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Putting Alibaba’s Ofo Investment in Perspective

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Sep. 13 2017, Updated 9:07 a.m. ET

Alibaba raises $700 million for Ofo

Alibaba (BABA) was among the investors that recently helped raise more than $700 million in funding for Chinese (MCHI) bike-sharing operator Ofo. The funding round also drew the participation of investors such as CITIC Private Equity, Hony Capital, and Didi Chuxing—China’s equivalent of Uber.

In 2016, Apple invested $1.0 billion in Didi Chuxing, and it didn’t take long after that investment before Uber surrendered to competition in China and sold its assets to the rival.

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Ofo’s expansion plans

Ofo is one of China’s leading bike-sharing startups. The firm operates in 150 cities in China, and its fleet includes more than 6.5 million bikes. It plans to reach 200 cities in 20 countries by the end of the year. That expansion would see Ofo’s fleet increase to 20 million bikes.

Bike-sharing is shaping up to be a huge business in China thanks to efforts to reduce air pollution and beat traffic congestion in China’s major cities. Ofo customers pay a small fee to ride its bikes. The company uses a smartphone app to enable its customers to access a bike.

Massive revenue opportunity

According to market research firm ReportLinker, China’s bike-sharing economy could be worth more than 29 billion yuan (about $4.4 billion) by 2021, up sharply from an estimated 8.9 billion yuan (or $1.3 billion) this year. Ofo competes with Beijing Mobike Technology and Youon in China’s bike-sharing industry.

As for Alibaba, investing in the bike-sharing economy can be viewed as part of the efforts the company is making to diversify its revenue streams. Alibaba depends on e-commerce for the bulk of its revenues, yet the sector is becoming more competitive. Alibaba is facing fierce e-commerce competition from Amazon (AMZN), eBay (EBAY), and JD.com (JD).

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