Auto Industry

Primed for production?

Evergrande deal gives electric carmaker Faraday a new lease of life

Faraday-Future-w

One for the future: Faraday’s FF91 concept model

I think we just became a real car company” was the message from Elon Musk last Sunday as Tesla finally hit its target of making 5,000 of its ‘mass market’ Model 3s in a week.

He was celebrating in an email to staff after longstanding scepticism about Tesla’s ability to produce its battery-powered cars in sufficient volumes.

Jia Yueting, the embattled founder of the sprawling tech empire LeEco, will be even more desperate to meet his production targets at Faraday Future, following a life-saving investment from a Hong Kong-listed unit of the Chinese real estate giant Evergrande Group late last month.

Electric vehicle start-up Faraday was founded four years ago as a potential challenger to Tesla but it hasn’t delivered on the hype and needed to be rescued from a cash crunch a few months ago by Season Smart, an investor based in the British Virgin Islands.

In a filing last month, Evergrande’s unit Evergrande Health said it would be buying Season Smart’s stake in Faraday, paying $860 million now and committing to $1.2 billion more investment in future.

Evergrande will become the largest single shareholder in the car company with Jia Yueting and other original shareholders keeping a third of the shares and the remainder held by employees.

The move is in line with the plans of Evergrande boss Xu Jiayin to invest Rmb100 billion ($15 billion) in high-tech industries such as life sciences, aviation and quantum technology (see WiC404).

Investors seemed pleased by the foray into new energy cars, another of the priority areas, with Evergrande Health’s share price soaring two-thirds on news of the deal, which will be funded by a loan from the parent firm in China.

This is already the second time that Jia has been bailed out by a property tycoon, following the rescue of his Shenzhen-listed arm Leshi Internet and Technology by Sunac China last year (see WiC352).

Only a few months later Sunac’s founder Sun Hongbin was admitting that he regretted putting Rmb15 billion into Leshi and its affiliates and he called a halt on further financing at the start of this year before resigning as chairman a few weeks later.

“People should admit defeat because sometimes it works, sometimes it doesn’t,” a crestfallen Sun then told reporters.

That hasn’t deterred Evergrande from taking on the stake at Faraday. In April Chinese media reported Ruichi, an affiliate of Faraday, bought a large site near Guangzhou zoned for electric car manufacturing and there was speculation that the deal had been backed indirectly by the Guangdong-based developer, which has its headquarters nearby (see WiC406).

Before Evergrande’s rescue act, Faraday had hoped to begin production of its FF91 electric sports utility vehicle at a new factory in Nevada but financial pressures forced a scrapping of the plan and the company has been scrambling to repurpose an older tyre plant in California instead.

Faraday is now promising a “dual-home market” strategy in which its production lines will be split between output for US customers from its factory in California and cars for Chinese buyers (most likely cheaper, less-powerful models) from the plant near Guangzhou.

The pressure on Jia to get Faraday into production is intense. Reportedly, he wanted to hold onto a majority stake in Faraday as part of Evergrande’s investment but he eventually accepted a smaller shareholding with voting rights that give him more say than his new investor.

To keep these privileges in place he has to hit a series of performance targets and although details are hard to pin down, the People’s Daily is reporting that one key target is a model ready for mass production by the turn of 2018.

“Although Jia has maintained actual control of Faraday Future through this round of financing, under the terms of the agreement if the car is not produced by the end of the year he will lose everything and Faraday will become the property of Evergrande,” the newspaper warned.

Meanwhile, 21CN Business Herald thought that Evergrande has the whip hand over Jia, describing the investment as more of a bet on Faraday’s technology than its founder, who is battling to save his reputation.

“The cost of his dishonesty in going overseas is that he has left himself exposed, and he has few other options,” NetEase also agreed.

Even if Jia hangs around, he is unlikely to visit his new factory in China. Faraday’s chief executive hasn’t been there since the end of last year, when he declined an ‘invitation’ from Chinese financial regulators to come home to explain how he intends to repay his creditors (see WiC392).

That might make it more awkward to account for how he has managed to source another $2 billion in funding for his automotive venture at Faraday, despite being pursued by angry creditors in his other businesses. The Shenzhen stock exchange asked similar questions of heavily indebted Leshi ear-lier this year when Faraday acquired the land for its new factory in Guangzhou through Ruichi. The company told regulators that it had no legal relationship with Ruichi and it repeated the advice when the Evergrande deal for Faraday was announced last week. Leshi is due to repay Rmb5.6 billion of loans by year end and an additional Rmb7.2 billion of unpaid receivables is due from Jia’s other unlisted LeEco units.

Effectively Jia’s last throw of dice, Faraday has been positioning the FF91 as a high-end performer with faster acceleration and longer chargeable range than most new energy vehicles. There is talk of other features such as unmanned parking functionality, in-vehicle entertainment and cloud services, and facial recognition for car security.

If the company can get into meaningful production it will be coming to market in China at a time when the government is switching focus from subsidies and incentives for firms that make new energy cars towards financial penalties for those relying on the production of gas-guzzlers. Faraday will be competing with a flurry of start-ups, more established Chinese carmakers and newly emboldened foreign brands, which have been granted the right to operate wholly-owned manufacturing plants on the mainland. GM has already said that it will introduce 20 new energy models by 2023, for instance, while Volkswagen’s Audi unit has plans to make five more by 2022.

Meanwhile last month, telecoms giant Huawei took the first tentative steps towards making its own car when it stripped out the battery and motor from a Tesla X and replaced them with its own versions, plus a control system. Two of Huawei’s new rotating chairmen, Xu Zhijun and Guo Ping, took it on an inaugural test drive.

Xu, who heads strategy, has long been a big electric vehicle proponent. As Sohu.com writes, he has mentioned the industry in pretty much every single speech he has given over the past three years.

Huawei’s top management is, however, keeping its options open. Huawei and Audi are trialling self-driving vehicles in Jiangsu province in a technology that allows cars and infrastructure such as traffic lights to communicate.

Huawei is also working with PSA Peugeot Citroen. The latter’s new DS7 Crossback is the first to deploy Huawei’s OceansConnect ‘Internet-of-Vehicles’ platform, which includes an infotainment system, voice recognition and enhanced navigation.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.