- October 24, 2018 Case Studies
The Rise, Fall, and Restoration of the Kingdom of Bicycles
This is the second of several historical case studies that illustrate how important aspects of the Chinese political economy have evolved over the first 40 years of the country’s Reform and Opening policies. The first case study, on how KFC changed China and how China changed KFC, can be read here. Later this year Two Fen will publish a series of in-depth examinations of China’s economic transformation to commemorate this 40th anniversary.
Toward the end of the Qing dynasty in 1898, the most influential newspaper at the time predicted that “bicycles will prevail in the future.” It was not wrong. Invented in France, the two-wheel pedal bicycle reached China in 1868. In the decades that followed, the bicycle enjoyed steady uptake by Western expats, cosmopolitan elites, postal authorities, and armed forces, but remained an expensive curiosity for ordinary Chinese.
When the Chinese Communist Party (CCP) came to power in 1949, however, it embraced the bicycle as a symbol of proletarian progress. Chairman Mao Zedong’s government merged local bicycle producers into national champions—such as the iconic Flying Pigeon company of Tianjin, founded in 1950—that enjoyed privileged access to scarce materials. The first Five-Year Plan (1953-1957) set ambitious goals for bicycle production, which resulted in China doubling its 1949 bicycle stock to one million by 1958. The bicycle was also touted as a sort of bride-price: Together with a watch, a sewing machine, and a radio, it constituted the “three rounds and a sound” that bachelorettes of the CCP elite looked for in prospective marriage partners.
China today has over half a billion bicycles, a colossal feat of manufacturing attributable to the policies of Reform and Opening. The boom and bust cycles of the bicycle market have closely reflected the dramatic changes in the Chinese economy over the past four decades.
Bicycles dominated the streets of fast-developing Chinese cities in the 1980s and 1990s, causing a production boom as the market opened to entrepreneurs. In the mid-1990s, amid rising incomes and rapid urbanization, the Chinese government threw its weight behind the automobile industry, coinciding with declining bicycle usage and a surge in exports. But horrific traffic, coupled with the rise of environmental and health consciousness, caused urban Chinese and their governments to reconsider their choices, helping to spur today’s bike-share startups.
The humble bicycle has returned in force to China’s cities—this time not as a symbol of socialist glory but as a proxy of wealthy elites yearning for a post-material sharing society.
Bicycle Boom Time in the 1980s and early 1990s
While the phrase was first coined in the Mao era, China became widely known as the “kingdom of bicycles” in the 1980s. That’s when throngs of bicycles filled the epic boulevards of Beijing and left indelible impressions on the Westerners who came to witness China’s Reform and Opening.
Avenue of Eternal Peace (Chang’an Jie), Beijing, 1986
From journalists to mayors, foreign observers were mesmerized by the rivers of cyclists that snaked through Beijing’s concrete jungles. Pulitzer-winning China correspondent Nicholas Kristof remarked in 1988 that riding a bicycle in the city “was exhilarating, in that I was joining the proletariat, communing with the masses of cyclists pulsing through every major artery in the capital.” The Chinese capital’s bicycles even inspired New York City mayor Ed Koch to trial six-foot-wide bike lanes in Manhattan in an attempt to relieve congestion, though the experiment ended after a month for lack of use.
Bicycles exploded across China in the 1980s and early 1990s primarily because of economic growth and the unbridling of market forces. In the early days of reform, when central planners still controlled most of the economy, buying a new Flying Pigeon bike not only cost many months’ wages for an average urban worker but also required “good guanxi” (connections) to get on a multiyear waiting list. In other words, it was the Tesla of the Chinese command economy.
To make bicycles more attainable, the government ended production quotas and price controls in 1978, and approved policies to “vigorously develop” bicycle manufacturing in 1981 and 1984. Even so, bikes were still heavily rationed—a factory with a thousand workers might only receive four or five coupons for bike purchases. The rationing system was finally abolished in 1986, marking the end of explicit central planning of the bicycle market.
The state’s receding hand allowed the industry to capitalize on huge demand and abundant labor to basically establish a vertically integrated production system by the end of the 1980s, with 60-plus bicycle factories and over 1,000 component suppliers. China’s opening to the world also enabled domestic firms to benefit from “technology transfer.” Factories in Tianjin, for example, used advanced heat treatment equipment from abroad to gain a competitive edge in the assembly of chains, pedals, and flywheels. Flying Pigeon alone ramped up production to 4 million bicycles per year and employed 10,000 workers in the 1980s. More efficient manufacturing and competition from new market entrants saw China’s annual bicycle production balloon from 8.5 million in 1978 to 41 million in 1987.
Beyond market forces, China’s urban geography also favored bicycles. Public transport was meager and cars were scarce and unaffordable, so bicycles became the essential vehicle for commuters and leisure-seekers. Most urbanites also belonged to a danwei, or “work unit,” where state employers provided housing, food, and social services to employees who lived in compounds close to their workplaces. This arrangement made for relatively short commutes that favored travel by foot or bicycle. Starting in the Mao era, urban planners had deliberately built roads that accommodated “bicycle mass transit systems” with three-lane carriageways that featured dedicated bike paths—many of which survive today. Beijing alone had around 242 kilometers of such roads by 1991.
As the supply of bicycles increased significantly, rising real incomes meant that more Chinese could afford to buy one. In just seven years from 1981 to 1988, the number of bikes in China tripled from 77 million to 225 million. Beijing, an especially bike-friendly city, had 76% of its road space taken by cyclists in 1988, including busy intersections that saw 20,000 bicycles an hour. By 1995, the city had 8.31 million bicycles on its roads.
Bicycles also became a symbol of national and individual progress, similar to owning a television or a refrigerator. China’s paramount leader at the time, Deng Xiaoping, even defined prosperity as “a Flying Pigeon bicycle in every household.” One Chinese commentator claimed that, back then, “riding a Forever bicycle [a close competitor of Flying Pigeon] gave you as much face as driving a Mercedes-Benz.” The Flying Pigeon was so iconic that when President George H. W. Bush and First Lady Barbara Bush visited China in February 1989, Premier Li Peng gifted the couple two Flying Pigeon bicycles (the couple had left an impression by posing with bikes in front of Tiananmen when Bush headed the US Liaison Office in the 1970s).
“Independence starts with a Phoenix Bicycle,” undated advertisement, likely from the 1980s.
While the bicycle was embraced as a state symbol and a measure of the success of Reform and Opening in the late 1980s, pedal power would fall from grace in the mid-1990s. New economic priorities and changing social attitudes would drastically reduce domestic bicycle usage, prompting Chinese manufacturers to focus on the global market, particularly the United States.
Chinese Consumers Upgrade to Four Wheels
In March 1994, the State Council issued the “Automobile Industry Production Policy,” which kickstarted auto manufacturing in China and presaged a fundamental shift toward auto-centric urban planning, road construction, and traffic management. The Ministry of Housing and Urban-Rural Development declared soon after that bicycles were an “inferior” mode of transport and “the growth of bicycles in cities is not a [desirable] direction of urban transportation development.”
The rise of cars in China over the past three decades, tied directly to a period of intensive urbanization, has had a tremendous impact on China, affecting everything from energy security and air pollution to commodity demand and traffic congestion. The decline of the work unit system and the growing influx of internal migrants into large metropolises in the 1990s created enormous demand for new housing and new lifestyles, which led to urban sprawl. The urban area of Beijing, for instance, increased from 397 km2 in 1990 to 4,144 km2 today—larger than the state of Rhode Island.
Today, not only is China a majority urban country—with the urbanization rate growing from just 18% in 1978 to 58% in 2017—it is now the world’s largest producer and consumer of automobiles, with car ownership reaching 185 million in 2016 (see Figure 1). Urbanization and its attendant sprawl produced lengthier commutes and greater need for long-distance transport such as cars, buses, and subways. In response, the Chinese government built massive urban rail systems in 31 cities that stretch a total of 4,400 kilometers and also expanded bus routes. These investments in infrastructure made public transport the most popular means of commuting for Chinese citizens.
Figure 1. Car Ownership Skyrocketed in the 2000s (in millions)
Source: National Bureau of Statistics.
It was cars, though, that became the new status symbol of urban modernity. This consumer evolution is a familiar story across developing countries: As people make more money, they start to buy cars. Bicycles came to be seen as “for the poor” and a car became the new “bride-price” necessary to guarantee a middle-class marriage and a professional reputation. Borrowing a well-known concept from the economist Simon Kuznets, as GDP per capita grew, bicycle ownership in rural China first shot up before falling and stabilizing at a lower level as soaring incomes altered households’ consumption preferences toward more expensive goods like cars (see Figure 2).
Figure 2. Kuznets Curve of Bicycle Ownership in Rural China (1978-2012)
Sources: WIND; World Bank.
The proliferation of automobiles also came at the expense of bicycles because authorities had to get bikes off roads to accommodate millions of new motorists. Many cities began to discourage bicycle use. Guangzhou, for example, aimed to decrease bicycle usage from 33.8% of trips outside the home in 1992 to 13.3% in 2010. Dalian even declared itself a “bicycle-free city” in 2000. China’s first Road Safety Law, introduced in 1994, contained a provision that allowed local governments to reassign bicycle lanes to cars, a process that severely disrupted the existing network of bike paths. Even in cities like Beijing, where cyclists are separated from drivers by traffic islands, it is commonplace to see cars driving through or parked in bike-dedicated lanes.
Traditional pedal bikes fell further out of favor with the development of e-bikes, encouraged by the government from the early 1990s to improve traffic and energy efficiency. Aided by continual advances in motor and battery technology, e-bikes became popular with working- and lower-middle-class Chinese because they are faster than bicycles, cheaper than cars, and less regulated than motorcycles, which are restricted in roughly 180 cities. China now boasts 200 million e-bikes, 1,200 manufacturers, and around 90% of the global market share.
None of these trends boded well for the domestic bicycle market, which reached its height in the mid-1990s. The number of bicycles in China had exploded from 74 million in 1978 to 523 million in 1996, and bicycle ownership peaked at 197.2 bicycles per hundred urban households in 1993 and at 147 bicycles per hundred rural households in 1995. In Beijing, bicycle use fell from 62.7% of road transport in 1986 to only 15%in 2014, a trend found in many Chinese cities (see Figure 3).
Figure 3. Bicycle Share of Road Transport in Beijing (%)
Sources: Qiuning Wang; SCMP.
Opening Up an Export Boom in the mid-1990s and 2000s
A saturated domestic market, coupled with enormous overcapacity that pushed down prices and forced many manufacturers to close, caused significant changes in China’s bicycle industry, which had flourished for nearly 20 years. State-owned bicycle producers also suffered during the wave of corporate restructuring and privatization that swept through government-backed businesses in the late 1990s and early 2000s.
Take Flying Pigeon for example. The flagship brand of the Chinese bike industry was stripped of public subsidies as part of this overhauling of the state sector. The firm struggled against domestic entrepreneurs, foreign entrants, and evolving consumer tastes in a new business climate of cost-cutting and intensified market competition.
Superior foreign brands from Taiwan (Giant and Merida) and the United States (Trek) were allowed to enter the China market as the country prepared to join the World Trade Organization (WTO) in 2001. Their lightweight designs and higher quality began to outcompete the socialist workhorses of national champions such as Flying Pigeon, Forever, and Phoenix. (Some Flying Pigeons were said to be so bumpy that people nicknamed them “aspirin bicycles.”) Foreign competitors also offered a more diverse slate of products, such as folding bikes, mountain bikes, racing bikes, and gear bikes, which pushed domestic firms to seek foreign investment and further upgrade their factories in order to make these new models.
Flying Pigeon was not prepared for this onslaught, and its output shrank from 4 million units in the late 1980s to just 600,000 in 1997. Two years later, after the firm’s management bought the rights to the brand, Flying Pigeon was able to fire surplus employees, hire contract labor, and move its factory to cheaper land on the outskirts of Tianjin. As a result of this leaner approach, the company had something of a turnaround as output and profits increased and it diversified into new products like e-bikes.
Undoubtedly buoyed by the country’s path to the WTO, China’s bicycle industry turned into an export-oriented one during the 1990s. The change was dramatic: China’s share of global bicycle exports swelled from 18.7% in 1990 to a whopping 58.5% in 2002 (see Figure 4). By 1998, over half of the bikes produced in China were exported, a share that has increased to more than 70% today (see Figure 5). In 2016, China exported 58.2 million bicycles with a value just north of $3 billion. Even as China faces strong competition at both ends of the market—lower-end manufacturers in India and higher-end manufacturers in Europe—it still accounts for around 50% of all exports.
Figure 4. China’s Share of Global Bike Exports by SITC Value (%)
Source: The Observatory of Economic Complexity, MIT Media Lab.
Figure 5. More Than 70% of Chinese Bike Production Is Destined for Export
Sources: UN Comtrade; WIND.
Like with most goods for which China became a manufacturing powerhouse, the pace and scale of its bicycle exports had an enormous deflationary effect on world prices. After China’s share of US bike imports jumped from 23.7% in 1994 to 32% in 1995, American manufacturers accused Chinese producers of dumping. In May 1996, the US International Trade Commission agreed and imposed moderate penalties, such as a 2.95% duty on Shenzhen China Bicycle Company, then China’s largest exporter (loss-making SOEs like Forever and Phoenix faced duties of up to 61.7%). It didn’t end there—by 2017, the US levied an 11% import duty on most Chinese bicycles and the European Union imposed an even heftier 43% anti-dumping tariff.
Bikes are also caught in the ongoing US-China trade war launched by the Trump administration. The 10% tariff that the US levied on $200 billion of Chinese imports in September 2018 included roughly $1 billion of bicycles, e-bikes, and parts, many of which already attracted import duties. Given the United States buys nearly one-third of Chinese bicycle exports, the China Bicycle Association railed against the tariffs and recommended that manufacturers export through free-trade zones in neighboring countries and explore co-production in the United States, Mexico, and South America.
Even with the latest tariffs in place, it may be difficult to dethrone China as the dominant bike exporter since, as of 2017, China accounted for 93% of the 15.7 million bicycles that the United States imported. In fact, US retailers like Huffy are concerned that the tariffs would hurt sales and jobs. It has called the tariffs a “serious threat” as the US industry “has no immediate viable alternatives” to China and could be forced to raise per-unit sale prices by up to $125.
Bicycle Revival in the 2010s?
Just as Chinese exporters cemented their dominance in the global bicycle trade, however, changes were afoot in the domestic market. A moment that perhaps crystallized clashing public sentiments came in 2010, when Ma Nuo, a contestant on the popular dating show If You Are The One, infamously told a suitor of modest means that “I’d rather cry in a BMW than laugh on a bicycle.” Some viewers applauded Ma’s focus on getting ahead, but her callous insult touched a nerve with millions more, who decried her raw consumerism. Motivated by increasing desires for healthier lifestyles and a cleaner environment, many professional and white-collar Chinese urbanites had in fact begun to long for bicycles again.
Within the Chinese government, too, there was something of a rethink of the auto-centric urban development that China had pursued since the 1990s. The negative side-effects were obvious—traffic congestion, road accidents, oil dependence, air pollution. Cities began to restrict car use: Beijing implemented a stringent quota in 2010, coincidentally the same year that Ma Nuo’s slight went viral. In 2012, the central government issued “Guidelines for the Planning and Design of Urban Walking and Bicycle Transportation,” which encouraged “slow-moving transportation” and advanced national standards for bike racks and paths.
Shifting consumer sentiment and the central government’s reemphasis on bicycles seem to be reinforced by a secular slowdown in the growth of car ownership, which has declined from 24% in 2010 to under 15% in 2016 (see Figure 6). This is likely a natural correction after years of breakneck development. Both Chinese city governments and private companies seem to have noticed that there are new opportunities for bikes in this changing environment.
Figure 6. Car Ownership Growth May Be Slowing (%)
In fact, Beijing began a small bike sharing program ahead of the 2008 Olympics. Although it folded after a couple of years, numerous other Chinese cities launched their own schemes. Hangzhou, for instance, now offers a fleet of over 84,000 bicycles. These municipal bike sharing programs operated much like those in American cities, where users rented a bike with payment cards and returned bikes to docks at designated locations.
But these programs were inconvenient for point-to-point travel. So, as China rapidly adopted smartphones and an app-based economy over the 2010s, entrepreneurs saw opportunities to monetize more efficient bike sharing. That’s exactly what happened, when startups like ofo launched in Beijing in 2014 and MoBike in Shanghai in 2015. These pioneering for-profit firms relied on a model of dockless bicycles and smartphone payments that gave users much greater flexibility and access to bikes. Free-floating bikes addressed the “last-mile” problem of millions of people whose work or home was more than walking distance from subways or parking lots.
By 2016, China accounted for seven out of every ten shared bicycles worldwide and growth in customers and earnings seemed staggering. In 2017 alone, the bike-sharing industry’s revenues leapt ten-fold from 1.2 billion yuan ($181 million) to 10.3 billion yuan ($1.52 billion). In the same year, users grew from 28 million to 209 million. China’s official news agency breathlessly proclaimed bike sharing as one of the country’s “new four great inventions.”
Swift uptake of the service invariably generated enormous hype and frenzy: By the end of 2017, ofo and Mobike had together raised almost $2 billion, with each valued at around $3 billion, and had the backing of tech giants Alibaba and Tencent, respectively. Foreign investors got into the game as well, backing at least eight other local startups.
It seemed like bicycle manufacturers could ride the sharing craze to revive the domestic industry. In the past two years, ofo and Mobike alone ordered 19 million bicycles, many with specialized locks, non-deflating tires, rust-resistant bodies, and GPS tracking. Last year the storied Flying Pigeon factory was cranking out 400,000 bicycles a month for ofo.
But it’s unclear whether bike sharing would benefit domestic manufacturers in the long run. Not only does sharing discourage ownership, making near-identical share bikes is a volume business, not a value business. Such mass production disincentivizes innovation because it shifts production away from high-end specialties to generic models. Even as China’s bike production rose by 24.5% to 59 million units in 2017, and revenue grew by 16.6% to 64.7 billion yuan ($9.4 billion), profits actually fell by 9.2% to 2.2 billion yuan ($321 million).
However, the bike-sharing bubble burst about as quickly as it inflated. Much like what transpired in the ride-sharing battle between Uber and Didi, bike-sharing startups waged a bitter “subsidy war” to win market share and crush rivals by taking enormous losses on heavily-discounted user fees. As a result, many firms went bust, leaving in their wake enormous “bicycle graveyards” that haunted urban centers. The proliferation of share bikes cluttered busy urban streets and led many cities to cap their numbers, including Shanghai, which has gained at least 1.5 million new two-wheelers since 2015.
User growth is also set to decline precipitously from over 600% in 2017 to a projected 14.6% in 2018. Take Mobike, the healthiest of the bike-sharing startups—its monthly users exploded from 5 million to 38 million in 2017 but have since plummeted to 20 million (see Figure 7).The industry will now consolidate, likely creating an oligopoly around Mobike (which was acquired this year by Meituan for$2.7 billion, ofo, and Hellobike. This sudden correction was disruptive for the bicycle industry, as orders all but dried up, sending many smaller producers to the exits.
Figure 7. Mobike Users Have Declined Sharply in a Single Year
Chinese elites have championed the bicycle across three centuries. Puyi, the last emperor of China, enjoyed cycling around the Forbidden City so much that, in the 1920s, he converted the Pavilion of Crimson Snow into a bike shed and had 30-odd thresholds removed from doors so that he could ride around easier.
Pujie, younger brother of Puyi, stacks it on his bicycle in the Forbidden City, 1920s.
Who knows whether the Qing dynasty might have become an “empire of bicycles,” but Chinese elites—both communist and consumer—shaped the bicycle’s course through the first 40 years of Reform and Opening. The development agenda that Deng spearheaded in the 1980s moved China from a command economy towards market mechanisms that removed restrictions on economic life, which revolutionized the consumer market and the bike manufacturing industry.
Official support for the automobile industry and public transport, motivated partly by rapid urbanization and rising incomes, depressed the domestic bicycle market during the mid-1990s. But the government’s concurrent push to enter the WTO helped Chinese producers access overseas markets and become a dominant force in the global bicycle trade. More recently, as China has encouraged homegrown innovation, official tolerance of bike sharing allowed Chinese startups to become leaders in green public transport. Throughout Reform and Opening, the arc of the bicycle industry has shown the effects of much broader shifts in China’s economy.
Now, however, the Chinese bicycle industry faces export headwinds abroad and an uncertain market at home. Yet the sharing economy looks set to continue growing, albeit at a slower pace, and the emerging lifestyle consciousness of Chinese consumers is only set to deepen. Shared bikes aside, today 12 million Chinese cycle for exercise, most of whom are young people the government describes as “highly-educated, highly-paid, and of high character.” Authorities hope this avocation will revitalize the bicycle industry through demand for higher end models and generate 150 billion yuan ($22 billion) in revenue by 2020.
This particular target may seem ambitious, given that the bicycle industry’s revenue was only 64.7 billion yuan ($9.4 billion) last year. But China’s growing desire to bring back the bike isn’t a pipe dream either. The halting success of bike sharing not only suggests there is latent consumer demand but also that China’s cities still exhibit “high-density residential land-use patterns” conducive to cycling.
Environmental concerns, too, mean central and local agencies increasingly seek to moderate car use and enhance cycling infrastructure to make cities more livable. The policies of Reform and Opening continue to strengthen the domestic bicycle industry through competitive markets, international trade, foreign investment, and more sophisticated consumption patterns. Taken together, these trends mean that the lifestyle aspirations of China’s urban denizens may well restore some of the territory lost by the kingdom of bicycles.
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