming the next Didi Chuxing (which is an Ofo investor). They practically give away their product for free to beat competition and build market share. The problem is, bike sharing isn’t anything like Uber ride-sharing. The more people who join your bike company, the more bikes you have to buy. The more bikes you buy, the more problems like theft and bikes abandoned far from city centers start to matter.

Jeffrey Towson is an investor who once worked for Prince Alwaleed and a professor at Beijing University. He can’t believe the amount of money the companies have received and recently dissected the problems. Just the biggest:

  • There’s no network effect in bike sharing. This is not like Facebook (fb) or Uber, which improve as more of your friends or drivers join the platform. Scale “ doesn’t create a much lower cost structure per unit,” Towson points out. In other words, when Mobike or Ofo add another 1,000 customers, they need to buy more bikes. Economies of scale don't work in bike sharing.
  • Prices are so low that the bike-sharing companies are either unprofitable, or carry razor-thin margins. Mobike and Ofo, the two largest companies, charge between 0.5 yuan to 1 yuan (7 cents to 14 cents) for 30 minutes. And those bikes can be expensive. Mobike's premium bikes reportedly cost 3,000 yuan ($435) to produce last year. It says the cost has since fallen. But if you assume each bike is used five to eight times a day, which is unlikely, as many end up far away from popular destinations, it takes more than a year to recoup costs. Ofo has said its simpler bikes are 250 yuan ($36). Even then it takes several months to recoup costs, which increasingly include paying employees to haul bikes back to busy intersections, find abandoned bikes, fight theft, and comply with new regulations sprouting up because officials in Beijing and other cities are annoyed at hordes of bikes blocking sidewalks.
  • Competitors keep piling in. There’s almost no way for them to differentiate, except for tiny differences in bike style, comfort, and their app. There’s no way to keep competitors from piling in and there are already some 30 companies.
  • Even when China’s 30 or so bike-sharing competitors are whittled down to a few, scale doesn’t pay off then either. That’s because, again, there’s no asset-sharing going on. People aren’t listing their bikes to be used like homes on Airbnb. The bikes are bought and kept up by the companies.

Earlier this year Mobike raised $300 million from Tencent (tcehy), Foxconn (fxcny), and Temasek. Ofo raised $450 million from DST and Didi Chuxing.

The business is being defined by how much capital competitors can raise to spend on gaining market share.

The problem is, once they capture some, real profits may never be part of it. Beware of a future initial public offering.

Reuters contributed to this report.

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