Q&A: Why Brian Gu quit JP Morgan for electric car venture

The former JP Morgan veteran talks about how Alibaba-backed XPENG can rival Tesla in China, and his efforts to build $1 billion war chest for the startup this year.

Brian Gu, JP Morgan's former chairman of Asia Pacific investment banking, discusses how his decades in dealmaking will help his startup to secure funding in the face of fierce compeition from other electric-car makers.

In a phone interview with FinanceAsia, Gu, vice-chairman and president of XPENG, talks about the Alibaba-backed company’s plans to raise more capital this year and the advantages it believes it has in China’s rapidly growing electric car market. In his role Gu leads the company’s strategy, financing and investments, as well as developing strategic partnerships globally.

China’s carmakers are quickly turning all-electric. The country’s carmakers sold 680,000 electric vehicles last year, more than the rest of the world combined, according to China Association of Automobile Manufacturers. The uptick is expected to continue for the next decade, with analysts at Bank of America expecting electric vehicles to account for half of total sales by 2030.

However, despite the promising outlook, investors should not overlook the development risks and the potential for a regulatory backlash when things go wrong. A self-driving Uber car that killed a pedestrian in Arizona in March has raised serious questions about the autonomous driving technology that lies behind zippy startups like XPENG and Nio, a Tencent-backed electric carmaker.

XPENG completed its Series B funding round in January, raising Rmb2.2 billion ($350 million) from an elite roster of investors including Alibaba, Foxconn Technology, and IDG Capital. The latest round puts XPENG’s total fundraising to date at Rmb5 billion ($790 million).

Gu's move to XPENG in late March after a 20-year stint in investment banking. Prior to joining JP Morgan, Gu was a healthcare specialist with Lehman Brothers in New York.

The following transcript of the interview has been edited for clarity:

Q What will be your immediate priorities at XPENG Motors?

A We’re still a young company, even after years of business development and technological advancement. The company is rapidly growing its team and developing its business model, as well as investing more capital for [research and development] and our infrastructure build out. We are fine-tuning our strategy for a complex business that encompasses the whole value chain of the electric vehicle and mobility industry – from batteries to charging stations, car manufacturing to sales and marketing, and connected devices to autonomous driving.

On top of what we have raised so far, we will be looking to raise more than $1 billion of additional capital this year to sustain the growth of the company, primarily for our new car commercial launch and further R&D.

My near-term focus will be building our team, as well as leading the company’s strategy, financing, and investment efforts.

Q Where will the capital come from?

A We want to attract the highest-quality financial and strategic investors globally. We prefer partners who can provide synergistic linkages to their portfolio companies or their own strategic value to our business.

Given the size we’re targeting, we would naturally want to attract some of the more prominent investors globally, similar to our existing investors Alibaba and Foxconn.

Q What do you need the money for?

A Selling electric vehicles is a capital-intensive business that requires funding for R&D and new model launches. We are constructing our own manufacturing plant, which will start mass production next year. We also expect to grow our company from the 1,000 employees currently to almost 3,000 by the end of this year. The majority of our personnel growth will come in R&D, with the remaining in manufacturing, marketing, and corporate functions.

Q Your major competitor Nio is planning a US initial public offering this year. What’s your IPO timeline?

A We don’t have a specific timetable for an IPO at this time, but I always keep a close eye on the capital markets. We will see how their IPO performs and look forward to it bringing more attention to the entire sector.

Q How do you differentiate your business model from competitors such as Nio?

A They have raised a lot of capital and garnered publicity from an early start. On the other hand, XPENG has been lower profile and stuck to our focus on investing in first-rate technology, product design, and autonomous driving innovation. [Before his venture in electric vehicles, XPENG Motors chairman He Xiaopeng founded UCWeb, China's leading mobile browser. UCWeb was acquired by Alibaba in 2014.]

We target different customers. XPENG is aiming for the mass affluent market at between Rmb200,000 ($30,000) and Rmb300,000 per vehicle. Nio sells to the ultra-high-net-worth, charging over Rmb500,000 ($80,000) per vehicle.

XPENG has been very efficient with how we spend our capital. We’ve matched their product milestones with significantly less capital deployed, giving us ample firepower going forward. XPENG’s flagship model, the G3, is designed to appeal to China’s new generation of consumers who embrace innovation and exploration.

The entire [electric vehicle] market in China is enormous. There will be a lot of opportunities for both XPENG and Nio, the two market leaders.

Q Is the surge in electric vehicle startups driven by a swathe of capital?

A Making cars is more difficult than making smartphones. Electric vehicles are even more complicated, requiring cross-industry expertise in battery technology, artificial intelligence, and mobility innovation. All the electric vehicle makers will face a similar challenge: delivering a great driving experience at affordable prices.

Secondly, industry expertise and capital are both critical to staying competitive. A lot of companies coming into this business without sufficient capital are unlikely to survive over the long-term. There will be lots of ups and downs as the market evolves. On top of that, the efficiency of R&D and production, as well as the ability to identify its market opportunities, will play a role in the success of an EV maker.

Q The G3 will be Xiaopeng’s first production car. What will be the average selling price and when will it hit the market? [G3 is the company’s first mass-production model, and is a sport utility vehicle with an autonomous capability.]

A The price of the flagship G3 model hasn’t been set exactly, but our target range is the mass affluent market which tends to be around Rmb200,000 to Rmb300,000. The target is to pre-sell the car in the second half of this year, begin delivery by the end of the year and reach mass production in early 2019. XPENG will produce the G3 model with a manufacturing partner and launch its own new manufacturing facility by the second half of 2019.

Q In the world of electric vehicles, battery life plays a pivotal role. Can you tell us more about your edge in battery technology?

A The battery for the G3 will be supplied by leading battery manufacturers. At XPENG, we focus on our proprietary battery management system technology. Similar to Tesla, we purchase batteries from external suppliers, then work to improve their performance in our vehicles.

Q How does the changing regulatory landscape for electric vehicles in China impact your business?

A China is the largest auto and electric vehicle market. In the past few years the Chinese government promoted electric vehicle purchases to reduce carbon emissions and pollution. Now they are taking a more holistic approach, providing more support for EV-charging stations and giving priority licenses to EV buyers over conventional car buyers. Regulatory changes have been positive for the sector in China.

Q In autonomous driving, do you think we need more coordination in data collection? In light of recent autonomous vehicle accidents, how reliable is XPENG’s self-driving technology?

A I think the data collection process will evolve by itself over the long term. At the moment, a lot of data is collected by the vehicles itself. Whether it will be collected by a coordinated platform, I doubt that will happen anytime soon. But the adoption of autonomous driving should come earlier rather than later. It is possible that L3- and L4-stage autonomous­­­ driving will start to emerge in many driving scenarios in the next three to five years.

[According to Society of Automotive Engineers' 2016 standard, there are six levels of autonomous driving within the industry. Vehicles in Level 3 are partial automated to monitor the driving environment. Level 4 vehicles are classed as highly automated, which suggests they can handle a problem by themselves if something goes wrong on the road.] 

At XPENG, we take safety very seriously and our flagship G3 model will only incorporate autonomous driving features that are proven to be reliable and in certain manageable driving conditions.

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