The opinions expressed in this essay do reflect my personal views only. The original version of this article has been published on China Tech Blog.
France first and next up Germany? 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 became the battle ground of both, American scooter-sharing players Bird and Lime (both established 2017) and European players Circ, Tier and Voi (all established 2018), to just name a few. Indeed, transportation has become a major pain point for many urban citizen. Nowadays, in big European cities usually somewhere between 25-50% of total space is dedicated to roads (incl. sideways), surface parking and parking lots and yet urban congestion and pollution are real issues. Also, this is great news considering that many have been waiting for the "next big trend" in the consumer start-up space. Yet, the launch of more than 12 companies and emergence of their 20k scooters in Paris also showed some dark sides, and led mayor Anne Hidalgo refer to it as 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 moves and 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 the below are my personal reflections only, they present a possible future scenario for 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 certainly 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 becomes how to educate 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 first year 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 severe in most regions in 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 about prices as the main argument to buy (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 many of these observations to the passenger transportation industry as a whole. For example, it is common knowledge that many public transportation providers are subsidized and no ride-sharing company (think Uber or Grab) run overall profitable businesses.
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, it 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. What started out at larger scale somewhere around 2016 at one point had more than 100 start-ups competing with more than 30 million shared bicycles across China while securing billions of USD of funding. Fast forward to April 2018, Meituan-Dianping acquired the company Mobike for USD 2.8 bn which since then rebranded to Meituan Bike. That was probably the best outcome achieved of the different player, 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 went up several times from basically zero during the peak days. No bike-sharing company successfully went public (IPO) or was able to survive independently and with 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 several companies involved hyped each other up, thinking higher market shares (= 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 real interesting thing that happened in China then 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 that funds were largely available. No one wanted to miss out. While investors certainly not necessarily only need to support future profitable businesses and companies still can in private and public markets achieve remarkable valuations nevertheless, 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 not certain to say. The major challenge in the mid-term is in establishing a balance between demand and supply. For now, we see similar patterns in that we have obviously at least 10+ major companies competing in an industry of 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, currently e-bikes are taking over German cities such as Berlin. Below, in no particular order, I share some observations for what we have observed in China before 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 it turned out very hard to increase customer loyalty to a certain company long-term. Usually, people would mostly care about availability of bikes in the first place, second they would care about price (mostly for free) and then - other things equal - they would pick the better bicycle. That said, once prices rose and availability got worse, so were fewer people 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 since the peak days, the number of rides and active users have actually been going down. There are many reasons to explain why this is 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 public perception on the demand side for consumers very aware of sustainability, especially when it turns out that walking is upgraded to cycling, scooter, etc. 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 just did not look so good anymore 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. Looking at it from that point of view, even with minimum charges the business model seemed quite feasible. Yet, that totally missed the main point in many ways. First, the durability of bikes assumed often was much longer than in reality, e.g. due to quality and vandalism, etc. Second, many bikes showed an extremely low utilization as they move into wrong locations over time and cannot be recovered potentially. 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 nicely and fast. Part of it is due to the ability to update legacy always 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. Up until now on the streets of China, one can find everything from unbearable version 1.0 bicycles to comfortable latest-version for several brands.
Regulations kick in
While the local governments in many Chinese cities were initially extremely open, later on they imposed several requirements on the operating companies including capping the quality of supply. Partly, that was due to the mess perceived by local citizen. That said, over time it became a constraint to supply.
Rapid international expansion
While competition in the Chinese market was still going on, Mobike and ofo embarked on their rapid international expansions from 2017 onwards. Those were very ambitious and by some measures successful projects but both companies retreated essentially largely from international markets in 2018/2019 or sold / try 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. With that, they led to limited operational freedom in the Chinese home market in terms of budgets and supply. In fact, the number 1 bicycle-sharing company now is HelloBike, a company with a very clear geographical focus ever since.
Implications for users, companies and investors
It remains that transportation is one of the historical toughest industry in terms of profitability. That said, if scooter-sharing turns out profitable over time as claimed by some right now, it would be the first industry in the modern history of transportation. 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, barely is it 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 where 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 also more expensive and many providers recollect the majority of scooters every night for repair, charging and reallocation. With so limited product differentiation, operations then actually will turn out to be key.
If we look at what happened in Paris before where 12 companies and more than 20k scooters flooded the streets, we feel reminded of the days in China. Yet, actually the scale of the European scooter-sharing hype is small by now 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 overall (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 yet to be seen if we are going to experience a deja-vu in terms of overcapacities. Regulation will potentially increasingly come. 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 will potentially expand rapidly. With more capacity expected to build up over the remaining 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 though that the marginal costs for additional trips in the former are essentially zero. That is not the case for the latter and that 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 as well. That is a fundamental difference in the nature of the product which can shape the outcome of the industry in some way. Just because no bike-sharing company in China was able to go public or survive as a standalone business at previous scale by now, does not mean this is the destiny for American and European scooter-sharing companies as well. Yet, it is likely 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 to reflect on here then 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, below I am sharing some of the implications for users, companies and investors.
When there is overcapacity it is good for users since prices are 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 long time, for many heavy users it can be more economically to purchase their own scooter.
The main battle is around price and availability and not necessarily around the best technology, even though eventually it was Mobike, having arguably the best technology, which 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 industry concentration forces to come and thus should build partnerships or evaluate potential for collaborate with larger potentially acquiring companies.
Investors must be aware that this is an industry operating in an internet company fashion and speed, yet dealing with hardware and thus 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 by earlier forcing consolidation, integration with other transportation services and acquisitions from outside companies with an interest in this space. Given the distinctive feature of having marginal costs per ride (opposed to shared-bicycle companies in China) and no subscription schemas for heavy users as a result, some might assume this industry to turn into 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 for 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.
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