Bike sharing – BATmen again

Ofo’s travails will put it in Didi clutches.

• Ofo is facing another angry creditor, which combined with the seemingly endless bicycle graveyards in China, clearly indicates that the consolidation phase is now upon us.
• Bike sharing like food delivery, app stores, valet apps and so on is passing through the classic hype cycle (first defined by Gartner) and now finds itself positioned squarely in the “sliding into the trough” phase.
• This is where the failures and consolidation begin and extra money has to be pumped into the leading players to keep them afloat.
• Nowhere is this more clear than at Ofo where the supplier of its bicycles (Shanghai Phoenix Bicycles) has petitioned the Beijing court to compel Ofo to pay its bills.
• According to the filing, Ofo owes Shanghai Phoenix Bicycles $9.9m.
• This is not the first time that Ofo has been embroiled in unpaid debt disputes, as July saw the provider of 3m of its smart locking devices threaten to terminate service if its bill was not paid (see here).
• This would have resulted in an inability to locate its bikes, effect remote maintenance or change passwords.
• This would have effectively bricked 3m bikes.
• The dispute was resolved as presumably, Ofo paid the supplier all of the areas by the July 25^th deadline.
• Ofo is clearly not out of money yet, but its financial department obviously has instructions to conserve cash at all costs which means spinning creditors out for as long as possible.
• I am pretty sure that Mobike is suffering from exactly the same problems, but now that it is tucked-up under Tencent’s wing, there will be a much better supply of capital.
• One only has to visit one of China’s major cities to see the seemingly endless lines of unused bikes lying around in the streets which is further corroborated by the 55% decline in net income reported by the parent company of Shanghai Phoenix Bicycles in H1 2018.
• Given this outlook and the fact that Ofo clearly cannot survive without a strong backer (like Mobike), it looks likely that Didi will succeed in its bid to acquire the company.
• However, I suspect that there is plenty of wiggle room in the $3bn price tag, given Ofo’s precarious financial position.
• The net result is that bike sharing, like food delivery, instant messaging, app stores and pretty much every other Digital Life service in China will become a battle between the BATmen.
• However, with Baidu increasingly unwilling to compete generally (focusing instead on search and AI), it will be Tencent and Alibaba that slug it out.
• Of the two, Tencent is starting to look interesting again as the short-term focus on regulatory uncertainty in the Chinese games market is masking the long-term impact.
• This impact will be to increase barriers to entry as smaller competitors will not have the know-how or the resources to deal with an increasingly Byzantine regulatory system, leaving the way open for Tencent.
• Hence, I will be looking to get back in as the long-term estimates are certain to be cut due to the short-term problems.