Anatomy of an Implosion

Wang Fei

Bluegogo’s halcyon days were not that long ago, but they came to a decisive end one morning this past week as reports began popping up of its demise. BiaNews reported that most of the shared bike company’s employees had been let go, and the remainder were expected to be folded into another company. Meanwhile, CEO Li Gang’s other company, SpeedX, a maker of smart sports bikes, was also said to be shedding staff.

Reporters swarmed to the company’s offices, but nerves were apparently raw. One reporter was struck.

Bluegogo also reportedly has a number of accounts to settle up with suppliers, some of whom came calling to protest and vent their frustrations. Despite the company’s promises that it would pay its debts, one supplier we spoke with expressed little optimism.

Likewise, users of Bluegogo’s app report that the option to get their deposits returned has become unavailable. Some who applied for returns in October have been waiting for weeks without any response, though the company issued an earlier statement that the returns would be processed by November 10.

But all the same, even just a few days ago, everything was quiet. The company seemed sound. So what happened?

Bluegogo was founded only in October of last year, and came onto the radar in January of this year. It announced that month that it had completed an A round for 400 million yuan, rising to an estimated valuation of 1 billion yuan.

In March, Bluegogo debuted in Beijing. On stage at the launch event, Li was confident and charismatic, beguiling the audience. From time to time he would scoff at the competition. “January or February next year will be a deathly winter for them,” he said, alluding to the problem of how competitors would absorb the cost of cheaply constructed steel bikes that, by that time, would be worn and rusting out. That, he concluded, would lead to two turning points for the shared bike industry: the problem of worn out bikes piling up like litter, and following that, a shortage of usable bikes on the street.

“Every city has a ceiling on the number of bikes, so the next stage will be about wringing out efficiencies, the smallest number of people doing the most things.”

Li said that by January Bluegogo had deployed more than 80,000 bikes in Beijing, and after just four months of operation it had accumulated 6.25 million riders nationwide.

Speed is one key to success, product strength another. In a field where many competitors were compelled to cut corners to minimize costs, Bluegogo’s bikes were genuinely well constructed and comfortable to ride, and Li believed that users would vote with their feet.

According to Bluegogo’s own data, from November 22 of last year to now, it has deployed 150,000 bikes in five cities, with a userbase of 2.53 million. Daily rides averaged 830,000, peaking at 1.17 million.

For a time, Li was something of a star within the business, and Bluegogo vaulted to the rank of number three in the shared bike field, just behind Mobike and Ofo. While the latter two were (and are) locked in a nonstop, brusing battle for supremacy, Bluegogo seemed to be spared the worst of it.

In an April interview with PingWest, Li insisted Bluegogo’s position in Beijing was strong. Mobike, he suggested, had excellent PR and government relations, while Ofo excelled in the speed and efficiency of its deployment operations. Bluegogo, however, was focused on the quality of its product. This was only natural, as Li hailed from 360, an older internet company, where he had been a high-level manager for its smart hardware.

Bluegogo was no wallflower, though. In May, for example, it penned a deal with Ant Financial to allow people with good credit ratings to ride without a deposit. Li believed that this was only the beginning for the company’s business development. He dismissed Ofo’s bizarre plans for launching satellites and Mobike’s byzantine “ecosystem” of partnerships, saying that Bluegogo would create a truly open platform. Their newest bike model was to add a smart controller for navigation (and displaying ads, of course).

Li said: “We’re happy to rely on rental money of one yuan here and one yuan there, because from the first day we thought, if the shared bike industry just relies on a yuan here and fifty cents there, then when we add it up, with potentially 100 to 150 million rides per day, and one yuan per ride, that would be 100 to 150 million yuan per day. That would be the industry ceiling.”

If the company had 10 million bikes, however, all displaying ads, then their market reach would exceed that of even Baidu.

But it wasn’t to be as easy as that. In the first few days of June, the company launched an ill-conceived promotional campaign (let’s just say it involved riders having to spot bikes with images of tanks on them) called down the wrath of the authorities.

After a police investigation, Bluegogo was forced to enter a period of quiet reflection. A PR company offered its help, but Bluegogo rejected it, saying it had things under control. A planned media event, however, in which the company was to publicize its plans for international expansion was postponed and then canceled.

That may have marked a downward turn for the company, but strictly speaking it was neither the beginning nor the end of its problems.

Back in April, Beijing’s municipal government had announced that it would limit the number of bikes that could be deployed. That lent the advantage to companies like Mobike that had already been in the city for some time, and was a blow to Bluegogo as a newcomer, hindering its market growth.

Afterwards, other major cities followed with quotas of their own. Yet by May, Bluegogo had already assembled a supply of the smart controller screens for its new bike model. The new raft of restrictions and regulations that was then suddenly emerging turned that equipment into dead weight. The new bikes couldn’t be deployed, and in some places regulations were prohibiting shared bikes from displaying ads even if they were deployed.

Then, the company’s B round fell through, and the crunch began.

Some back of the envelope arithmetic illustrates the problem. With 400 million from its A round, and assuming a cost of 1000 yuan for each of some 700,000 bikes deployed, Bluegogo’s costs had already ballooned to more than 700 million. That, of course, is not counting other costs.

The math behind its operating costs is just as warped. At the start of the year, Bluegogo issued a 199 yuan card good for half a year, allowing unlimited rides—and, inexplicably, the full fee would be returned at the end of the period. Yet that was then extended to a full year. And as Li himself observed, the money from this and users deposits needed to be applied towards expansion.

Of course, such incoherent economics has been the rule of the shared bike industry, and even Mobike and Ofo are not immune from it. Each and every company has tried to claw together what business it can with so many rate cuts, discounts, and special offers that it has become mathematically impossible for that business to actually translate to meaningful earnings. That had already felled several other companies; now it has caught up to Bluegogo.

Li might have once hoped to seize second place from either Mobike or Ofo, but by the middle of the year it was becoming obvious, at least internally, that that was not going to happen, and the company sought to merge with one of the two larger rivals, but no deal was reached. Ofo’s bid was too low, while Mobike simply had no interest in a merger.

According to someone familiar with the negotiations, Bluegogo also sought out Ant Financial and others, but they too were hesitant.

Over the past year, the brute reality of the shared bike industry has become painfully clear: it is an industry more explosive, and more cutthroat, than any other, swollen with feverish investment, wracked by vicious competition, beset by public and government backlashes, and, above all, troubled by uncertainties about the basic economic sense of the business models in play. Perhaps it really shouldn’t be a surprise that Bluegogo’s fall was as steep as its rise. Though it may have made mistakes of its own, it was undermined by the intrinsic flaws of its own industry, just like so many of its unfortunate peers before it.

The question now is, with the competition whittled down, will Mobike and Ofo find a little more breathing room—or will the same problems that overtook the number three company finally catch up to them?