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Can China’s Bike-Sharing Boom Last?

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Bike-sharing has taken off in China far faster than in any other market where it’s been offered. The unexpected and shocking popularity of the service has attracted lots of investment capital and media coverage. The attention has also raised questions about potentially razor-thin margins, wide-spread bike vandalism and theft, and looming government regulation. Hype, scrutiny and liquidity have quickly overwhelming a story about a nice, convenient and surprisingly popular service.

At the center of this is an important and still mostly unanswered question: Why did bike-sharing take off so very rapidly in China versus other countries?

  • Why is it so popular? Especially in a country where bikes can already be purchased for as little as $7.
  • And as Chinese services like Mobike and Ofo enter markets overseas like Singapore, London and Silicon Valley, will they catch on more than previous attempts?
  • Also could this all be a fad?

Solving a real problem?

Venture capitalists and entrepreneurs tend to think in terms of existing problems to be solved. Usually if new technologies or business models are rapidly adopted it is because they address a long-standing problem, remove an inconvenience or “pain point”, or offer a cheaper alternative to an existing service or product. In each case, the demand is already there and the adoption can happen fairly quickly. So one possible explanation for the hyper-adoption of bicycle-sharing in China is that it is solving a real problem.

It is worth noting that there is no actual new technology involved in bicycle sharing. It is a business that was enabled by the widespread adoption of smartphones and mobile payments in China alongside the falling cost of GPS devices. The real innovation was the creation of a new business model that enabled bicycles to be rented on-demand by phone and then left anywhere. This has proved to be a particularly convenient way for getting around large college campuses, in the case of Ofo, and within dense cities, in the case of Mobike. The services have also turned out to be useful for getting home from the subway and other situations.

However, is this actually solving a real problem? Much of the bike-sharing hype has cited big macro transportation problems such as the often-stand still traffic of Beijing and the crowded subways of Shanghai. And as urbanization continues, another 300 million Chinese will be living in cities within the next 8-10 years – so this is part of a solution to this big macro problem? Personally, I don’t see bike-sharing having a significant impact on Chinese urbanization or transportation. I don’t buy this sweeping macro argument.

Another more realistic problem that bike-sharing is actually solving is what to do with your bike when you ride it somewhere. If you take your bike out of your apartment to ride, you will need to eventually park and lock it – and take it back home. Bike-sharing obviates these issues and enables more convenient and frequent riding. That is a convincing argument. But does this explain why bike-sharing is so much more popular in China than in other similarly crowded countries? Probably not.

Enabling impulse rentals?

Perhaps bike-sharing is more about enabling impulse spending, as with vending machines. Vending machines don’t solve a particular problem. If you want a Coke, you can generally walk into a store to get one. But vending machines enable you to make impulse purchases with small change as you pass by. Similarly, a Chinese commuter who gets off the subway and sees a Mobike may impulsively decide to spend 1 yuan to save walking three blocks home. Why not?

I find the impulse argument much more convincing as a explanation for bike-sharing popularity in China. And being able to leave the bike anywhere speaks to this “why not?” argument. But again, city bike programs have been around for almost 20 years and there have been over 600 launched worldwide. Plus, there were fixed-station city bike programs in Shanghai and Beijing for many years prior to the recent explosion of bicycle-sharing. So why the surge this year?

What has changed this year?

In the past year, Chinese have started to do everything on their phones. This is what has really changed recently. They are paying bills with Tencent Wallet, from Tencent Holdings. They are paying at stores with Alipay, the service affiliated with Alibaba Group Holding.. They are sending friends hongbao, gifts of small amounts of cash traditionally made using red envelopes.

And in the past 2-3 years, Chinese consumers have adopted mobile services like virtually no other population has. In particular, they have adopted mobile payments in staggering numbers. The average American pays with credit cards, debit cards and other non-cash payments an average of 20-30 times a month. The average Chinese consumer now pays over 50 times a month using a mobile phone alone.

So what if the bike-sharing boom is mostly about mobile payments and Chinese consumers just being crazy for mobile apps right now? Maybe this is more about the smartphones than the bicycles? That would explain the unique popularity of bike-sharing in China – and the hyper-adoption over the past year. Could this story be 60% about a popular smartphone app, 20% about enabling impulse purchasing and 20% about solving an actual problem.

If that were true, it would also mean there is a significant risk that this may be partly a fad, with users soon moving on to the next hot mobile app. That does not mean bike-sharing demand would drop to zero, but maybe the surging growth investors are probably counting on will not continue. Or maybe demand will drop back to what follows from just impulse purchasing and a few specific problem situations, like transport around college campuses and in central business districts.

I think this is the biggest worry. Chinese consumers are notoriously fickle and brands rise and fall in this market quickly. If the bike-sharing boom mostly reflects the current interests of Chinese consumers online, then leading operators like Mobike and Ofo may stand little chance of repeating their success overseas, disappointing investors hoping for the next Didi Chuxing.

Thanks for reading – jeff

(originally posted at Nikkei Asian Review, here)

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Thanks for reading. My writing (and speaking) are on:

  • How rising Chinese consumers and companies are disrupting global markets. #ConsumerChina
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About: I am a Professor of Investment at Peking University Guanghua School of Management in Beijing. I am also a PE investor, consultant and former executive / slave to Prince Alwaleed.

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