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Due diligence required to stem phony innovation
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HOW long does it take for a much-hyped entrepreneurial idea to become a laughing stock? The answer, it seems, can be as little as one year.
In the latest saga about China’s start-up fiascos, an elevated bus said to be capable of gliding over urban motorized traffic and thus easing congestion is now being dismantled in the northern Chinese city of Qinhuangdao, Hebei Province.
Blessed with futuristic designs, the so-called “straddling” bus runs on rails laid along the road and has a designed capacity of more than a thousand passengers. Its elevated structure means cars (less than 2 meters in height) can pass underneath. Unveiled at a 2016 trade expo to much fanfare, its prototype had been sitting idle for about 10 months before workers recently began removing the rails and other supporting infrastructure.
The bus has been dogged by controversy since inception. Many doubt its operability in Chinese city centers, since roads there are too narrow for a bus that straddles two lanes (and occupies more when it makes a turn.) It has a big chance of creating more problems than it might solve.
As more and more media exposes and details surface, the nature of the bus is increasingly clear: a fund-raising hoax disguised as high-tech innovation.
To fund the project, the company behind the bus, Huaying Kailai, issued peer-to-peer (P2P) financial products promising high returns on investment. With a crunch in its cash flows, many investors are now left worrying about the security of their assets. This is despite the fact that the company, a non-financial institution, should have been barred from engaging in online lending under China’s financial regulations.
The bus debacle is a rude awakening to local authorities who once hailed it as a future mobility solution. To say the least, they are to blame for failing to exercise due diligence in vetting the project’s feasibility. If officials looked carefully, they would have noted the failure of a similar elevated bus in the US back in the 1960s, and then decided otherwise.
It appears that some officials in their earnest to develop urban public transportation have become short-sighted and unsuspecting — perhaps willingly so. What the bus saga has also revealed is a danger about what might be called phony innovation.
Caution against big talk
In an environment bitten by the bug of innovation, many local governments are sometimes overly generous in granting subsidies or tax breaks to those with an entrepreneurial spirit and nothing more. In fact, big talk is what some start-ups are all about. A popular saying in the investor community goes that one can get A-, B-, and C- round financing as long as he or she is articulate enough to give the business plan an added cachet than it actually warrants.
Sugarcoated with artful storytelling and impenetrable jargon, half-baked start-up schemes could even dupe experienced investors, let alone government officials or citizens lacking a keen eye for frauds. Instead of fueling the economy, this kind of phony innovation is inflating a bubble. Once it bursts, it will take with it the reputation of officials who bankroll it.
It’s hard to say if China’s start-up scene is ridden with bubbles. The bus episode, after all, is an isolated case. But we’ve also seen a spate of cases where hardly innovative business models have prospered solely on the back of speculation.
The shared bike craze is the first thing that springs to mind. The recent bankruptcy of Wukong Bike is perhaps the first domino in a major industrial shake-up that will reduce the number of players in the market to less than a dozen. (Nationwide, bike-for-rent companies currently number around 100.) Concerns are already being voiced about who is the next to go under.
Once a champion of a low-carbon lifestyle, shared bikes now proliferate and urban managers’ love affair with them has turned rancid. Moreover, unbridled competition between operators risks plunging the market into a lawless jungle, a pure game of big capital. Meanwhile, new entrants hardly bring anything new to the game.
The same is true of the once red-hot O2O (online to offline) model, which has overhauled practically every conceivable industry by means of the Internet. But even it now proves to be a fad difficult to last. Funding of new O2O start-ups is running dry, since many are mere copycats of existing success stories.
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