What will happen with e-scooters in the US? Look to bike-shares in China

No shortage of supply.
No shortage of supply.
Image: Reuters
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In cities across the United States, startups have flooded curbs and street corners with electric scooters that pedestrians can rent out and ride around, typically for just a few dollars per ride. Led by three California companies—Bird, Spin, and Lime—the emerging sector offers internet-connected scooters managed through smartphone apps and GPS trackers.

The phenomenon has consumers zipping all over town, but analysts are scratching their heads, wondering whether the business model is sustainable. Quartz’s Alison Griswold, making back-of-the-envelope calculations, writes that the startups should be able to pay off the cost of a single scooter after about 20 days of use and earn nice profits thereafter. At the Information, Sam Lessin argues that low consumer loyalty and regulatory pushback—some cities are getting tired of all the scooters—will make it tough for the firms to stay afloat (paywall).

The questions surrounding the new services bring to mind similar ones applied to another sector offering two-wheeled transport via smartphone apps—in China. In recent years, bike-sharing companies in China—led by Ofo, Mobike, and Bluegogo—enjoyed explosive growth, with users loving the convenience but analysts wondering about the business logic.

The fate of those companies in China has become increasingly clear of late, and it offers clues about what will happen to the scooter startups in the US.

A flurry of recent reports suggests that Ofo, one of China’s largest bike-sharing companies, is on the verge of getting purchased by Ant Financial and Didi Chuxing (Alibaba’s finance subsidiary and China’s answer to Uber, respectively). Estimates of the purchase price have ranged from $1.4 billion (link in Chinese) to $2 billion.

If Ofo gets acquired at a price in that range, it will mark a significant drop in the company’s valuation, which reached about $3 billion (paywall) last December. Reuters, citing a source familiar with the deal, reported that the acquisition might be dropped altogether if due-diligence procedures reveal that Ofo’s finances are worse than expected.

An Ofo spokesperson denied the recent reports of an imminent deal. Representatives for Ant Financial and Didi declined to comment.

Signs of struggle at Ofo first emerged in March, when it closed an $866 million round led by Alibaba Group that came partially in the form of debt. According to reports, the startup was originally slated to receive an investment from Didi, which had funded it earlier, but the relationship soured. In January, Didi ended up acquiring Bluegogo, then the No. 3 player, and launched a bike-sharing service of its own around the same time.

In June, Hellobike, an Ofo rival popular in China’s second- and third-tier cities, scored a $321 million investment from Alibaba, putting further pressure on Ofo. Last month, Ofo drastically pulled back its international operations—a sign that a greater fallout was imminent.

Ofo isn’t the only bike-share startup to suffer from a declining valuation. Mobike, its chief rival, got purchased by China’s Yelp-esque Meituan in April at the reported price of $2.7 billion—below its $3 billion valuation. At the time of the deal, a former Mobike employee told Quartz that the company was generating enough revenue to break even, but not enough to become profitable.

What happened to the other players? At one point there were dozens of them in China, but most disappeared almost as quickly as they emerged.

There are some key differences between China’s bike-sharing companies and the e-scooter firms in the US. Perhaps most significantly, there are fewer of the latter—only about five major ones.

Still, the Chinese precedent suggests that scooter companies might ultimately get acquired by existing tech giants. Indeed this has already been happening. In April, one of them, Jump Bikes, was purchased by Uber. Three months later its larger rival Motivate was bought by Lyft.

Given the sector’s low barriers to entry and imminent pressure from US tariffs aimed at China—where most of the scooters are manufactured—it seems likely that deep-pocketed buyers will have lots of economic leverage over their targets.