China’s US$87B electric-car giant hasn’t sold a vehicle
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China Evergrande New Energy Vehicle Group Ltd.’s expansive pop-up showroom sits at the heart of Shanghai’s National Exhibition and Convention Center. With nine models on display, it’s hard to miss. The electric car upstart has one of the biggest booths at China’s 2021 Auto Show, which started Monday, opposite storied German automaker BMW AG. Yet its bold presence belies an uncomfortable truth — Evergrande hasn’t sold a single car under its own brand.
China’s largest property developer has an array of investments outside of real estate, from soccer clubs to retirement villages. But it’s the recent entry into electric cars that’s captured investors’ imaginations. Shareholders have pushed Evergrande NEV’S Hong Kong-listed stock up more than 1,000 per cent over the past 12 months, allowing it to raise billions of dollars in fresh capital. It now has a market value of US$87 billion, greater than Ford Motor Co. and General Motors Co.
Such exuberance over an automaker that has repeatedly pushed back forecasts for when it will mass produce a car is emblematic of the froth that has been building in EVS over the past year, with investors plowing money into a rally that briefly made Elon Musk the world’s richest person and has some concerned about a bubble. Perhaps nowhere is that more evident than in China, home to the world’s biggest market for new energy cars, where a mind-boggling 400 EV manufacturers now jostle for consumers’ attention, led by a cabal of startups valued more than established auto players but which have yet to turn a profit.
Evergrande NEV was a relatively late entrant to that scene.
In March 2019, Hui Ka Yan, Evergrande’s chairman and one of China’s richest men, vowed to take on Musk and become the world’s biggest maker of EVS in three to five years. Tesla Inc.’s Model Y crossover had just had its global debut. In the two years since, Tesla has gained an enviable foothold in China, establishing its first factory outside the U.S. and delivering around 35,500 cars in March. Chinese rival Nio Inc. earlier this month reached a significant milestone when its 100,000th EV rolled off the production line, prompting Musk to tweet his congratulations.
Despite his lofty ambitions and Evergrande NEV’S rich valuation, Hui has repeatedly pushed back car-production targets. The tycoon’s coterie of rich friends, among others, have stumped up billions, but making cars — electric or otherwise — is hard, and hugely capital intensive. Nio’s gross margins only flipped into positive territory in mid-2020, after years of heavy losses and a lifeline from a municipal government.
Speaking on an earnings call in late March after Evergrande NEV’S full-year loss for 2020 widened by a yawning 67 per cent, Hui said the company planned to begin trial production at the end of this year, delayed from an original timeline of last September. Deliveries aren’t expected to start until some time in 2022. Expectations for annual production capacity of 500,000 to 1 million EVS by March 2022 were also pushed back until 2025. Still, the company issued a buoyant new forecast: 5 million cars a year by 2035. For comparison, global giant Volkswagen AG delivered 3.85 million units in China in 2020.
It’s not just Evergrande’s delayed production schedule that’s raising eyebrows. A closer look under the company’s hood reveals practices that have industry veterans scratching their heads: from making selling apartments part of car executives’ KPIS, to attempting a model lineup that would be ambitious for even the most established automaker.
A closer look at Evergrande NEV’S operations reveals the extent of its unorthodox approach. While it’s established three production bases — in Guangzhou, Tianjin in China’s north, and Shanghai — the company doesn’t have a general car assembly line up and running. Equipment and machinery is still being adjusted, according to people who have seen inside the factories but don’t want to be identified discussing confidential matters.
In a response to questions from Bloomberg, Evergrande NEV said it was preparing machinery for trial production, and would be able to make “one car a minute” once full production is reached.
The company is targeting mass production and delivery next year of four models — the Hengchi 5 and 6; the luxe Hengchi 1 (which will go up against Tesla’s Model S); and the Hengchi 3, according to people familiar with the matter. The company has told investors it aims to deliver 100,000 cars in 2022, one of the people said, roughly the number of units Nio, Xpeng Inc. and Li Auto Inc., the other U.s.-listed Chinese EV contender, delivered last year, combined.
Its workers are also being asked to help sell real estate, the backbone of the Evergrande empire.
Meanwhile, the ambitious targets have Evergrande NEV turning to outsourcing and skipping procedures seen as normal practice in the industry, people with knowledge of the situation say.
While it’s hiring aggressively and recently scored Daniel Kirchert, a former BMW executive who co-founded EV startup Byton Ltd., the firm has contracted most of the design and R&D of its cars to overseas suppliers, some of the people said. Contracting out the majority of design and engineering work is an unusual approach for a company wanting to achieve such scale.
One of those companies is Canada’s Magna International Inc., which is leading the development of the Hengchi 1 and 3, one of the people said. Evergrande NEV has also teamed with Chinese tech giants Tencent Holdings Ltd. and Baidu Inc. to co-develop a software system for the Hengchi range. It will allow drivers to use a mobile app to instruct the car to drive via autopilot to a certain location and use artificial intelligence to switch on appliances at home while on the road, according to a statement last month.
Rather than staggering model releases, Evergrande NEV appears to be rolling out every type of car all at once under its Hengchi brand, which sports a roaring gold lion on the badge and translates loosely to ‘unstoppable gallop.’ The nine models being launched span almost all major passenger vehicle segments from sedans to SUVS and multi-purpose vehicles. Prices will range from about 80,000 yuan (US$12,000) to 600,000 yuan, although the final costs could change, a person familiar said.
That’s a completely different product development strategy to EV pioneers like Tesla, which only has four models on offer. Nio and Xpeng have also chosen to focus on just a handful of marques, and even then are struggling to break into the black.
“The market has proved the effectiveness of the ‘one product in vogue at one time’ strategy,” said Zhang Xiang, an automobile industry researcher at the North China University of Technology. “Evergrande is offering many products and expects a win. There’s a question mark over whether this will work.”
While there’s no suggestion Evergrande’s approach violates any regulations, its stock-market run could be in for a reality check. After similarly hefty market gains, some EV startups in the U.S. that have yet to prove their viability as revenue-generating, profitable entities have lost their shine over the past few months amid concern about valuations and as established carmakers like VW move faster into EV fray.