Electric vehicles (EVs) hit the headlines again last week after two separate events when EVs burst into flames in China. Tesla and NIO, two EV makers that are listed on Nasdaq and NYSE respectively, said they are investigating the cases but no details have been released.
Despite the furore, investors are not steering clear of the sector, in fact they might double down specifically on battery safety investments.
Ian Zhu, managing partner of NIO Capital, is typical. He dismisses the recent fires as small incidents and speaks about the opportunities in the car and battery safety business.
Established in 2016, NIO Capital was founded by Chinese EV maker NIO in partnership with Sequoia Capital China and Hillhouse Capital to invest in the automotive sector, logistics, energy and new technologies. Most of its funding still comes from outside legal partners, high net-worth clients, listed companies and local governments.
NIO itself, which takes Tesla as its benchmark and produces electric passenger vehicles, listed on NYSE in September last year.
Compared to their US rivals, the valuation of Chinese EV startups is still low. Zhu says that NIO Capital is always looking for billion-dollar business opportunities from startups with leading technologies. What NIO Capital does is to pull the traditional car manufacturer and new tech startups together and to get them to adjust to the new synergies.
Zhu is optimistic about the current development of EV batteries but remains doubtful about ride-sharing platforms. He confirms that NIO Capital is looking into some power management projects at the moment.
The following conversation with Ian Zhu has been edited for brevity and clarity.
Q How many funds does NIO Capital have?
A Our first fund is an RMB fund which totals Rmb3 billion ($445 million). We have invested in 20 projects from early to late stage ones. These include some pre-IPO projects. One of our investees, Ronbay Technology, was among the first to apply to list on the new technology innovation board in Shanghai. We have already distributed cash to our investors on another project - as we have started to make money.
We also have a USD fund which focuses on venture stage innovations in China. NIO Capital has invested in six companies using this fund which totals around $100 million. The investors in the USD fund include oil companies BP and Total, a large European car manufacturer, one sovereign wealth fund, banks and insurance companies.
Q Where has your focus been recently?
A For the past two years we have focused on autonomous driving. For example, we have completed investment in 80% of sectors in the whole industrial chain of autonomous driving.
Pony.ai, the best autonomous taxi company in China, is one of our investees. We also invested in Momenta, one of the best level three autonomous driving companies in China. We recently funded another visual chip startup called Black Sesame Technology. And laser radar startup Innovuision is another project in which we have invested. Most of the companies we invest in are automobile-oriented and use component, algorithm and advanced technologies.
Next, we are going to focus on how to apply these technologies in real life. For example, our latest investment is a logisic application. We invested in TrunkTech, which provides autonomous driving algorithms for port logistics. Another one is Inceptio Technology, which develops autonomous driving technologies for trucks.
Q How do you choose the companies in which you invest?
A As an investor, we focus on a big market - it needs to have a space to grow large and to provide various opportunities in industry.
We will invest in a company that can add more than Rmb1,000 in value to each car. Every year around 100 million cars are manufactured, and that can add up to a Rmb100 billion market. With the application of new technologies, there will be a lot of opportunities like this.
A good team is also essential, whether they have the right background and experiences. We will also invite experts in the auto industry to evaluate the technology of these startups, and hope to get at least a prototype out of it.
Where we can help the most is as the technology goes to market. We understand more about the automotive market as we are an industry-focused investor.
Our portfolio structure is a little different from others, because we also invest in some late-stage ventures. As most of our investees already have a prototype, we have a lower failure rate. We expect more than 50% of them to be successful, which means a return of five to 10 times, or even higher.
Q How do you value these automotive startups?
A The application scenario is what we focus most on when valuing a company. This defines how large the business can be. One standard we have when looking at investing is whether this company can grow to a valuation of $10 billion. Because China is a big market, with a similar culture, a business can be easily replicated in different regions.
Second, we will judge whether the company is a leader in its field. If it is a leading startup that can be applied to the market as a whole, we will not hesitate to value it properly. When we compare autonomous driving companies in the US and China, the value of leading startup companies in the US is 10 times higher than those of their counterparts in China.
Q Are valuations too high?
A I don’t think so. All the leading Chinese startups in this industry are undervalued. Chinese investors are more practical, which means that there is more of a focus on the startup’s financial health.
RMB investment in China is very profit-oriented. If we look at how the RMB market exits, most require startups to be profitable when they apply for an IPO. Although we do have the technology innovation board now in Shanghai, the first batch to apply for an IPO are all profitable companies. Even USD funds in China are partially influenced by the profit-driven standard in the region.
Some large sovereign wealth funds have participated more in the US than they have in China, which is another reason why US startup valuations are higher. But I do believe that a leading company with good technology will eventually get the recognition from big investors.
Funding in the Chinese new automotive sector is still not enough. Many investors just follow trends blindly, without thinking too deeply about them. They enter a market quickly, but they also exit quickly once there’s any uncertainty. I hope to see more investors who have joined after thorough analysis. And sovereign wealth funds can fund some trusted local general partners to make good investment decisions.
Q What is the average holding period for NIO Capital’s projects?
A We will generally exit the project at the right time. We have two projects where we will exit in two years’ time, and there are about four projects that we will exit in four years’ time.
Q What do you need to think about when investing in the automotive industry?
A Automobile development has a long life cycle. The design was probably developed three to five years before the manufacturing. But technology upgrades very quickly. Only one or two weeks is needed to update software and get it out to customers. How to combine these two very different life cycles industries is a big challenge for us.
Our investments tend to help tech companies understand the cycle of traditional automobile companies and adapt to it. We also help traditional car manufaturers to adjust more quickly with technology upgrades, and use the power of capital to the pull two sides together.
Q How do you view the technology developments for electric vehicle battery?
A Current battery development can meet market demand. The battery cost is one tenth of what it was 10 years ago. That is quite cheap if you look at the energy system as a whole.
I don’t think people should worry too much about mileage. When you use an EV in the city, it is impossible to drive more than 100 km a day. Plus, I can charge it at night. The user experience is already very good.
It might be more problematic for customers who don't have their own charging piles. It may require battery changing services or a charging pile set up in office buildings. EV maker NIO now offers door-to-door charging services for its owners, which cannot be done on traditional fuel engine cars.
We need to think about it from the EV’s angle, instead of viewing things from a traditional perspective.
Q How do you view car rental platforms in China?
A It is a bit difficult to expand the car rental market in China. Because calling a taxi is cheaper than renting a car, it is not a low cost option. The rental market can only target customers with high end services in China.
Also, I think it will be difficult for ride-sharing services in China. Take Uber for example. I used to like its services a lot, but the service level has reduced recently. Drivers are joining Uber as a profession now, rather than using it their spare time to make some extra money. These new drivers don’t have professional experience as taxi drivers, and the quality of service has fallen.
Q Will you invest in ride-sharing services?
A We invest in new models of transport, especially new models of legitimate transport. For example, we invested in a taxi service platform that makes online reservations for licensed taxi services. I find it interesting because we have a lot of taxis in China and it can generate 50 million transactions a day, mostly offline. If we can make half of these services online, it will generate huge revenue and traffic. We put taxi services online with Dida Chuxing.
We are still investing in anything that upgrades transportation, but what we look for is a fundamental change to the sector.
Q In what recent projects has NIO Capital invested?
A The energy industry is on our radar. Opportunities not only lie in EV charging, but also in energy trading and data analysis. Energy storage costs little nowadays and an energy storage plant can be set up in three months. AI and big data will help promote the energy storage business.
We may soon secure investment in a building power management company. And earlier this month we took a stake in Yiqi Exchange, a battery changing platform for scooters. We hope to build a network effect and let Yiqi’s product become the standard in its field and include more users in the future.
We are also looking into advanced technology and smart vehicles.
Q How would you describe the current pace of investment in the automotive sector?
A I think we are going along the right lines. The Chinese market cooled down in the second half of last year. Companies are now more realistic about investment since RMB funding has declined. The pace of investment has slowed down again recently. It is a very good time now.
Q Are you worried that startups may list on the technology innovation board to get funding, rather than raise money from venture capitalists?
A No, I am not. People are still waiting to see how the new technology innovation board in Shanghai will work in practice.
