The sun is rising on China's electric vehicle industry.
Supportive government policy and strong investor appetite are driving growing production of battery-powered vehicles.
In the first quarter of 2018, China produced some 108,000 battery-powered vehicles and some 102,000 were sold – increases of 124.7% and 131% on the same period a year earlier, Ministry of Industry and Information Technology data shows.
The world's second largest economy is now its biggest electric car market, accounting for 40% of the global electric vehicle fleet and half of global sales in 2017, according to the International Energy Agency’s ‘Global EV Outlook 2018’.
Regulators have been supportive, including providing subsidies to manufacturers. In a sign of how regulators want the market to develop, a tweak to the subsidies took effect on June 12, providing more support for higher-quality vehicles that consumer less energy.
One investor with a unique perspective on the electric vehicle market is NIO Capital, a private equity fund affiliated with NIO, a Beijing-based electric vehicle unicorn that has raised more than $2.6 billion from investors including Tencent. NIO Capital is tasked with finding opportunities right along the electric vehicle production chain.
“We definitely believe in the electric vehicle ecosystem, in fact we are trying to form the ecosystem,” Ian Zhu, a partner in NIO Capital, told FinanceAsia in an interview.
And while government support remains a key factor in the growth of electric vehicles — as in other nascent industries, such as solar energy — Zhu says market forces are now a key factor in the market's growth.
“Economically, investing in the Chinese electric vehicle industry starts to make sense,” Zhu said — besides the environmental and social benefits of the technology.
MULTIPLE OPPORTUNITIES
While the growth of China's electric vehicle sector in recent years has been exponential, the industry remains very much in its developmental stage — and there are opportunities emerging across the value chain.
Looking upstream, car components — and especially batteries — are the hottest area of interest.
“We look at the battery makers whose products offer the highest energy density, longest cycle life, and best performance in low or high temperature,” Zhu said.
Technology leadership matters significantly in the battery case, as large groups such as China's CATL and foreign players Panasonic, LG and Samsung are all playing in the field. “It is a scale game,” Zhu added.
Chinese regulators clearly feel the same.
Under the new policy that took effect this week, subsidies go toward electric cars with stronger technical indicators. Specifically, subsidies to models with longer ranges (those that can travel for 250 km and more on a single charge) have been increased, while subsidies to models that can travel less than 150 km have been removed.
Further along the value chain, car makers, who are able to launch products with a good match between the performance parameter and price could also make attractive investment targets. “Who collectively make the best product will win a significant market share,” Zhu noted.
And despite the threat from new players, Zhu still sees opportunities for traditional car makers. He believes they will be able to use their traditional expertise and experience of making attractive cars, but must learn how to cooperate with technology firms.
Zhu also sees opportunity in the areas of operations and services, especially given the emergence of concepts such as autonomous driving and connected vehicles — vehicles linked to the internet and capable of sharing information with other devices inside or outside the car.
“We are investing in tech firms providing the best artificial intelligence solutions,” Zhu said, adding that to identify the right targets, his fund rather takes a bottom-up approach — thinking about what the person who ends up driving the electric car will really want.
Infrastructure also offers promising investment targets, such as battery swapping stations, and other distributive power infrastructure including solar, battery and charging stations.
DON'T DIG TOO DEEP
Opportunities and risks always go hand in hand, especially in emerging industries like electric vehicle.
For tech-focused investor like NIO Capital, the safest bet is to stick to what it knows rather than going digging for gold in the natural resources sector.
“There are things we clearly exclude, mining for instance,” said Ian Zhu.
While scarce lithium is vital to the batteries electric vehicles rely on, NIO Capital sees lithium mining as “an entirely different business” from what it typically does.
Its concerns about the sector include pricing dynamics and the difficulty of having the right people in place to deal with unspecified "political issues".
Regulatory issues are also a core concern when it comes to areas the fund has already invested in. While government intervention in the industry has helped bring opportunities, it is also a significant source of risk.
For example, while national-level policies are shifting clearly towards favouring high-end products and services, there is no guarantee local governments will follow suit, especially if local authorities want to protect homegrown businesses.
At the same time, regional government support could allow cost curves at second- and third-tier manufacturers fall sharply. But this would put at risk genuine cost savings driven by real improvements in productivity as a result of technical evolution, which would enhance a target company's competitiveness.
“So, do not underestimate what local governments are able to do, and be very careful about the [lower-tier] investment target,” Zhu emphasised.
PLAYING THE LONG GAME
Globally, the electric vehicle industry is embryonic. That makes it a field for investors with longer duration profiles and a long-term vision.
“When you look at innovations in the field, you need to look beyond the typical Silicon Valley technology investment length,” Zhu noted, pointing out that the electric vehicle industry burned through cash much quicker than, say, an IT firm.
However, the growth of electric vehicles is all about future sustainability, he added.
According to Zhu, NIO Capital has attracted investments from a large Asian sovereign wealth fund, a few multinational insurers seeking financial returns, and several large corporations whose businesses will face a large impact from the growth of electric vehicles.
And Zhu says the electric car investor needs to look past bold claims for the industry's future and lofty environmental values to focus on the most important point in any investment: making the right decision.
“People bought an electric vehicle because it is a better product [than a traditional automobile], not because they want to be just environmentally conscious,” Zhu stressed.
