By Prof. Oliver Rui

With the fading of the initial buzz around bike-sharing schemes, rationality has begun to return to the market. The bubble began to burst with the fourth-tier bike-sharing companies, then with the third-tier, and now, even the second-tier ones are collapsing. Today the sector has two dominant first-tier players, Mobike and Ofo. Bluegogo was one of the second-tier bike-sharers and had acquired more than four million users. Yet even scale like this does not pay off, there is still no sign of even the possibility for profitability. The main reason for failure is the fierce competition which leads to lower frequency of consumer usage. On top of that, the bikes’ damage rate has been much higher than what investors expected. The initial damage forecast was 2% to 3% but the actual figure may have hit 10%, or even higher.

Tipping Point

I think we’ve reached the tipping point for the bike-sharing business. The original idea of a sharing economy was to separate ownership and right to access, and to make idle resources fully available for sharing. In that sense, the bike-sharing scheme is a pseudo-sharing economy model. Why? Because it’s not about making use of idle resources but rather investing in new production and therefore has no network effect. It does bring lots of convenience to people’s lives though, and it’s green and eco-friendly. And the regulators like it because it’s a way for “good money to drive out bad” Every country has its own ‘last mile’ pain points. In China, loopholes in the legal supervision system left room for ‘black market taxis’. Shared bicycles are a legal replacement of these ‘black market taxis’ and in a sense they contribute to social progress.

The two dominant bike-sharing players are unlikely to fail because they’re backed by the state. The Chinese government supports ‘green’ travel because cars take up a lot of space and resources; bike-sharing is in line with being ‘green’. However, the nature of bike-sharing (users are more likely to use shared bikes in the specific geographical locations they frequent) will see the natural emergence of a regional monopoly, rather than national ones. This means there are still some opportunities in the market.

But bike-sharing schemes need to find new profit models. Currently there are two main models: one is to charge users for a fee; the other is to collect a deposit. I’ve seen calculations suggesting that for a company like Mobike, which has over 40 million users, if each user deposits RMB199, total deposits will make the company equivalent to a small bank. However, deposits and fees are not the most important factors in generating a profit. The key is finding new ways to cash in, such as advertising – some of the shared bikes put ads on their wheels now. It’s also important to capitalize on user data and drive consumer traffic. When we know where users are riding the bikes, we can track consumer behaviour and drive consumer traffic.

Loss-making Sharing Economy

One of the common features of the sharing economy is that, when it comes down to economies of scale, the only outcome is winner-takes-all. There’s no prize for second best. There are two main reasons for this: one is the law of diminishing marginal cost. It’s not hard to understand that the cost of developing an application for 1 person is almost the same as developing it for 1 million people. The other reason is the platform effect. If I were to develop an application similar to [Chinese instant messaging system] QQ, if only one person is using it, the application would be useless – who would he talk to? But if 200 million people are using it, there will be significant spill over effects. This is the difference between the sharing economy and the traditional economy: it is imperative to become the leading player in the industry and be the winner that takes all. All others are merely supporting characters in your show.

Venture capitalists have calculated that 10 out of 100 projects in which they invest may succeed; and two to three out of these ten may yield excess returns. Therefore, their investment portfolio may include a number of similar projects. As long as one of these projects is a winner, the VC will achieve the coveted ‘winner-takes-all’ outcome.

But ultimately the market determines whether or not a business model can make huge profit. The VCs may have done a lot of predictions, but the market has the final word.

Sharing Economy Still Promising

I believe the buzz around the sharing economy will continue. It’s a trend because it fills consumers’ need. It’s become clear, today, that the true force in the sharing economy is not the generation of consumers born in the 1960s or 1970s, but rather the ‘post-95s’. Their consumption philosophy is ‘open, win-win, and sharing’. They are willing to share and to try, which represents a sector of market demand.

From a social point of view, the sharing economy is what academics refer to as a "Pareto optimum." If I am the only person to use something, there is no doubt this item’s maximum efficiency is not being realized. But if I share it with the society, there is better allocation of the resource and it would benefit others much better. “Pareto efficiency” or “Pareto optimality” is an optimal state of allocation of resources in economics terms, which represents a trend.

While people in China can feel the heat of a very vibrant sharing economy, the reaction from the West seems lukewarm. This has a lot to do with access to smartphones. Currently, the number of smartphone users in China has exceeded 700 million, which creates a massive user base. Silicon Valley may have come up with great business models ‘from 0 to 1’, but only China can do it from ‘1 to 100’. Also, although China lags behind in terms of a legal supervision system, the government encourages innovation. We can therefore conclude that the sharing economy is booming in China because of a combination of the country’s massive user base and government policy.

For China to become the business leader of the world, business model innovation is critical.  The sharing economy includes sharing of resources, time, space and knowledge, etc. In today’s society, all resources are unevenly distributed – some people may have much more than others. By separating ownership and access, more people are able to benefit than ever before. Moreover, the sharing economy is a channel for democracy and personalization. Under the conventional B2C model, consumers are the disadvantaged group who must accept the terms given by business providers. However, the sharing economy is, in effect, the C2C model – a peer-to-peer exchange which represents equality and is therefore a token of modern thoughts and concepts.

A gargantuan dilemma that the sharing economy faces, however, is human nature. When you use a borrowed item, do you use it with the same amount of care shown to items you own? Another factor is the ‘free rider’ psychology – some people are willing to give while others are only there to take. True sharing cannot happen with only one party willing to give. Therefore, the most important thing is to change people’s mind-sets so they will willingly share.

At the same time, legal regulations should keep up. Moderate regulation is good; no regulation is bad – no regulation leads to abuse of the market. Also, we want to take tradition into consideration. I have seen in other countries a combination of docked bikes and dockless ones. In China all bikes are dockless, which is very convenient for users but is not without the cost of many hidden risks, such as parking chaos and traffic accidents. Work can be done to improve this from both society’s and government’s perspectives. As transportation is part of public services and should be under the government’s purview, the corporate sector is in fact doing the government a favour by providing a transportation solution. Therefore a better approach would be for the corporate world and the government to work together so that regulators and the market can both play a role in shaping a regulated growing sector of sharing economy businesses, rather than having it remain as it is now.

Oliver Rui is Professor of Finance and Accounting at China Europe International Business School (CEIBS). This article was first published in The Economist.