The cash is flowing for China’s electric car hopefuls, and not because they’re making heaps of it – or vehicles. But what can you expect if Tesla Inc. is the industry pioneer?
Sucking up capital is reminiscent of Tesla’s trajectory (and arguably, ongoing path). But that shouldn’t justify this current frenzy. Elon Musk’s car venture had a first-mover advantage that the others never will. Through its 10-year journey as a public company, Tesla has mostly burned cash as it tried to sort out production processes. No one else will get that luxury, despite the money coming in.
New York-listed Chinese upstart Nio Inc. announced Jan. 11 that it was issuing $1.3 billion of convertible debt. XPeng Inc., another electric auto company, signed an agreement last week for a $2 billion credit line with a group of domestic banks after raising $2.2 billion in December. These follow other debt and equity offerings by the firms in recent months.
For its part, Tesla was sitting on over $15 billion of debt as of September. The firm said in December it plans to sell as much as $5 billion of common stock over time. Two multi-billion dollar raises earlier in 2020 helped boost spending on plants and equipment. It came close to its 500,000 vehicle delivery target for the year.
Musk observed that the latest offering aimed to retire debt and “have a bit more of a war chest… at the end of the day what is money? Money’s an entry in a database.”
Hopefully, China’s electric car makers won’t believe that: The fandom and free pass from bullish investors this early in their journey may prove to be fleeting.
Perhaps investors buying the stocks think that much like Musk’s struggles over the last couple of years, the new Chinese firms also need capital to bridge the gap until they’re able to scale up. These US-listed companies are often hyped as Tesla competitors. But for all that debt and equity they’re raising, they deliver just 5,000 to 7,000 cars a month, showing sharp increases only recently. Yet, their stocks are surging. Nio, for instance, hasn’t been profitable since inception and in a recent public offering document noted it may have to scale back operations if it can’t move into the black.
All this sounds like standard startup risk, but here’s the thing: Tesla shouldn’t be seen as a precedent. Musk started going down the electric car route early, building the hype and thus the brand. He created the halo around green cars. That propels much of his stock’s performance. Now, the game has changed. It’s less about getting people revved up for electric cars and futuristic technology and more in making good, affordable vehicles – at scale. The bar is higher than a decade ago.
For one, the competition has caught up. Urged ahead by emissions guidelines and the onslaught of Musk’s rhetoric, German companies like BMW AG, Volkswagen AG and Mercedes-Benz AG-owner Daimler AG tripled their sales of electrified vehicles to almost 600,000 in 2020. Volkswagen, the world’s largest automaker, delivered 212,000 vehicles last year that were either fully electric or hybrid. There is, after all, something to be said for German car manufacturing skills.
Can Nio, XPeng and Li Auto Inc. accomplish what Musk did and traditional firms have set out to do? Unlikely. Sure, there’s an edge in hailing from and operating in the world’s biggest auto market, where electric-vehicle sales are pulling ahead. Government support and China’s hold on the parts supply chain are key levers that Musk is pulling to his advantage. But some of the local players depend on others to build their models, as well as supply the parts. Nio leans on state-owned Jianghuai Automobile Group Co. for production prowess. The state-owned firm is better known for its partnership with Volkswagen. It’s hard to call the new entrants carmakers.
This capital exuberance for electric cars isn’t unique to Chinese firms, of course. Consider the blank check companies flooding the US stock market. Investors have piled into special purpose acquisition companies that raise cash in public offerings and then find a firm to buy. Automotive technology companies with limited track records have been frequent targets.
The reality is that investors latch on to concepts without looking for what the technology and company really bring to the table or what their financials show. A reassessment is due.
Bloomberg
