Investors pull plug on EV funding

By Reuters - Global Times Source:Reuters-Global Times Published: 2019/6/20 18:33:40

Start-ups jostle for attention in China’s crowded market


A view of the NIO House located in Shanghai in June 2018 Photo: VCG



Last year, Wei Qing and his private equity investment team visited more than 20 Chinese electric vehicle (EV) manufacturing start-ups. The end result? They decided not to invest in any.

"There are too many uncertainties from when a company tells a story in the early stage, to when it produces a sample car and raises funds, to the eventual mass production," said Wei, managing director at Shanghai-based Sailing Capital.

Wei, who declined to identify the EV makers his team visited, said that he thinks only a few of them will survive. Sailing instead decided to invest in an EV parts supplier, he added.

His concerns reflect what bankers describe as increasingly tough funding times for Chinese EV makers, which must jostle for attention in a crowded sector and produce convincing arguments about profitability despite government cuts to EV subsidies and plans to phase them out.

Numerous setbacks plaguing US EV giant Tesla in its quest for sustained profitability as well as a dramatic slide in sales and problems with some cars at Chinese start-up NIO Inc have also put investors on their guard.

As of mid-June this year, Chinese EV makers had raised just $783.1 million, compared with $6 billion for the same period a year earlier and $7.7 billion for all of 2018, according to data provider PitchBook.

One Hong Kong-based banker said he had been approached by at least a dozen EV makers seeking new funds but had to pass on most of them as they were not able to set themselves apart from the crowd.

Even fundraising efforts that have gotten off the ground are not moving as fast as EV makers would like.

"It is challenging," said the banker, who began working on one fundraising this year. "If you can get a meeting with investors, you can always tell a story, but some don't even reply to your requests for a meeting."

He declined to be identified as the negotiations were not public.

Subsidies dwindling

Eager to curb smog and jump-start its own auto industry, China has said it wants new-energy vehicles (NEVs) - which also include hybrids, plug-in hybrids and fuel cell cars - to account for one-fifth of auto sales by 2025 compared with 5 percent now.

Those ambitions have spawned a plethora of EV start-ups competing not just with each other, but also global automakers and Tesla, which plans to start production in China this year.

The first phase of Tesla's Gigafactory 3 in Shanghai will wrap up this summer and production will begin on the Model 3 by the end of the year, Tesla CEO Elon Musk has said.

About 330 EV companies are registered for some sort of subsidy, government data shows, although the number of better-established start-ups is much smaller, at around 50.

But amid criticism that some companies have become overly reliant on government funds, the Chinese government has reduced subsidies, raised the standards needed for vehicles to qualify and warned they will end altogether after 2020.

That has led to sharp slowdowns as vehicle prices rise. Sales of NEVs in May rose 1.8 percent year-on-year compared with 18.1 percent in April.

Surviving in this funding environment requires much cost discipline, said Daniel Kirchert, CEO at Chinese EV maker Byton.

"Given the current situation, it is not enough for any start-up to come up with good products and be fast to market. At least it's equally important to manage costs. Not only fixed costs but variable costs," he said.

Byton, which is backed by state-owned automaker FAW Group and battery supplier Contemporary Amperex Technology Co (CATL) is one of a few EV makers with a fundraising round in train, seeking $500 million.

Others include Leap Motor, backed by state-owned Shanghai Electric Group Corp and Sequoia Capital China, which is seeking $372 million as well as CHJ Automotive, founded by entrepreneur Li Xiang, which wants to raise as much as $500 million.

Those with successful funding under their belts this year include Baidu Inc-backed WM Motor Technology Co, which closed a $446 million round in March, according to PitchBook.

Some have obtained money outside private equity. E-Town Capital, a Beijing government investment firm, will invest 10 billion yuan ($1.4 billion) in a joint venture with NIO, which could help NIO build its own plant.

Tesla, NIO weigh

But overall, industry funding prospects are much bleaker, particularly as Tesla and NIO struggle.

Musk told Tesla employees in May that the $2.7 billion the company recently raised would give it just 10 months to break even at the rate it burned cash in the first quarter. Shares in the industry pioneer have slid 32 percent in the year to date.

NIO's shares have been hit harder, down 60 percent this year on a cut to its delivery outlook, a halving in first-quarter sales from the previous quarter, increased competition and reduced subsidies. It delivered 3,989 units in the first quarter.

Its reputation has also been hurt after three vehicles caught fire and by the inadvertent shutdown of a car on Beijing's Changan Avenue after the driver initiated a software update.

NIO's manufacturing base in East China's Anhui Province has an annual production capacity of 100,000 units, but this is insufficient, NIO Chief Executive Officer and founder William Li Bin told a conference in May.

The company, based in Shanghai, operates the factory at Hefei, capital of Anhui, together with Anhui Jianghuai Automobile Group Co.

"Some of the listed EV industry leaders are currently underperforming in the secondary trading market and that has created pressures for the sector's short-term outlook," said Brian Gu, president of EV start-up Xpeng Motors and a former senior JP Morgan banker.

"We are seeing investors become more cautious, selective and keenly focused on the frontrunners. I think this trend is likely to persist," he said.



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