The inevitable fall of the sharing economy: who to blame?

Coleman Kam

Introduction: What exactly is sharing economy?

It was only a few years ago when the idea of a sharing economy became a global frenzy. The sharing economy can be viewed as a collaborative consumption,[1] in which a wide variety of products ranging from bicycles and cars to homes and luxury items are shared. It thrives on monetizing underutilised assets by facilitating sharing between people.

However, falling as quickly and as spectacularly as its rise, the sharing economy reached an early peak but proceeded to face many retreats and even bankruptcies. For example, the high-profile Initial Public Offering (IPO) of Softbank-owned WeWork, a co-working company once valued at $47 Billion in 2019, soon became a fiasco with a huge layoff after the failed plan.[2] The million-dollar question that’s in the spotlight is then who, or what should be blamed for the dramatic collapse of this once sought-after industry?

Bubbling valuation: Every party must come to an end

Firstly, the reason propelling the industry to its height is the same reason why the unattainable high hopes propped by the market drove the eventual drop. Lyft, a ride sharing company similar to Uber, lost $2.6 billion in 2019 alone.[3] Yet, it fetched a valuation of $20.6 Billion at IPO in March 2019, only to lose more than half of its market value to date.

Graph 1: The falling share price of Lyft since IPO[4]

This was attributable to the over-optimistic sentiment investors had about the growth of these companies, overlooking the potential problems of profitability in their business models.

For instance, WeWork typically enters into office leases of more than 10 years but offers tenants monthly leases. This made WeWork highly susceptible to economic downturns as it had to cover the high fixed cost with fluctuating revenue.

Ridesharing companies essentially offer undifferentiated services with little cost of switching between service providers. This led to a low entry barrier and significantly limited the possibility of a networking effect as a result of expansion, hindering the improvement of profitability. Also, for bicycle sharing businesses, which was once hailed as the “Four Great New Inventions in Modern China” by Chinese state media, [5] there were endless reports of vandalism and dumping, with almost 10% of new bicycles being damaged within the first month of usage. [6]

Graphic 2: damaged Ofo bikes in China[7]

However, the inherent problems in these sharing economy companies’ business models were pretty much ignored, with investors giving irrational valuations, prioritizing revenue growth over all other features. As the old saying goes, whatever goes up must come down, the bubble eventually burst, just a bit sooner than everyone expected.

Effect of pandemic: benefitted from or drown by lockdown?

Secondly, the coronavirus pandemic in 2020 further hampered the business and cash flow of companies in the sharing economy. It is trite how Covid-19 has shaped our new life, notably forcing people to take less commute, more work from home, and little, if any, international travel.

This seriously hurt many companies in the industry, such as Airbnb, which acts as a broker in offering lodging in private homes. The absence of tourists across the world caused the demand for lodging to plunge dramatically to almost zero, leading to a reduction in bookings and brokerage fees for Airbnb. Its revenue decreased by 67% and made a loss of $400 million in the second quarter of 2020, after witnessing more than $1 billion cancellations due to Covid-19. [8]

The inevitable increase in work from home due to health concerns across densely populated cities also saw reduced demand for office space, especially co-working space which is highly flexible for tenants. This led to lower rents, occupancy, and higher rent arrears. UK co-working office operator IWG, which also owned Regus, made a loss of around £200m in the first half of 2020, compared to a profit in the same period in 2019. It identified a total charge of £155.8m due to COVID-19. [9]

Furthermore, the growth of the peer to peer (P2P) lending business is at risk due to the economic downturn triggered by the pandemic. P2P lending allows direct lending between individuals through online platforms,[10] providing investors with higher yield and borrowers with the alternative to banks and potentially looser credit checks. The reduced income and loss of jobs caused by the pandemic has impacts on both borrowers and lenders. It makes default from borrowers more likely and it also reduces investors’ confidence, which prompts many investors to withdraw their cash from the platforms. For example, UK’s largest P2P platform RateSetter has still not yet processed withdrawal requests since March to October.[11] Many P2P platforms also halted plans to grow in preparation for loan defaults. For example, RateSetter halves its interest rates after Covid-19.[12] The other P2P platform which focuses on lending to small business, Funding Circle, is not accepting new funds from for all investors.[13]

This showed that, probably unsurprisingly, the sharing economy is not immune from the epidemic and the economic downturn, which exacerbated the challenges already faced by the industry.

Legal challenges: never-ending hostility from law?

Thirdly, legal restrictions are also one of the major causes of the downturn of the sharing economy.

Regulatory restrictions, legal battles, and lawfulness all post challenges for the practicability of the sharing economy. For example, in Hong Kong, where the Asian headquarter of Uber is based, it is still illegal for drivers to carry passengers without a hire-car permit, effectively rendering the operation of Uber as illegal. [14] Also, tough regulations are enforced in Barcelona, requiring registration and inspection for ‘tourist households’ providing short term residential services to tourists for income. [15]

A case in point would be P2P lending in China. The industry attracted many investors but regulators started clamping down the industry after it had a loan balance of almost $218 Billion. Regulations started to tighten after reports of Ponzi schemes that caused a $9 Billion loss. The tough regulations not only successfully compelled the closure of targeted P2P lenders but also unexpectedly resulted in losses of $115 billion for investors with many other good P2P lenders forced to close.[16]

Graphic 3: victims of mass closures of P2P lending platforms protesting in China[17]

Therefore, it is evident that legal and regulatory restrictions further added operational difficulties for companies engaged in the sharing economy.

Major culprit: poor business decisions made by Companies

In my view, notwithstanding the severity of the above factors in the demise of the sharing economy, bad decisions making by companies are the primary cause for its downfall.

For instance, the ill-timed breakneck and reckless expansion strategy adopted by Ofo, a bicycle sharing company, resulted in its inevitable bankruptcy. It was valued at $2 billion at its peak but is now unable to repay 12 million users’ deposits. [18] After gaining major market share in China, it ambitiously expanded its international operations in 2017, including to Singapore, the UK, the USA, and Europe. [19] Yet, the operation only lasted less than 2 years and was dissolved in early 2019. [20] It faced significant cash flow problems due to over-expansion both domestically and overseas. While the bicycle sharing market in China faced intense competition with an increasing number of competitors, requiring Ofo to spend more on buying bikes to fend off competitors, the management still decided to burn all the cash with the failed overseas expansion which yielded no return but only debt. It was too late when Ofo decided to retreat and attempted to maintain its operation in China in early 2019 with no cash in hand.

As evident from the above unfortunate history of Ofo – the flawed judgement by the management in over-expanding, especially in venturing into new markets with little knowledge, crippled the whole company. With the benefit of hindsight, their overestimation of financial liquidity and cashflow was arguably a failed business strategy which out-shadows the other factors mentioned in the article. Others can hardly be blamed for Ofo’s own demise.

Conclusion: Is there still a future for sharing economy?

Despite all the above challenges, it is not to say everything is over for the sharing economy. There are several recent progressions that are beneficial to the sharing economy. For example, Uber recently won a case in London to continue operating.[21] It also won a case in California that could continue to regard its drivers as independent contractors, thus not paying the minimum wage.[22] Positive signs are also observed in the crowdfunding sector, which allows a group of citizens to fund a project.

The adverse impacts from Covid-19 are heading for a U-turn with the positive news of Pfizer-BioNTech and Moderna’s vaccines achieving 95% effectiveness and looking set to receive emergency approval in the coming weeks.[23] For instance, Airbnb observed a rebound in booking in the US by people searching for vacation rentals near their house.[24]

There are always two sides to a coin, and on a positive note, these difficulties could provide valuable lessons for operations of the sharing economy and consolidate the leadership of surviving companies in the industry. For now, we can only wait and see how the industry could emerge stronger after a tough year.

[1] PWC Consumer Intelligence Series: the Sharing Economy p. 14 [2] Business Insider, The WeWork fiasco of 2019 [3] Lyft financial results for fiscal year 2019, published on 11 Feb, 2020 [4] The information is up to the date of the writing of the article (18/11) from Yahoo! Finance [5] SCMP: Bike-sharer Ofo has nearly 12 million users waiting for deposit refunds – more than the population of Belgium [6] Daxue Consulting, Mobike and Ofo: Reinventing the Bike-Sharing Business Model in China, 07 Jun, 2020 [7] BBC: Chinese bike share firm goes bust after losing 90% of bikes, 21 June, 2017: Photo by Reuters [8] Bloomberg, Airbnb Quarterly Revenue Drops 67%; IPO Still Planned [9] IWG plc, INTERIM RESULTS ANNOUNCEMENT – SIX MONTHS ENDED 30 JUNE 2020 The loss after tax from continuing operations was £202.1m [10] Linklaters: P2P lending in China enters into a regulated era [11] The Gurdian, Peer-to-peer lending: ‘I’m 19,050th in the queue to get my savings back’, 17th Oct, 2020 [12] The Guardian: UK's biggest peer-to-peer lender halves interest rates to prepare for defaults [13] Ibid (n 12) [14] HKSAR v. YUONG HO CHEUNG AND OTHERS [2020] HKCFA 29; FACC 1/2020 [15] Barcelonaña-barcelona?_set_bev_on_new_domain=1604706448_MmFmNzNlM2QxZWI4 [16] Chinese regulators estimate that their P2P lending crackdown resulted in $115 billion in losses for investors [17] SCMP: China’s scandal-plagued P2P sector faces ‘continued pressure’ in 2020 amid tightening regulation Photo: Reuters [18] Daxue Consulting, Mobike and Ofo: Reinventing the Bike-Sharing Business Model in China, 07 Jun, 2020 [19] SCMP: The story of Ofo is one of the wildest rides in China’s tech history [20] ChinaDaily: Ofo dissolves overseas unit [21] Business Insider: Uber secured its London future in a landmark court case — but the mayor warned he would scrutinize the taxi service and take 'swift action' if needed [22] BBC: Uber and Lyft win battle over driver status in California [23] Pfizer-BioNTech trial data show vaccine to be even more effective [24] Wall Street Jornal: How Airbnb Pulled Back From the Brink

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