China EV: End of the road?

Time is running out for the “new forces” in China’s electric vehicle (EV) market. Behind the likes of Nio, Xpeng, WM Motor Technology, and Lixiang Automotive there is a long tail of independent manufacturers that received PE backing. For many, the chances of survival were always slim due to inferior technology or insufficient financial backing. But COVID-19 is accelerating their demise and others may get dragged into the vortex.

“Chinese EV competition is entering its final phase,” says Daniel Li, a vice president at Lighthouse Capital, a local investment and advisory firm. “This year or the next, we will find out who are the ultimate survivors. Many companies are closing down.”

EV sales dropped 60% year-on-year in January and February as out-of-home consumption activity in China ground to a half, according to government statistics. However, the rot set in at least six months earlier. In 2019, overall car sales fell 8.2% to 25.8 million units, the third consecutive year of declines. EV sales came to 972,000, down 1.2%, with swingeing cuts in subsidies largely responsible.

“The second half of 2019 was much worse than the first half, follow a 75% reduction in subsidies per vehicle for end-consumers,” says Jochen Siebert, a managing director at JSC Automotive, a China-focused independent automobile consultancy.

Meanwhile, global carmakers are aggressively targeting the country’s EV market. Last week, Volkswagen announced a EUR1 billion ($1.1 billion) investment in its Chinese EV joint venture, JAC Volkswagen, increasing its stake from 50% to 75% and gaining the management control. It has also committed EUR1 billion to state-owned battery manufacturer Gotion High-Tech. Volkswagen plans to deliver 1.5 million new energy vehicles (NEV) by 2025.

“There is no ‘new force’ EV company worth investing in,” according to Wei Zhang, chairman of Co-Stone Venture Capital. “We believe that the real opportunity for new energy vehicle manufacturing is still with the traditional manufacturers. The industry must burn through more than RMB20 billion ($2.8 billion) and be tested for at least 10 years if it is to be a success.”

Good timing

China’s EV subsidy scheme took off in 2013, with car owners eligible for RMB35,000-60,000 and large vehicles like buses receiving as much as RMB500,000. They were increased in each of the next two years. Sales reached 330,000 in 2015 – more than 23 times the 2012 total – as China became the world’s top NEV consumer and manufacturer.

Bin Li, who previously founded automotive information portal Bitauto and took it public, got his timing spot on in establishing Nio in 2014. The company raised $2.4 billion through four rounds from investors including Tencent Holdings, Hillhouse Capital, Sequoia Capital China, and Temasek Holdings. A $1 billion US IPO followed in September 2018.

Since then, Nio’s stock has lost 30% in value. The problem was cost controls. Li wanted to offer the best car and the best quality service: its first vehicle was the EP9 supercar; its third, the seven-seat premium ES8, had interiors of Napa leather. There were no assessments based on key performance indicators (KPIs), staff travel expenses were reimbursed without question, and mobile charging stations were driven to the customers. The latter service translated into a loss of RMB4,000 per customer per year.

“Nio often takes the most expensive versions of parts and ends up with a very expensive vehicle. They should have sold it at a much higher price, but the market is not there at that price point. This is a strategic mistake,” said JSC’s Siebert.

Another misstep came with rapid expansion into the US under Padmasree Warrior, previously senior executive in Motorola and Cisco. Hired on an annual salary of $1.5 million, she built up a team of 690. Engineers were typically taking home $200,000 a year, but the big-spending didn’t pay off. The US team was put in charge of smart software and the ES8 encountered numerous problems in this area post-delivery.

Warrior was dismissed in 2018. Overall employee compensation amounted to more than RMB4.1 billion that year, yet Nio generated only RMB4.95 billion in revenue. Last August, Li announced internally that 2,500 people – or 25% of total headcount – would be laid off. In the US, 42% of staff were made redundant. Meanwhile, Nio delivered 20,000 vehicles in 2019, half its target. Losses for the year amounted to $1.6 billion in 2019 and the company had only $151.7 million in cash and liquid assets on hand.

In April, Nio received a RMB7 billion investment from the government of Hefei, capital of Anhui province. As part of the deal, the company agreed to establish its headquarters in the city. It also transferred core assets, including R&D, manufacturing and sales and services capabilities, to an entity in which the government is an investor.

Nio is not the only member of China’s EV new forces with liquidity issues. WM Motor, which was launched by Freeman Shen, previously an executive at Chinese automaker Zhejiang Geely Holding, set out to raise $1 billion in Series D funding in the second half of 2019. The round has yet to close, with Shen blaming COVID-19 for the slow progress.

Taking on Tesla

What makes the situation worse is the arrival of Tesla, which broke ground on its Shanghai factory in January 2019 and entered production 10 months later. Last December, the US-headquartered company delivered the first batch of 15 China-made Model 3 vehicles. Relying on imports alone, Tesla had already sold 300,000 Model 3 units in China in 2019, more than the combined output of the new forces.

“Previously, the new forces had two advantages over Tesla: a lower price point; and the risk that Tesla might be unable to meet consumer demand without a local plant. Now these two problems are solved. Tesla can reduce its prices in China through local manufacturing,” Co-Stone’s Zhang wrote in an essay.

In January, Tesla reduced the pre-subsidy sticker price for the standard-range Model 3 from RMB355,800 to RMB323,800, compared to RMB358,000 for Nio’s top-end SUVs. It has since brought the price down to RMB303,500. Sales came to 18,586 between January and March, including 16,017 China-made vehicles.

Shen, among others, believes that Tesla will have positive impact, arguing that the likes of Geely and Great Wall Motor became stronger after the arrival of foreign carmakers. Further, she asserts that the technology gap between the new forces and Tesla is negligible, and in some respects, the new forces are superior.

WM Motor has the added advantage of strong supply chain and manufacturing capabilities, owing to its founding team’s experience with traditional carmakers. “WM’s founders have been worked for many years in the car industry, they are good at cost and quality control,” says Lighthouse’s Li.

If marketing and automotive manufacturing are wound into the DNA of Nio and WM Motor, respectively, then Xpeng has internet origins. The EV maker is named for Xiaopeng He, a Tesla fan who wanted to invest in the space and ended up backing a team that spun out from Guangzhou Automotive Industry Group. He previously founded mobile web browser UCWeb, which was sold to Alibaba Group in 2014, the same year as Xpeng’s establishment.

The company is taking the fight to Tesla with the P7, described by an industry analyst as the company’s only meaningful contribution but one that has been well-received. The P7, which starts at RMB229,900, has the longest single-charge cruising range of any China-made EV. Most importantly, it is defined as “the second generation of smart cars,” capable of over-the-air (OTA) updates of most functions.

“I like Tesla, but I don’t think Tesla is in line with China’s local conditions,” says He. “In China’s large cities, parking spaces are often small and difficult to park in. Car companies can continuously improve the success rate and ease of use of automatic parking through OTA iteration. On this line, Tesla did not actually do much.”

Xpeng has set a goal to bring new features to users every month. Its previous model, the G3, achieved sales of 16,521 units and the utilization rate of the assisted parking function was 51% as of March, much higher than the single-digit industry average. He believes that P7 will deliver better first-year sales in China than Tesla’s Model 3. Having raised RMB16.8 billion in private funding – including a $400 million Series C last November from Matrix Partners China and Xiaomi – Xpeng is said to be targeting a Hong Kong IPO.

Time will tell

Even though they appear to face existential threats, it is still relatively early days for China’s new forces. “Buying a car is different from buying other household items. Consumers need a safety period of around five years to have confidence in a brand. That means it is hard for a new model launched by a latecomer to breakthrough,” Changwu Wang, a partner at Hina Group, tells AVCJ.

Much rests on what happens over the coming 12 months, but if the new forces can overcome the challenges they face, they may emerge stronger and wiser for the experience. Lixiang founder Xiang Li is perhaps a case in point. He departed Nio in 2015 to launch his own EV brand, and while strict cost controls were in place from day one, Lixiang erred in launching a two-wheeler as its first vehicle.

However, the company wasn’t to be so easily thwarted. Last August, it raised a $530 million Series C round, led by Meituan-Dianping founder Wang Xing, and unveiled the Lixiang One four months later. As of April, sales of four-wheel SUV had reached 6,500 units.

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• Topics
• Greater China
• Expansion
• Technology
• China
• automobiles
• Transportation
• Growth capital
• Lighthouse Capital