Bottom line: Ofo and rival Mobike will use their hundreds of millions of dollars in new funds to buy better and more expensive bikes to flood city streets, even though neither has a sustainable business model that can justify such long-term expense.

The race for supremacy in China's fast-moving shared bicycle realm is kicking into high gear, with word that second-place Ofo is raising $150 million with an eye on achieving a $1 billion valuation. That would come just a month after sector leader Mobike raised a larger $215 million, in a deal that also valued the company at about $1 billion.

Readers may note that I've called this particular contest a "dead-end race", because I really do think there's no winner here. That's because I honestly believe this business is based on a model that won't work, especially in China. The reality here is that a lack of public spirit means that many people simply use bikes and then carelessly discard them without much thought about whether they might be damaging those bikes or putting them in places that effectively take them out of circulation.

I wrote about this topic last year when the shared bike fad first burst onto the scene, and expounded a similar view. (previous post) But that hasn't stopped investors from giving this pair of companies -- both just around 2 years old -- hundreds of millions of dollars in cash on a bet that they can change the habits of ordinary Chinese.

First let's look at the latest headlines, which don't have any additional detail about the latest fund raising besides the $150 million target. (English article) The articles note that this newest funding comes just 5 months after Ofo raised a slightly smaller $130 million last October, from investors including smartphone maker Xiaomi and private car services leader Didi Chuxing.

As a former Shanghai resident now living in Beijing, I can personally testify that both Ofo and Mobike have been spending their millions of dollars to one-up each other by swamping popular pedestrian areas with increasingly sophisticated bikes. That's a far cry from the early days, when Ofo in particular rolled out a business model that used extremely cheap bikes to entice its users who were mostly students on tightly controlled college campuses.

That business model actually made a bit of sense. After all, it wouldn't be too difficult to earn back the cost of bikes costing only 100 yuan ($15) apiece, even if operators like Ofo were only generating 1 or even 0.5 yuan per ride.  What's more, limiting those bikes to college campuses guaranteed a certain level of control, meaning bikes were less likely to disappear from circulation or end up in being discarded in piles by city traffic police who found them a nuisance.

Fast forward to the present, which really isn't all that distant from Ofo's past as a college campus specialist. Nowadays, each generation of new Ofo and Mobike bikes looks flashier and more sophisticated than the last, and I've read that these newer models cost hundreds and often even more than 1,000 yuan apiece.

High Costs

If we do a little math and assume a single bike can generate perhaps 5 yuan a day, that means it would have to last on the street a year and get maximum usage every day just to pay for the cost of the bike. But of course many bikes may not make it that long, and there are also the costs of maintenance and running a business to consider. Meantime, it's quite obvious that all these millions of dollars in new funding are going directly into buying newer and better bikes, without much thought as to whether they will ultimately provide a positive return on each investment.

That's not to say that this business model is completely unworkable. I do have to commend both companies for their savvy combination of mobile and location-based technologies to create this product that is extremely flexible and convenient. I've heard people who own bicycles but never use them say they actually have started biking again specifically because of the convenience of services like Mobike and Ofo.

But there's a reason that nobody in western markets has "discovered" this business model yet, nor has anyone in other developing markets, at least not to my knowledge. Other developing markets are too prone to hanky-panky games by scoundrels and consumers who lack the public spirit to make such a system work.

Such issues would be less problematic in more mature western markets. But much higher costs in those market would also make such systems more difficult to operate profitably. For those reasons, I really don't see a bright future for either Ofo or Mobike using their "bicycles for all" business model. That doesn't mean the shared bike concept won't work, though any success will probably come by scaling back their ambitions and operating a system limited to, for example, college campuses or smaller tourist towns.