Ep. 15: Bike-sharing in China Part 1: Ofo’s Wild Ride

The Internet age has brought with it the “New Four Great Inventions” of China: high speed trains, scan-and-pay mobile payments, bike-sharing, and ecommerce. This week’s episode is the first in a two-part story on bike-sharing— told against a backdrop of Ofo, one of the two major Chinese players, pulling out of international markets. What happened? And most importantly, what is happening now? Listen to this week’s episode of TechBuzz China by co-hosts Ying-Ying Lu and Rui Ma, for a history lesson on Ofo! Guest speaker Karl Ulrich, the Vice Dean of Entrepreneurship and Innovation at the Wharton School, weighs in as well.

TechBuzz China by Pandaily is a weekly technology podcast focused on giving you a peek into what’s buzzing within the tech community in China. It is co-hosted by Ying-Ying Lu and Rui Ma, who are both seasoned China watchers with years of experience working in the technology space in China. They uncover and contextualize unique insights, perspectives, and takeaways on headline tech news that don’t always make it into English language coverage.

Our co-hosts Ying-Ying Lu and Rui Ma break down the origin story of Ofo. Started by five Peking University graduates in bubbly 2014, the team was getting 4000 orders per day on the PKU campus alone, two months after launch. After being spotted by GSR Ventures investor Robin Luo, the rest is history. Today, ofo is at 32 million rides a day in over 200 cities. However, challenges continue to abound: repair costs, oversupply, and figuring out a viable business model in a heavy capex business.

Listen to the newest episode of TechBuzz China and decide for yourself– should bike-sharing, which has fundamentally changed how hundreds of millions of people move, remain as one of the four New Great Inventions?

As always, you can find these stories and more at pandaily.com. Let us know what you think of the show by leaving us an iTunes review, like our Facebook page, and don’t forget to tweet at us at @techbuzzchina to win some swag!

Full Transcript

Please be advised that parts of the transcript has been edited for enhanced readability.

We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network.
We are a new weekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. TechBuzz China is a part of Pandaily.com, a new English language site that tells you “everything about China’s innovation.”

(Y: Ying-Ying Lu; R: Rui Ma; K: Karl Ulrich)

[0:00] R: This is the first part of a two episode story on bikesharing in China.
Y: Until recently, this fast growing sector was dominated by two players: the yellow-colored ofo bike and the orange colored Mobike.

[0:13] R: Today’s show is on ofo. How it came to be. Who are the people behind it? And most importantly, what’s happening now? If you’ve been paying attention to the news, there’s constant coverage of ofo pulling out of international markets and rumors of its impending death, at least as an independent entity. Those rumors has been circling for a long time.
Y: What happened here? It seems but a few years ago that it was an experiment on the Peking University campus. That’s not an exaggeration, by the way. That was actually less than three years ago. But it’s been a crazy journey since then. Let us share with you how it happened.

[1:43] Y: Shoutout to our listeners AJ Cortese, Arman Zand and Andy K from El Cerrito for weighing in on our Xiaomi debate last week, the bears outweighed the bulls on this one!
R: This week, we have a similar ask. Tweet at us about your thoughts on today’s episode for a chance at free Techbuzz swag! That’s @techbuzzchina on Twitter And of course, if you enjoy listening to us, please take the time to leave us a rating or review on iTunes or Facebook!

[2:18] R: Yingying, let me test you on your Chinese history here. What are the four major inventions of ancient China?
Y: That’s too easy. Every Chinese kid knows this by like age 5. The 四大发明 or Four Great Inventions are papermaking, printing, the compass, and of course, gunpowder.
R: Dingdingdingdingding! And the Chinese are majorly proud of these. However, even the last one of these great inventions, printing, happened at least a thousand years ago. But have no fear! The internet age has brought with it the four Great Inventions of modern China.

[2:55] Y: Yes, the 新四大发明, or New Four Great Inventions. And they are, high speed trains, scan-and-pay mobile payments, bikesharing, and ecommerce.
R: Who came up with these you ask? The Silk Road Institute of the Beijing Foreign Language University did a survey of exchange students in China and collected survey results from the youth of 20 countries – countries like Romania, Kazakhstan, and Mongolia – along China’s new One Belt One Road policy.

[3:22] Y: Now renamed to Belt and Road. Anyway, it’s way too boring to go over what that policy is, but suffice to say, it’s one of the most important pronouncements by President Xi since coming to power, and it figures prominently in Chinese media and business initiatives.
R: Yeah, so these students apparently voted for these as the new four great inventions, and it quickly became a meme of sorts in China.

[3:47] Y: What these students didn’t realize, of course, is that China didn’t actually “invent” any of these things. But it does have a dominant lead, mostly due to its large domestic market. There is just too much demand.
R: Well today, as you already know, we are going to be talking about one of them in particular- bikesharing. Specifically, dockless bikesharing,or as some people call it, flexible bikesharing. Bikesharing has been around as early as 1965, starting off in Amsterdam, of course, and one of the oldest dockless bikesharing programs, Deutsche Bank’s Call A Bike, has been around since 2000. Obviously, back then, there were no smartphones and no apps, so it worked through your phone, using a series of authentication codes.

[4:20] Y: Which is really not all that different from what ofo, the Chinese bikesharing company known for their 小黄车, or little yellow bikes, rolled out initially. In fact, it was even simpler. It had a mechanical lock which opened with a static code. That meant if you could remember the bike number and the code, then you could always open it, without having to use the app. And that’s what happened. Plenty of people abused the system and basically stashed away the bike somewhere hidden so no one else could find it, and just committed the lock code to memory.

[4:51] R: So, for a while, in typical Chinese opportunistic fashion, ofo bikesharing actually spawned a whole side industry of its own: ofo bike lock password sharing. People created Wechat groups with spreadsheets of bike plate numbers and lock codes which they shared with each other. I think most of these were free, but some people were a bit more greedy and would charge you 30 cents, or about a nickel in USD, for the lock code. For the bargain hunter, this was 70% or more off from ofo’s fees, which was 1 yuan or 15 cents for half an hour.

[5:24] Y: When an early stage investor was asked about this bug, he said, “it’s not a bug, it’s a feature. In an early stage company, do you think it’s more important to grow distribution or revenue?” Okay! I find that really hard to believe, but whatever makes for a good story, right?
R: Yeah I don’t believe that either. What, we made crappy locks so people would ride our bikes more? Anyway, we know now that that kind of distribution over revenue thinking definitely came back to haunt them.

[5:55] Y: Oh for sure. But let’s go back in time a bit, to 2014, where there was no ofo yet. Because I think the birth of ofo is an important story. It explains a lot about why they became the company they are today.
R: Let’s do it, Ying-Ying!

[6:08] Y: So in 2014, the five founders of ofo — who are they? Well, the most important one is Dai Wei 戴威, the CEO, who got his undergrad in finance from Peking University’s Guanghua School of Business, which is either the top 1 or 2 university in China, depending on who you ask. 薛鼎 Xue Ding was a classmate in the same program, and they completed their bachelors in 2013. 张巳丁 Zhang Siding was from Archaelogy, 杨品杰 Yang Pinjie from International Studies, and the only remotely technical person was 于信 Yu Xin, who was in the Information Sciences school. Dai Wei, Xue Ding and Zhang Siding were members of the University’s cycling club, and it was during one of the club’s trips freshman year that Dai and Zhang met.

[6:52] R: Remember, it’s 2014, and the notion of mass entrepreneurship, or “大众创业万众创新”, was just beginning to show up. Premier Li Keqiang formally introduced it in September 2014 at China’s Summer Davos. The government went all in. This became the refrain for the next several years in China.
Y: In China, the government’s calls to action are heeded. In a big way. And we see that very clearly in venture capital investments in China, which jumped from less than $20Bn in 2014 to $30Bn or even $60Bn in 2015, depending on which source you use.

[7:30] R: Ying-Ying and I were both on the ground as this was happening, and let me just say, it was crazy.
Y: So no surprise that Dai Wei and his friends became obsessed with entrepreneurship, specifically internet entrepreneurship, which was what the government was calling for, in 2014. Just a few years back, this would not have been viewed very positively for 5 PKU graduates.

[7:51] R: And so, early in 2014 they got started, and decided to combine their love of bikes with “internet entrepreneurship.” Later articles would mock them for this period as 面子创业, which basically just meant that they were doing a startup for the sake of doing a startup. But even though it was quite bubbly but then, they weren’t all that successful in the beginning. For an entire year and 7 months, they basically made no money. But I think this is an extremely formative period in the company’s history, because they didn’t give up, and I think that persistence and pigheadedness carries through to today, for better or for worse.

[8:27] Y: Credit to them though, they never strayed away from bicycles. They did mountain biking rentals online, and received one order in two months. They did installment payments for highend bikes, and sold 5 bikes. They tried secondhand bike marketplaces, and bike-related wearables, but nothing worked.

[8:44] R: Until they hit upon the idea of bikesharing. According to Dai, they only had about 400 yuan left in the bank and decided to regroup. He thought hard about his own worst customer pain point, and decided that it was losing 5 bikes in his 4 years of undergrad. They thought sharing bikes would solve this problem. On June 6, 2015, they convinced their first classmate to put his bike on this bikesharing platform. It wasn’t yellow, but a blue mountain bike.

[9:13] Y: Probably because they realized that would be too slow, they began to make their own bikes. On September 7, 2015, right as school is starting, they rolled out their first batch of bikes. On the first day, they had 500 registered users and 200 orders, on the second day, 300. By the tenth day, they had 1500 orders a day and in less than two months, they were getting 4000 orders per day on just the Peking University campus alone.

[9:40] R: And then, legend has it, investor Robin Luo from GSR Ventures happened to be on campus for an event and saw these yellow bikes, immediately called for a meeting, recruited senior partner Allen Zhu to look at the project, and put in a $1.5MM investment. With that money, they immediately expanded to other campuses.

[10:02] Y: I’ve always wondered what the heck “ofo” stands for, because Chinese people like to make up English words. But we found the answer as we were doing this story. It’s actually just the pictorial representation of a bicycle, with the two “o”s representing the wheels, and the f representing the frame. Get it? I thought that’s actually pretty clever.
R: I guess from the get go, the team wanted the product to be global. So they chose a name that could be understood the world over.

[10:27] Y: Yeah, if anything, ofo was never lacking in ambition. I think that’s a point we want to hit home. Ofo, to me, represents the archetypal post 90s entrepreneur. There is no lack of passion with these teams. And they pride themselves as mission-driven. Dai Wei is fond of saying that he believes there will be a day where ofo can have just as much impact as Google in the world.

[10:51] R: It’s this attitude that can maybe explain much of what happened later. Because obviously, as with anything in China, there’s going to be a ton of competition. And we want to contrast the ofo founding team with the older and clearly more experienced Mobike founding team, most of whom had experience in the transportation and automotive spaces. One of them was the ex-GM of Uber Shanghai.
Y: And another was Pandaily founder Kevin’s ex-colleague! But yeah, the teams clearly had very different DNA.

[11:20] R: Back to the story. We don’t want to repeat ofo’s many fundraisings and milestones here, because you can find that online anywhere. But basically, they have raised about $2.2Bn in less than three years. And note that their last disclosed valuation from 2017 is only $2Bn. This is a heavy capex business! Anyway, they have a ton of investors which we won’t name here. Importantly, they share a few important investors with another GSR portfolio company, Didi. Wang Gang, famous Didi angel investor, Matrix, and most importantly, Didi itself. As of late last year, Didi supposedly owned 25.3% of ofo and had a veto vote in all financing decisions. It’s second only to Dai Wei’s 36% at the time.

[12:08] Y: Why did Didi do that? Well, it began as a hopeful and synergistic relationship — Didi would put ofo bikes into its system, further realizing its vision of multimodal transportation, ofo would have access to all of Didi’s millions of users … but all of this, as we will find out, seemed to quickly disintegrate.

[13:18] R: You know how we mentioned the stubbornness of ofo’s team earlier? Well that kicks in here in a big way. As you already know, the ofo founding team were college buddies. This was their first company. They are mission-driven. They really resisted outside control. Didi had sent some “adult supervision” after their investment. The ofo team, however, wanted to do things their own way, and refused to give these “outsiders” any real power. By the end of 2017, all the Didi placements had left, and their relationship was pretty icy.

[13:52] Y: Yeah, ofo not getting along with their largest shareholder became the industry’s worst kept secret. It was reported that Didi was vetoing all of ofo’s attempts to fundraise, which Didi denied. But it doesn’t really matter because Didi bought the assets of bluegogo, a bankrupt bikesharing company, and started incubating its own bikesharing solution, 青桔, which means green orange, and whose bikes are teal colored. Those launched earlier this year.

[14:20] R: Yeah, you definitely sense here that there is a sort of just dog-headed fearlessness with the ofo team, I mean why would you go to battle with Didi? It was during this battle that, supposedly, that early investors like GSR, who, as I’ve mentioned before, invested also in Didi, abandoned the company and are reported to have already sold out their shares. So in late 2017, with Didi more enemy than friend, and Tencent as a big shareholder in rival Mobike, ofo’s only chance was pretty much, you guessed it, working with Alibaba.

[14:54] Y: Anyway, these weird conflicts of interest and veto rights really hampered ofo’s ability to close any funding in 2017. But they were hemorrhaging cash, so they came up with a clever way to get some cash, by using their fixed assets, i.e. bikes, as collateral, and getting over $250MM from Alibaba without having to go through board approvals. Or at least that’s what’s been reported.

[15:17] R: And I don’t know what happened, but after a year of rumors, ofo finally closed a $866mm fundraising led by Alibaba in March. Most likely because Didi, even if they hated ofo, wouldn’t want to stand in Ali’s way. This fundraising probably hastened Mobike being bought by Meituan-Dianping for $2.7Bn in April, although that was probably always going to happen, since Meituan is Team Tencent. Anyway, Alibaba now owns 16% of ofo. But now let’s switch gears, no pun intended, and talk about the deposit system of these bikesharing companies. Because many of you must be wondering, if ofo was needing cash for a year, how could they have survived for so long with no new funds coming in?

[16:06] Y: See, most bikes in China are not tied to a credit card, but work on a deposit system. Ofo, for example, charged you 199 RMB or almost $50 upfront before you could take advantage of their 1 RMB per ride system. It was the deposits that allowed many of these bikesharing companies to stay afloat, and because there was not much transparency into what happened to the deposits nor much regulation about it, we see most of the bikesharing companies using this money to fund operations.

[16:36] R: You might think this is ridiculous, but this is what happens in China on a regular basis due to the lack of an advanced credit system. If you check into a hotel, for example, you always have to prepay a deposit as insurance for incidentals. Anyways, two months ago Beijing just formally announced proposed legislation regarding deposits for bikesharing. So in the future, the deposits will probably have to be kept in a separate account. But it’s not law yet.

[17:06] Y: And that’s why we see in the over 50 bikesharing companies who have gone bankrupt that most of them have users complaining that they never got their deposit back. Probably all of them operated the same way.
R: You mean, basically misusing funds?
Y: Well, I do think using deposits is shady, but it wasn’t illegal, and frankly, the business model was so difficult to get to work anyway. It’s an entrepreneurial pursuit that leaves “no room for mistakes”

[17:28] R: That’s giving the entrepreneurs a lot of credit. I mean, you can call bikesharing companies 被资本养大的巨婴, which translates into, giant babies that have been raised by capital.
Y: For good reason. A few investors have done the following math – based on estimates, an ofo bike could expect to be ridden 2.5 times a day. But I’ll use 3 for illustration purposes.

[17:54] R: 3 times, that’s close to the public stats that Dai Wei has mentioned in April, which is 32mm rides across 10mm bikes.
Y: Yup. But that’s in good weather. So let’s optimistically use 250 days a year, even though we both know that in much of China, the whole northern half, basically, it’s probably a lot less than that due to the severe winters. So ok, if you do 3 times 250, that’s 750 yuan, or a little more than $100 by today’s exchange rate. We know that the cost of each ofo bike has gone up from less than 300 RMB to higher now because they had to add smart locks to compete with Mobike. OK so less than a year to make your money back. But not when you take into account the fact that maybe nearly half of them are broken.
R: Nearly half?!

[18:38] Y: Yup, a recent survey in Shanghai, one of the largest bikesharing markets in China, showed that just 60% of bikes were functional. That’s not just for ofo, but industrywide. So there’s a lot of repair costs here. In fact, there’s a joke that the real beneficiaries of the bikesharing craze are the bicycle repair mechanics. And of course, I am not counting any operational cost involved in promoting or moving the bicycles around to rebalance supply. This is just to have your bikes be working.

[19:10] R: Yeah, I’ve heard that too. But maybe the mechanics won’t be complaining for much longer because the bikesharing craze does most definitely seem to be dying down. The first sign are the suppliers, who seem to be dying in droves. In the so-called “China’s First Bike Manufacturing Town,” 王庆坨 WangQingTuo village in Tianjin, supposedly a hundred businesses have already gone kaputz. Probably not all bikesharing suppliers, but a good amount.

[19:38] Y: Although I will caveat that headline with the observation that frankly, Chinese businesses spring up out of nowhere and die suddenly all the time. It’s totally not weird to go on vacation for a few weeks and find that when you come back, the restaurant you used to go to all the time downstairs is not only gone, but has been replaced by a hair salon. Few realize that while businesses in China grow at exponential speed, many of them also die at exponential speed.

[20:03] R: And maybe that’s what ofo is doing. Dying at exponential speed. Just this month, ofo has also announced that it’s pulling out of overseas markets, for example Australia and the United States. It’s announced a bunch of layoffs. And we don’t know what will happen with the Chinese government. A state-owned paper recently criticized the oversupply of bikes in China.

[20:26] Y: People are complaining that there are just too many bikes. Let’s take the city of Shanghai. There are 1.7mm bikes now in Shanghai. Granted, the city has something like 25mm people. But that’s still one bike for every 15 people. Experts think it should be more like 500-600 thousand bikes for the city, or one roughly every 50 people, not 15! That means the current market is 2 times over supplied. Ofo alone has 700K bikes in the city, and Mobike over 600K. Assuming all the small players die, they still need to cut down their supply by half or more.

[21:07] R: Which might be the reason why ofo has been trying to diversify its revenue stream in recent months. It’s been aggressively pushing advertising on its bikes. It’s also started selling ads inside of its app, and even putting in news, video and gaming features. Critics are seeing this as an example of just how deeply troubled its business model is.

[21:28] Y: Basically, in China, you resort to gaming when you just can’t figure out how to make money with your original product. It’s the fastest cashflow when you’ve got traffic, which ofo has. In May, it had over 28mm MAU.

[21:41] R: But don’t think we are hating on ofo here. I am an avid user of bikesharing. I’ve used it in several European cities and I just rode over 100 miles this month on the local Cambridge docked bikesharing system Blue Bikes. So we are not haters! But let’s hear what our bike expert Karl had to say. Karl, can you introduce yourself?

[22:03] K: My name is Karl Ulrich, I’m the Vice Dean of Entrepreneurship and Innovation at the Wharton School. I’m the founder of the personal transportation company Zooter, and I’ve been following the fspace really carefully for more than two decades. I also spend a few weeks a year in China and I’ve been fascinated with innovation and entrepreneurship there.

[22:24] Y: What do you think of the current obstacles facing the industry though, like the ones we’ve been discussing today?
K: Bikesharing in China has certainly encountered a few obstacles, but this is totally normal at the dawn of an industry. I remain optimistic about the future of bikesharing. A lot of the apparent problems we see now are the natural result of the frenzy of competition that occurs in a new network-driven industry. Every enthusiastic entrepreneur and investor thinks that he or she can take advantage of an emerging opportunity without recognizing that with so many competitors, the chances of success of any one effort is really small. So we’ve watched a shakeout of competitors and excess supply of bikes. I think the situation will work its way out and we will settle into a healthy and sustainable level of supply and demand.

[23:18] Y: Okay, so Karl is an optimist on the industry, and maybe less so on any individual company. Anything to add, Rui?
R: Yeah, before we finish, I want to put things into perspective. One of the older and more established bikesharing programs in the world, ClearChannel Smartbike program, says they have 20 million rides a year. A year. As we mentioned, as of a few months ago, ofo is at 32mm a day in over 200 cities globally. A day! Mobike was about the same. These two companies have fundamentally changed how people move for hundreds of millions of people.
Y: So maybe bikesharing should remain as one of the four New Great Inventions after all.

[24:03] R: Bike slash scooter sharing.
Y: Oh man, that’s a whole other can of worms. We won’t go there today. And plus, that’s not really a big thing in China yet.
R: But we do plan to have a followup episode on Mobike and others next week. There’s a lot of drama we had to skip because we wanted to focus on just ofo today.
Y: And ofo is just half the story of China bikesharing. Maybe soon to be less than half at the rate they’re going. Tune in next Tuesday for the rest of the story!

[24:40] Y: We’d like to give a shoutout to our partners at SupChina. In addition to our podcast here with Pandaily, they publish the excellent Sinica podcast, a weekly discussion of current affairs on China with journalists, writers, academics, policy makers, and business people.
R: So while we only focus on tech, they really give you the entire overview. In addition, if you liked what our guest Professor Karl Ulrich had to say today, highly recommend you subscribe to his podcast called Launch Pad, from Penn Wharton Entrepreneurship, available everywhere you can find podcasts.

Follow us on twitter, at @thepandaily, @techbuzzchina, @ruima and @ginyginy. Thanks to our producers Carol Yin and Kaiser Kuo, and our intern Ska Du.