Fundraising

Q&A: TH Capital on why autonomous driving has regained its momentum

Self-driving truck company TuSimple has closed its $215 million Series D round of funding. We speak with the financial advisor on that deal about the development of the market.

Autonomous driving startups are back into the limelight.

TuSimple, a unicorn developing self-driving trucks, completed another round of funding this year at $120 million on Tuesday.

South Korean auto component manufacturer Mando Corporation led the follow-on Series D funding. CDH Investments also joined the round, together with existing investor UPS.

The company's Series D funding now totals $215 million. TuSimple raised an initial $95 million Series D round from Sina in February.

TH Capital continues as the financial advisor to the funding and vice-president Zheng Yu shared some of his thoughts on China's self-driving market with FinanceAsia.

“It is a contest between the new and the old in the logistics industry,” Zheng said. “TuSimple’s technology has become best practice for autonomous driving.”

Founded in 2015, TuSimple got its testing license in the US in 2017. Last month, the company said that it now provides autonomous trucks around ports in Shanghai.

Autonomous driving has regained its momentum. Unlike the gold rush two years ago, investors are now focused on leading players within the field. Zheng suggests that investors set a standard and find the top companies within the self-driving market. Only then should they put money into the leading ones. "It is important for startups to solve an actual complex issue," Zheng said. "And we will see a global technology race."

The conversation below is edited for brevity and clarity

Q What is the current environment for Chinese autonomous driving like?

A If we look at the self-driving industry as a whole, we can see some commercialisation among the leading players. A lot of companies have spent the last decade doing research and development. But gradually since last year, they have started to sell their products. Some of the self-driving companies have formed a scalable business model and have begun to have a steady income.

China is one of the frontrunners in the autonomous driving sector, it probably ranks second in the world. But a lack of Chinese infrastructure and regulations may cause slower development when compared to the US.

Q Is there a big difference between the valuations of Chinese self-driving company and the US ones?

A There is quite a wide range in valuations of autonomous driving companies and although there is indeed a difference between Chinese and US companies, is not a huge gap. In early 2018, the Chinese market commanded a premium when compared to the US market, but valuations in China have fallen below those of US companies.

The difference between the valuation of Chinese startups and US ones is due to them being in different business cycles and economic environments.

Q Are startups more focused on passenger cars or commercial vehicles?

A The application for autonomous driving is quite diverse. Apart from its use for passenger vehicles, the technology can be used on trucks, shuttle buses, garbage trucks and taxi fleets.

There has been a similar trend in both China and the US over the past two years. Newly founded startups are focused on solving problems in one particular field which, most of the time, is commercial or corporate usage. These companies are creating greater value, so it’s safe to say that we are seeing more players looking at commercial vehicles.

Q Do you think it is a competitive market for autonomous driving companies in China?

A The biggest challenge for autonomous driving companies still comes from the old business ecosystem.

In China, autonomous driving startups are still at the pioneer stage and there isn’t much competition between the startups themselves. Everyone is still improving their own product.

Although we have already seen some startups generate revenue over the past year, it will take longer for them to scale up and to gain market share.

For example, TuSimple has generated revenues since the second half of last year. As a leading company in this vertical, it has conquered the most difficult part – to turn technology into an actual business. But long-distance truck driving needs to deal with more complicated scenarios and such technology can apply to many different cases. There is still a lot of room to grow.

But it is technically easier to sell self-driving shuttle buses in the market, as there is limited scope for development. For self-driving taxi fleets, the application scenario is very complicated and it will take even longer for the product finally to be available for the mass market.

Q How has truck autonomous driving technology developed?

A For self-driving truck companies, operation is critical. Companies want to be the operator themselves rather than the tech vendor. 

Because there is a very high usage rate for each truck, a truck has to run on the road for most of a day to make money. Autonomous driving technology won’t make much of difference to sales volumes. This means that truck manufacturers don’t really have any impetus to invest in self-driving technology because sales are unlikely to decrease or increase sharply if autonomous driving technology matures.

But it is different with passenger cars. If self-driving technology fully develops in the future, people will have less of a motive to buy a car if they can call a safe robot taxi anytime, anywhere. Traditional car manufacturers are looking into autonomous driving technology just to keep up with the market. And carmakers are willing to invest in self-driving startups.

Q Is it a good time to invest in the self-driving market?

A It is always a good time to invest in top self-driving companies because technology can create huge value-add in the future. 

The enthusiasm for the sector has cooled over the past year as private equity investment has declined. But opportunities are still there.

The total amount invested in the self-driving sector has increased slightly in the past few months, but it is not as much as it used to be. The money is concentrated on the leading companies.

Investors are also more practical now, as they expect a startup to solve a real problem. They are no longer satisfied with a demo.

Q What would be your advice for foreign investors?

A I would suggest that investors to view startups' problem-solving ability as the priority when looking into companies, rather than thinking about how to exit from the Chinese market.

The self-driving market excites people's imagination and there are a lot of applications. Investors shouldn’t worry about the upper limit of the technology. There is still plenty of space for technology and valuation to grow. What they should really care about, is how to solve actual problems.

Investors need to have defined evaluation criteria for self-driving companies and they need to put more capital into the top ones. The leading players have a greater chance of using their technology and have more bargaining power within the traditional car supply chain.

Q How will the autonomous driving market develop in the future?

A It is inevitable that self-driving startups cooperate with car manufacturers, especially those which are developing autonomous passenger vehicles. For end-users, the service will still be provided by an actual car.

For tech startups, it is important to maintain a lead on technology, and then they can use that advantage for leverage with upstream and downstream suppliers.

 

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