Cycling Became Cool Again
I came to Shanghai for the first time in 1993 when I was 12 years old. It was a few months after the Shanghai Metro commenced operations. Today, the Shanghai Metro is the world’s largest subway system with 588 km and 3.4 billion annual ridership. But, in 1993, there was only one line with merely 4.4 km connecting Shanghai South Railway Station and Xujiahui Station in Puxi, and not many people knew the concept of a subway system. A bicycle was people’s main transportation and, as the economy grew rapidly and the government encouraged people to move to larger cities, bicycles became even more important for people’s daily life. By the mid-1990s, China had up to 523 million bike owners—that’s 43 bicycles for every 100 people. By 2007, China produced almost 70% of the world’s bicycles.
However, as private car ownership became a status symbol, the subway systems expanded, and cycling was seen as backward, Chinese people abandoned bicycles. The migration of bicycles in the morning and evening, south to north, west to east, was becoming a scene of nostalgia.
Not yet. This new business called Mobike (Mobile + Bike) emerged in Shanghai last summer and completely changed China’s bicycle scenery. It was co-founded by Hu Weiwei and David Wang, former head of Uber Shanghai. The mobile-enabled bike-sharing system made cycling cool again and rapidly became a staple in people’s lives. Mobike is one of the world’s first dockless bike-sharing programs with an embedded GPS locator. You can unlock Mobike and pay for a ride (RMB 1 per 30 min) by your mobile phone. In Shanghai, you can find bikes everywhere. Together with Mobike’s competitors (ofo and Bluegogo), there were already 450,000 shared bikes in Shanghai or more than 2 bikes for every 100 Shanghainese. Investors are pouring money into Mobike and its rival ofo. While Mobike raised $325 mm, ofo raised $580 mm. ofo is now valued at $1 billion, according to Bloomberg. These companies are growing at an unprecedented pace, but are these businesses as attractive as investors think?
Mobike Economics
First of all, Mobike is not cheap. The cost of its bicycle is estimated at Y3,000-4,000 or $400-600. Mobike charges Y1 per ride (30 min). It needs 4,000 rides to recover the cost. Unlike Uber, Mobike owns bikes, so it is very capital-intensive. The company is trying to introduce the system in 100 cities. How much more capital do they have to raise in order to satisfy this ambitious goal?
Well, Mobike’s unit economics is actually more attractive than I initially thought. Assuming the cost of Mobike at Y3,000, average daily utilization of 4 times (confirmed this with an industry professional), Mobike can recover cost in 2 years. The annual gross yield, which excludes maintenance costs and depreciation, is 49%. If Mobike does not break down after 2 years, it will generate attractive cash flow. The Classic Mobike is built with puncture-proof tires and a shaft transmission system. It’s heavy and more expensive mechanics than conventional chain drive, but the bicycle needs very little maintenance and lasts longer.
However, what makes Mobike attractive is not only its unit economics but its self-funding mechanism. Mobike requires users to make a deposit of RMB 299. Mobike reported having 10 million unique users. This means Mobike can collect almost RMB 3 billion deposit, which can be used to buy 1 million bicycles. This is a big advantage of Mobike for future expansion. None of the traditional rental car companies had this luxury. And, for a rider, RMB 299 is cheaper than buying a brand-new bicycle.
Thanks to Mobike’s success, there are more than 100 bicycle-sharing businesses in China. Eventually, only two or three will survive.
People’s Solution for the Planned Economy without Planning
In fact, the story of Mobike is more than its economics. Through Mobike, Chinese people are addressing the problem of the Planned Economy. Over the last 50 years under the Communist Party’s rule, China spent massively on infrastructure. Many of the infrastructure projects were led by top-down policies without considering the local needs and ended up very inefficient. China’s subway system is a good example. Today, China has 7 subway systems among the world’s 19 largest. These subway systems cover 2,415 km with 13 billion ridership a year. However, there are only 1,500 stations for the entire system. Said another way, the system length per station is 1.64 km in China vs. 1.19 km elsewhere. This means Chinese subway riders need to travel an extra 0.4 km to reach a station. In New York City or Paris, subway riders need to travel less than half. As China’s cities expanded, the average traveling time to a subway station became longer and longer and Chinese commuters needed to find another transportation to go to the nearest subway station.
Currently, given China’s local government debt problem, which we discussed extensively in Crouching Bankers, Hidden Opportunity, the government cannot meet people’s demands for better infrastructure. But, rest assured, our fellow comrades, our people can find a solution by themselves for their planned economy without planning with the power of “capitalism”.
Source
The Guardian ran a very good, well-researched article on Mobike, “Uber for bikes: how ‘dockless’ cycles flooded China – and are heading overseas” on 22 March 2017