The Chinese Are Coming - #27

DID NIO JUST COME OUT OF NOWHERE?


NIO debuted on the New York Stock Exchange last week, with shares jumping way up - then sliding way down.

The wild gyrations spawned a flurry of notes from readers: Are there more NIOs on the way? How many, how soon, how real? Which one will guarantee my kids' education? 

Now I could give you names to watch like Byton or XPeng, SF Motors or even Singulato. But they mean practically nothing without some context.

First, three big-picture observations: 

• Young, very young. NIO and another 40 plus Chinese EV start-ups have all burst on the scene since 2015.

• None of them make money, nor is there promise of profits in the near-term. No, these are long-term plays that exist solely because the Chinese government is mandating the formation of a powerful, fully-integrated EV industry. 

• Most Chinese EV models won't appear on U.S. roads until after 2021. They'll first debut in China and make fixes to the inevitable mistakes of young companies.

Now, keep in mind that EVs are but a tiny sliver of China's auto industry. Traditional car companies will produce about 30,000,000 vehicles this year or about 1/3 of the world's total. 

1. "Big 6" State Enterprises (And Their Foreign Joint Ventures) - 75% of total vehicle production. 

2. "Big 3" Private Tigers - 16% 

3. "Smaller Orphans" - 8% 

4Too-Many-to-Count EV Start-Ups - <1%

Why the sudden surge in Chinese EV start-ups like NIO now? Well, that's where history comes in...

Note to Dear Reader: History can be a real yawner for many Americans. But I promise you, taking time to "get" Chinese history will make us all a lot smarter about China's future.

So, here we go:  

In the Beginning. When I first arrived in China in 1986, there were just two automakers. First Auto Works located in chilly Manchuria. And Second Auto Works, buried in the mountains of central China. They made lots of noisy, diesel particulate-spewing trucks and buses - and a few hundred Russian-based sedans for government officials. That was it. 

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1980s-1990s:
 China wanted to make modern cars - but how? Leader Deng Xiaoping recommended joint ventures with global automakers. Three cities - Shanghai, Guangzhou and Beijing - were selected to form city-owned car companies called - you guessed it -  Shanghai Auto, Beijing Auto and Guangzhou Auto.

China's first modern car was the VW Santana, circa 1983. 

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The Big 6. By the early 2000s, China had six major state-owned companies, each partnering with one global automaker or more.

1. First Auto Works (Volkswagen, Toyota, Mazda) 
2. Second Auto Works* (Nissan, Honda, PSA Group)
3. Shanghai Auto (VW and GM) 
4. Beijing Auto (Jeep, Mercedes and Hyundai) 
5. Guangzhou Auto (Honda, Toyota) 
6. Changan (Ford, Suzuki) 

*Second Auto Works changed its name to Dongfeng which means “East Wind”.  

2000s.  Big 3 Private Tigers Go Backdoor. Cities not selected to be in the exclusive Big 6 club wanted to build auto industries in their own backyards, too. But how? Enter genius entrepreneurs like Geely founder, Li Shufu and BYD founder, Wang Chuanfu who persuaded officials in Beijing to give them auto production licenses too.

1. Geely: (owns Volvo, Lotus) 
2. Great Wall: (The "Jeep" of China)
3. BYD: (Warren Buffett-invested)

2010s. Big Ambitions. By the early 2010s, Chinese leaders had arrived at two important new conclusions. First, China had a real opportunity to lead the world in future technologies including EVs and AVs.  Second, getting there would require new blood. The Big 6 state-owned enterprises were not innovative. And the Big 3 Private Tigers did not have enough capital.

2015. Tech Takes Charge. So, Beijing invited smart and highly profitable tech giants like Baidu, Alibaba, Tencent (BAT) to bring capital and innovation. The tech firms wasted no time. They started investing in EVs and AV and ride-hailing start-ups at a breathtaking pace. 

2018. China EV Gold Rush. Global investors like Sequoia, Softbank and Hillhouse Capital joined the river of billions of dollars into Chinese EV start-ups like XPeng and its first product, the G3. 

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Which brings us back to NIO. The cash-burning start-up looks fragile. They’ve delivered less than 2,000 cars since June, with pre-orders short of 20,000.  And yet the company managed to capture $1 billion via the IPO in New York. How can that happen? 

NIO and its start-up EV rivals are bets on the future. Bets that China will indeed create competitive EV companies powered by a massive home market, deep subsidies and no end of capital. 

It's a freight train a comin' - one driven by the same political engineers that took China from an automotive industry-nobody in the 1980s to the the world's largest - by far - today.

For investors, a decision: Jump aboard or stand clear. 

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- PAGE 2 -

ELECTRICS • AUTONOMOUS • RIDE-SHARING• NEW DEALS 

ELECTRICS


>> China EV Record.
 Chinese consumers bought a record 600,000 EVs through the first 8 months of 2018, up an astonishing 88% YoY.

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Takeaway:  Demand for EVs is sizzling at a time when China's light vehicle demand has been trending negative for the past three months. Government EV incentives and quotas are working.  

>> Envision Battery. Envision plans to make batteries in Japan, the United States, the UK and China after acquiring a battery operations from Nissan. 

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Takeaway: Envision thinking big and global, not piecemeal. Other investments include ChargePoint, AutoGrid, Germany's Sonnen and Norways' Bazefield.  

>> Toyota/Geely. Toyota might be in talks with Geely to share hybrid technology. 

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Takeaway.  Toyota up until now been extremely reluctant to make its hybrid technology available in China. Toyota and Geely have even clashed over the Toyota logo. Electrification quotas start in 2019. Toyota might elect to license its hybrid know-how, despite the risks.  

AUTONOMOUS

>> Waymo/Testing.  Waymo established a commercial presence in Shanghai last month so let us see how soon the company secures a testing permit.

Takeaway: Baidu has been the undisputed leader in China's autonomous vehicle space. That Shanghai approved Waymo's entry indicates that the Chinese are prepared to encourage some foreign competition. 

RIDE-SHARING

>>Go-Jek. Tencent-backed Go-Jek, Indonesia's most valuable start-up,  is open for officially business in Vietnam under the name Go-Viet.  

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Takeaway:  Grab and Go-Jek may be a quiet cradle of inventive mobility services. You can order up delivery of food, a house cleaning crew, a beautician, a masseuse, even on-demand entertainment. 

NEW DEALS

>> Go-Jek.  Go-Jek is expected to draw a fresh $2 billion from investors for expansion before the end of 2018. 

Takeaway:  Look for Go-Jek to use fresh funding to push into Grab strongholds in Thailand and Vietnam. 

>> Meituan. Meituan raised $4.2 billion in a Hong Kong listing last week. The share price indicates a company value of $53 billion.


Takeaway: Meituan looks like it is backing away from plans to challenge Didi in the ride-hailing space. Too much cash burn for the now public company. 

>> Lucid.  A Saudi Arabian fund is investing $1 billion into Lucid, an all-electric premium start-up based in Palo Alto, California. 

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Takeaway: Lucid drew its early funding from Jia Yueting. Mr Jia also has a stake in Faraday Future and his own company, Le Eco. With the Saudi investment, is Mr Jia now sidelined? 

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