Entrepreneurship and fierce competition

Around 600 large cities in the world have established a public bike system that allows individuals to rent a bike for short periods of time. Toronto has Bixi-Bikes (www.bikesharetoronto.com), Montréal has Bixi-Montréal (http://montreal.bixi.com/en), and even Paris offers bikes for rental (www.parisvelosympa.com), as does London.

All systems are similar in concept. Bikes are available at determined locations that users must find. Individuals need to register, pay a caution and then present a credit card. The user is then able to take the bike at rates that are generally around $3 for a one-way rental, $5 to $7 for one day ($20 in Paris!) and $90 for a whole year. The bicycle must then be returned to a rack, which might be at a fair distance from the location the customer targets.

bixi-bikes-torontoBixi bikes in Toronto. Source: Toronto Life, Image: Gary J. Wood.

These systems are generally provided by private companies with a guarantee from cities that they will not operate at a loss. Many of these services are only marginally profitable. In fact, Bixi Toronto went bankrupt in early 2014 and needed to be restructured.

Large cities in China had a similar system: fixed rental stations, guaranteed by the city, where customers needed to pay by credit card. Not anymore. Private enterprise has taken over this business by creating a new way of servicing this market.

In the middle of 2016, a new approach to bike rental was rolled out. Beijing based, privately held Mobike introduced a bike that simply was “on the street”, available for rental. Goodbye fixed stations! Customers would simply take the bike where it was located and drop it at the end of their journey, where ever that was. Forget having to locate a station to rent the bike, and one where to drop the bike at the end of the ride. This innovative approach simplifies the process for the customer, leading to a much higher level of usage. For registered customers, a smartphone app allows them to simply sign into the system and unlock the bike all within 15 seconds.

mobike-on-the-street             Mobike on the street. Source: Unknown.

mobike-gps         Mobike GPS and control system. Source: http://lanseybrothers.blogspot.hk.

Mobike’s innovation involves an interactive control unit that communicates with the central monitoring station via a wireless system. The customer simply scans the QR code with a smartphone. The lock is then released. Once the journey is completed, the user re-scans the QR code and the bike is then re-locked. With a GPS system included in the control unit, Mobike knows at all times where the bikes are placed. This allows the company during the night to reposition bikes that are located in low utilization positions or in places where it has too many bikes compared to the historical utilization rate. This smart system can be adjusted based on consumer behaviour.

Other design features, like no-flat tires and sturdy welded tubular construction were incorporated in order to minimize downtime and costly repairs. In a redesign of the bike, a front basket was added to increase customer appeal.

mobike-locking-mechanismMobike locking mechanism. Source: YouTube.

The main competitor to Mobike is a venture called “Ofo”, also based in Beijing. Its business model is similar to Mobike’s, but Ofo has designed a low-technology, low-cost bike (250¥ (yuan), roughly C$50), compared to Mobike’s more technically advanced bike which costs 3,000¥ (C$600). This has allowed Ofo to charge a lower registration deposit of 99¥ (C$20), compared to 299¥ (C$60) by Mobike. Both companies charge 1¥/30-minute (C$0.20) for use, but only Mobike has a fully functional GPS location system.

A total of 17 competitors have now emerged within China. These companies have a regional or city based strategy, compared to Mobike and Ofo that target serving the whole of China. These two firms also aim to expand internationally. Ofo announced in late 2016 that it was targeting the USA and the UK for its first international foray, with the goal of shipping 20,000 bikes in early 2017. Mobike is targeting Singapore as it begins moving beyond China.

mobike-ofo-et-alMobike (the new design will lower manufacturing costs), Ofo (yellow) and a local competitor (blue). Source: Author.

The market penetration strategy is very similar to what has been used by technology companies: grow fast by growing the market, gain market share and don’t worry about profitability as it will come later (at least they hope so!). The speed of the market roll-out is amazing. In 2017, Mobike targets to manufacture 10 million bikes (way too optimistic in my opinion) in partnership with Foxconn (largest manufacturer in China (roughly 1.1 million employees), which assemble Apple computers). This is quite a jump from the 400,000 bikes Mobike manufactured in 2016.

Financial support is coming from large technology firms, as these organizations believe that this market will grow to be worth US$5.8 billion by 2020. These two firms raised around $500 million in the last 6 months. Mobike backers are Tencent, Ctrip.com (both multi-billion dollar Chinese organizations) in addition to US venture capital (VC) firms. Ofo has the financial support of Didi (the company that defeated Uber in China) and US VC’s. Valuation of each company is estimated to be above US$500 million.

These new ventures aim to reinvent the personal bike ownership concept, and reposition it as a shared asset that can be used to simplify the life of city dwellers. Their success hinges on two operational issues. The first is the level of damage, vandalism or theft and the second is the wide availability of these bikes at easy to access locations, most probably on sidewalks.

The challenge regarding damage, vandalism or theft should not be a serious concern in China. The existing social system has created a low-crime environment, which should address this issue. Will this however, be the case in the West with a less regimented society?

tight-on-the-sidewalkIt can get tight on the sidewalk. Source: Author.

The second challenge regarding the availability of bikes is not an issue in China as sidewalks are already quite busy, more bikes should not cause further aggravations. Pedestrians are already used to dodging all sorts of things: store racks, garbage bins, running bikes and motorcycles, and a large number of bikes parked in designated and non-designated areas. But how will all these bikes be integrated in the well-structured environment in the West, where “there is a place for everything and everything is in its place”. Dropping these bikes everywhere, particularly if there is snow to be cleared, would not go well with city planners.

To compound the situation, the labour required to re-position bikes, change the battery in the control unit or repair damaged bikes will be more expensive than in China. This will result in higher operating costs. To address this challenge, Ofo has plans to charge $1/hour, still a substantial reduction compared to the current rental cost in western cities. Another key issue could be civil liabilities as the West is much more litigious than China where it is almost non-existent.

The high density of population in Asia and the co-existence of bikes and car have facilitated the rental of bicycle. But in the West, which has a much lower population density and where a strong “car culture” exists, are city planners ready to leap into the “bike culture”? We should know within a couple years as Mobike and Ofo rush to internationalize.

dodging-taxis-et-alDodging taxis, buses and cars in London. Source: Martin Godwin for The Guardian.

This example clearly demonstrates that China has the capabilities of creating, developing and nurturing innovative businesses. Chinese by nature are risk takers and will work hard at succeeding when they embark on a venture. The Japanese success of the 80’s was based on their organizational capabilities. The Chinese success will be based on innovation and entrepreneurship, once their cost competitive advantage is diminished. The West better be careful if it does not want to lose further ground in the race to maintain its economic leadership. History indicates that China was at the top of the world for centuries. That is the position they are targeting. Watch out! The Chinese are coming!

gdp-realignmentThe upcoming economic realignment. Source: The Economist (2010).

Pierre

Round 1: China 1 – USA 0

In a previous blog, I discussed the China-USA dynamic in the Trump era. After the first month of the Trump administration, it is most interesting to see what is happening on the world stage in regards to the dynamic between these two hegemons.

walmart-in-china        Source: China Daily

In its rapport with the USA, China has built on its cultural strength based on its long history, and has come on top of this game. Over 2,500 years ago, a Chinese sage put in writing the fine art of power. Sun Tzu wrote The Art of War, which is required reading at military academies around the world.

The Chinese have put in practice this long rehearsed skill. No wonder the Trump administration was bamboozled.

A recent article in BBC News details the strategy and accomplishments of China over the last few months. The totally amateurish Trump administration could not stem the “charm” and “power” of China.

Welcome to the new world order where cunningness trumps strength and brashness.

Pierre

BBC News Link: http://www.bbc.com/news/world-asia-china-39061702

Air pollution – How bad is it?

Western media often show pictures or discuss the air pollution challenges facing China. Almost everyone has seen pictures of people with face masks walking in a grey haze. Are these rare occurrences? Is it as bad as it seems? Let us have a look at what is happening.

tiananmen-square-in-beijingTiananmen Square in Beijing. Source: Source: Reuters

The key issue for air pollution in China mainly focuses on small particles in suspension in the air. Unlike the West, which faced the acid rain challenge in the 1970’s, China faces a different problem, though it can be difficult to appreciate the extent of the challenges as pollution is not openly discussed in the Chinese media.

Let us understand what the PM2.5 standard is. PM2.5 stands for Particulate Matter of 2.5 micrometers (0.0025mm) or less. The World Health Organization (WHO) has established a guideline and a guide for PM2.5. The guideline stipulates that PM2.5 should not exceed     10 μg/m3 (micrograms per cubic meter) annual mean (i.e. similar to average), or 25 μg/m3 24-hour mean for it to be acceptable. The WHO guide on PM2.5 is as follows.

who-air-quality-guide-for-pm2-5World Health Organization Air Quality Guide on PM2.5. Source: WHO

It is to be noticed that China has set the PM2.5 at a higher acceptable level than the WHO standard. The acceptable annual mean was increased from 10 μg/m3 to 35, and the 24-hour mean from 25 μg/m3 to 75. In effect, China has tripled the level set by the WHO, which makes it less demanding.

Let us now look at the actual PM2.5 pollution over the years. The data was obtained from the US Embassy in Beijing, which has a monitoring station on its roof. An analysis of the data has provided the following table.

beijing-air-quality-2008-2015 Source: US Embassy in Beijing (www.stateair.net/web/post/1/1.html).

For example, based on the above graph, roughly 180 days a year (i.e. 49% of 365 days) in Beijing would have a PM2.5 that would be Unhealthy (i.e. between 151 and 200).

If we use the mid-point value in each category of the WHO Air Quality Guide, we arrive at an annual average of 163 μg/m3, which is 4.7 higher than the Chinese acceptable standard and 16.3 times higher than the WHO acceptable standard.

The PM2.5 pollution is not distributed equally across China and affects particularly the eastern regions which are large consumers of coal, with an even greater pollution level in the provinces adjoining Beijing.

provincial-distribution-of-pm2-5-pollutionProvincial distribution of PM2.5 pollution, 2008-2010. Source: NASA

We can therefore conclude that the air pollution issue is of serious concern in China. But how do the Chinese people feel about this issue?

In a survey in spring 2015, the Pew Global Survey found that nationwide 76% of Chinese view air pollution as a moderate (41%) or very important (35%) problem. If this survey would have been done in the provinces that are most affected by air pollution, the percentage would have been understandably higher.

coal-consumption-of-coalNational wide, the consumption of coal generate by far the largest percentage of the PM2.5 pollution. Source: AFP

In China, air pollution contributes to an estimated 1.2 million premature deaths annually through an increase occurrence of lung cancer, cardiovascular disease and respiratory disease.

The state has realized that this issue has impacted a large segment of the Chinese population. It has started to take action, but for some, it is too little. To a limited extent, people have taken to the street to protest. The state has reacted forcefully to any public display of disapproval as seen in the city of Chengdu in Dec. 2016, where protesters were arrested and a planned protest was prevented.

sit-in-protest-in-chengdu        The sit-in protest over problems of smog in Chengdu lasted for 10 minutes before the demonstrators were taken away by police. Source: Twitter@paleylin

In an upcoming post, we will look at the actions taken by the government and what could be done to address the fundamental sources of the PM2.5 problem.

Pierre

Note: An excellent article (Jan. 18, 2016) from the Council on Foreign Relations presents the environmental challenges that China is facing (China’s Environmental Crisis). It can be found at: http://www.cfr.org/china/chinas-environmental-crisis/p12608