Chinese EV industry reaches a tipping point amid wider user adoption

Global VC firm GGV Capital’s Managing Partner Jixun Foo and Brian Gu, Vice Chairman and President of Chinese smart electric vehicle (EV) brand Xpeng Motors, talks to Mercedes Ruehl, Asia Tech Reporter at Financial Times, during a fireside chat at DealStreetAsia's virtual Asia PE-VC Summit on November 25, 2020.

Chinese electric vehicle (EV) market has reached the beginning of “a tipping point” where its growth momentum is expected to continue accelerating amid wider consumer adoption, heightened investors’ interest, and increased government support.

After China’s auto sales took a hit from the COVID-19 pandemic in Q1 2020, there were “drastic rebounds” in the last two quarters, especially in Q3 when the auto sales volume in the country was about triple of that in Q1, said Brian Gu, vice chairman and president of Chinese EV maker Xpeng Motors, during a fireside chat at DealStreetAsia’s virtual Asia PE-VC Summit 2020.

A significant part of the auto sales pick-up in China, said Gu, was contributed by the sales of EVs, including what his company manufactures, the so-called “smart EVs” or “Internet vehicles” that are powered by intelligent in-car software and advanced technologies like AI, Internet of Things (IoT), and autonomous driving to enhance the automated control of vehicles.

US-listed Xpeng posted in its latest financial report the deliveries of 8,578 smart EVs in Q3 2020 with a 265.8 per cent increase from the same period in 2019. For the first time since its inception in 2014, the firm achieved a positive gross profit in the quarter.

Through a nationwide network consisted of 116 physical stores and 50 service centres, Xpeng reported a record monthly delivery volume of 3,478 smart EVs in September, up 31 per cent quarter-over-quarter (QoQ) and 145 per cent year-on-year (YoY).

“The EV penetration rates in large cities like Shanghai, Beijing, Guangzhou, and Shenzhen are approaching 10 per cent, compared to China’s overall EV penetration rate of below 5 per cent,” said Gu. “There is a strong [trend of] consumer adoption going on. And that is what I see as a tipping point of EVs.”

A tipping point for Chinese EVs

Already the world’s largest auto market, China topped the global EV sales in 2018 with a market share of 57 per cent, according to a report released by ResearchAndMarkets.com in January.

To further promote its EV development and battle air pollution, the Chinese authority set a goal in December 2019 to push the country’s sales of new energy vehicles – which include battery-only EVs, plug-in hybrids, and hydrogen-powered vehicles – to 25 per cent of overall new car sales by 2025 from just 5 per cent now.

Xpeng’s revenue milestone came on the heels of similar record-breaking numbers announced by its major homegrown peers including Nio, which set a monthly delivery record of 4,708 vehicles in September and a combined 12,206 deliveries in the quarter; as well as Li Auto, which booked its highest quarterly delivery result of 8,660.

Elon Musk’s Tesla also reported a new high of global deliveries in Q3, at 139,300. According to its regulatory filing, the growth was largely driven by sales in China, where Tesla’s EV sales rose 64 per cent to $669 million, compared to a 39 per cent drop in its third-quarter sales in the US.

Tesla, now one of the major players in the Chinese EV market, sold nearly 12,000 vehicles in China in August alone. The country has become an increasingly important battleground for the California-based EV brand, underscored by its earlier price cuts and a production ramp-up through a local factory in eastern China’s Shanghai city.

Unlike the traditional auto space where “foreign brands command a huge premium,” consumers in the Chinese EV and smart EV markets have a lower degree of foreign brand consciousness, said Gu.

“I think people recognise that it requires a different kind of products to compete [in the EV segment]. Not all large and leading [traditional auto] brands are able to offer those [smart vehicle] technologies in differentiation,” he said. “Domestic EV products are actually getting more recognition from consumers in terms of quality, functionality, and smart capabilities.”

Tesla aside, China’s lucrative EV market currently remains dominated by more established carmakers. An October report from domestic industry researcher iiMedia Research shows that SAIC-GM-Wuling (SGMW), a joint venture among Chinese state-owned SAIC Motor, America’s General Motors, and Liuzhou Wuling Motors, ranked first in terms of monthly EV sales in China in August 2020, followed by BYD Auto and Hebei-based Great Wall Motors.

A game of scale

China’s burgeoning EV market, coupled with recent sales rebound, has opened an attractive opportunity for the country’s cash-burning EV makers to raise funds necessary for them to compete in the cutthroat domestic market.

According to calculations by the Chinese media outlet 21st Century Business Herald, less than half of China-listed EV companies were profitable based on their Q3 financial results, although 38 of them saw increases in their net profits in the past quarter.

Backed by investors like Chinese e-commerce titan Alibaba and smartphone giant Xiaomi, Guangzhou-based Xpeng raised $1.5 billion in an initial public offering (IPO) on the New York stock exchange in August, as the firm saw what Gu referred to as “a window of opportunity” brought by the share price rallies of US-listed counterparts including Tesla and Nio.

Jixun Foo, managing partner of global VC firm GGV Capital – an early backer of Xpeng – is also of the view that the momentum in China’s EV development is accelerating: “Certainly, there is a path [to profitability] that Tesla has painted for emerging EV players like Xpeng and Li Auto.”

“From an investor’s point of view, we understand that this [EV industry] is ‘a game of scale.’ The gross margin was negative as they started off to develop and roll out vehicles. But you will see margin improvements as they grow bigger and realise economies of scale,” said Foo.

Xpeng went public roughly one month after Li Auto floated its shares in a $1.1-billion IPO on Nasdaq in late July. Li Auto’s major shareholders include Chinese food delivery platform Meituan Dianping and its co-founder Wang Xing, as well as TikTok-owner ByteDance. Its wide range of earlier institutional investors also covers Matrix Partners China, Source Code Capital, Bluerun Ventures, and Future Capital, among others.

Investors in the private market have pumped billions of dollars into Chinese EV startups but still proved insufficient, as many more of them seek to tap the public market for more funds.

In the private market, at least 34 unlisted Chinese EV and smart EV companies have amassed over $3.3 billion in the first three quarters of 2020, according to proprietary data from DealStreetAsia. The largest financing in the sector was a 10-billion-yuan ($1.47 billion) Series D round completed by Shanghai-based WM Motor in September, right before the company kick-started a process to list on Shanghai’s Nasdaq-style STAR Market.

ENOVATE also announced its plan of pursuing a listing in 2021, as it completed a Pre-IPO round at over 5 billion yuan ($742 million) led by Chinese local government industry guidance funds and large state-owned banks in mid-October.

Aiways, a three-year-old EV brand in Shanghai, joined the slew of Chinese EV players to mull an IPO that could most likely happen on a domestic stock exchange, according to a Reuters report in September, citing the company co-founder and president Fu Qiang. Xpeng and Li Auto’s IPO success had helped fuel its listing ambitions, Fu was quoted as saying.

“We are at the beginning of a smart car evolution that is almost like the launch of iPhone One,” said Foo. “Many investors are not just looking at what it is today, but are looking at where these [EV] companies can be in a year or two down the road.”

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.