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Despite early promise, China's on-demand bus services hit potholes on the road to profit

China · Oct 08, 2019 · By Li Yuan

High costs – not a lack of customers – have forced promising on-demand bus service startups like DuduBus to shift their focus to corporate shuttle services 

In 2015, Liu Yixun resigned from Tencent, one of the most sought-after employers in China, and founded DuduBus with a group of friends to provide on-demand bus services. They believed the business had significant growth potential. “At that time, Didi Chuxing and Uber had already begun to offer car-hailing services in China. We thought bus-hailing must be the next hit, as there was no dominant player in this sector,” Liu said.

The entrepreneurs also gained their confidence from the urgent needs of bus commuters. During peak hours, buses in China get extremely crowded, especially in first-tier cities. A bus normally carries 100–200 passengers, which is about 11 people in one square meter of space. Car-hailing, while a big business in China, could not solve this problem because it is a costly alternative for bus commuters.

Liu thought that a chartered bus with customized routes – voted on through an app based on their popularity – might be the answer. Shenzhen-based DuduBus launched its first bus line in April 2015, running through bustling areas in Shenzhen. It charged slightly higher fares than a public bus with the promise of a seat for every passenger and inclusions like breakfast, newspaper, Wi-Fi connection and even a first-aid kit. Users could book and pay for the service through DuduBus’s app or its official WeChat page.

DuduBus soon attracted white-collar workers who valued comfort over price. The occupancy rate of its first bus reached 85%. The company launched more lines and its users could now submit their pick-up and drop-off locations through the DuduBus app or WeChat. DuduBus would then use algorithms to work out how to ply the routes with the most demand. A new line was launched once it had over 30 votes from users. This way, DuduBus launched more than 200 lines in just two months – all with more than 80% occupancy rates.

DuduBus was not the first player in the on-demand bus service sector.  However, DuduBus’s strategies offset some of the first-mover advantages of the other companies already in the sector.

Wang Pu, former director at Ceyuan Ventures, which participated in DuduBus's Series A funding round in September 2015, said: “I've known about DuduBus since its very early days, and was surprised to find that after only three months’ operation, it could be counted as one of the top two players in terms of the number of lines and seat occupancy rates.” 

Didi, a big threat

However, in April 2015 – four months after DuduBus was formed and just as it launched its first bus line – car-hailing giant Didi Chuxing entered the on-demand bus sector by launching Didi Bus. With much deeper pockets, Didi Chuxing soon announced huge subsidies for its new business line. It offered next-to-free rides for the the first two weeks and plowed money into bus rental companies. 

According to Liu, after Didi Chuxing joined the market, the cost of chartering buses rose rapidly. "Didi Chuxing was willing to pay RMB 1,000 for the buses we chartered for RMB 800. Some bus rental companies broke their contracts with us to work with Didi Chuxing,” Liu said. Many venture capitalists that intended to invest in DuduBus also shunned the startup at the first whisper that Didi Chuxing had launched a similar service.

“It was the first time I realized the power of capital,” said Liu, who, undeterred by the competition, rolled out new strategies.

First, DuduBus encouraged users to buy a monthly pass, using a loyalty program to retain customers. Next, DuduBus created a WeChat group for every bus line to build an online community for the users who shared a bus every day. The sense of belonging increased its attraction and helped reduce the churn rate. Then, in addition to paying rent to bus rental companies, DuduBus provided them its vehicle management SaaS system for free to ensure a steady supply of buses.

DuduBus survived the competition along with some other bus-booking services including Haluo Chuxing and Dadabashi, while another early player, Kaolabanche, was acquired by Didi Bus. In September 2015, DuduBus secured its Series A funding.

Shortly thereafter, however, the outlook for the sector took a bleak turn. After spending RMB 700m, Didi Bus stopped its operations in 2017 and was reduced to checking bus routes within Didi Chuxing’s app. Dadabashi and Xiaozhubashi went out of business in 2017. Haluo Chuxing and DuduBus are still operating, but apart from some lines for individual users, their core business has shifted to bus services for corporate users.

Problematic business model

User experience was not the problem. On Zhihu, China’s equivalent of Quora, almost all users praised the convenience and comfort provided by on-demand, bus-booking startups including DuduBus. Instead, the root cause was the high operational costs of chartering buses from bus rental companies.

“A bus normally has 55 seats, and we sell each seat for RMB 8–10," Liu said. "If 80% of the seats are taken in the morning and evening, that would mean the income is around RMB 700, which just about covers the daily operation cost for a bus."

Most on-demand bus service startups agreed that their costs resulted in very slim profits; sometimes they couldn't even break even. Their profitability, therefore, depended on occupancy rates and prices, but it was very difficult for companies to achieve both high occupancy rates and higher prices.

A bus driver surnamed Hu who worked for Dadabashi recalled: “In 2016, our buses were almost full every day when we charged each passenger RMB 6. It’s nearly the same price for a metro trip, but we attracted users by guaranteeing them seats. However, when the price was raised to RMB 9 in 2017, the occupancy rate dropped sharply.”

Other problems also led to decreased occupancy rates. People finished work at different times and often also had unplanned, spontaneous activities after work. “It’s rather easy to attract people to the morning bus, but seat occupancy rates on the evening bus are much lower,” said Hu.

Another issue was punctuality. Delays were not only caused by passengers who turned up late, but buses also ran late due to traffic congestion, which was compounded by on-demand buses not being allowed to use bus-only lanes in some cities. The consequence was either an increase in a company’s operational costs or damage to passengers' trust in on-demand bus operators. 

All these issues forced these bus-booking startups to re-evaluate the sector and shift their business focus.

Switch to business clients

In 2017, DuduBus shifted its focus to corporate clients, providing them with buses to shuttle their employees from home to the workplace or a company event. It also started to provide SaaS to business users, enabling them to monitor the shuttle service, including checking real-time locations of a bus, making payments and optimizing bus routes.

“Businesses have a longer decision-making process compared with individuals, which is an increased cost for us to acquire users," Liu said. "However, working with them [businesses] could ensure a steady passenger flow. Our monthly income grew by 200% after the switch.” 

Another survivor, Haluo Chuxing, stopped renting buses from suppliers in 2015 and bought 1,000 buses for its operations, aiming to bring costs down in the long run. Now, it describes itself as a transportation solution source, providing businesses with charter buses and cars for various purposes. It is no longer a bus-booking service using excess capacity of underutilized vehicles belonging to rental companies.

However, some companies are still eyeing the individual user market that startups like DuduBus have largely vacated. After Didi Chuxing’s carpooling business, Didi Hitch, was closed temporarily due to security concerns, Didi Chuxing quietly rebooted its bus-booking service. In December 2018, Didi Chuxing launched Ninbashi, an on-demand service similar to Didi Bus, in Nanjing.

Another Beijing-based on-demand bus service, Webus, is testing a different model, providing door-to-door bus sharing service with dynamic routes created with algorithms. This model has been welcomed by individual users, but high operational costs remain a problem. In 2017, a similar service in Boston, in the US, called Bridj abruptly went out of business due to funding issues.

As existing players rush to focus on business clients, it remains to be seen if those eyeing individual users can build a sustainable business.

Edited by Wang Xiao'e and S. Mani