Mobike, Bike-Sharing, and Bonfires of Cash

Wang Jianfei / Edited by M.E. Strickland

Mobike, one of China’s leading bike-sharing companies, has closed out yet another round of funding (E series, for those still counting), this time led by Tencent to the tune of $600 million. Tencent, according to its own media subsidiary, is now the largest stakeholder in the company. But Mobike only just completed its last round of funding about four months ago, for upwards of two hundred million dollars.

So what, exactly, is eating Mobike’s money?

It isn’t any of the obvious things. Bike-sharing companies in China have been burning through cash at a furious rate, and in that Mobike is clearly no exception, but it and its largest rival Ofo both have deployed the most durable bikes in the field, meaning they do not need to be repaired or replaced on such short cycles. Deploying new bikes, on the other hand, does require large amounts of cash, and the industry is still putting more tires on the streets with no sign of slowing down. Estimates are that Mobike’s costs are relatively high at about 1800 yuan per bike, with over four million now deployed, which, by a back of the envelope calculation, would put its deployment costs at about 7.2 billion yuan. With 34 million users, Mobike has tens of billions of yuan in deposits, but that isn’t money it can really spend. The only option, therefore, is to draw in more funding.

But there is more to it than that. Mobike has expanded to nearly a hundred cities domestically already, yet even in China, there are only so many urban zones with the population density needed to support its business. In a television interview, CEO Wang Xiaofeng said that the company hopes to expand to 150-200 cities globally this year, and is currently seeking mobile payments and credit card partners abroad for that purpose. Indeed, Mobike has already signed a deal with Apple Pay.

And then there is R&D. Mobike has looked to Hina Group to develop thin film solar power technology, Dow Chemical to develop new materials for bikes, and to China Recycling Development to improve the recycling of its worn out bikes. This could all open new ways forward for Mobike, but there has been some skepticism, such as from the founder of internet company 360, Zhou Hongyi, who says that under such tight competition bike-sharing cannot afford to rely on technical innovation.

Faced with all these pressures to keep expanding merely to keep its head above that of the competition, Mobike’s repeated and frequent funding rounds are no surprise. Rival Ofo has likewise been swallowing up masses of capital. The road for bike-sharing companies is steep, and as we have covered recently, they have been hurling money into everything from music singles to concerts, tablets installed on bikes, and even satellites—little of which has anything to do with the basic, core business of renting out bikes for people to get around town.

If bike-sharing truly is a viable business, it is only because of the use rate; the fees collected on bikes are low. At unit rates of no more than one yuan, shared bikes are in a different class from the O2O and ride-hailing businesses that have matured in the last two years, where prices have not been driven through the floor and competition is not so ruthless.

Ads for Mobike and Ofo are to be found plastered across billboards, bus stops, and subway station walls (sometimes even across the full length of a single station), a level of ad spending that seems unparalleled by any other industry.

Outside of China, where bike-sharing isn’t so overheated, single companies tend to quickly come to dominate particular regions, and once stabilized can begin drawing in a profit.

In China, however, for all the attention the industry has received from both the public and investors, that has so far failed to happen. Rides in many cases have been so heavily discounted as to be effectively free, with some “red envelope” promotional gimmicks even giving riders the chance to make money from picking up stray bikes in remote locations and riding them back to parts of the city where they are more in demand.

Even if a single player does eventually win out to stand unopposed, it may not be left with much breathing room to improve its profits. Just as has happened with Didi in the ride-hailing business, riders already accustomed to low prices might not tolerate any increases.

Mobike and Ofo’s breackneck funding cycles and international expansions begin to look more sensible when viewed in this light. With a home market nearing saturation and cutthroat competition now entrenched, growing outwards may be the only means of survival.