In China, of every 100 cars running on the road, only three are powered by electricity. And yet, investors are willing to pour billions of dollars into a vast number of loss-making electric car start-ups — despite knowing that the majority of these startups will not be around in the long term.
So how does the savvy investor find opportunity in an auto market that still has much growth in it? They could do far worse than turn to the traditional car-related sector.
As a bonus, some sub-sectors are in the value chain of both traditional and electric car industries – auto parts, maintenance service and parking lots, for instance. After all, even an electric vehicle needs somewhere to park.
On Friday, Alibaba closed a Rmb1.6 billion ($235 million) investment in online auto maintenance service platform qccr.com. Jack Ma's internet juggernaut said it planned to leverage “its great advantages in internet traffic and capital to better explore the automotive aftermarket”.
Two days earlier, Tencent joined the latest roster of investors in Chinese smart parking solution provider Keytop, demonstrating its strong interest in this vertical.
Jack Ma and Pony Ma, who respectively backed leading Chinese electric car brands XPeng and NIO, are not the only tech gurus attracted by traditional automotive aftermarket – a relatively traditional but sizable area that is ripe for technological innovation.
Cassmall, a Shenzhen-based business-to-business auto parts e-commerce platform, said on Thursday it had completed its Rmb250 million series B+, bringing its series B fundraising to Rmb650 million since November 2017.
In its previous rounds, the company attracted two Chinese venture capital funds, Shunwei Capital and FuQi Capital – founded by Xiaomi’s Lei Jun and NIO’s William Li respectively.
“With technological means like advanced data analysis, we expect to better tap into China’s trillion-Rmb automotive aftermarket,” Shanghe Capital, an earlier investor in Cassmall, said in the statement.
NO SUPER CHARGER SOON
To be sure, the development of the electric vehicle industry is accelerating globally, and China as the world’s largest consumer market, is a key player.
But it would be very surprising to see electric cars fully substitute for petrol vehicles over the coming two or even three decades.
Europe is leading the campaign to stamp out petrol emissions, with France and Britain both last month releasing plans to ban new petrol and diesel vehicle sales from 2040. Proposals for similar bans by 2025 have been mooted in the Netherlands and Norway.
Rumour has it that the Chinese government is pondering putting a similar ban in place by 2035. But even if that comes to pass, petrol and diesel cars would likely still be on the road well into the 2040s, as the average life cycle of a used car is eight to 15 years.
A look at the actual market sales suggests widespread adoption of electric cars is even further away — and that traditional car sales are still rising faster.
China’s electric vehicle industry might be booming in terms of investment and maybe research and development, but mass production is not coming any time soon.
In April 2017, the Ministry of Industry and Information Technology (MIIT) issued its ‘medium- to long-term development programme of the automotive industry’, aiming for annual production of seven million electric and hybrid power cars, and 28 million traditional autos by 2025.
How long will it take to fully charge the electric car industry? Two decades will be a very ambitious estimate.
INVEST IN THE AFTERMARKET
It's almost become a cliché to bemoan Chinese electric vehicle companies’ uncontrollable cash-burning and lack of profitability.
Deep-pocketed investors may tolerate weak profitability for now. But they will not want to miss out on the billions of dollars stemmed from the auto aftermarket — all of the things the proud driver spends money on after shelling out for a shiny new car.
According to Chinese data provider iResearch, the country’s auto maintenance market will grow faster than car ownership, and may have topped Rmb800 billion for the first time in 2017. Meanwhile there is enormous room for online platforms to grow at the expense of traditional roadside garages, as the penetration rate is still miniscule.
As for the smart parking sector, China’s state-run press agency Xinhua expects it to become a “trillion-renminbi market” as drivers turn to their smartphones to find a parking spot and pay for it. In a report published in November 2017, the propaganda organ referred to a Bain analysis, which predicted revenue generated from shopping mall parking lots and curbside parking to top Rmb780 billion and Rmb200 billion respectively by 2021.
More broadly, the MIIT predicted in its development programme that China’s automotive aftermarket would rise to 45% of the entire value chain by 2020 and further increase to 55% by 2025, from the current 40%.
The auto parts sector is obviously one key value points as well – for both traditional and electric vehicles. MIIT promised in the development plan to foster multiple Rmb100 billion-sized auto parts companies by 2020.
Specifically, Cassmall, the Shenzhen based auto parts platform, noted that the total value of China’s auto parts inventory ranged from Rmb600 billion to Rmb700 billion.
“The industry upgrade demands more efficient inventory turnover and fund utilisation; we want to help mobilise these inventories,” Jiang Yongxing, CEO of Cassmall, said in the statement.
Jiang said that the auto aftermarket is now facing a dilemma of overall oversupply against undersupply of high-quality products and services, which will be solved with internet innovations, such as significant improvement of data analysis.
“And that is helpful to deal with the mismatch as well as drive the industry upgrade, which will ultimately lead to a healthy ecosystem of internet,” Jiang said.
And for the investor, a healthy ecosystem points to healthy profits.