Bicycles the new front line of Chinese internet giants’ fight for e-commerce dominance

In 2017, China saw millions of brightly coloured bicycles filling the streets of its major cities, the result of a surge in the number of bike-sharing businesses that had sprung up, seemingly overnight. By the spring of 2018, hundreds of thousands of those bikes had been abandoned in fields and car parks, making great fodder for photographers.

But while the initial craze has faded, the multibillion-dollar business fight is far from over, becoming instead another battleground in the intractable war between China’s competing mobile payment systems – Alipay and WeChat Pay, run respectively by China’s two internet giants, Alibaba and Tencent.

The money needed to keep this fight going, over bicycles and a lot more, will have to come from these companies, with the winner possibly winding up taking a cut from every consumer transaction in China.

But just how did bike-sharing become caught up in the battle for China’s mobile payments market?

It began in 2014 when a group of five young college students, led by Dai Wei, founded Ofo, so named because the letters resemble a bicycle. By 2015, main competitor Mobike was founded and by 2016, dozens of other competitors had joined the fray.

The idea was straightforward. Commuters need to traverse short distances between bus stops, subway stations, offices and homes, so readily available bicycles would make that “last mile” quick and easy. To fulfil that need, the bicycles had to be available in large quantities and riders needed to find them, unlock them and pay for the ride via an app without worrying about returning them to a specific location. Companies tracked their bicycles and gathered tremendous amounts of data in the process.

User numbers rose 630 per cent year-on-year from 2016 to 2017, according to ii Media Research. Venture capital money poured in, led by the likes of Sequoia, Hillhouse Capital, Ant Financial, Bertelsmann Asia and Temasek Holdings. Cheetah Research has estimated that over US$4 billion was invested in the China bike sharing business in 2017 alone – about 10 per cent of all venture capital invested in China that year. By September 2017, China’s transport authority estimated that 16 million rental bikes had been put on city streets.

Yu Xue, research manager for IDC China, estimates that the two leading firms, Ofo and Mobike, with over 90 per cent of the market between them, each received at least US$2 billion. According to Crunchbase, at least US$4.5 billion was invested in China’s four leading bike-sharing firms, while a tally based on reporting by China Money Network puts the figure at about US$5 billion.

China's bike-sharing war enters crucial stage with Mobike going deposit free

To date, no bike-sharing company in China has turned a profit, though Mobike, Ofo and Hellobike are now reportedly valued at over US$1 billion each.

They have also had to contend with restrictions on their businesses imposed by city governments angered at having to clear the streets of discarded bikes. And while the forecast is 14.6 per cent rider growth in 2018 and over 17 per cent in 2019, according to a iiMedia Research report quoted by Caixin, bike-sharing is an expensive business.

Besides the cost of buying bikes and keeping enough of them on the streets to be convenient, there is ongoing maintenance and the need for companies to offer incentives to make sure riders pick their bikes and not those of their rivals.

“Funding is a weapon” in the bike-sharing business, said Jeffrey Towson, professor of investment at Peking University’s Guanghua School of Management in Beijing. “You win by taking greater losses than the other guy.” He estimates that to turn a profit, bike-sharing companies need to three to five rides a day.

And that is where Alibaba and Tencent come in. Both companies try to use their investments and acquisitions to direct users to their systems, and as Chinese are more prepared to shop online and share data, the battle over mobile payment systems is worth winning.

Hong Kong’s bike-sharing start-ups struggle to shake off bad name

In their 2018 Internet Trends annual report, venture capital firms Hillhouse Capital and Kleiner Perkins noted that mobile payment volumes in China had risen from nothing in 2012 to nearly US$16 trillion in 2017, with Alipay having 54 per cent market share, WeChat Pay 38 per cent and the rest at 8 per cent. Alipay’s share had been 84 per cent in 2014.

As Alibaba and Tencent have become more involved in the bike-sharing business, the entanglements became pricier and more complicated and there have been casualties on the way – in June 2017 Wukong Bike, based in the western city of Chongqing, closed shop after just six months. It lost 90 per cent of its bikes, after neglecting to put GPS monitors on them.

Meanwhile, the original venture capital investors in Ofo and Mobike had reportedly hoped for a merger between the two, presumably to stop the competitive spending. Increasing involvement from Alibaba and Tencent put an end to that idea.

China’s internet giants are using bike-sharing as an “entry point to their business ecosystem”, said Professor Wu Dong at Zhejiang University School of Management, with the data they gather including user credits and consumption habits. And thanks to numerous investments and acquisitions by Alibaba and Tencent, those ecosystems are growing in complexity.

“As many bike-sharing companies die, they will keep burning money until others quit or they merge as one,” Wu said.

Bike-sharing firm Ofo’s CEO rallies staff to ‘fight till the end’

Hellobike and Youon Bike merged in 2017 and received heavy investment from Alibaba and its affiliate, Ant Financial. Mobike, in which Tencent invested, was bought for US$2.7 billion in April 2018 by online food delivery firm Meituan-Dianping, which itself is at least 20 per cent owned by Tencent. The acquisition cost loss-making Meituan about half its 2017 revenue.

Meanwhile, Ofo received a US$886 million investment led by Alibaba in March, while ride-hailing service Didi Chuxing – whose investors include both Alibaba and Tencent – is reportedly considering its own bike-sharing business.

“We look forward to partnering with more bike-sharing companies in the future, leveraging Ant Financial’s payments, risk management and mobile platform technologies to support further development of the bike-sharing market,” the payments firm said in an emailed statement.

The statement cited reports saying that Hellobike user numbers had increased 70 per cent and daily rides had doubled since March 2018, when it began to offer deposit-free bike rentals through Zhima Credit, Alibaba’s credit scoring system.

China’s sharing economy headed for troubled waters

Ofo remains the overall leader in bike-sharing, claiming 65 per cent market share “worldwide”. According to an Ofo spokesman, the company is ramping up operations in over 250 cities across 22 countries.

For its part, Mobike says that it is now operating in over 200 cities in 18 countries, with 200 million registered users and 9 million Mobikes. On July 5, Tech Crunch reported that Mobike’s app will be integrated into Meituan-Dianping’s “super” app, which has 310 million users. Tech Crunch also reported that Mobike would attract new users by forgoing deposits and refunding deposits already paid, “to establish a no-threshold, zero-burden and zero-condition deposit-free standard for the entire bike sharing industry.”

Ultimately, success in China’s online to offline business world, whether bikes or elsewhere, will come down to size, according to Sundeep Gantori, an analyst at UBS Global Wealth Management CIO.

“The two major entry barriers to become a successful O2O player in China are a) access to vast amounts of data and b) deep pockets to continue to invest. In this regard, we believe the big players have a unique advantage and they will continue to see increased industry consolidation,” Gantori said.

Until then, expect to see the bikes piling up around China’s cities.