QDaily's New Company of the Year, 2016: Mobike, and the Bike-Sharing Boom That Changed Short Trips in the City

But the investment frenzy has pushed this industry further and further from making money.

"It's broken again — for three hours none of the bikes would unlock."

On the very morning we were publishing this piece naming Mobike our New Company of the Year, that was the talk of the day. Every kind of trouble and headache a new company can run into showed up at once.

It feels a little strange when you remember that ten months ago this wasn't even a "trouble" you could have run into. Mobike appeared on the streets of Shanghai only in April 2016, and in Beijing in August, and it has already become an important part of daily life.

At the end of every year, QDaily names a New Company of the Year — a new company that beat outside expectations and changed the existing business environment, even the way people live.

The "O2O" and virtual-reality startups that were red-hot a year ago have all but disappeared. With basic needs like ride-hailing, food delivery and ticket-booking already solved by big companies, bike-sharing is one of the few new trends to take shape this year. Mobike is what set it off.

Mobike entered Beijing in mid-August, and within two weeks its app downloads had passed those of Dianping and Baidu Nuomi, both of which were running back-to-school promotions at the time.

Over the next four months, 11 bike-sharing startups, carrying 21 rounds of investment between them, parked hundreds of thousands of shared bikes on the streets of 14 cities across the country.

Capital drove bike-sharing's rapid spread. But in this capital-driven industry, not one person yet knows how to make money. A rental fee of 0.5 yuan per half hour clearly cannot cover a bike that costs several thousand yuan to build, let alone the staff costs that climb fast as the fleets grow.

When Mobike CEO Wang Xiaofeng was asked about this in December, he said: "If I had a 30% profit margin, why would I need investors?" Other bike-sharing founders have put it more or less bluntly, but it all comes down to the same thing: burn the money first, work the rest out later.

In the four months since entering Beijing, Mobike has announced four rounds of funding, each worth tens of millions or more than a hundred million US dollars. That money helped Mobike move quickly into nine new cities, but it still hasn't found a business model that can last.

Public bikes and connected bikes already existed, but Mobike is what remade them

Beijing's municipal public bike program has been around since 2008. It never caught on, because the city's public bikes were not convenient to use.

To ride off with one of the red bikes parked at a docking station in Beijing, you had to bring your ID to a fixed service point, pay a deposit and have a card activated. If you lost the card, you had to go back to a service point to have it reissued. These service points were usually at subway stations, but not every subway station could issue cards, and not every service point opened on weekends.

Even if you managed to get a card, you still had to deal with fixed docking stations: you had to know which one nearby was closest for picking a bike up, and which one was least trouble for dropping it off near your destination.

Ofo, a startup born on the Peking University campus, was the first to solve picking up and dropping off a bike anywhere. It fitted its bikes with combination locks; users typed a bike's ID number into the app to get the unlock code.

But Ofo itself had no way of knowing how long a user rode or where they went. Users had to tell the app when they were done, then scramble the combination lock by hand.

The product leaned too heavily on users' goodwill, and because the bikes were no different from ordinary bicycles, they needed frequent servicing. More than a year after launch, Ofo was still confined to campus.

Mobike solved these problems with technology.

Every Mobike bike has a built-in SIM card and GPS. Using existing GPS and cell-tower positioning, users can open the Mobike app and see at a glance which bikes nearby they can ride away.

Mobike also added a smart lock to the bike, which made parking simple. Users scan a code with their phone to unlock a Mobike parked at the curb, and closing the lock at the end of a ride completes the billing.

To cut how often the battery has to be replaced, Mobike bikes charge as you pedal, keeping the power supply going. That made the first Mobikes on the street somewhat hard to ride.

None of this was breakthrough technology, but combining these mature technologies into one finished product turned Mobike into a new way to get around: you see a bike, you ride it away, and when you stop, you have "returned" it.

No bike-sharing product before it had managed that. It was even more convenient than buying your own bike — you no longer worried about the bike being stolen, or about how to carry it onto the subway or into an elevator.

A subway station a kilometer away, a little restaurant two kilometers away. In congested parts of the city, that awkward one-to-two-kilometer distance — a bit far to walk, and not much quicker by car — suits a bicycle better. The bike-sharing model Mobike remade put a bike within reach, and met a real need.

"I saw bikes like this parked at a subway exit in November, and the first time I rode one I thought it was really convenient. It isn't complicated either — the instructions are stuck right on the bike. I drive to work now, and the parking lot is about a 10-minute walk from the office, so whenever I don't feel like walking I find one of these bikes and ride over," Shu Chao, who works at a financial firm in Chengdu, told QDaily. That month, five bike-sharing companies had already put bikes on the streets of Chengdu.

Bike-sharing didn't make much money, but at first it didn't burn much either

When it first launched, Mobike charged 1 yuan per half hour — not a business that looked like it could make much money. Back then Mobike had no money to burn either: when it put more than 10,000 bikes on the streets of Shanghai this April, it had only a few million US dollars in funding behind it.

To keep operating, Mobike worked to cut wear and tear starting with the hardware itself.

"The parts of a bicycle that break most easily are the tires, which need air, the chain, which slips off, and rust — all of it takes a lot of effort to maintain," Hu Weiwei said. "With that in mind, I visited a lot of domestic bicycle assembly plants and parts factories. My goal at the time was to build a bicycle that needed no maintenance for four years."

To stop the chain slipping, Mobike used a shaft drive rather than the chain drive common on ordinary bicycles. It is heavier and costlier, but it needs no maintenance. Mobike also used solid puncture-proof tires, which take only light wear over 20,000 kilometers of riding and never need air.

To control production costs, Mobike built its own factory in Wuxi. Hu Weiwei said they hadn't planned to build a factory at first, but "not many factories were willing to do what we were doing, because none of our parts were the conventional kind — we made our own molds for all of them, and we were paying a high price. When we ran the numbers, opening our own factory looked more controllable and better value."

These design choices pushed the cost of each Mobike bike to 3,000 yuan. An entrepreneur with experience running traditional public bike systems told QDaily that docked bike-sharing systems, which had low usage rates, lost about 5% to 8% of their fleet value a year to wear and damage.

At six hours of use a day and 5% loss a year, Mobike could earn back the cost of a bike in 13 months. That doesn't include building the factory, transport, logistics or R&D — and expansion spending comes on top of all that. Roughly speaking, Mobike was a company with thin margins that didn't burn much cash.

Ofo, now Mobike's main rival, was growing slowly at the time too. The student startup, founded at Peking University in 2014, had only ever put its shared bikes inside the closed environment of a campus. With no smart locks or GPS, it couldn't track where its bikes were, so losses ran high once bikes left campus. Ofo even hired people to stand at the campus gates and stop students from riding bikes out.

As late as this September, just as Mobike was catching fire in Beijing, Ofo's founder was still very cautious about expansion. He told QDaily in an interview: "This is a process. There's no way I can blanket the whole of China at once, that's just not possible, my bikes are limited... Right now we have more than 50,000 bikes, and which cities they go to depends mainly on the caliber of the students there."

Capital poured in, and a market with no way to make money got a subsidy war

Mobike's move into Beijing was the start of a change in how capital saw bike-sharing.

From its August entry into Beijing onward, Mobike announced four funding rounds totaling around US$200 million, with heavyweight backers including Tencent, Sequoia and Hillhouse.

In September and October, Ofo took three rounds totaling more than US$200 million, from backers including Didi, Xiaomi and Matrix Partners. In the year or two before that, Ofo had raised just 35 million yuan in total.

After that, more companies raised money and entered the bike-sharing market: Xiaoming Bike, which had first wanted to run shared bikes on campuses; Youbai Bike, backed by a bicycle manufacturer; and CCbike, which had previously supplied technology to public bike programs.

CCbike's Zhang Jin told QDaily in an earlier interview: "We thought of a model like Mobike's last year. Capital wasn't as hot then — we went through several rounds of talks and investors weren't too keen. Now they're coming back to find me."

After that, bike-sharing went from a business surviving on careful budgeting to a cash-burning game. Zhu Xiaohu, a partner at GSR Ventures and an early Didi investor, said after backing Ofo that "low cost is king, and user experience comes second. The bike-sharing war will be over in three months."

The fight between Mobike and Ofo became obvious. When Ofo entered Shanghai, one of the first places it dropped bikes was the doorstep of Mobike's Shanghai headquarters. Outside Ofo's Beijing launch event, you could see rows of neatly arranged Mobikes, unloaded from trucks the night before.

Ofo's little yellow bikes, with no electronic lock and no GPS, went out across city after city in bulk, but the operator didn't really know where each bike was, and couldn't be sure users would lock them after riding. The chains and tires, no different from those on a cheap ordinary bicycle, also took a lot of manpower to maintain.

These bikes gave users convenience, but they were not a business that could make money.

Once burning money to grab market share became the first priority, saving money stopped being something these startups thought about. At Guomao, the busiest transfer station in Beijing, an entire wall of ads belonged to Ofo. Ofo now runs subway ads at the busiest transfer stations in Beijing, Shanghai and Guangzhou.

Newer companies reached some second-tier cities earlier still: in Suzhou, Ningbo and Hangzhou, other companies arrived more than a month before Mobike did.

More and more competitors broke Mobike's original rhythm.

Mobike used to decide which city to enter, and where in that city to place bikes, from data on local users opening the app to look for one. Going from Shanghai to Beijing took four months. But since October that pace has become two to four new cities a month. Ofo formally announced it was entering Xiamen on December 16; Mobike announced it had entered Xiamen four days later.

Getting into more cities quickly takes more people, and putting more bikes on the street inevitably drives down how much each one gets used.

Mobike also stopped holding to four years of no maintenance. In its third month in Beijing it launched the cheaper Mobike Lite, which cut the weight from 25 kilograms to 17. The shaft drive, adopted specifically to save costs, was changed to a chain drive, and the basket dropped earlier for maintenance reasons was put back on the Lite.

A business that wasn't making much money to begin with then got into a price war: the Mobike Lite's price fell from 1 yuan per half hour to 0.5 yuan, the same as Ofo's.

The credit system originally designed to make users treat the shared bikes well stopped working too, once competitors arrived.

Every new Mobike user starts with 100 credit points; parking illegally or damaging a bike costs points. If the score falls to 80 or below, the fee jumps to 100 yuan per half hour — which is a way of saying you can't ride anymore. But now, even if a user's Mobike account is blocked, they can simply use a competitor's product.

All of this has pushed Mobike, and every other bike-sharing business in the industry, further and further from making money.

Capital can find its way out easily. The companies that grow by burning it may not.

It isn't hard to see why investors put money into these companies that can't make money, and then urge them to burn it.

Bike-sharing doesn't make money, but there is nothing else in transportation left to invest in. Didi is already too big, beyond what venture funds can reach. The expensive-bicycle projects of 2014 and 2015 — Qingke, Yeshou Qixing, 700Bike — never took off either.

Mobike came up with a product that got people to accept the bicycle as a way to travel. Its arrival proved that shared bikes were a business with real user demand, one that could pull in large numbers of users.

What investors care about most, though, is not whether these companies can grow in a healthy way. It is whether they themselves can make money. As long as the bike-sharing bubble can be blown a little bigger, and there are big companies and later rounds to take it off their hands, early investors can get their money out.

Even if a company can't hold on and can't be sold, investors can fall back on the terms of their agreements to get more of their money out first, when the company lists on the New Third Board or is sold off.

Egged on by capital, founders have grown bolder too. Bluegogo CEO Li Gang said at a launch event in November: "Burn as much as you've got. A project like this comes along once every few years." With so much capital coming in, he wasn't worried about finding investors.

"Before, we were selling solutions, and of course that had to make money. Now we think it's fine — burning money works too, it lets our partners play along." That is how Xingwoxing, which used to supply technology to public bike programs, described its change of attitude to QDaily after launching Qiqi Chuxing.

Some small companies are looking at other ways to make money, such as contracting for government public-bike projects. But that isn't a business with any margin in China either. Lvchang Technology, which runs public-bike projects in Beijing, Ningbo, Jinhua and other cities, had revenue under 60 million yuan in each of the past three years, with profit bouncing between plus and minus two or three million yuan a year.

Both Mobike and Ofo have announced overseas plans. But PBSC Urban Solutions, which put more than 10,000 bikes on the streets of London, filed for bankruptcy in 2014 when its debts exceeded its assets, and was later bought cheaply.

What's left is big investment, heavy burning of cash, and a merger at the end that leaves an oligopoly. This capital-led logic has become normal in China's internet industry, because it lets the early investors get their money back.

Didi burned cash and merged with rivals to take over the ride-hailing market. After Meituan and Dianping merged, the combined company all but took over group buying.

But four years after launch and more than $10 billion in funding, Didi still hasn't built a profitable business, and the new regulations have made that road harder. Meituan, after raising more than $5 billion, is still burning money on food delivery.

Nothing suggests that what either company earns after cornering its market can justify its current valuation. Several years in and more than a dozen funding rounds later, both are still worrying about how to make money.

Mobike has changed our lives, but it hasn't found a way out for itself. As a company that depends on a physical asset — bicycles — Mobike has the harder position. It is unlikely to open up a new market the way Alibaba found Taobao in 2003. Even if it wins the cash-burning war, it will struggle to find a way to earn profits that justify a valuation built on hundreds of millions of dollars of investment.

This company has already changed our lives. But a company that doesn't make money and has no special significance is hard to sell at a high price.

"There's so much money in the market, it's like the exam date got pushed back — you don't actually need to study any harder." That is how Roelof Botha, an early Instagram investor, once described companies that grow by burning capital.

The exam comes eventually.

Cover image from Mobike.