By Alexander Kremer, Senior Manager, JD.com
France first and Germany next? Starting last month, Germany allowed scooter-sharing companies to officially operate across the country (if an ABE ‘Allgemeine Betriebserlaubnis’ is in place). These days it seems Europe has become the battleground for both American scooter-sharing players like Bird and Lime (both established 2017) and European players Circ, Tier and Voi (all established 2018), just to name a few. Indeed, transportation has become a major pain point for many urbanites. Nowadays, in big European cities, usually somewhere between 25-50% of total space is dedicated to roads (incl. sideways), surface parking and parking lots; yet urban congestion and pollution are real issues. But, this is great news considering that many have been waiting for the “next big trend” in the consumer startup space. However, the launch of more than 12 electric scooter-sharing companies and the introduction of 20k scooters into the Parisian cityscape has been far from perfect, leading mayor Anne Hidalgo to refer to it as a trend “not far from anarchy”.
Is history repeating itself? A lot has been written about the bike-sharing craze in China between around 2016 and 2018. In some ways, many of the actions taken by users, companies, investors and even regulators seem to mimic things we have observed in China before (note that scooter-sharing companies are blocked from operating in many Chinese cities).
I want to connect the dots between what is happening in the scooter-sharing space in Europe (and US) right now and how this relates to the bike-sharing craze in China. While this article is a reflection of my opinions, it also presents a possible future scenario of what will happen next in the scooter-sharing industry.
General thoughts about the transportation industry
To start with, let us look at some general facts about the transportation industry.
Getting from a to b, a basic need
The great thing about ventures in the transportation industry is that companies do not have to educate consumers first about a need they do not have yet. On the contrary, just like e-commerce, transportation (“getting from a to b”) is a basic need almost everyone has in some way or another on a daily basis. As a result, in theory, the main task for ventures in this space is educating consumers about satisfying their needs in a different way.
Back to B-School: transportation industry suffers from low profitability
Many of us learned about the differences in industry profitability during our first year of college courses or later in business school. Often times, the famous Porter’s Five Forces framework was used to explain this and point out that airline transportation is an industry with very limited profitability. Why is that? At least three of the five forces can help to explain this. First, competition is incredibly intense throughout the airline industry. Second, the entry barriers are relatively low as leasing an airplane and airport gates is somewhat easy, compared to having to develop a sophisticated technology in years of research and development. Third, buyers usually and mostly consider price as the main argument to buy tickets (see rise of low-cost airlines such as Ryanair) while overall the service itself is largely standardized. While these are observations from the airlines industry, one can easily generalize and apply many of these observations to the transportation industry as a whole. For example, it is common knowledge that many public transportation providers are subsidized and not one ride-sharing company (think Uber or Grab) runs an overall profitable business.
Industry forces lead to high supply-side concentration
If not prevented otherwise – e.g., by geographical focus or niche targeting – sub industries in the transportation space seem to lead to concentrated structures on the supply-side due to the advantages of dense distribution networks for users. The case in point is the liberalization and rapid monopolization of the long-distance coach travel industry in Germany. After the government broke up the quasi-monopoly of intercity coach travel previously granted to the Deutsche Bahn, it took Flixbus (established 2011) only a few years to consolidate market forces and establish a new quasi-monopoly as a platform. Another example can be found in the consolidation in the ride-sharing space in China which eventually led to Didi becoming a quasi-monopoly. However, one also has to keep in mind that for short distance travel offerings, this is a city-by-city industry. That said, in every city the player with the best availability will dominate.
Emerging patterns in the Chinese bike-sharing hype 2016-2018 and where we are today
The hype that happened in the Chinese bicycle-sharing industry has been analyzed in various articles before. It had started out at a large scale somewhere around 2016 and at one point had more than 100 startups competing with more than 30 million shared bicycles across China while securing billions of USD in funding. Fast forward to April 2018, Meituan-Dianping acquired the company Mobike for USD 2.8 bn which it since has rebranded to Meituan Bike. That was probably the best outcome achieved by a shared bike player at least from the point of view of the founding team and early investors.
Even before the acquisition, pictures of bicycle-graveyards were shared frequently on the internet and news of deposit misuse due to funding squeezes became an unfortunate reality. Following several M&A activities and companies going out of business, the industry became an oligopoly consisting of Meituan Bike, Hellobike, and Didi. The prices for renting bicycles since then drastically increased from basically zero during the peak days. No bike-sharing company successfully went public (IPO) or was able to survive independently and at the scale achieved during the heydays. Clearly, there was a huge supply/demand-misalignment in the process both in quality and quantity. In fact, the different companies were acting as if they were operating in an industry with massive first-mover advantages and winner-takes-all dynamics. Realizing that was a wrong assumption, this then was followed by a massive and painful correction which whipped out the majority of previous players while the remaining ones focused on improving their operations. Moreover, the companies involved hyped each other up, thinking higher market shares (i.e. more bikes) will lead to more funding. In some way, this is normal with new industries since it is hard to forecast the future demand accurately. The really interesting thing that then happened in China was the irrational willingness of investors to support the buildup of those massive overcapacities, ignoring the underlying industry fundamental of no first-mover advantages, no winner-takes-all dynamics, and chronically low profitability. Partly, the behavior of investors can be explained by the fact that 2017/2018 saw China rising to become the largest VC market in the world, so the funds were largely available. No one wanted to miss out. While in the age of internet companies, investors often focus on metrics such as revenue growth rather than potential for profitability and companies that achieve remarkable valuations in both private and public markets; the bets placed in the Chinese bicycle-sharing market did not turn out well for most.
Will the European scooter-sharing market follow the very same dynamics? That is hard to say. The major challenge in the mid-term is establishing a balance between demand and supply. For now, we see similar patterns in that we obviously have at least 10+ major companies competing in an industry with no first-mover advantages, no winner-takes-all dynamics, and chronically low profitability. At the same time, building on the earlier trend of shared bicycles, e-bikes are currently taking over German cities such as Berlin. Below, in no particular order, I share some observations on what we have previously observed in China that can potentially shape the European scooter-sharing industry in the months to come.
Availability, price, and then technology
In the bike-sharing heydays in China, a lot had been said about the superior or inferior technology of certain players. Yet, in the very end, people still just want to go from a to b and so it became very difficult to increase customer loyalty to a certain company in the long-term. Usually, people mostly cared about availability of bikes, followed by the price, and then – all other things being equal – they would pick the better bicycle. That said, once prices rose and availability got worse, fewer people were interested in riding shared bicycles.
Even though there is definitely a fundamental demand for transportation, that very demand can be satisfied in many ways. Consequently, bike-sharing initially sparked a lot of interest with users but ever since its peak days, the number of rides and active users have actually gone down. There are many reasons to explain why this is the case, but some part of it is that there was certainly an initial excitement for the new trendy shared bicycles in the beginning that vanished over time.
Certain players in the Chinese ride-sharing space rapidly moved their business purpose to a higher level when they pitched to improve sustainability in cities through cycling and sharing. While on the surface this makes sense, this claim has later come under scrutiny as people started to look into the underlying dynamics including production and recycling. Also, over time people got annoyed by bicycles blocking streets and by drunken people riding them around. Such an examination might spark a change in public perception on the demand side for sustainability-conscious consumers, , especially when it turns out using shared bikes or scooters appears to be simply replacing walking. instead of replacing car trips.
Seasonality dynamics hurt
The bike-sharing craze in China started to settle in April 2018 when Meituan-Dianping acquired Mobike. This is not a coincidence, given that the 2017/2018 winter led to a massive reduction in demand, especially in northern regions. Following that tough winter, numbers no longer looked so good and it became harder to raise new funding rounds.
Unit economics work out but overhead is key
To prove the viability of the business model, often bike-sharing companies presented the unit economics of single bikes. From that point of view, even with minimum charges, the business model seemed quite feasible. However, this totally missed the mark in many ways. First, the durability of bikes was often assumed to be much higher than in reality due to factors such as quality and vandalism. Second, many bikes showed low rates of use because they were moved over time to the wrong locations and sometimes could not even be recovered. Third, a significant chunk of the cost comes from operations (fleet management, i.e. moving bikes around) and the overhead, i.e. marketing to acquire and retain customers. Considering all of this, scale makes sense.
Hardware is hard
Software products scale easily and quickly. Part of the reason is due to the ability to update to the newest version of the product based on a simple click. Unfortunately, hardware is hard, and the nature of hardware does not allow for upgrading to the latest version that easily. All of this imposes some supply side constraints. On the streets of China, one can still find everything, from unbearable version 1.0 bicycles to comfortable latest-versions for several brands.
Regulations kick in
While the local governments in many Chinese cities were initially extremely open, they later on imposed several requirements on the operating companies including capping the quanity of supply. This was due partly to the disorder perceived by local citizens and over time enforcing supply constraint became increasingly common.
Rapid international expansion
While competition in the Chinese market was still going strong, Mobike and ofo embarked on their rapid international expansions from 2017 onwards. Those were very ambitious and, by some measures, successful projects. However, both companies essentially retreated from international markets in 2018/2019 or sold and are trying to sell their foreign arms, thus not creating sustainable businesses. On the contrary, it seems that when financial resources became scarce, the international operations became a burden. This led to limited operational freedom in the Chinese home market in terms of budgets and supply. In fact, the number one bicycle-sharing company now is HelloBike, a company with a very clear geographical focus.
Implications for users, companies and investors
The fact remains that transportation is historically one of the toughest industries in terms of profitability. That said, if scooter-sharing turns out profitable over time as some are claiming now it would be the first in the modern history of transportation to run at an overall profit. It is also certainly true that there are actually few first-mover advantages and no winner-takes-it-all dynamics in the scooter-sharing space. Currently, it is barely possible to distinguish the different offerings from one another in terms of product. It seems that too few players actually invest in R&D to develop their own scooters. Also looking at the (very similar) pricing, one wonders about differentiation and sustainability, for instance Circ, Lime, Tier and Voi right now all charge 1 Euro per ride + 15 cent / minute in the majority of German cities. That is higher than what Mobike and ofo charged in their heydays but obviously scooters are more expensive and many providers recollect the majority of scooters every night for repair, charging and reallocation. With such limited product differentiation, operations will actually turn out to be key.
If we look at what happened in Paris when 12 companies and more than 20k scooters flooded the streets, we are reminded of the height of the bike-share frenzy in China. Yet, the scale of the European scooter-sharing hype today is actually small as compared to what we have seen in the Chinese bike-sharing space 2016-2018. Lime claims to be in 23 countries by now and 100 cities. According to Circ, they are present in 7 countries while Voi claims 1 million users and recently announced they passed 5 million trips since it’s launch (to compare, some Chinese bicycle-sharing companies had more than 5 million trips in a single day). American leader Lime received a total of USD 770 million in funding so far (latest round: series D); Voi overall raised USD 80 million (latest round: series A). According to estimates by Civity, Tier currently dominates the streets of Germany with 4000 scooters.
It is still unclear if we are going to experience a deja-vu in terms of overcapacity. Regulation will potentially increase over time, however, if companies believe that there will be first-mover advantages (e.g., due to tender processes per city), then this will actually backfire as they might rapidly expand. With higher capacity expected to build up over the remainder of the summer and coming fall months, the winter 2019/2020 will be a reality check for many of the start-ups. The very interesting difference between bicycle-sharing and scooter-sharing is that the marginal costs for additional trips in the former are essentially zero. That is not the case for the latter and this is also why none of the current companies offers a subscription model (e.g., monthly pass) at scale which would be another way to lock in users. Also, given their ease to ride and higher speed, shared-scooters actually have to potential to compete with public transportation alternatives such as metro and bus. These are the fundamental difference in the nature of the product which, in many ways, can shape the outcome of the industry. Just because no bike-sharing company in China was able to go public or survive as a stand-alone business at previous scale, does not mean this is the destiny for American and European scooter-sharing companies as well. It is likely though that there will be a wave of consolidation in the mid-term. Also, it will be interesting to see which larger companies (such as Didi and Meituan-Dianping in China) will be willing to acquire scooter-sharing ventures moving forward. So far, we have seen BMW/Daimler and Uber getting involved. Their desire to join the hype makes sense since they are able to keep customer acquisition costs low from their existing users base and increase loyalty as part of a larger transportation offering. The question here is where it makes sense to acquire or just start a similar service, considering the lack of entry barriers and lack of first-mover-advantages. Assuming some of the patterns in supply and demand side will resurface in the months to come in Europe, I will be sharing some of the implications for users, companies and investors below.
When there is oversupply it is good for users since prices are more likely to be low and availability is high. That said, in China we experienced several months of essentially riding bikes for free thanks to generous VC funding. Considering that, the best days for users are now or in the months to come as more and more scooter-sharing companies launch in cities across Europe and users are advised to enjoy the cheap or free rides. In line with that, news broke recently that Tier will raise prices from 15 cent / minute to 19 cent / minute in Dusseldorf. Over time, for heavy users it could become more economical to purchase their own scooters.
The main battle is around price and availability and not necessarily around the best technology, even though, as we saw in bike-sharing china, Mobike, arguably, had the best technology, and it was acquired in China by Meituan-Dianping. However, that can also be attributed to the characteristics of the management team. Companies are advised to take a long-term view on their business and manage funds in a responsible way. Also, companies should be aware of the potential concentration forces in the industry to come and thus should build partnerships or evaluate potential for collaboration with larger potentially acquiring companies.
Investors must be aware that this is an industry operating like and at the speed of an internet company, and is dealing with hardware challenges and thus runs at high costs. Also, generally transportation companies are unlikely to achieve software-company-type profitability. That said, the mid- and long-term development of the industry forces are foreseeable. Investors can influence the outcome earlier by forcing consolidation, integration with other transportation services and acquisitions from outside companies with an interest in the space. Given the distinctive feature of having marginal costs per ride (opposed to shared-bicycle companies in China) and no subscription schemes for heavy users as a result, some might assume this industry will turn to selling scooters in the long-term though. In case cities will not go for tenders to limit the numbers of companies allowed to operate, there is no need for investors’ FOMO as late-movers potentially are not positioned any worse. Taking this into consideration, investors do not need to invest when valuations are hyped up.
A former console e-sports national champion, analyst for IBM, Junior Manager at McKinsey and Corporate Development Manager at Mobvoi, Alexander Kremer currently is a Senior Manager at the e-commerce company JD.com in Beijing. He is an observer of and frequent visitor to China since 2012. This article was first published on China Tech Blog where Alexander and other professionals leverage their on-the-ground insights into the mind-blowing developments in far East to tell the world all about Tech in China.
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