Will two startups shake up China’s traditional bike business – a new round of ride-hailing fight in China
As China’s ride-hailing industry faces tougher regulations, tech companies and VCs are seeking for opportunities in a two-wheeled business instead of four
Context of ride-hailing business and unaddressed pain points:
Today on Beijing and Shanghai’s streets, you can see a battle between orange and yellow bicycles. Two tech company-backed startups are trying to capitalize on a return from a very traditional two wheeled commodity – bicycle.
While ride-hailing industry has been fast growing in the past years and created new generation of giant tech companies like Didi (if you still remember that recently Uber sold its China business to Didi and gave up Chinese market), there are still some unaddressed pain points for “last-mile” transportation. Citizens normally feel uneconomic to ask for an Uber to a place only 1-3 miles away, but they are also hesitated to walk all the way there. Besides, it’s always painful to get a car during peak traffic hours in Beijing or Shanghai, no matter whether you have ride-hailing apps on your mobile or not. While some local governments provide bicycle services to ease crowding on roads and subways, citizens still feel inconvenient as they must pick and return bicycles at certain bike stations, which are located sparsely in cities.
Unique business model and recent success of two startup companies:
Two Chinese startups, Mobike and Ofo, have emerged recently to address these pain points.
With limited sign-up fee on mobile app, you can easily become a Mobike (featured with orange bicycles) or Ofo (yellow) member. Every time you need a bike, the app provides a map of nearby bikes (normally within hundreds of meters) and guides you directly to them (similar to Google Map). With a built-in GPS, the bikes don’t require docking at a specific station and can be left anywhere as you want. After using the bike, customers can pay for the ride via app, which is linked with popular online payment apps like Alipay or Wechat Wallet.
It’s also convenient for bicycle operators. An alarm alerts the operator if a bike is moved without being unlocked, so one operator can monitor thousands of bikes simultaneously. In addition, Mobike’s bicycles are custom-made with reinforced structure, which has expected life of more than five years. 
Currently, revenue comes from upfront sign-up fee and charges on bicycle use. Compared with Uber, riding bikes is a much cheaper choice. Mobike caters to the white-collar crowd, who can afford its smart GPS locks and the nearly $50 deposit. Ofo primarily goes after students, with rates for its yellow bikes as low as seven U.S. cents an hour and deposits of $13. 
Both Mobike and Ofo have attracted thousands of customers in a couple of months with very low customer acquisition costs, which proves that both companies successfully address citizens’ pain points. Detailed operation numbers are not disclosed yet, but investment veterans consistently believe that customer base is growing exponentially.
Like many startups, for now neither company is earning money, yet capital keeps flowing in: in October, Mobike received $110M investment in a Series C round backed by Sequoia Capital, Tencent, Hillhouse Capital and Warburg Pincus, while Ofo attracted $130M investment led by Didi and Xiaomi. 
Additional steps to encounter challenges:
First challenge is conflict between low cost and rapid expansion. While combined fleet has surpassed 100K very quickly, people doubt whether cost is also soaring. Mobike designs and manufactures its own bicycles, which is a fairly asset-heavy model with significant up-front capex investment, and might slow down Mobike’s expansion. Ofo outsources bike production and adopts low quality bikes. While cost is low, Ofo has to recycle and refurbish bikes frequently as they can be damaged easily, which brings increasing maintenance expense. Given fierce competitive environment in China, both fast expansion speed and low-level manageable cost are the keys to success. I would suggest both Mobike and Ofo to design a new bike with features between their current bike offerings: good-enough quality at reasonable cost level.
Secondly, both startups face challenge of frequent bike thefts, as neither uses the docking stations of traditional bike-sharing plans around the world and GPS system could potentially be damaged. Bike operators sometimes have to recover bikes that ended up in the middle of a river or on someone’s private balcony. To address this issue, both companies should improve bike tracking & lock system, encourage good customer behaviors and punish bad ones. It is also essential to leverage local police resources to help retrieve lost bikes and punish bike thefts.
Word count: 727 words
 Tom Mackenzie, Yuan Gao, Brad Stone and Lulu Chen, “25-Year-Old’s $500 Million Startup Fuels China Bike-Share Battle”, Bloomberg Technology, Oct 30 2016: https://www.bloomberg.com/news/ articles/2016-10-30/uber-s-bruising-battle-in-china-is-being-refought-with-bicycles
 Liyan Qi and Alyssa Abkowitz, “Chinese Startups Saddle Up for Bike-Sharing Battle”, The Wall Street Journal, Oct 25 2016: http://www.wsj.com/articles/chinese-startups-saddle-up-for-bike-sharing-battle-1477392508
 Tomas S. Noda, “China: Bike-sharing app ofo raises $130m in Series C round”, DealStreetAsia, Oct 12 2016: http://www.dealstreetasia.com/stories/china-bike-sharing-app-ofo-raises-130m-in-series-c-round-55282/
Student comments on Will two startups shake up China’s traditional bike business – a new round of ride-hailing fight in China
This is a very exciting business proposition but my first and foremost concern is bike theft and destruction. The lack of formal docking sites significantly reduces the company’s ability to track or enforce damage control, as after a trip is paid and completed there is nobody to hold accountable for the bike until the next user logs on. This is why in the long-term, I would put my money on Mobike, though in the short term, whoever has more cash to burn may come out the winner. I wonder how the company deals with non-uniform flow of their assets? (e.g., unidirectional travel with commuting times. Do they offer discounts for those who travel in the opposite direction?
Hey Lisa, thank you for your comment. As of theft and destruction issue, both Ofo and Mobike have strengthened their bicycle structure and updated their GPS tracking system. In the meantime, they are trying to cooperate with local police in some cities. However, as you said, it would really take a lot of money and time to educate local customers (especially in Tier 2/3 cities) for this new type of business. As of uni-directional travel, currently they don’t offer any discount. They are still trying to increase total bicycle fleet available in the city. Technical wise, their current system is not robust enough to track customers who travel in the opposite direction.
Great post! Though admittedly the first reaction when I had reading this was, this would never work in Latin America! I think there are several operational components that are key to the success of bike-sharing in China:
1) The trust factor. I would be curious to know what percentage of bikes are stolen and or damaged. Both bike companies could hedge against this by charging a contingent deposit (similar to a hotel) in the event the bike disappears. This would also be another potential revenue stream (charging a premium on insurance for the bike).
2) Online Payment Integration. Linking it directly to customer’s wallets removes any of the hassles that arise with paying on the spot. The issue with new markets is there is a significant portion of the population that remains underbanked.
3) Managing the inventory and flow of bikes. Similar to what Lisa mentioned above I’m curious about the way this is managed by Mobike and Ofo.
It’s very encouraging to see two very young startups compete for such a large market. I’ve had the opportunity to ride bicycles that have to be returned to docks and I must say I agree with the fact that it can be a hassle to locate the nearest station if you’re not lucky enough to have one right in front of your destination. I’m curious to see how and if they control where their bicycles are in such large cities as Shanghai and Beijing, which I think is how they cracked the code!