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China's bicycle renaissance is no boon to biggest manufacturers

Friday, May 26, 2017 - 12:04

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In China, a bicycle-sharing phenomenon is changing the way urban dwellers get around - and forcing listed manufacturers to scramble to get a slice of the profits.

[SHANGHAI] In China, a bicycle-sharing phenomenon is changing the way urban dwellers get around - and forcing listed manufacturers to scramble to get a slice of the profits.

Across major cities such as Beijing and Shanghai, sidewalks are filling up with parked bikes that anyone with an app can unlock with a swipe of their phone. The cost is a few US cents a hour, and users can dump the vehicle wherever they want, unlike rental schemes in Western cities where bicycles typically have to be returned to docking stations.

As competition grows more aggressive - with at least seven companies offering such services in Beijing alone - the biggest bicycle-makers are trying to get a slice of the boom. Their stocks have been in retreat as the emergence of bike sharing risks eroding sales already hit by China's economic slowdown and competition from smaller manufacturers.

Taiwan's Giant Manufacturing Co, the world's largest cycle maker by market value, will deliver 600,000 bikes by the end of the year to Ofo Inc, a rental firm whose yellow two-wheelers command over half of the market in China. Shanghai Phoenix Enterprise Group Co, which has been making bikes in China since the 1950s, said this month that it will also supply Beijing-based Ofo with at least 5 million bicycles.

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Bike manufacturers are "are now at a crossroads," said Rui Shi, a Beijing-based analyst at Internet consulting firm iResearch Consulting Group. "It's inevitable that big bicycle manufacturers will seek cooperation with rental companies because the rise of ride-sharing will undermine their retail sales of low-end models."

So far, the rental companies have relied on smaller manufacturers to supply basic models at a low cost. Tianjin Flying Pigeon Cycle Development Co and Tianjin Fuji-ta Bicycle Co, both privately held, are among Ofo's suppliers. Ofo's chief rival Mobike built its signature orange-coloured bikes, which use a GPS locking system, with the help of Foxconn Technology Group and Tianjin Aima Sport Goods Co, according to the Beijing Morning Post.

"Some listed bike manufacturers have been latecomers in joining the bike-sharing business," said Wang Chenxi, an analyst with Analysys International, an Internet research firm in Beijing. "They are more cautious than small, private makers and take a much longer time to make decisions." While China's bike-sharing startups are raking in venture capital, it's not translating into stock gains for the larger manufacturers.

Giant's shares have fallen more than 30 per cent over the past two years as the company reshuffled management amid falling profits. While stocks in Taiwan are surging, Giant slumped to a four-year low last month after it blamed a more than 20 per cent drop in China revenue for its first annual sales decline in seven years. Asia's largest economy accounts for about a third of Giant's total revenue, according to Chun-Hao Chang, an analyst focused on leisure stocks and consumer companies at President Capital Management in Taipei.

Phoenix jumped late last year on speculation it was cooperating with major bike-sharing firms. The shares then tumbled after the company denied this and are now down 47 per cent from a December peak. Phoenix is yet to provide contract or pricing details on this month's bike supply agreement with Ofo.

Zhonglu Co, maker of China's popular Forever bike brand, has had similar struggles. The Shanghai-based cycle manufacturer invested 6.5 million yuan (S$1.3 million) in a smaller bike-sharing company called U-bicycle in January, even after expressing skepticism about the profitability of the industry and warning that the deal could result in a loss. Its shares have fallen 37 per cent in 2017.

Big bike manufacturers may have to reorient their production toward the low-end models demanded by bike-sharing firms, which offer thinner margins, said Wu Kan of Shanshan Finance in Shanghai. He manages about 500 million yuan of equity investments, mostly in the A-share market, but doesn't hold the stocks of any bike manufacturers.

"In the near term, manufacturers may do well relying on orders for rentals, but the good days won't last long," he said. "After the initial boom, the bike-sharing industry will hit a bottleneck." Phoenix declined to comment when contacted about the impact of bike sharing, while calls to Zhonglu's headquarters in Shanghai weren't answered.

Given the models favored by rental companies are cheap, they aren't expected to contribute much to Giant's revenue or profit in the near term, said company spokesman Ken Li. "But as it attracts more consumers to cycling, bike sharing is expected to boost sales of high-end vehicles in the long run."

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