As big tech enters the race, PE-VCs look for next big thing in China’s growing EV market

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A few years after investing in China’s electric vehicle (EV) market, and witnessing its ups and downs, investment veteran James Mi is finally buying himself an electric car. His first EV purchase, he told DealStreetAsia, “will definitely be a domestic brand”.

Mi, the founding partner of venture capital (VC) firm Lightspeed China Partners, and his team made their initial bets in China’s EV industry in 2018, by when the country, driven by years of generous government subsidies, had become the world’s biggest EV market, accounting for over half of global EV sales.

Fast forward to 2021, and China’s EV market has only evolved further. Enhanced charging infrastructure and batteries now support an average driving range of 250 miles per charge — the approximate distance from Lightspeed China’s headquarters in Shanghai to e-commerce hub Hangzhou.

This has only made consumers like Mi more confident about using green vehicles for daily commutes.

The flip-side of this rapid growth, though, is that PE-VC investors will now find the Chinese market for consumer-facing EV brands too crowded and too expensive. They may have to look beyond brands and find value elsewhere in the EV supply chain.

Moreover, Chinese big tech companies, including Alibaba and Baidu, are making inroads in the EV manufacturing market. Smartphone maker Xiaomi is the latest to formally enter the sector. It announced the launch of its smart EV business this Tuesday, pledging to pour $10 billion in the wholly-owned subsidiary over the next 10 years.

“With more participants, from incumbents and startups to big tech companies joining this game, we expect the market to become more fragmented before entering into a consolidation stage,” Paul Gong, head of China Autos Research, UBS Global Research, wrote in an email  to DealStreetAsia. “We are probably going to see more industry dynamics that surprise us.”

Sales charge ahead

In China, sales of new energy vehicles (NEVs), including plug-in hybrids, battery EVs, and hydrogen fuel cell vehicles, have outperformed many other countries for six consecutive years. Statistics from the China Association of Automobile Manufacturers (CAAM) show that consumers in China purchased nearly 1.4 million NEVs in 2020, up over 13.3% year-on-year.

Moving forward, the world’s largest NEV market is projected to expand further. China’s State Council said in October 2020 that sales of NEVs are forecast to rise to 20% of overall new car sales by 2025, from just 5% now. With the promotion of government policies, China’s NEV market is expected to grow at a compound annual growth rate (CAGR) of 36.1% to hit an annual sales volume of over 5.4 million by 2025, according to global market intelligence provider IDC.

Mi believes that Chinese domestic EV brands would overtake foreign players in the home market “very soon.”

Tesla performs better on the roads of the United States, said Mi, recalling his experience of driving in a Tesla in California. But domestic players’ abilities in fast iterations and their proximity to some of the world’s biggest supply chain titans like CATL would allow them to create offerings “more suited for the Chinese market,” and offerings that can “resonate with” local consumers.

But it is not a winner-take-all market, he said. “Just like the market for traditional gasoline-based cars, there is no single dominant [EV] car company.”

Retail, institutional investor interest

As vehicle sales have risen, retail investors have been quick to lap up the shares of publicly-traded Chinese EV brands.

The investment frenzy started around mid-2020. Xpeng Motors, a portfolio of Lightspeed China, went public on the New York Stock Exchange (NYSE) in August, raising about $1.5 billion. The size of the offering was expanded by more than a third from the initial target amid surges of other US-listed EV makers including Elon Musk’s Tesla.

Xpeng now commands a market cap of nearly $24.7 billion, and trades at more than twice its offer price. The Lightspeed China team estimates a return of 15x from its investment in Xpeng based on the firm’s recent stock price.

The stock price of NYSE-listed Nio has also gained significantly since its listing in September 2018, with a market cap of over $54.5 billion as of March 30. Nio is backed by Tencent and Hillhouse and was the first Chinese EV brand to sell shares in the US

Homegrown peer Li Auto, which started trading on Nasdaq just one month before Xpeng, has seen its market cap double to about $19.7 billion.

Among domestic listings, WM Motor completed its prelisting tutoring in January and is now moving ahead to become the first EV IPO on Shanghai’s Nasdaq-style STAR Market.

Leapmotor, co-founded by Chinese surveillance equipment maker Dahua Technology, was also mulling a STAR Market IPO. Its co-founder and president Wu Baojun told local media outlets in late 2020 that the firm would file for an IPO application in the second quarter of 2021 and target to trade shares by end-2021 or early-2022.

ENOVATE, a Shanghai-based EV maker, also announced plans for a 2021 listing when it raised over 5 billion yuan in October 2020.

As with retail investors, institutional investors, too, are showing interest in the sector.

PE-VC companies have made some of their biggest transactions around IPO-bound EV brands in China. According to proprietary data from DealStreetAsia, four of the five biggest fundraisers in the country’s EV market in the past 14 months are consumer-oriented EV brands, namely WM Motor, ENOVATE, Leapmotor, and Xpeng.

Collectively, privately held companies in China’s EV industry raised close to $5.3 billion across 30 deals in the 14 months ended February 28, 2021. The numbers cover firms developing passenger EVs, commercial EVs and electrified trucks, EV batteries, charging facilities, EV software/hardware, and EV plus self-driving, among others. (Source: DSA Research & Analytics)

Looking beyond EV brands

As many EV brands are shifting to tap the public market for financing, Mi and his team are setting sights on emerging startups elsewhere in the industry chain, to continue the streak of good returns.

“We have a thesis that, eventually, all these EVs will include a certain level of autonomous driving. It may not be Level 4 or Level 5, but potentially Level 3 ADAS (advanced driver-assistance systems),” said Mi. “It is already happening now.”

For that, Lightspeed China in 2018 infused capital into Shanghai-based Hesai Technology, a developer of lidar sensors for self-driving cars. Hesai’s lidar technologies and solutions now serve global customers including Bosch and Aurora.

Lightspeed China also invested in self-driving truck startup PlusAI, and Newrizon, an ex-Nio executive Charles Huang-led startup that develops smart, electrified commercial vehicles. As Mi put it, the segment of electric commercial trucks is “a big sector” for investors to look into because trucks have a higher carbon footprint than passenger cars.

Investments are also being made in charging infrastructure players, and EV battery makers.

Expand Table

China's Top 10 EV fundraisers in 2020

CompanyInvestment size (USD)IPO plan (if applicable)Investment stageLead investor(s)Investor(s)SectorMonth
WM Motor$1,470 millionIn process of a STAR Market IPODThree Shanghai state-owned investment platforms (Qingpu Investment, Yangpu Investment, Shanghai State-Owned Asset Investment), SAIC MotorSIG China, government-finance industrial funds (Hubei, Jiangsu, Hunan, Guangzhou, Anhui), Sino IC Leasing, Tsinghua unisplendour, Tsinghua Holdings' unit, Hongta Tobacco Group, Agile PropertyEV BrandSep-20
ENOVATE$742 millionTargeting an IPO in 2021EV BrandOct-20
Leapmotor$664 millionTargeting an STAR Market IPO in late 2021 or early 2022BHefei local government, SDIC Chuangyi Industry Fund Management, ZJU Jiuzhi Investment Management, Yonghua CapitalEV BrandJan-21
SVOLT Energy Technology$541 millionTargeting an STAR Market IPO in H2 2022ABank of China Group Investment, CMG-SDIC Fund ManagementBeijing Financial Street Capital Operation Centre, Changzhou Venture Capital Group, ZJU Jiuzhi Investment Management, IDG Capital, Cathay Capital, HT CapitalEV Battery PackFeb-21
Xpeng Motors$500 millionListed on the NYSE in August 2020C+Aspex, Coatue, Hillhouse Capital, Sequoia Capital ChinaEV BrandJul-20
Nezha$305.5 millionTargeting an STAR Market IPO in 2021C1HD CapitalEV BrandDec-20
TELD$195 millionTargeting an IPO in mainland ChinaAChina Chengtong Holding Group, China Reform Financial Network, CDH Investments

Venus Growth Company Limited, Guangzhou Xinye Investments, Shenzhen Gaopeng Venture Partners, Qingdao Henghuitai Industrial Development Fund, Zhongchuang Yongte (Foshan) Investments Qingdao Jinyang Investments, Qingdao Honghu InvestmentsEV Charging Infrastructure/PilesMar-20
Star Charge$125 millionTargeting an IPO in mainland ChinaASchneider Electric, CICC Capital's sub-fundCCB International, Shanghai Guohe Capital, Wiz International scientific and technological cooperation's unit, CDB-CDC Investment ManagementEV Charging Infrastructure/PilesSep-20
Inceptio Technology$220 million(Two rounds)CATLGLP, G7, NIO CapitalElectric Self-DrivingApr & Nov-20
ProLogium Technology$100 millionDFAW Group, Bank of China Group Investment, a unit of Bank of ChinaEV Battery PackApr-20

Enter big tech

PE- and VC-backed EV players are also competing toe-to-toe with traditional car manufacturers, such as Chinese state-owned SAIC Motor and BYD, who are tilting more resources towards this next big thing that could disrupt China’s mobility and energy consumption.

“Every major carmaker has acknowledged the fact that the market has moved to EVs,” said Le Tu, managing director of Sino Auto Insights, a Beijing-based consulting firm that specialises in mobility and transportation. “The competition is only going to get fiercer.”

More companies are joining the fray.

China Evergrande New Energy Vehicle, the EV unit of Chinese real estate developer China Evergrande Group, has so far invested 47.4 billion yuan ($7.2 billion) in developing EVs and related technologies, it disclosed in a press conference in Shenzhen on March 25. Its EV brand “Hengchi,” also backed by Tencent and Sequoia Capital, is already worth more than Ford Motor although it is yet to start mass production.

There are also China’s big tech giants joining the race.

E-commerce firm Alibaba, a major investor in Xpeng, launched an EV joint venture in December 2020 with SAIC and Shanghai Zhangjiang Hi-Tech Park Development, an investment arm of the local government. Their brand “IM,” which stands for “intelligence in motion,” is ready to take preorders for its first EV model in April and start delivering by the fourth quarter of this year.

On January 11, internet search giant Baidu also announced its plan to build a new venture for intelligent passenger EVs. It entered into a strategic partnership with auto maker Geely, which owns the Volvo and Geely brands, to leverage the firm’s automobile design and manufacturing capabilities.

“There is going to be a push for expertise in gathering data, analysing data, creating insights, and then executing on it to provide new services and new revenue streams beyond just selling vehicles,” said Le.

Compared to traditional car sales that only lead to one payment from the car buyer upon purchase, the future of EV companies will be “software- and services-driven” so that companies can generate “recurring revenues,” Le explained. He referred to Tesla’s subscription-based full self-driving (FSD) software and Nio’s three-minute swappable battery leasing programme, which both firms are counting on to be a big boost to their profit margins going forward.

Big tech giants’ strong capability in monetising data is “a calling card,” he said. “But it would be at least five years of growing pains to figure out whether these partnerships bear fruit.”

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.

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.