Class of 2020 | cohenjas@wharton.upenn.edu
When Uber sprang onto the scene less than 10 years ago as another hot new startup out of Silicon Valley, no one would’ve guessed that it would be worth upwards of $65 billion after garnering nearly $13 billion of funding. However, as the economy has fundamentally transformed since 2009, Uber’s business model has been shockingly effective. The sharing economy – one in which full ownership is less and less common – has highlighted the importance of services themselves over the vehicles that accomplish them. There are people who like driving and care about car ownership, but for the vast majority of people, cars are merely tools for the service of cheap and convenient transportation. As the world, and particularly the developing world, rapidly becomes more urbanized, transportation becomes a complex problem. Public transportation strains under the pressure of demand, and cars become impractical on clogged city streets.
Every country is finding its own solutions to their increasing transportation concerns, and Uber recently found out the hard way that not every country wants then same thing. Their excursion into China recently led to complete defeat as Didi Chuxing – then a $28 billion company – bought out Uber’s business in China for $7 billion. However, it looks like Didi is facing new problems as an old, cheaper form of transportation is being aggressively brought back.
Denser cities mean bikes can become cheaper alternatives to cars and public transportation. However, owning a bike can be expensive for individuals in developing countries, and the bike sharing systems in many western countries that involve “stations” that bikes need to be parked at are complicated, inconvenient, and not very widespread. Here is where Ofo, Mobike, and many other bike-sharing companies solve the problem. These companies have simple apps that allow users to either scan a barcode or unlock a lock to ride a bike. The bikes, brightly colored and simple, can be left absolutely anywhere, meaning that there is an incredible amount of convenience for the average user. In just a few years, these bikes have taken over China’s city streets and fundamentally altered the transportation landscape in Beijing, Shanghai, and beyond.
While the growth has been rapid, the margins are razor thin. Making just one yuan, or $0.14, every half hour on a single bike, bike sharing companies would need over 1,500 hours of bike riding to simply cover the cost of the bike, let alone cover labor, R&D, or make a profit. Assuming a bike is rented four times a day for two hours total, it would take more than two years to reach that target. These numbers make it difficult to justify the recent $450 million Series D funding round of Ofo from backers such as Lei
Jun (the founder of Xiaomi Corp.) and even Didi Chuxing. This round doubled the value of the company in just five months and is exemplary of the cash guzzling, but potentially lucrative business that is bike sharing.
Ofo’s chief rival, Mobike, has received upwards of $300 million in funding from investors such as Foxconn and Tencent Holdings Ltd. However, while the money can buy new bikes and improve the app, it is difficult to fix the fundamental flaws of the business. The ability to park a bike anywhere can lead to individuals hiding bikes, parking bikes in inconvenient or dangerous places, or even simply discarding bikes. The two main types of unlocking the bikes are also problematic. Mobike’s QR codes are often defaced, rendering them unreadable. Ofo’s mechanical bike locks, the code to which is given by the app, can be replaced with a personal lock or have their codes memorized. Bikes often get damaged, and significant manpower needs to go into finding and repairing these bikes.
Luckily, investors are lining up for these companies, and popular trends are on the side of bike sharing. Biking is simply more efficient and cost effective for many people than cars or public transportation, and China has even officially praised Ofo and Mobike for working towards cutting emissions. This business model can thrive once the market becomes more defined, and can even expand into other developing countries that are in dire need of a solution to their increasing traffic nightmares.