My attention was drawn to an interesting piece of bike industry news from China today.
Chinese bike manufacturers are reporting significant drops in turnover as a result of bike share companies shrinking. Like, really significant – ofo supplier, the Shanghai Phoenix Enterprise (Group) Co Ltd, experienced a 55% drop in turnover and net income in the first six months of this year.
So, for once, this is only tangentially a transport post. One of the things I like to do in transport is track who is investing in what because it underlines trends (follow the money if you want to know what people really believe). I subscribe to a few feeds and keep my eyes open to interesting financial information. I enjoy reading crazy cryptocurrency news and fairy tales about unicorns from the enchanted forest (as told by Matt Levine at Bloomberg). For the uninitiated, a unicorn is a privately owned start up valued at over $1 billion.
The hushed whispers about unicorns imply that they will, forever, be allowed to develop their magical powers in the enchanted glade (commonly Silicon Valley although locations may vary), fed and watered by private equity until they ‘go public’, showering many fragrant returns on their investors.
when do unicorn droppings start to smell of horse ordure?
There’s always a fair pinch of salt (especially from Matt Levine) about some of these denizens of the magic glade (if you’ve not read about Juicero, you’ve not yet had chance to luxuriate in utter incomprehension at the bounds of human folly). And often intimations that there may be some rather overvalued creatures prancing around as well as the frankly fraudulent.
After all, it’s not as though we’ve not seen it all before. The dot com bubble inflated beyond sanity then burst in 2000, and we are still feeling the impact of the 2008 credit expansion and crunch. But despite this, there is a lot of private equity around and investing this cash in potential billion dollar companies is far more attractive than the tiny interest rates generally on offer (another of the after-effects of the 2008 crash). Supporters of unicorns (and those aspiring to unicorn status) remind us that the various crunches all happened on the stock market – and these new and valuable companies are all private, implying a degree of immunity.
The thing is, when crashes happen, everything gets dragged in. Almost twenty years ago the dot com bubble burst and the stock market as a whole fell. Ten years ago, mortgage-backed securities failed and the entire banking system teetered on the brink of collapse (with parts crumbling over into it). The world’s financial system continually hovers somewhere between glib optimism and utter ruin and with it our homes, jobs and lives.
So, how do we know when the optimism runs out and the ruin sets in? People rarely see the signs.
I’m not a financier but this time I’m going to call it. One of the most magical unicorns in the grove nibbles on grass that I have a professional interest in. The untouchable, unstoppable and gloriously prancing Uber, which has absorbed billions of dollars of private equity (and thinks nothing of evaporating that cash in its quest for market share). It is resolutely unprofitable and infinitely deferring the point at which it goes public.
For what it’s worth, I have come to the reluctant conclusion that Uber (or something Uber-shaped and Uber-sized) is here to stay. Consumers are addicted to this form of transport. Uber (or some version of it) will persist - much like the Amazon of 20+ years ago. Amazon, which has been adopted by consumers as a new way of shopping, which has had a visible impact on the high street, but which has barely turned a profit and never paid a dividend in the intervening period.
But this blog is not really about Uber or Amazon. It’s about the canaries in the coalmine and crying of unicorn tears (to mix metaphors).
There are a few smaller unicorns (think My Little Pony versions) in the enchanted herd – and these include the brightly coloured emergent bike share companies ofo and Mobike. Whilst Uber has mainlined cash from its investors for nine years, these newer and smaller companies have experienced a sudden, rapid, demand from their investors to start focusing on profitability after a mere three or four.
The big banks and holding companies are no longer prepared to spend millions on acquiring market share or defer their returns indefinitely. And the bike share companies are in flight in response.
We’ve seen them retrench in the UK (about which I have written here) and also internationally. There’s been cost cutting and stream lining and bikes piled up at recycling depots in Texas. These impacts – whilst not negligible – are contained. They’re limited, at first glance, to the companies themselves, their investors and to the places and people which have lost a bike share scheme.
However, when we see the impacts being reported in the bottom lines of their suppliers, we need to start worrying about contagion. It’s not just about a unicorn hanging its noble head and weeping, it’s about real world industries with people to pay and supply chains to support. The Chinese bike industry is already faced with additional tariffs in the ongoing face-off with Trump’s latest protectionist policies. It’s an industry with $12.8 billion in revenue. And whilst it’s not big, it’s still part of the Chinese economic drive that aims for 8% growth per year. Who knows where the reverberations will show up?
I don’t know the overall impact but I do know that change is a curious thing. It can have unexpected roots and obscure indicators. Who would have thought, in 2008, that the first intimations of economic crisis would be detected in regional German banks?
So if we’re looking for the first sneeze before the world catches another of its economic colds, I’m seeing it here. A bunch of unicorn investors are getting cold feet and there are consequences.
The Phoenix bike company could be the canary in the coal mine that signals the demise of the enchanted forest, the exile of the unicorns and another global economic crisis.
Disclaimers
I may be wrong.
This is not investment advice, nor is it legal advice.
I do not own any shares in these companies, nor am I a short seller.
In fact, I’m a bit rubbish like that and don’t own any shares at all.
I do not own any canaries or unicorns. I do have a nice dog.