How hype and greed destroy the bike-renting business - Jeffrey Towson

Jeffrey Towson

As long as funds are flooding the bike-renting business, the dance will go on. But, warns Beida business professor Jeffrey Towson at his website, when the music stops, the dancing will be over. Consumers might be the winners, as long as the music plays.

Jeffrey Towson:

Across the board, what we are seeing is non-economic behavior and a race for scale that is fueled by hype and enabled by easy access to money. This is warping and distorting what is an ultimately very nice and popular consumer bicycle rental service. But the ‘music is playing’ and all the companies ‘have to dance’ – or leave the market. This is likely to end badly for everyone, except for the consumers and bike thieves. 

The biggest part of this problem is the drive for scale. The leading companies are all trying to get big and capture market share, with Mobike reportedly having over 70 percent of the China market, measured both by the number of bikes and number of rides taken. 

However, the problem with this is there doesn’t appear to be any big advantages to scale. It doesn’t create a superior service like in taxi ride-sharing (more drivers means shorter waiting times). It doesn’t get a network effect. It doesn’t create a much lower cost structure per unit. And it ultimately doesn’t stop any small company from spending RMB 200,000 and deploying 1,000 bikes in a particular neighborhood. 

The business model followed by so many bicycle-sharing companies just doesn’t appear (yet) to have any competitive advantage. The market may well consolidate, but there is no reason yet to think the business itself will generate any type of exceptional profitability. The race for scale looks more like a race for a big sale or IPO.

More at Jeffrey Towson's website.

Jeffrey Towson is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more experts to deal with your China risk at the China Speakers Bureau? Do check out this list.    

Bike hailing does not make business sense - Paul Gillis

Paul Gillis

Bike hailing services got another round of funding this week in hundreds of million US dollars, but Beijing-based observers like Beida accounting professor Paul Gillis just do not see how those companies, involved in a giant competitive war, will ever pay back those loans, he tells QZ.

QZ:

But widespread customer negligence and razor-thin margins could make it hard for these businesses to stay afloat. The very factors that make China’s bike-share services so convenient—low prices and ease-of-use, namely—are the same factors that could spell their death. 

“What they’ve got is a very interesting technology, but a basic business model that makes no sense,” says Paul Gillis, who teaches accounting at Peking University in Beijing... 

All of these factors merely compound the stress placed on an already shaky business model. Mobike and its rivals won’t reveal how much their bikes cost to produce, but an old estimate (which Mobike says has since decreased) places the cost of a standard Mobike at 3,000 yuan (about $437). Professor Gillis says that fares alone will hardly recoup these costs in a timely manner—let alone cover labor and R&D expenses. 

“They rent for one yuan every half hour, and they expect that they might be rented four times a day for a half hour, which amounts to four yuan per day,” he tells Quartz. “If you take four yuan per day and you take that into the 3,000 yuan, you’ve got a long time before you’ve recovered the cost of a bike.”

More in QZ.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more experts in managing your China risk at the China Speakers Bureau? Do check out this list.  

Related articles

• In Era of Journalism Cutbacks, a Chinese 'Robot Reporter'
• The 10 Most Innovative Companies In Health 2017

Why bike-sharing is no ride-sharing - Jeffrey Towson

Jeffrey Towson

Investments have been flooding into bike-sharing, with Shanghai-based Mobike and Beijing-based Ofo as main players, including funds from ride-sharing giant Didi. But bike-sharing is nothing like ride-sharing warns Peking University professor Jeffrey Towson on his LinkedIn page. Five arguments.

Jeffrey Towson:

Bicycle-sharing does not have a network effect. 

Ride-sharing (i.e,. using cars) is awesome because it has a powerful competitive advantage via a two-sided network. Basically, each additional rider increases the networks’ value to the drivers (i.e, more customers and they are closer by.). And each new driver increases the value of the service to each rider (i.e., shorter wait times, more cars available). So bigger platforms actually have a superior service offering to both populations. And the market usually collapses to the leading companies quickly (Uber and Lyft in the USA, Didi in China, Ola in India, Grab in SE Asia, etc.). 

Additionally, once the market has matured, it is very difficult for a new entrant to break in. If you then want to launch a ride-sharing service, you will have to offer the same big driver network and short wait times as the dominant competitors from day one. But to get all those drivers, you have to offer them a big customer base. It's the multi-sided platform "chicken-and-egg" problem but with entrenched competitors. This type of indirect two-sided network effect also happens in home sharing (AirBnb), credit cards (Visa, MasterCard), app stores (Apple, Google Play), auction houses (Sotheby’s, Christie’s), and even shopping malls (sort of). 

But none of this happens in bicycle-sharing. There is no second population of drivers using the  platforms - and providing the cars (which are the key assets). You just need to put lots of bicycles around town. Each new rider does not add any value to the other riders, nor to a population of drivers. 

Bike sharing is basically a commodity b2c service. It is a traditional merchant business. Being bigger helps somewhat but it is still fairly easy for a new entrant to enter. All you would need is about 30,000 bicycles (Ofo currently has about 95,000). That would cost about $2.5M. So this is a cheap and fairly easy business to enter, which will impact long-term profitability. 

However, in the short-term companies like Ofo and Mobike should do really well. They are offering an innovative new service and are first-movers in a massive market.

Four more arguments here.

Jeffrey Towson is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in a speakers´request form.

Are you looking for more internet experts at the China Speakers Bureau? Do check out this list.    

Mobike: great service, but no viable business model - Paul Gillis

Paul Gillis

Emerging startup Shanghai Mobike expanded to Beijing, to the delight of its citizens. But while accounting professor Paul Gillis likes and uses their service, he does not see how this VC-financed operation is going to make any money, yet, he writes at this weblog.

Paul Gillis:

Mobike offers bike rentals, something I can use to avoid Beijing’s heavy traffic. Mobike’s app opens to a map that shows me the nearest bikes to me, usually only hundred meters or so away.  I can then reserve the bike, follow the map to find it, scan a QR code on the bike and the bike unlocks itself.  

When I am finished with it I park it anywhere I wish, push a switch to lock it, and get charged 1 yuan per half hour – essentially free.  I paid a depost of 299 yuan using my Wechat pay account – another amazing app. 

Mobike as 10,000 bikes in Shanghai and 3,000 in Beijing and is adding hundreds every day. I have not had a problem finding one in Beijing, although they are scarce during rush hour. 

Mobike is VC funded, and the business model makes no sense to me. Each bike costs 3000 RMB – they are quite sturdy and some complain about the weight and lack of adjustability. At that cost it is estimated that it will take 25 months to recover the cost of each bike if each does four trips a day. That creates an interesting accounting problem. It appears the bikes are impaired as soon as Mobike puts them into service, necessitating a writedown, because the expected discounted future cash flows are significantly lower than the cost to build them. 

I can’t see Mobike doing a successful IPO. Some suggest it may be acquired by one of the ride sharing apps, but that does not make much sense to me either.  I think the business model only becomes viable if they transform the company into a software company and sell services to governments around the world to start their own bike sharing operations. 

Many cities have bike sharing, (Beijing has 50,000 bikes in its program) but they usually use fixed locations and payment can be challenging. Mobike could provide a turnkey solution for cities that want green transportation, and that might be a viable business.

More at ChinaAccountingBlog.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you looking for more financial experts at the China Speakers Bureau: Do check out this list.

Related articles

• How Is China Going To Capitalize On Sport Using Tech?
• Circle CEO on Chinese payment apps: 'There's just nothing like that in the West'
• Risk management experts at the China Speakers Bureau (updated)
• Online Booking of Bicycles Arrives in Beijing
• Australia should use Chinese online media to exert 'soft power', report says
• China c.bank working on Shanghai-London stock connect - Securities Times