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.
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.
China's Top 10 EV fundraisers in 2020
|Company||Investment size (USD)||IPO plan (if applicable)||Investment stage||Lead investor(s)||Investor(s)||Sector||Month|
|WM Motor||$1,470 million||In process of a STAR Market IPO||D||Three Shanghai state-owned investment platforms (Qingpu Investment, Yangpu Investment, Shanghai State-Owned Asset Investment), SAIC Motor||SIG China, government-finance industrial funds (Hubei, Jiangsu, Hunan, Guangzhou, Anhui), Sino IC Leasing, Tsinghua unisplendour, Tsinghua Holdings' unit, Hongta Tobacco Group, Agile Property||EV Brand||Sep-20|
|ENOVATE||$742 million||Targeting an IPO in 2021||EV Brand||Oct-20|
|Leapmotor||$664 million||Targeting an STAR Market IPO in late 2021 or early 2022||B||Hefei local government, SDIC Chuangyi Industry Fund Management, ZJU Jiuzhi Investment Management, Yonghua Capital||EV Brand||Jan-21|
|SVOLT Energy Technology||$541 million||Targeting an STAR Market IPO in H2 2022||A||Bank of China Group Investment, CMG-SDIC Fund Management||Beijing Financial Street Capital Operation Centre, Changzhou Venture Capital Group, ZJU Jiuzhi Investment Management, IDG Capital, Cathay Capital, HT Capital||EV Battery Pack||Feb-21|
|Xpeng Motors||$500 million||Listed on the NYSE in August 2020||C+||Aspex, Coatue, Hillhouse Capital, Sequoia Capital China||EV Brand||Jul-20|
|Nezha||$305.5 million||Targeting an STAR Market IPO in 2021||C1||HD Capital||EV Brand||Dec-20|
|TELD||$195 million||Targeting an IPO in mainland China||A||China 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 Investments||EV Charging Infrastructure/Piles||Mar-20|
|Star Charge||$125 million||Targeting an IPO in mainland China||A||Schneider Electric, CICC Capital's sub-fund||CCB International, Shanghai Guohe Capital, Wiz International scientific and technological cooperation's unit, CDB-CDC Investment Management||EV Charging Infrastructure/Piles||Sep-20|
|Inceptio Technology||$220 million||(Two rounds)||CATL||GLP, G7, NIO Capital||Electric Self-Driving||Apr & Nov-20|
|ProLogium Technology||$100 million||D||FAW Group, Bank of China Group Investment, a unit of Bank of China||EV Battery Pack||Apr-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.”