Ofo's big wobble shows the Chinese bike-sharing bubble has burst

Getty Images

A "graveyard" of dockless bikes awaiting repair in China.

• Ofo is cutting its presence in lots of markets after raising billions of dollars and expanding rapidly.
• It signals a big change in strategy by refocusing on big cities, and possible cashflow problems.
• Sources said bike-sharing economics are unprofitable and that, in the US, scooter startups like Lime and Bird are growing faster than dockless bike companies.
• It's another sign the Chinese bike-sharing bubble has burst.

Another Chinese bike-sharing startup is looking pretty wobbly right now.

Ofo quietly canned its service in the UK cities of Sheffield, Norwich and Worcester, and made an undisclosed number of staff redundant earlier this month. It also shuttered most of its US operation, refocusing on larger cities and is cutting the bulk of its workforce, according to the Wall Street Journal.

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The company has raised $2.2 billion to date to pioneer "dockless" cycling in cities, where riders can use an app to find a nearby bike, hire it for a small fee, then leave it anywhere after they've finished using it. It is backed by Chinese giants Alibaba and Didi Chuxing.

Ofo isn't just cutting back its presence in Western markets. It has wound down operations in India, cut back in Australia, and scaled back in its home country China - all this year.

The changes signal a complete rethink in strategy for a startup which tried to grow as quickly as possible by dumping huge numbers of dockless bikes into new cities. And it's another sign that the bike-sharing market, pioneered mostly by well-funded Asian startups, is going through a painful crunch.

With billions in backing and huge expansion, what's going wrong at Ofo?

Ofo pulling out of cities suggest a cashflow problem

Sources connected to Didi Chuxing speculated that bike-sharing unit economics simply weren't very profitable. "It would make sense for them to go for efficiency," one person told Business Insider.

Kevin Frayer/Getty Images

Chinese commuters ride bike share through Tiananmen Square.

Another source formerly worked at Bluegogo, another Didi-backed startup that subsequently shut down. That person said in the US, homegrown electric scooter startups were outgrowing foreign bike-sharing startups.

US firms like Bird and Lime are seeing explosive growth by hiring out electric scooters by the minute, and it's possible this is squeezing companies that focus on old-fashioned bicycle hire.

IDC analyst Xu Yue, who keeps a close eye on bike-sharing startups, said Ofo may be struggling to understand the Western market as a Chinese startup. "They may have a problem facing the different cultures of different governments, and the different policies overseas," said Yue.

Yue added that Ofo's main competitor, Mobike, had more capital for expansion and bicycle maintenance after it was acquired by on-demand giant Meituan this year for $2.7 billion. Ofo, on the other hand, has reportedly rejected a buyout offer from its investor Didi and decided to remain independent. That, Yue said, may be causing cashflow problems.

Reuters

Dai Wei, chief executive of Ofo, reportedly rejected a buyout offer from Didi Chuxing.

Another problem, added Yue, is that Ofo is struggling to maintain its bikes. This is backed up by media reporting around broken bikes being dumped around cities.

"If someone wants to ride a bike, and it's hard to find a usable one, people won't open the bike-sharing app again," said Yue. "Ofo is behind competitors like Mobike, because of the visibility of usable bicycles."

The Chinese bike-sharing bubble has burst

Ofo isn't the only one in trouble. There's Bluegogo's closure. And Singapore-headquartered oBike closed its operations in its home country despite raising tens of millions of dollars in funding.

The closures suggest a bubble, with too many players funded by too much capital expanding too quickly.

But IDC's Yue doesn't think it's impossible to make money through dockless bikes, provided startups can make the offline process of repairing and collecting bikes more efficient. That involves hiring staff or contractors to go around cities collecting bikes, then either repairing them or moving them to a better location.

"That's a very serious challenge for bike-sharing companies," he said. But, he added, "I don't think it's doomed to fail because of profitability."

If you know more about Ofo's withdrawal from cities, contact the author anonymously sghosh@businessinsider.com.