China’s bike rental firms Mobike, Ofo are actually secret cash cows: Gadfly

Ofo Inc. and Beijing Mobike Technology Co. bicycles sit parked on a sidewalk outside a subway station in Shanghai, China, on Thursday, Sept. 12, 2017. Photographer: Qilai Shen/Bloomberg

China’s bike rental companies Mobike and Ofo are in talks to merge, Bloomberg’s Lulu Chen reported Tuesday.

There’s not a sane mind in the world who doesn’t think that’s a good idea.

One parallel is the merger of Didi Dache and Kuaidi Dache to form Didi Chuxing, which then eventually folded in Uber China. They are, of course, extremely different businesses.

Car-sharing companies generally don’t own inventory. This means they’re not spending buckets of money buying assets that get piled up like trash on sidewalks, nor do they have to worry about huge maintenance costs. And while they do dish out vast sums subsidizing drivers to get them to use the platform, rider-driver hookup services charge the consumer more than a token fee.

Despite purchasing bikes by the ton — Ofo and Mobike have more than 13 million combined — they hardly charge anything for rental, making outsiders scratch their heads at how this can possibly make sense.

But there is one factor ride-sharing companies don’t enjoy: deposits. Beijing Mobike Technology Co. and Beijing Bikelock Technology Co. (trading as Ofo) require users to pay a surety upfront for the right to rent. With millions of users on their books, that translates into billions of dollars of cash on hand.

Let’s run the numbers. Mobike claims to have 100 million users, and it requires a 299 yuan ($45) deposit (let’s assume this surety is similar in all markets). That means it has just shy of 30 billion yuan, or $4.5 billion, in cash. That’s four times the amount VCs have thrown at it. The deposit pile at Ofo comes in at around 2 billion yuan, a lot less because it has fewer users and demands a smaller bond. It also allows deposit-free rental for some with a good Sesame Credit score.

Compare the combined $4.8 billion of deposit money with the $2.3 billion CB Insights estimates the duo have raised through outside funding and you realize that in reality, the unwitting venture capitalists in all of this are actually China’s millions of bike riders.

With only 7 million bikes but 100 million users, Mobike holds 4,200 yuan cash per bike. Ofo’s numbers aren’t anywhere near as favorable.

In theory, such funds are like callable deposits, but in reality, the process is a little more cumbersome — most users won’t bother asking for their money back because they plan to keep renting bikes. Executives from both rental companies have said publicly that this cash isn’t being used to buy extra bikes or fund operations. I have no way of fact checking such an assertion, but assuming that it’s true, this would be the smartest move possible.

Instead of frittering away 32 billion yuan on unprofitable assets such as bicycles, the companies can easily funnel those funds into money markets and other investments that earn around 4 percent annually. It may not make up for the billions burnt on bikes and operations, but babysitting cash is one easy way to make a dime.

Also Read:

China: Mobike, Ofo investors in early talks to merge startups

Bloomberg

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Following vacancies can be applied for (only in Singapore).   

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.