No Intermission for Shared Bikes’ War

12 min read 

Hundreds of workers in bright yellow uniforms assemble small yellow bicycles at the Tianjin Flying Pigeon bicycle factory on May 19. The workers hurriedly attach the wheels and gears to each frame, and every 15 seconds a new ofo unit is born. Workers at the end of the line load each new bike into cardboard and seal it with plastic. The bikes will make their way to China’s subway stations, residential areas and office buildings to join the rest of the fleet.

To meet the order of 5 million bicycles per year, Pigeon has opened 20 ofo single-track production lines. Each line employs 70 workers, and the 5 million bicycles account for a third of Flying Pigeon’s yearly production.

Tianjin Fuji, Phoenix and 700bike have also become ofo partners. Fuji and Phoenix provide ofo with the annual capacity of 16 million vehicles.

Mobike chose to co-operate with Foxconn, which opened a dedicated bicycle production line with a yearly capacity of 5.6 million units. It has since doubled its capacity to nearly 10 million bikes.

“The market is too big. China has a billion of people and they may need 400 million bicycles. We would have to make 100,000 bikes a day for 10 years to reach that number,” said Dai Wei, founder and CEO of ofo.

ofo and Mobike recently announced the completion of their D round financing. According to media reports, the two have completed eight rounds of financing in the last 70 days. The rapid absorption of hundreds of millions of dollars have led both sides to radically expand their market.

Expansion and competition have not slowed, and their contracts with the bicycle manufacturers who are building their fleets have turned into an arms race.

But as each stocks up with equipment they look to the next phase of the game.

Round One: Burn Money to Buy Market Share

 

In March, Wu Xiaobo’s channel (吴晓波频道) held a poll to see which kind of bicycle people would favor for use on China’s streets. The 27,000 respondents voted “Whatever bicycle is readily available.” accounting for 47 percent of the total responses.

According to statistics from the Ministry of Transport, China has more than 30 companies operating in the bike-sharing market. Their combined fleets total more than 10 million bikes. Building more bikes and putting them into service is the basic tactic by which the companies aim to occupy the market.

Big data monitoring platform Trustdata recently published its “2017 Q1 Report on China’s Bicycle Sharing Industry Users.” During the first quarter of the year, ofo bicycles were the easiest to find on every Monday, and the company expanded its fleet in second- and third-tier cities and began to enter fourth-tier cities. ofo’s 5 million bicycle fleet had a presence in 100 cities by May. Data for the same period showed Mobike in 80 cities with 4.5 million bicycles.

The cost to put a million people on bicycles is not small. The first generation of Mobike bicycles cost 6,000 yuan while Mobike Lite bicycles cost up to 1,000 yuan. As for ofo, Flying Pigeon Bicycle Factory said it charges 600 yuan to 700 yuan as an original equipment manufacturer.

If Mobike could reduce its average cost to 1,000 yuan, it could produce 2.35 million bicycles with its existing financing of $355 million. ofo received $450 million in its D round financing recently, and its production capacity will be much larger with the same funding. At a unit price of 600 yuan it could produce 3.9 million bicycles.

And if ofo cooperates with traditional bicycle manufacturers the cost could be lower still. At a cost of 300 yuan per bicycle, ofo could make 7.8 million bicycles. Mobike’s high production costs constrain how many bicycles it can put on the street and delay its profitability.

However, ofo’s decision to debut without location functions has hampered its subsequent development. Dai Wei said reducing operating costs is the core of ofo’s business model. According to this logic, if there are enough bicycles and they are available, then an intelligent lock with GPS positioning is not necessary.

But at the end of March, the Standard for Bicycle Sharing Products published by the Shanghai government specified that all bicycles operated by bike sharing companies must have Internet access and GPS positioning so that operators can improve the quality of their service. In April, Beijing issued a similar draft that required its bicycles to have GPS positioning.

Although ofo saved money initially, it now must spend heavily to upgrade its existing bicycles.

ofo and BeiDou(北斗) Navigation Satellite System reached a strategic cooperation in April this year. It announced that it will be adding global satellite navigation and positioning technology and an intelligent lock from BeiDou to its Beijing, Tianjin and Hebei fleet.

“Intelligent locking a core part of the bicycle and costs about 500 yuan,” Li Gang, the founder of Xiaolan Bicycle, said in an interview with Southern Metropolis Daily. With ofo’s target annual output of 5 million bicycles, the cost of smart locks alone may range as high as 2.5 billion.

The low-cost bicycles also have a very high loss rate, which has greatly increased ofo’s operation and maintenance costs. “ofo users reports malfunctions at a significantly higher rate than Mobike users, with reports reaching 39.3 percent,” Tencent Penguin Zhiku (企鹅智库)said in its bicycle sharing data report.

Mountains of damaged ofo bikes has been spotted by media and named “mass graves for little yellow bicycles.” Interface News reported seeing numerous yellow bikes awaiting repairs in Beijing. Their problems varied from scratched out barcodes to missing seats, broken locks, damaged pedals and flat tires. “Each repairman can fix no more than 40 to 50 bicycles per day. Only 400 to 500 can be fixed on any given day, which is far fewer than ofo requires. We can never finish them all,”an ofo repairman said.

Overall operating costs, including maintenance, have become a burden for the bicycle sharing enterprise.

In May, Tianjin published its “Interim Measures for Internet Rental Bicycle Management” which required bicycle sharing companies to shift their human resources to support their offline needs. Tianjin now requires no fewer than 50 repair workers for every 10,000 rental bicycles in the fleet.

If operators were to comply with this provision, Mobike and ofo would have to hire 22,500 and 25,000 maintenance personnel since they operate fleets of 4.5 million and 5 million bicycles.

According survey conducted by Beijing Business Daily, the employees responsible for operation and maintenance under ofo and Mobike earn a monthly salary of 5000 yuan. ofo and Mobike spend as much as 100 million yuan per month on their repair workers..

In any case, the two operators remain dedicated to burning each other out of the market and attempting to leave their competition in the dust.

Bida Consulting Company released a first quarter report on the bike sharing market which said there were 30.1 million bicycle sharing users at the end of March 2017 – a year-on-year increase of nearly 30 percent. ofo’s market share in the first quarter reached 51.9 percent and Mobike’s reached 40.7 percent.

“We are hoping to have a presence in 100 cities, where where can meet the most needs,” said Hu Weiwei, Mobike founder, in an interview with Interface News. Hu insisted his 100-city plan would not change:

To be sure, ofo and Mobike have sufficient cash and will continue to produce more bikes, but their coming competition will require more than burning through investment to win.

Round Two: Optimize the Experience and Retain Users

 

Even if the market is large enough, there is no reason to believe Mobike or ofo can up divide it between themselves. The competition is far from over.

At present, bicycle sharing companies are burning less money than ride sharing app operators. Since they don’t have to offer incentives to drivers, the subsidies for bikes are far smaller. Bike sharing operators can still afford to burn money, and investors still want to pursue a monopoly position for maximum commercial return.

The next competition between Mobike and ofo will be to encourage long-term attachment to their brand.

“Free rides” have been the most common approach. During 2017, both companies have introduced free riding weeks. They have also attempted to gamify the search for a bicycle by hiding red envelopes with money and prizes on certain bikes. The strategy has helped to reduce the pressure of repositioning and maintaining their fleet.

“A user pays 1 or 2 yuan to use a bicycle, but the cost to find it and relocate it might be 20 to 30 yuan. This is not viable for a business,” said Wang Xiaofeng, the CEO of Mobike.

In order to reduce maintenance pressure, Mobike launched its “Red Envelope Bikes” program in March. Users can locate and unlock bikes and win cash rewards of 1 yuan to 100 yuan if they ride for 10 minutes or more. Users have a higher chance of getting a big envelope if they deposit the bike near a subway station, shopping district or other high-traffic zone.

“We hope this will encourage users to participate in guiding our bikes to high-traffic areas. It will let them enjoy the convenience of bicycle sharing while boosting the efficiency of our operations,” said Hu Weiwei, Mobike founder, in an interview with Interface News. Operating efficiency improved 2.6 times by May, Wang said.

In April, ofo also joined the red envelope war. It announced that users who ride in red areas have a chance to receive red envelopes worth as much as 5,000 yuan.

The company is also looking beyond bonuses to focus on users’ riding experience, such as whether bikes are equipped with baskets or whether their wheels are too heavy. These past complaints have been solved in ofo’s most recent vehicles.

In May, ofo changed its slogan from “A ride whenever and wherever” to “Rides can be easier.” The former highlights the number of bicycles and their availability while the latter focuses on the new lightweight bicycles.

“We never feel like a bike rental company. We see ourselves more as a technology company,” said Wang Xiaofeng, CEO of Mobike. The company has 39 patents that include chainless bicycles, rear axle assembly bicycles and tricycles with anti-theft monitoring equipment, bicycle monitoring methods and anti-theft systems.

More recently, the two companies appear to be seeking strategic cooperation. From their list of partners, it’s not hard to see their common interests in the Internet of things, digital payment and open platforms. Mobike and ofo are paving the way for common usage scenarios in the future.

Mobike gained access to WeChat on March 29. The company said its weekly growth rate reached 100 after that, and 52 percent of new users eventually chose to download the app. On June 6, it also announced Mobike would begin using Apple Pay and would support the iPhone camera to unlock by scanning.

In terms of the Internet of things, ofo announced its partnership with Huawei and China Telecom in February. Huawei will provide chip and network technology for ofo and China Telecom will provide wireless network coverage.

On May 23, Qualcomm and China Institute reached a strategic partnership with Mobike. The MDM9206 LTE, an Internet of things multimode modem by Qualcomm, will be incorporated into Mobike’s smart bike lock in the near future.

Mobike and ofo have also opened access to their platforms. On May 12, ofo announced its would open its API interface to partners, the first batch of which includes Ant Financial, Didi, Gaode Map, China Telecom, CITIC Bank, China Hotel Group and Vanke Real Estate.

On May 19, Mobike announced eight companies would receive access to its API: China Unicom, China Merchants Bank, China UnionPay, Baidu Map, Chinese Wyatt Circle, Shenzhou Car, China Hotel and R&F. This first groups of strategic partners covers businesses in the telecommunications, finance, travel, health, hotels and real estate sectors.

In order to win the initiative in the battle of users, ofo reached a strategic cooperation with Zhima Credit (芝麻信用) in March. Users in Shanghai with a Zhima Credit rating of 650 points or higher could use their credit authorization to ride without paying a deposit. Its cities with deposit-free riding have expanded to include Hangzhou and Guangzhou.

The deposit fee for Mobike is 299 yuan, while ofo’s current price is 99 yuan. When comparing 299 to 99 and 299 to 0, the deposit-free policy does tilt the balance for some users toward ofo.

Bike sharing deposits have raised questions of illegal fund raising and have been compared to a second revenue stream. The Guidance on Encouraging and Regulating the Development of the Internet Rental Bicycles (Draft) issued by the Ministry of Transport offers clarified requirements for companies that accept deposits. Enterprises which collect deposits and prepaid funds from users must implement earmarking and accept supervision, namely offer refunds, so as to prevent and control the risk of fund abuse.

Bike sharing remains unable to see quick profit returns when compared with the generous input costs. However, according to Huxiu’s analysis, the high rate of use gives bicycle sharing business the potential to become a super cash flow with stable, daily revenue. Dai Wei said the daily revenue generated by each ofo bicycle was 5-10 yuan in late 2016. Based on the scale of ofo and Mobike, their cash flow must reach tens of millions every day.

By using the credit system to reduce human loss and the red envelopes to reduce repositioning costs, it should be possible to profit from bike sharing. Judging from the recent strategic partners, future prospects should be far more than the 1 yuan per hour that was initially expected.

Lanxi, a media writer, said ofo is expected to launch 20 million units domestically by the end of 2017. Based on the estimated number of 800 million Chinese urban residents, this means 1 in 40 people will have access to an ofo bike. Mobike will offer a similar volume.

The bicycle race is not developing as seen by Zhu Xiaohu, an early investor. “The battle will be over within 90 days,” he said. Considering their strategic partnerships and plans for the next phase, Mobike and ofo are positioned to penetrate every alley connected to a main road. That may have profound implications for the flow of city traffic.

This article by Chen Xiaoshuang  originally appeared in Jiemian and was translated by Pandaily.

Click here to read the original Chinese article.

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