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Tesla's surge sparks IPO rush among Chinese EV startups

Chinese startups XPeng Inc. and Li Auto Inc. are among several electric-vehicle makers that are looking to capitalize on investors' search for the next Tesla Inc. and to prepare war chests to survive the upcoming onslaught of electric vehicles by bigger, global brands on their home turf.

Despite escalating geopolitical tension between the U.S. and China, Guangzhou-based XPeng on Aug. 27 became the second Chinese EV company after Li Auto to go public in the U.S. in under a month. XPeng's shares jumped 41.47% on its NYSE debut, while Li Auto's stock has jumped nearly 42% since its listing on the Nasdaq Stock Market on July 29.

In 2020, as of Aug. 31, Tesla's stock has soared more than 435%, prompting the high-profile carmaker to announce a 5-for-1 stock split to attract smaller investors and issue additional common stock worth $5 billion. Shares of NYSE-listed Chinese EV-maker NIO Ltd. have gained nearly 395% during the period. NIO on Aug. 31 issued additional American Depositary Shares to raise up to $1.73 billion.

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In addition to XPeng and Li Auto, U.S.-based Fisker Inc., Canoo Inc. and Lordstown Motors Corp. have announced reverse mergers to go public, while Rivian Automotive LLC raised $2.5 billion in private equity funding over the past two months. Chinese EV-maker WM Motor Technology Co. Ltd. is seeking to list on Shanghai's tech-focused STAR board in early 2021, while robotruck maker Beijing TuSimple Future Technology Co. Ltd. reportedly is eyeing a U.S. listing.

The surge in investment in EV companies also is a result of investors buying into the Chinese government's vision to have clean energy vehicles account for 25% of all auto sales by 2025, analysts said. This is a significant shift in attitude even as conventional automakers continue to be assessed on near-term cash flow and profits.

"As long as investors are comfortable with the ideas, valuation, things are going to be fine over the near term. But at the end of the day it can be five years from now, eventually these companies will have to justify their valuation with cash flow or profit, so that's something that these companies would like to work on," said Ivan Su, an analyst at Morningstar.

The Tesla effect

Tesla's launch of locally made Model 3 sedans in January has delivered a much-needed jolt to the Chinese electric-vehicle market, turning many upper-middle-class car buyers into first-time owners of electric vehicles. In July, EV sales grew year over year for the first time in 13 months with the sale of 66,992 battery electric vehicles, of which 11,014 were Tesla's locally made Model 3 sedans.

"Tesla's role in the market is incredibly positive in terms of driving overall consumer awareness and excitement about EVs," said Rupert Mitchell, chief strategy officer at WM Motor.

However, luxury EV offerings from homegrown makers such as XPeng, Li Auto and WM Motor lack the recognition and brand appeal of Tesla, analysts said.

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"Tesla has done a brilliant job of marketing [itself] as a great brand, a cool car that [just] happens to be electric," said Tu Le, founder and managing director of Sino Auto Insights.

The U.S. carmaker also is eating into the share of other global luxury vehicle brands as major Chinese cities, such as Beijing, Shanghai and Shenzhen, continue a strict licensing quota for combustion engine vehicles.

Morningstar's Su said the reason Chinese consumers bought EVs was not only Tesla cars "are good looking and aspirational, [but] it's also because they can't get the license to buy BMW and Mercedes," which currently do not have models in this category.

Product differentiation

But the premium EV segment is set to get crowded within months as Volkswagen AG, the top-selling automaker in China, is expected to launch the first of several battery electric vehicle models in October. Daimler AG's Mercedes-Benz, Bayerische Motoren Werke AG, Toyota Motor Corp. and General Motors Co. are expected to announce competing products over the next few months. There also is likely to be competition from local rivals such as Geely Automobile Holdings Ltd., which announced a $2.93 billion capital raise to fund its EV push at Shanghai's STAR board, and BYD Co. Ltd.

"If these Chinese EV startups are not able to carve out a position in the market, they are going to get squeezed out because VW is going to have a product for every segment," Sino Auto Insights' Le said.

To compete, Chinese carmakers are offering differentiated products and services. NIO on Aug. 20 launched a battery-swapping subscription service at 980 yuan a month that will cut the price of its cars by 70,000 yuan. It is also looking to build customer loyalty through initiatives such as a members-only clubhouse at an upmarket shopping district in Beijing.

"EV is not just a car, it needs to come with service and the community. NIO had focused a lot on branding, community and the product ecosystem," said Joe Wong, general manager, integrated marketing services at George P. Johnson Experience Marketing.

On the other hand, XPeng is focusing on software and trying to establish itself as a specialist in autonomous driving with its XPilot system, while Li Auto is focused on battery range, a key EV parameter, and uses a small auxiliary gasoline engine that helps extend the range of its cars to a market-leading 800 kilometers, or almost 500 miles.

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The focus on premium SUVs, a segment favored by Chinese car buyers, is another differentiator for these Chinese manufacturers. But once Tesla launches its Model Y later in 2020, that advantage will not last, Bernstein auto analyst Robin Zhu warned in a research note.

Industry observers believe that given the vastness of the Chinese auto market, the homegrown startups will have plenty of growth opportunities, especially as the charging infrastructure improves.

"I think ultimately [for the] health and growth of the industry, continuous investment in infrastructure is much more significant a driver than direct purchase subsidies," said WM Motor's Mitchell.

Also, these companies can count on the government to step in to make sure homegrown players are leading the charge in the long run, analysts said.

"There's no way that the Chinese government is going to let foreign automakers lead the EV sector for a long period of time," Sino Auto Insights' Le said. "Right now, it is okay to let Tesla lead because they bring a spotlight onto it, and everyone can grow. But once the market gets more mature and competition more fierce, there's bound to be some protectionism if it looks like the Chinese EV-makers are struggling."