No matter where you are in the world, you are probably using Chinese-made goods; even if you are not aware of it. The latest big export is probably cluttering up the sidewalks in your part of the world too. These shiny, yellow bicycles (often missing a saddle, or with some other defect to make it unusable) will catch your attention every time you pass by.
Launched in June 2015 and headquartered in Beijing, ofo is the first and largest “dockless” bike-sharing company in the world. A quick online search will yield huge coverage of their global expansion despite the fact that they are less than 3 years old. We previously explained why Chinese bike sharing companies are suddenly everywhere overseas; and in fact, the company’s CEO just announced the figures last month – they are now operating in more than 250 cities and over 20 countries with 10 million ofo bikes!
Despite its continuous expansion, the company has recently revealed that it is running out of operating reserves. Last month, Tencent (who is backing Mobike) tech news published a piece of first-hand news which revealed that ofo has less than one month of operating cash in their bank account. They claimed the source is from someone familiar with the matter, but ofo fought back dramatically, announcing with some legal action to be taken. This could have been a sheer fiction, or a competition between the two giant bike sharing companies (ofo and Mobike); but to the surprise of many, there seems to be some truth behind the story.
The Street Fight
The battle between ofo and Mobike is literally a “street fight”: people can see both of them scattered on the roads, and see their campaigns targeting each other’s users. For example, in February last year, both companies launched a “free riding” program to draw an obvious competition to their users. The wars also took place in funding scenes: so far, ofo has closed 5 rounds of funding, including the last (E) round of 700 million USD in June last year; comparatively, Mobike also closed a 250 million USD funding deal within the first week of January 2018.
On one hand, investors believed that ofo demonstrates the ability to win the war by mass expansion supported by its lower product cost. Mobike, on the other hand, excels in product design, being the pioneer in applying built-in GPS and smart locks in their bikes. However, ofo seemed not demonstrated enough of its commercial strength. Some cases were Mobike pioneering in launching “Hong Bao” (red envelope) bikes to attract users during Chinese New Year before ofo followed the same path; also in June of the last year, Mobike gave away 10 million free ride passes, which was quickly followed by ofo in the following month. Obviously, ofo did not show enough of its brilliant strength in marketing ideas.
In the meantime, ofo was well known for being invested in by Alibaba, allowing it to integrate with the Alipay ecosystem. Also, ofo announced its free deposit scheme collaborating with Alibaba’s Sesame Credit, allowing users with higher credit rating to enjoy free deposit ofo riding privilege. As bike-sharing has become a highly popular activity in China, this certainly fulfilled the interest of Alibaba’s plan to structure the holistic credit rating for all customers. But three months later, however, ofo asked its users to double their original deposit amount – from 99 RMB to 199 RMB especially for the new users.
Furthermore, the cost advantage seems no longer keeping ofo ahead of its competitors – last year, Mobike announced its Lite version bicycles that were made at less than 1,000 RMB compared to an average of 480 RMB. The cost of the bikes itself has been dramatically lower due to mass production, but what is proving more costly are the maintenance costs.
The Cost of Going Global
In each city, ofo needs to hire a local logistic team to allocate and distribute the bikes every day. Repair team needs to be covered too, as many of the cheap bikes are reported broken after heavy use. The cost of operation climbs higher as ofo tries to open up more markets overseas, while many their bikes in China are also about close to the end of their life cycle and need replacement or substantial repairs.
Even though the cost is high, the business models were initially sensible: given there are estimated 50-100 million usages every day, and they are charging users at 1 RMB per use. It is, after all, a billion dollar business! However, in a cut-throat competition like it is in China, the free-rides and discounts have been impacting this profitable model – partly because there is so much competition now. Without consolidation and reduction of discounts, it is really hard to suggest a solid profitable model at this time – nor in the near future.
A Cry Baby
Alibaba has been trying to back its investee this time against Tencent’s Mobike, given its previous loss in the Didi Chuxing’s deal. However, the attempt to integrate its product with ofo seems to be hit-and-miss, while expanding internationally is also burning much of its funding. Now Alibaba is shifting its bid to the third biggest bike sharing company, certainly not a good news for ofo in the long-run.
How to keep its business in Alibaba’s long-term plan is now a challenge for ofo, without which it will be risky to grow even larger and to keep its dominant position in the industry.
Maybe, just maybe, the ending for ride-hailing businesses is universal – we have seen how Didi Chuxing acquired Uber in China; and Grab is in talks with Uber in Southeast Asia. As anticipated by many of their investors, it could be a good news if ofo and Mobike are in mid of an arranged marriage.
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Thanks for reading The Low Down, insight and inside knowledge from the team at Momentum Works. If you’d like to get in touch with us about any issues discussed in our blog, please drop us an email at [email protected] and let us know how we can help.
