The Chinese Are Coming - #29

CHINA'S SUPER LARGE CAR CORPORATION


Page 1:
China's Super Large Car Corporation
Page 2: Electrics • Autonomous • Ride-Sharing • New Deals

I’m meeting with clients in China this week to assess how the prolonged market slowdown (now in its fourth month) will change the industry landscape.

One of the most likely outcomes will be consolidation. Three giant Chinese state enterprises are expected to merge soon, creating one of the world’s largest automakers.

All three are currently owned by the central government. But they operate separately in different regions, with different global JV partners:

First Auto Works ("FAW")
HQ: Northeast
Foreign Partners: VW, Toyota, Mazda

Dongfeng Motors
HQ: Central China
Foreign Partners: Nissan, Honda, PSA, Kia

Changan Motors
HQ: Southwest China
Foreign Partners: Ford, Mazda

If the consolidation takes places as expected, the new mega company will have capacity to build roughly 10 million cars and trucks a year.

Key reason for the merger: The Chinese will obtain greater efficiency in product development (by sharing platforms and R&D costs). The massive new scale will also allow the company to purchase parts in large volume and at better prices.

What is the main impact? Look for the (new) united Chinese company to devote more and more of its resources to building its own name brands. A Chinese mega-merger would inevitably dilute the already slipping leverage of global players.

Middle market global brands look vulnerable.

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- PAGE 2 -

ELECTRICS • AUTONOMOUS • RIDE-SHARING• NEW DEALS 

ELECTRICS

>> Tesla. Tesla is acquiring land in Shanghai for $145 million. 

Takeaway: Big motivations for Tesla to move fast here: 1. Work around 40% import duties. 2. Don't allow challengers NIO and BYTON to get head starts. 3. China's luxury market is massive and lucrative. 

>> Faraday. Only weeks after securing a lifeline to funding, Faraday is in trouble again

Takeaway:  Founder Jia Yueting still searches for ways to secure fresh funding without ceding control of his company. How many more lives does this cat have? 


AUTONOMOUS


>> Robosense. Shenzhen-based lidar sensor maker raised  $45 million from Alibaba, SAIC and BAIC. 

Takeaway: Robosense already supplies delivery and retail giants JD.com and Suning for delivery bots. Investments by SAIC and BAIC indicate the company is ready to move up to cars. 

RIDE-SHARING


>> Didi/Ofo.  Rumors that Didi will buy Ofo for $2 billion refuse to go away.  

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Takeaway: Look for Didi or Alibaba to take over Ofo. Like Uber and Lyft, Didi would like to extend into bikes. Ofo has no clear path to profits standing alone. 

>> Mercedes/Geely. Talks are underway to form a ride-sharing JV. 

Takeaway: Dieter Zetsche, Daimler's out-going CEO says that the partnership "offers more opportunities than possible risks". This is German-speak for ”we're still working to overcome the shock that Geely is our number one shareholder.”  

NEW DEALS


>> BMW. Invested $4.1 billion in Brilliance to increase its JV stake from 50% to 75% and take firm control over this key global profit machine.   

Takeaway: Brilliance is a small player politically and financially in China, making this deal relatively straightforward.  Audi and Mercedes will have a tougher time with their powerful partners, FAW and Beijing Auto. Note: BMW will need to wait until 2022 for the deal to be effective.  In China, it's "patience, please." 

>> BYTON. Acquires FAW-Huali for less than 1 USD plus debt and assumed liabilities of $123 million. 

Takeaway: By acquiring the bankrupt subsidiary of First Auto Works, BYTON secures a crucial license to produce electric vehicles in China. Licenses to do business are a form of gold in the PRC.  

>> NIO. Tesla's 2nd largest shareholder acquired an 11% stake in NYSE-listed NIO for $515 million.  

Takeaway: British investment firm Baillie Gifford and Tencent (China's most valuable company) are now major investors in both Tesla and NIO. This a a bet that NIO will flourish in China - or be bought out by a powerful Chinese state enterprise. Or both. 

>> Borgward. Beijing Auto plans to sell its 67% stake in Borgward.  

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Takeaway: We're so accustomed to the Chinese acquiring companies that this news looks like a man-bites-dog story. But Beijing Auto cannot tolerate more losses at Borgward, the (idled since 1961) German brand it acquired several years ago. 

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