The Bike-Sharing Company & Bankruptcy: Case Study
In China, many companies are doing a bike-sharing business. Bike-Sharing has been popular among Chinese, even me! A new rider needs to sign up in the bike-sharing application, and then put money to the company as the deposit, which can be demanded when the rider doesn’t want to use company’s bike and its service in the future.
From my experience, a foreigner must send the passport photo and another in which you take a picture with your passport in order to verify your identity. After the company approving, the rider can use the application and scan bikes for their commute.
In Chinese bike-sharing business, the Economist said that around 70 companies are running on-demand bike sharing. Each company has its own color for its bike. For example, in Beijing, there are three big players in the capital city of China: Mobike, Ofo, and Bluegogo.
The bike-sharing model uses equipping bikes with GPS and digital locks. The riders open the lock by using their phones and Bluetooth. They don’t need to return the bikes to docks fixed to the ground. In this way, this model provides an easy way for cycling for riders.
Customers think this bike-sharing model offers many conveniences. However, the inconvenience is that when you have only an application of Mobike, but in your location, there are only Ofo and Bluegogo. As a result, you need to walk, walk, and walk to find out Mobike’s bicycles.
Ofo is founded by Mr. Dan Wei (戴威) in 2014 while he was 27 years old and a student at Peking University. Tencent, a Chinese tech giant, pour a large amount of money to the company. Once, the value of Mobike and Ofo is around U$3000bn. Therefore, Ofo and Mobike have been a leading bike start-up players in Chinese bike-sharing market.
Surprisingly, nowadays, Ofo is facing serious financial problems. It is unable to pay the money to its creditors, such as the bike manufacturer and the logistics service companies. Its founder is on a government blacklist and is not permitted to pay expensive services and luxurious transportation. As a result, Ofo has filed for bankruptcy.
Given Ofo’s financial problems, critics said that Ofo, which receives an enormous amount of investment injected by venture capitals and big companies, managed its money poorly. For example, instead of improving quality and services, it invested in advertising and low-return-rate investment heavily.
Actual Business is Dockless Rented Bicycles
Ofo’s business is to provide the on-demand dockless rented bicycles for the riders. It sends its bikes to many places and locations in order to provide convenience for its customers. Its clients can unlock the bike and ride it to their destination. This service costs the riders around 1-2 RMB, but they can buy designed period membership, such as one year.
In this way, Ofo’s model is not considered as the sharing economy similar to Uber and Airbnb, which people can share their properties to the person that need or want to use them.
Its model seems like the company providing rental bicycles service. Ofo’s business model refers to the favorite business model of many tech startups, so-called “cash-burning business model.” This model is about spending furiously to acquire new customers and put back the question about how to generate profits. Unfortunately, many startups that employ this cash-burning model are experiencing a wobble.
Cash-burning business model pays less attention to profits and focuses more on the increase of customers and market share. Ofo and Mobike were successful in gaining their market share (90% for these two companies) and have become the dominant players. In 2017, both of them had a high number of active users, approximately 40 million, but now the number is decreasing to 20 million per month. Some analysts opine that Ofo’s case demonstrates the difficulty in running the business in China. It shows the problem of cash-burning business model.
Further, many business ideas in China has inevitably imitated. Good ideas, such as bike rental, ride-hailing, food delivery, and so forth, are copied by the company that has enormous sources of money. Such a company can choose between establishing a business by itself or pour investment in the startups.
Many and Various Challenges
Cash-burning business model inevitably requires a large amount of money. For example, Mobike spends around 3 million per day. Fortunately, Meituan (美团), a big food-delivery company, acquired Mobike and has helped Mobike by providing financial resources.
Bike-sharing startups demand a massive sum of money to continue and run their business. For instance, they need to subsidize cheap bikes, to hire workers to fix broken bikes, and to pay for delivering bikes from low- to high-demand places, such as the center part of cities or the central business districts.
Mobike and Ofo need to raise more money to survive in this market. In the past, Xiaomi (小米), Alibaba (阿里巴巴), and Didi Chuxing ( 滴滴出行) injected the money to Ofo. However, now they have stopped pouring the money in it. Surprisingly, some of its supporters found the bike-sharing companies to compete Ofo. Alibaba set up HelloBike, which now has a significant market share in the industry.
Another problem is about some people who destroy bike and dump them in out-of-the-way. This costs much money to the bike startups because they need to buy more bikes and spend money on maintenance and relocation. Besides, many cities, such as Beijing, decided to block bike-sharing companies from adding more bicycles because the amount of them is enough.
Recently, people have realized the risk of losing their deposits. Millions of customers are demanding their placed deposits back from Ofo. Also, they are questioning other bike-sharing startups about financial health. In the case of Ofo, many clients used the Ofo have applied for refunds their money back, but the queue had reached more than 10 million number. In my own case, I didn’t apply for returning my deposit.
It is fascinating to keep an eye on the future of bike-sharing business. It provides many benefits, but in the long run, it cannot ignore the fact that the company must have profits to survive in the market.