09 May Automotive Investment Strategies Emerging From the COVID-19 Pandemic

LinkedIn Pulse, April 2020

by Bill Russo, Bevin Jacob, Emily Wang and Amber Shu

The Chinese automotive market is showing positive signs of a steady recovery since February when the country was under lockdown. As shown in Figure 1, the year-over-year change in daily average passenger vehicle sales over the same period narrowed from -96% (the 1st week of February) to just -24% (the last week of March). In regions that were under the strictest lockdown, like Wuhan, consumers reported higher consideration for owning private cars, which provide a sense of security at a time of heightened concern over the safety and availability of public transportation or other shared mobility alternatives.

Figure 1: China Average Daily Retail Sales of PVs (Feb. 2020-Mar. 2020)

In addition to this, the Chinese government is seeking to boost automotive purchases as a major driver for economic recovery. On March 31st, China’s State Council extended subsidies and purchase tax exemptions for NEVs by another two years until the end of 2022. At the regional level, an increasing number of cities, including Beijing, Hangzhou, Guangzhou, Changsha and Foshan, have announced stimulus measures such as cash incentives or additional license plate quotas to spur sales. As the world’s largest automotive market, China appears to be poised to use policy incentives to spur a recovery in this important sector.

How Investors Respond to the Crisis

Nearly mirroring the auto market bounce, China’s Venture Capital (VC) industry is heating up after a COVID-19 induced slowdown. Following a weak period in the first six weeks of 2020, Chinese venture capital firms recorded 66 deals for the week ended March 28, capping a positive trend over the last 2 month period (see Figure 2).

Figure 2: Venture Capital Deals in China by Week

Meanwhile, the VC industry in rest of the world appears to be pulling back as it sees more risk from the pandemic. The comparative movements are shown in Figure 2 below. The number of deals in the U.S. was down 26% compared to February’s weekly average. Activity is likely to slow much more in the coming weeks as the U.S. grapples with more COVID-19 cases.

Figure 2: Venture Capital Deals in US and EU by Week

In recent years, several automotive manufacturers and suppliers have created Corporate Venture Capital (CVC) organizations in order to boost the access to promising early stage companies. While CVCs permit risk-averse companies to take riskier bets off their balance sheet, it appears that these CVC groups are also playing a “wait and see” game and holding back on investing during the pandemic.

Private Equity (PE) firms have a history of stepping in during crises to pick up assets at lower valuations that can be redirected towards new and emerging opportunities. Like we observed after the global financial crisis in 2008-2009, we expect such investors will use their “dry powder” to buy up undervalued assets from corporations seeking to de-risk their balance sheets.

Seizing Opportunities from the Crisis

Compared with market-driven Western investors, Chinese VC firms are often guided by Limited Partners (LPs) of state or local government funds, and are therefore more likely to align with national interests – each contributing to help pull the economy out of a crisis.

The combination of rapid response at a policy level combined with an aligned venture-backed investment capacity will help China restore its economy more rapidly than the rest of the world, and may allow it to increase competitiveness in key sectors like automotive. As we saw after the global financial crisis in 2008-2009, when China sought to accelerate transformation through the investments made during the crisis. We expect a similar strategic response in the areas shown on the right of Figure 3.

Figure 3: China’s Crisis Response – Then and Now

While governments of major economies around the world are scrambling to prevent their national economies from a free-fall, China’s fiscal and monetary policies have so far been quite moderate. This is partially due to the consideration of China’s overall heavy debt level, but more importantly it indicates a different mindset. Continuing on a path that was announced for years prior to the COVID-19 pandemic, we expect China to favor policies that leverage the crisis to “double down” on investments in key strategic sectors. China is building its “New Infrastructure” in 7 key areas: 5G, AI, big data centers, industrial IoT, intercity rail and highspeed rail network, UHV (ultra-high-voltage) and NEV charging infrastructure.

As of March 10, a total of RMB 49.6 trillion of investments in 22,000 projects had been announced with investments this year expected to exceed 2 trillion yuan. The pandemic has accelerated China’s path to its future digital economy by pushing the development of “New Infrastructure” back into the spotlight. This will provide a foundation for the country’s long-term economic development and increase its forward economic growth and competitiveness. This approach very much mirrors the stimulus package in 2009 that created economic momentum as well as the world’s largest high-speed rail network, the impact of which extend far beyond the railway sector and transformed patterns of urban development, boosted tourism, and promoted regional economic growth.

Shifting Consumption Patterns and the Digital Services Economy

In may ways, the COVID-19 pandemic has altered behaviors and habits for everybody around the world, while boosting online consumption of goods and services. While online consumption has surely been increasing for some time, the pandemic forced many things that were conveniences to become necessary tools for everyday life and business.  Some new habits have been shaped, perhaps forever.

China’s booming digital services economy has exploded during the outbreak, as illustrated in Figure 4. Digital services including online-healthcare, online-education, online-entertainment, and telecommuting have flourished during the outbreak. A larger scale digitization will emerge to further disrupt traditional business models.

Figure 4: China’s Booming Digital Services Economy

This pattern has also been replicated outside of China as the pandemic has forced people to stay-at-home. Google Classroom has doubled its active user base to 100 million since the beginning of March. Disney’s new streaming service Disney+ has doubled its global subscriber numbers to 50 million during the COVID-19 lockdown. Demand is increasingly shifting to online consumption of goods and services.

As a result, companies and investors must pivot. Investors are already pivoting, by liquidating and re-allocating new investments, especially favoring digital service. For example, China’s Tencent-backed online education platform Yuanfudao secured a $1 billion Series G round led by Hillhouse Capital on March 31, as the COVID-19 outbreak drove up demand for e-learning with many children staying at home. On the same day, China’s eCommerce company Pinduoduo announced that it has raised $1.1 billion in newly issued Class A shares through a private placement. This capital will be used to finance growth, upgrade the online shopping experience for users, and expand product offerings.

Implications for the Auto/Mobility Sector

The epidemic spread quickly around the world due to large-scale people movement. Containing the spread and flattening the curve of case growth has required restricting people movement. Those under restricted movement become consumers of online services, which results in a massive expansion of demand for goods movement.

The automotive industry is primarily focused on people movement as its commercial target, which has clearly been negatively impacted by the crisis. The goods movement sector, especially for last mile delivery, has been given a tremendous boost. As a result, commercialization of autonomous last-mile delivery solutions are accelerating in China.

While global autonomous people movement players such as Waymo are halting their robo-taxi pilots during the pandemic, over 30 companies are deploying autonomous delivery solutions in China. Many of these are collaborations among e-commerce and services delivery platforms, self-driving tech startups and chassis integrators. Such autonomous delivery vehicles have been used in hospitals and locked-down communities for various use cases, such as disinfection, medical supply delivery and food and grocery delivery.

These efficient, around the clock, human-contactless solutions are being deployed for an expanding list of use cases during the outbreak. The ability to manage a growing number of online orders and delivering supplies to people when they are under lockdown has given China an important tool for containing the virus.

As eCommerce and services delivery platforms, self-driving tech startups and chassis integrators are deploying such solutions, savvy VC investors are pivoting to this opportunity for accelerated commercialization of AV technology for goods movement. One leading example is Neolix (see Figure 5), an unmanned logistics platform startup based in Beijing, with an annual production capacity of 10,000 L4 self-driving vehicles. In February, the company closed a US$29 million series A+ financing round led by Addor Capital, following a $14.8 million series A round in May 2019 led by Glory Ventures and Yunqi Partners. Neolix has received over 200 orders since January 2020, with customers including Alibaba, Meituan, JD.com, and Baidu.

Figure 5: Neolix’s Autonomous Last Mile Delivery Solutions

Conclusions

China is showing the early signs of automotive market new car sales recovery after the market crash in early February. Daily sales averages have increased for each of the past 8 weeks, but remain significantly below prior year levels.

There are stark differences between West and China in how they are responding to the crisis: In the West, the market drives the economy with government typically backing traditional industries (e.g. easing environmental protection policies). China is more likely to seize a crisis and invest to create a new set of competitive tools, as was the case in the aftermath of the global financial crisis.

In our view, the technology-enabled transformation of the industry business model is likely to accelerate in markets like China which seek opportunities to gain competitive advantage during a crisis.

Industry leaders and savvy investors will pivot and deploy capital toward emerging growth opportunities resulting from a shifting consumption pattern toward digital services which leverage new mobility platforms that enable autonomous goods movement and delivery.

Investors will seek to convert their portfolios from already appreciated investments into prospects that can create new value.

About the Authors

Bill Russo is the Founder and CEO of Automobility Limited. His over 37 years of experience includes 15 years as an automotive executive with Chrysler, and 16 years of experience in China and Asia. He has also worked nearly 12 years in the electronics and information technology industries with IBM and Harman. He has worked as an advisor and consultant for numerous multinational and local Chinese firms in the formulation and implementation of their global market and product strategies. Bill is also currently serving as the Chair of the Automotive Committee at the American Chamber of Commerce in Shanghai.

Contact Bill by email at [email protected]

Bevin Jacob is a Partner & Co-Founder of Automobility Limited. He has 19 years of experience in Investment Advisory, Business Development, Product Management, Mobility Startup Incubation & Engineering of Autonomous Transportation Systems and On-Demand Mobility Services for Shared Mobility, E-Retail, Automotive Infotainment and Telematics. He has also worked nearly two decades in the electronics and information technology industries with Continental, LG Electronics and Start-ups in Greater China, USA, South Korea & India.

Contact Bevin by email at [email protected]

Emily Wang is an Associate of Automobility Limited. She has 10 years of experience in Management Consulting and Marketing in Greater China and U.S., spanning over multiple consumer and industrial sectors. She is knowledgeable about China’s mobility market, technology innovations and digital ecosystem. She has helped multinational, Chinese POE and SOE and startup clients developing strategy for new market entry, M&A pipeline, due diligence, organization structure and operating model design etc.

Contact Emily by email at [email protected]

Amber Shu is a consultant of Automobility Limited. She graduated from Tongji University with major of Automotive Engineering. She is working in Strategy & Management Consulting and Investment Advisory with a focus on automotive sector and related domains. She has solid project experience in Market Entry & Growth Strategy, Cost Strategy, Business Plan Development and Industry Research for leading automakers and global industrial magnates.

Contact Amber by email at [email protected]

Simon Liang also contributed to the research for this article

About Automobility

Automobility Limited is a strategy and investment advisory firm helping its clients to build and profit from the future of mobility. Mobility needs, previously satisfied through product “ownership”, are increasingly being served through mobility services “usership” with profound implications not only for traditional businesses within the value chain, but also for new entrants – as they compete to deliver services. Connected mobility, which we define as “technology-enabled on-demand mobility services for moving people and goods from point A to B”, has become a disruptive, paradigm-changing development in the automotive industry. It requires a complete rethinking of the way to deliver value to the market. To succeed, companies must expand their focus from the product (the automobile) to the utility derived from the product (“automobility”), and create a business model and digital ecosystem optimized to provide digitally enabled solutions for both car owners and mobility services users.