Shared bicycle manufacturers are dying, and this is not a bad thing

Barely a few months ago, the bosses of China’s bicycle supply chain were beaming with joy.

Their factories were all running full capacity while new orders still kept coming up, thanks to the booming bicycle sharing industry.

Dozens of bike sharing operators, led by ofo and MoBike, took in billions of millions of US dollars of venture capital, and were racing to dominate the cities in China. Orange, yellow, blue, white – the colours quickly ran out, and new operators had to use colour combinations.

In early September this year, Beijing Government estimated that there were more than 1.6 million shared bikes in Beijing. And Shenzhen recorded more than 10,000 bikes being deployed within a day.

Of course, someone had to manufacture these mountains of bicycles. Thus orders piled in to the factories – to an extent that many factories added shifts and recruited more people to match the demand.

Some even built new production lines; and many simply abandoned their own brands to focus their full attention on these colourful bicycles run by so called internet companies.

It was a nice breeze for the bicycle industry, which for a number of year had been facing a seemingly irreversible decline. People commuted more on cars, and cycling became increasingly a leisure activity.

An official report from Chinese Cycling Association indicates that more than 25 million bicycles have been ordered by Mobike and ofo alone in 2017, surpassing the previous total annual sales of the entire industry.

Turn of fortunes

However, this capital-fueled (and supercharged) battle was faster than any of the previous waves of competition: groupon, ride-hailing or food delivery.

In June and July, the leading players MoBike and ofo announced their series E funding of US$600 million and US$700 million respectively.

Around the same time, many smaller players started throwing in the towel. Investors of these companies refused to fund further as they knew that it was impossible to out-compete MoBike or ofo.

In extreme cases, some operators’ bosses simply fled, without returning deposit to consumers or paying supply chain for the bikes delivered.

Of course, factories which supplied bikes to these broke operators were heavily impacted. Without being paid, they will have no money to pay their suppliers (of accessories), messing up the whole supply chain.

For example, Dingding bike normally gave suppliers 30% of the order amount as advance payment and will afford the remaining 70% after the delivery. When Dingding shut down operations, its owner just vanished, leaving 500 unpaid bikes still in the factory, each costing CNY 600 (US$ 91).

Negotiating with the (now) big guys

And that’s not the only trouble of the bike manufacturing industry. As pavements in major cities are saturated with these colourful bicycles, metro governments stepped in to limit the number of new bikes being brought in. In certain cases, they stopped it altogether.

Which means even the top players MoBike and ofo are not ordering as many bicycles as they used to, a few months ago. Worse for the manufacturers, these two even stopped paying the supply on time – well when you are dominating, you have the negotiation power.

We heard that one manufacturer is at the brink of total breakdown, after ofo dragged his payment for weeks, while he owes his accessory suppliers more than CNY40 million outstanding payments (US$6.1 million).

Whirlwind theory revisited

Of course, the society still needs bikes. And the bigger, smart manufacturers, especially the one who retain their own niche or high-end brands, will prevail.

Bicycle sharing had brought a ray of hope to the bicycle manufacturing industry. Now they are forcing this industry face another harsh reality, and inevitable transition or crash.

You have to be reminded of a quote from a famous internet entrepreneur in China:

Even a pig can fly if it is in the middle of a whirlwind.

But when the wind stops, the pig will crash onto the ground, a hard crash.

Ultimately this is not a bad thing – as the less competitive players die out, the whole industry evolves.