Bike-sharing – Poultry sports.

Bike sharing has descended into a game of chicken.

• Hellobike is raising $500m into a suicidally difficult market where its main competitors are either flirting with bankruptcy or have been completely swallowed by much larger ecosystems (Mobike).
• Hellobike is one of the smaller bike-sharing players in the Chinese market but obviously, it thinks that it has a shot at taking the other two out.
• Hellobike is currently backed by Ant Financial, the affiliate of Alibaba, both of whom have been big backers of Ofo in previous rounds.
• The valuation is unknown but given the implosion of the sector in H2 2018 and the huge risks being assumed by any investor crazy enough to put money into this must be far lower than $2.3bn the company said it was worth last July.
• I suspect the strategy here is to use the money to put the other two players out of business and take the whole market for itself.
• In this sort of business, it’s a winner takes all game and it will be only when there is one player left standing that prices will be able to rise and cash be generated.
• Until then, it is going to remain a bloodbath of brutal competition where huge losses are incurred and cash is burned.
• In a normal situation, the strongest company that uses its resources to best effect would outlast the others resulting in a high quality, well run and profitable service.
• However, bike sharing has long been a proxy war between the big ecosystems Alibaba and Tencent and in that regard, this has become a nasty game of chicken.
• Tencent is heavily invested in delivery logistics through its position in Meituan and logistics is a critical piece of Alibaba’s core business.
• This is where their interest in this sector stems from.
• Consequently, this bloodbath in Chinese bike-sharing is likely to continue until one of the two blinks.
• Furthermore, I suspect that even if Hellobike becomes the winner in bike sharing, it is unlikely to ever make enough money to earn a good return for investors in an IPO.
• This is because years of bloodletting have set user expectations of what bike sharing costs.
• To make money, prices need to rise a lot meaning that demand could very well collapse the minute the required price rises come into force given that China is such a price sensitive market.
• The net result is that neither Ofo or Hellobike are going to fare very well meaning that they will be forced into a merger (they have the same backers) in order to achieve scale and create operating leverage.
• I see no reason to even consider this investment and would not put any money in that I could not absolutely afford to lose in its entirety.