Is China's bike-sharing industry poised for a merger spree?

A man uses a smartphone as he rides a Mobike bicycle through an intersection in Beijing on October 19, 2016. Photo: Getty Images

China's bike-rental firm Youon has acquired bike-sharing service Hellobike, a move analysts said might set a trend of industrial integration in the country's cutthroat bike-sharing market.

According to a statement released last week, Youon's subsidiary Youon Low Carbon Technology would buy a 100 percent stake in Shanghai Junzheng Network Technology, the operator of Hellobike, with the latter responsible for the operation of the new entity.

Hellobike Chief Executive Officer Yang Lei described the merger, the first of its kind in the industry, as a strategic opportunity which Hellobike could use to enhance its strategic position in the bike-sharing market.

In an internal letter sent to his employees, Yang, who will be appointed as the new entity's chief executive officer, said that the merger would enable the new company to gain wider growth space and more abundant resources.

With China's bike-sharing market being dominated by Mobike and Ofo, analysts attributed Yang's confidence in the new company's future to the strategic partnership with well-funded Youon and its major financial backer Ant Financial, a financial affiliate of e-commerce giant Alibaba.

In August, Youon, which is mainly engaged in operating government-invested bike-rental systems with fixed return docks, completed an initial public offering at the Shanghai Stock Exchange, a move that guarantees relatively stable capital base.

Being the first listed bike-rental firm in China, Youon is reportedly eyeing the dockless bike-sharing business driven by venture investment. In a listing prospectus issued in March, Youon announced its plans to "add free-floating bike-sharing function" into its public bike-rental systems with fixed locking poles.

M&A a trend for smaller players

Some analysts said that the merger and acquisition appear to be a potential direction for smaller bike-sharing firms, especially in the face of the fierce competition from Mobike and Ofo, which have reportedly grasped more than 90 percent of the bike-sharing market.

Statistics from market research firm QuestMobile showed that Hellobike had nearly 3 million monthly active users in September 2017, ranking in the third place on the list of the most popular bike-sharing apps. Hellobike said recently that it has operated in more than 100 Chinese cities and had about 40 million registered users. However, Hellobike's data still lags largely behind what Mobike and Ofo own.

Some of the other smaller companies in the industry including Cool Qi, Bluegogo and Xiaoming Bike are mired in financial difficulties.

In September, many angry users stormed into Cool Qi's headquarters in Beijing for the reimbursement of the deposits they paid amid reports that the company was firing employees, implicitly hinting at the capital chain rupture. Coincidentally, Bluegogo and Xiaoming Bike also faced cash crunch.

"(Bad things) came faster than expected," Chen Yuying, co-founder and chief executive officer of Xiaoming Bike, complained in a previous interview.

The bike-sharing industry has entered a vicious cycle, in which Mobike and Ofo keep attracting big venture capitalists and realize rapid expansion, leaving little space for smaller players, which either go bankrupt due to a lack of capital or merger with each other.

In June, Chongqing-based Wukong Bike announced the end of its bike-sharing service only six months after its official launch. Wukong Bike's demise was followed by Nanjing-based Dingding Bike.

Question of profitability

Mobike and Ofo, the dominant players, cannot sit back.

The low profitability of the bike-sharing business has long triggered wide speculations about a merger of the two bike-sharing giants, which reached a climax in September when Zhu Xiaohu, founder and president of GSR Ventures which is a major investor of Ofo, said at a forum in Shanghai that it was now the time to consider a merger as it was the only way to become profitable.

"Although Ofo and Mobike have dominated the (bike-sharing) market, they still need huge amounts of money every month to maintain operations. It is only when the two companies merge that they can become profitable," Zhu said at the forum, according to domestic media reports.

Zhu's remarks remind us of a remarkable event in China's Internet-based car-hailing industry last year when Uber China merged with local rival Didi Chuxing after strong complaints of Uber's investors who could not put up with the fact that their huge investment produced no profit.

In addition to the problem of low profitability, Mobike and Ofo are facing tightened regulations as they ratchet up expansion at home and abroad.

So far, about 13 Chinese cities including Beijing, Shanghai and Guangzhou have issued regulations banning further deployment of dockless bikes, largely due to concerns over traffic problems.

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