Tycoons investing in China's electric cars face a reshuffle

 
Image source: Bloomberg

Some of China’s wealthiest tycoons have poured billions of dollars into electric-vehicle companies to fulfill China’s dream of becoming a leader in the sector. Now, a reckoning may be coming as auto sales slow and the government reduces subsidies for the nascent industry.

That leaves an increasingly steep path to profitability for the flagship companies of Jack Ma, Pony Ma, Hui Ka Yan and Robin Li, who bet that electric cars could become smartphones that connect passengers and other businesses. Their capital, along with $18 billion raised by dozens of startups, helped inflate an electronics bubble that now looks in danger of bursting.

China’s auto market is enduring a protracted sales slump that has prompted electric-car makers to slash earnings forecasts. As China considers further cuts to consumer subsidies to force automakers to compete on their own, a shakeup is looming that even the tycoons’ support may not be able to prevent, said Rachel Miu, an analyst at DBS Group Holdings Ltd. in Hong Kong. “It’s an uphill climb for newcomers in the electric-car space,” she said.

Here’s what China’s richest people had to say about their companies’ electric vehicle investments:

 
Image source: Bloomberg

Alibaba: Xpeng two-door car

In September, Ma stepped down as chairman of Alibaba Group after amassing a fortune of more than $40 billion, but China's richest man retains a board seat and influence at the e-commerce mall he founded. Alibaba has participated in several funding rounds for Guangzhou Xpeng Motors Technology Co., including a 2.2 billion yuan ($313 million) round in 2018 for the automaker co-founded by former Alibaba executive He Xiaopeng.

 
Image source: Bloomberg

Xpeng launched its first five-seat G3 SUV last year and has sold 11,940 units so far this year, according to data published by Bloomberg.

The company, founded in 2014, is also working with more established automakers. One plant, built with Haima Automobile Co., can produce 150,000 electric vehicles a year. Another will soon begin assembling the P7 coupe, with deliveries scheduled to begin next year.

Tencent: NIO will cut back after listing

Ma Huateng’s Tencent Holdings Ltd. led a $1 billion investment round in NIO Inc. in 2017. NIO beat rivals to an initial public offering in New York last year.

But as overall sales fell and losses mounted, the company, dubbed “China’s Tesla,” plowed money into marketing and real estate. It sponsored a Bruno Mars concert and opened a luxury club for NIO owners that includes a showroom, coffee bar and performance space. The company opened 19 new NIO Residences in 22 months through August, and spent a combined 6.3% of revenue on rent in the 12 months through March, according to Bloomberg Intelligence.

"NIO chose the direct sales model and pays great attention to user experience," the company said. It has no plans to close existing clubs or open new ones.

Image source: Bloomberg

 
NIO lost $2.8 billion on revenue of $1.2 billion in the 12 months to June, and its stock price has fallen sharply this year. The Shanghai-based company cut about 20% of its staff by September, when Tencent injected another $100 million.
"Our sales have been under pressure since the subsidy reduction," said William Li, NIO's chief executive. "This is a new era where one can only win customers with quality products and services."

Shenzhen-based Tencent said it supports electric vehicles but did not respond to specific questions about NIO.

Evergrande : High expectations

One of the most surprising new entrants into the electric vehicle industry is real estate developer China Evergrande Group, which has announced that it wants to become the world’s largest electric vehicle manufacturer within three to five years. That means surpassing Tesla, which just opened a factory in Shanghai. Between September 2018 and June 2019, Evergrande invested more than $3.8 billion in electric vehicle-related businesses, according to Bloomberg Intelligence, and will start production of the Hengchi brand next year.

Evergrande Group plans to invest 45 billion yuan in new energy vehicles between 2019 and 2021. On November 10, a subsidiary announced that it would spend nearly $3 billion to increase its stake in Swedish National Electric Vehicle Company (Swedish AB) from 68% to 82%.

Xu Jiayin, the billionaire chairman and founder of Evergrande Group, which is branching out into businesses including soccer and health care, acknowledged there wasn’t much overlap between Evergrande’s real estate and electric-vehicle businesses.

"We don't have any talent, technology, experience or production base in making cars," Xu said. "How can we compete with the world's century-old automakers?"

His answer was: open Evergrande’s wallet.

“Whatever core technologies and companies we can buy, we will buy,” he said.