Evergrande shares are up more than 1,000% in one year
The ‘boom’ of the electric car that China is experiencing has distributed the leading role among a significant number of firms that fine-tune their models to compete in the market. Of all of them, Evergrande is perhaps the one that best symbolizes the high expectations that are being generated in advance: it reaches a market capitalization of 87,000 million dollars, greater than that of giants in the sector such as the American Ford and General Motors, without having still sold only one vehicle.
China’s largest real estate developer has a number of investments outside the sector, from soccer clubs to retirement complexes. But it’s their recent entry into the electric car industry that has caught the attention of investors. Shareholders have caused Evergrande’s shares, which are listed in Hong Kong, to rise more than 1,000% in the past 12 months, raising billions of dollars in fresh capital.
This hysteria around an automaker that has repeatedly delayed forecasts of when it will produce a series car is a sharp reflection of the ‘sparkling’ moment , as they say in market lingo, which has been generated around the electric cars in the last year, with investors who have invested money in a career that has made Elon Musk the richest person in the world and that adds many voices warning of the risk of a bubble.
The truth is that Evergrande was a relatively late participant in this scenario. In March 2019, Hui Ka Yan , president of Evergrande and one of China’s richest men, promised to take on Musk and become the world’s largest electric vehicle maker within three to five years. Tesla’s Model Y crossover had just made its world debut.
In the two years since, Tesla has built an enviable position in China, establishing its first factory outside the US and delivering some 35,500 cars in March. Its biggest Chinese rival, Nio, reached a major milestone earlier this month when its 100,000th electric vehicle rolled off the production line, prompting Musk to tweet congratulations.
By contrast, despite his lofty ambitions and Evergrande’s high valuation, Hui has repeatedly pushed back on car production targets . The mogul’s group of wealthy friends, among others, have contributed billions, but making cars, electric or not, is difficult and requires a lot of capital. Nio’s gross margins did not enter positive territory until mid-2020, after years of heavy losses and help from the municipal government.
Speaking at an earnings conference in late March, after Evergrande’s losses for the full year 2020 rose a whopping 67%, Hui said the company planned to start trial production later this year, with a delay. compared to the original September deadline. Deliveries are not expected to begin until sometime in 2022 . Expectations of an annual production capacity of between 500,000 and a million electric vehicles by March 2022 have also been pushed back to 2025. Still, the company issued a new optimistic forecast: five million cars a year by 2035. By comparison , the global giant Volkswagen AG delivered 3.85 million units in China in 2020.
It’s not just the delay in Evergrande’s production schedule that is raising eyebrows. A closer look under the hood of the company reveals practices that have industry veterans taking their heads : from making apartment sales a part of automotive executives’ KPIs or benchmarks, to trying a model line that would be ambitious for even the most established automaker.
“It’s a strange company,” says Bill Russo, founder and CEO of the consulting firm Automobility in Shanghai. “They have invested a lot of money that has not brought them anything, and they are also entering a sector in which they have very limited knowledge. And I’m not sure they have the technological advantage of Nio or Xpeng,” he adds, referring to Chinese manufacturers of electric vehicles that are listed on the New York Stock Exchange and that are already implementing smart functions in their cars, such as laser navigation.
A closer look at Evergrande’s operations reveals the extent of its unorthodox approach . Although it has established three production bases – in Guangzhou, Tianjin in northern China, and Shanghai – the company does not have a widespread car assembly line in operation. Equipment and machinery are still being adjusted, according to people who have seen inside factories but do not want to be identified to discuss confidential matters.
In response to questions from Bloomberg , Evergrande says it is preparing the machinery for trial production and will be able to produce “one car per 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 luxurious Hengchi 1 (which will take on Tesla’s Model S) and the Hengchi 3-, according to people familiar with the. affair. The company has told investors that it aims to deliver 100,000 cars by 2022 , according to one of the people – roughly the number of units that Nio, Xpeng and Li Auto, China’s other publicly traded electric vehicle competitor, delivered together in the year. past.
The company’s quirks don’t end here. From the top it also asks its workers to help sell real estate , the backbone of the Evergrande empire. New hires have to undergo internal training and attend seminars that educate them on the company’s real estate history and have nothing to do with car manufacturing.
In addition, employees in all departments, from front-line workers to administrative staff, are encouraged to promote apartment sales, whether by posting ads on social media or by taking family and friends to the centers. sale to make them look busy. Senior-level staff even have their performance bonuses tied to such efforts, people familiar with the measure reveal.
Meanwhile, Evergrande’s ambitious goals mean it is turning to outsourcing and skipping processes that are considered normal industry practice, say people familiar with the situation. Although it is hiring aggressively and recently hired Daniel Kirchert, a former BMW executive who co-founded the electric car company Byton, the company has contracted most of the design and R&D of its cars from foreign suppliers . Hiring out most of the design and engineering work is unusual for a company that wants to reach such a scale.
14 models at a time
One such company is Canada’s Magna International, which is leading the development of the Hengchi 1 and 3. Evergrande has also partnered with Chinese tech giants Tencent and Baidu to jointly develop a software system for the Hengchi range. This will allow drivers to use a mobile app to command the car to drive on autopilot to a certain location and use artificial intelligence to turn on appliances at home while on the road.
An Evergrande spokesperson has confirmed that it was working with international partners such as Magna , EDAG and Austrian parts maker AVL on the development of “14 models simultaneously”. Representatives for Magna have declined to comment. A Baidu spokesperson has said the company had no further details to share, while a representative for Tencent claims that the alliance for the software is with a related company called Beijing Tinnove Technology that operates independently and has also not made any statements.
Rather than stagger model releases, Evergrande seems to want to debut all at once under its Hengchi brand, which sports a roaring golden lion on the badge and translates, more or less, to “unstoppable gallop.” The nine models that are launched at once cover almost all the main passenger vehicle segments, from saloons to SUVs and multipurpose vehicles. Prices will range from 80,000 yuan ($ 12,000) to 600,000 yuan ($ 92,300) , although final costs may vary, according to a person familiar with the matter.
This is a completely different product development strategy than that of electric vehicle pioneers like Tesla, which only offers four models. Nio and Xpeng have also chosen to focus on a handful of models, and even then they are struggling to break into the market.
Without any long-term car manufacturing knowledge, Evergrande has issued uncompromising directives to meet its latest production targets. Two models, including the Hengchi 5, a compact SUV that competes with Xpeng’s G3, will go into series production in just over 20 months. To meet this deadline, certain industrial procedures may be omitted, such as the manufacture of ‘mule cars’ or test vehicles equipped with prototype components that require evaluation. Evergrande explains to Bloomberg that it has entered a “sprint phase towards mass production.”
Although it is not suggested that Evergrande’s approach violates any regulations, its stock market career could be subjected to the scrutiny of reality itself. Having made a lot of money in the market, some US EV start-ups, which have yet to prove their viability as profitable and income-generating entities, have lost their luster in recent months due to concerns about valuations already that established automakers such as Volkswagen are rapidly entering the fray for electric vehicles.
Beijing looks askance
The multibillion dollar rise in the sector has also not escaped Beijing’s attention. Evergrande shares fell last month after an editorial by the state-run Xinhua news agencyexpress its concern about the evolution of the electric vehicle sector. According to the letter, which specifically named Evergrande, companies that shirk their responsibility to build quality cars, the blind rush of local governments to attract projects, and the high valuations of companies that have not yet delivered a rating are of particular concern. series production car only. “The huge difference between production capacity and market value shows that the market for next-generation electric vehicles is being exaggerated,” the editorial noted.
Still, Evergrande shares have risen 18% since then, driven by prospects for the Chinese electric car market. Electric vehicles currently account for about 5% of annual car sales in China, according to data from BloombergNEF, and demand is forecast to skyrocket as the market matures and electric car prices decline. Electric vehicle sales in China could rise more than 50% this year alone , according to research company Canalys in a February report.
Skeptics keep warning. “The market is filling up with people, but unless you have a preferred lane, there is not much chance of winning,” says Russo of Automobility. “Maybe there is some synergy with the real estate business, but right now it is an electric car story, and quite expensive,” he points in the direction of Evergrande.