King of the road?

He made his first fortune by thinking small, but these days Evergrande’s founder dreams much bigger. Xu Jiayin (or Hui Ka-yan as he is known in Cantonese) is one of the country’s best known tycoons (see WiC364) after riding Guangdong province’s property boom over the past two decades.

Xu’s innovation was to focus on sales of much smaller apartments that gave him a quicker profit. Today, he ranks third behind Jack Ma and Pony Ma on the Forbes China rich list. However, last year he suffered the largest fall in absolute dollar terms after his net wealth declined $11.7 billion to $30.8 billion.

Xu knows better than anyone that while property got him close to the summit of the wealth rankings it is unlikely to keep him there – as a maturing sector it shows signs of declining returns and more stringent regulation. So now he wants to ride the next government-backed business trend instead: Made in China 2025.

After various attempts at diversification (for instance, into bottled water) Xu seems to have settled on the sector where he wants to focus – electric vehicles (or EVs) – and the bet he is making is an outsized one, even by Chinese standards.

Over the past month, the Guangzhou and Shenyang municipal governments have signed agreements with Evergrande involving a combined investment of Rmb280 billion ($40.9 billion). In both his homebase of Guangzhou and the capital city of Liaoning province, Xu plans to build separate EV and battery plants, plus R&D centres.

In a country where billion dollar figures are often bandied about, it is all too easy to miss just how ambitious some of these ventures actually are. In Xu’s case, the two proposed investments would not only mean a bigger outlay than building the Three Gorges Dam (Rmb203 billion), but also be greater than the second Rmb200 billion capital raising for China’s national IC investment fund (designed to deliver a homegrown semiconductor sector).

Perhaps more appropriately, the sum is also almost four times the amount that Tesla has invested in the EV industry since it was founded in 2003.

The new investment also represent Xu’s second attempt to break into the sector. He initially tried to piggyback on someone else’s vision: fellow tycoon, Jia Yueting, founder of LeEco and a backer of Faraday Future, which aimed to become the first US-based but Chinese-funded EV brand. However, the combination of Xu’s cash and Jia’s vision was not a great success and they acrimoniously parted ways.

In fact, the collapse of Jia’s LeEco empire left him on a debtors’ blacklist in China, and he and Xu ended up in court over Faraday Future. Xu is now Jia’s largest creditor after the two came to an agreement last December, while Jia is trying to resurrect Faraday with investment from video company The9 (in June it signed a Rmb6 billion strategic co-operation agreement with the Hohhot city government in Inner Mongolia).

So for the past year, Xu has been forging a new path on his own, and at the beginning of 2019 he formally created a new group, Evergrande New Energy Power Technology, under Hong Kong-listed Evergrande Health Industry.

The first piece of the jigsaw came last September when Evergrande ploughed Rmb14.5billion into auto sales and energy group Xinjiang Guanghui, becoming its second largest shareholder.

In many ways, Evergrande’s strategy seems to be modelled on Geely’s approach to creating an automotive powerhouse, i.e. primarily through acquisition. Geely purchased Sweden’s Volvo to get much of the technology that it needed and Evergrande has turned to the same country in its own bid to build a car brand.

In January, it purchased a 51% stake in National Electric Vehicle (NEV), the lossmaking all-electric successor to Saab, which collapsed at the turn of the decade. That same month, NEV was used to purchase a 20% stake in sports car designer and manufacturer Koenigsegg Automotive for $168 million and in US-based Protean, which produces in-wheel electric motors (see WiC438).

Domestically, Evergrande has spent a further Rmb1.1 billion on a 58% stake in lithium ion battery manufacturer Shanghai CENAT New Energy and purchased another 70% stake in a second in-wheel drive company, TeT Drive, based in Hubei.

In March Xu announced that Evergrande plans to produce a million cars and 50 GwH worth of batteries every year. These targets are hugely ambitious, although the response from local news sites like Jiemian were largely positive. “This is not only a greater investment than other entrepreneurs entering the EV industry but it also shows much clearer determination,” it proclaimed.

More specialised analysis from overseas portals took a different view. EV Bite pointed out that Evergrande’s proposed factory will be bigger than the plants of international giants such as Volkswagen, whose Wolfburg plant in Germany is currently the world’s largest (VW aims to ramp up output to one million vehicles a year by 2020). Clean Technica warned that many an entrepreneur has been mistaken in their belief that ploughing cash into production will deliver results, predicting that “the car business has made paupers of many entrepreneurs and will do so again”. BreakingViews added that Evergrande’s “hasty diversification could do more damage than a softening real estate cycle”.

Bloomberg calculates that a total of 20 EV manufacturing hubs are under construction in China, with their respective provincial governments believing that they will generate all manner of ancillary industries too. Most of the investment is doomed to fail, the news service thinks, and domestic business magazine Caixin also sounded a note of caution about Evergrande, warning that heavy spending won’t innoculate it against the challenges facing most EV start-ups, as well as the problems specific to its much-publicised entry into the sector.

It goes on to spell them out. Multiple acquisitions like these take time to integrate, it says (and sources within Evergrande are already telling the magazine that there are delays to rolling out the first model). And then there is the question as to whether Xu can even afford it. The parent company, China Evergrande, already has a B1/B+ rating on its finances, a far lower rating than most of the other larger developers, because of the group’s heavy debt load. According to S&P Global Market Intelligence, its total debt to equity ratio stood at 219.6% in December 2018.

That said, Xu has been carrying a huge debt load for many years and has confounded his critics repeatedly in servicing it.

Xu’s investment also comes at a time of breathtaking change within China’s auto industry. Tesla will begin producing its mass market Model 3 domestically by the end of the year, and other foreign auto manufacturers are scaling up to be ready to respond to the government’s quotas on EV sales.

And then there are the domestic start-ups which have pitched headfirst into a fierce funding and production battle in bid to break into the ranks of tier-one producers. In addition to Evergrande, other corporate giants are hoping to diversify into the sector too. The Financial Times reports that even Huawei is hoping to launch a line of self-driving cars as early as 2021, in partnership with European and Japanese automakers.

The China Association of Auto Manufacturers expects 1.6 million electric cars to be sold domestically this year. On an absolute basis, sales growth has declined since subsidies were phased out in March. In May, they rose just 2% year-on-year to 104,000 vehicles, according to Clean Technica figures.

However, on a relative basis, EV sales are doing much better than cars with gasoline engines. That is a trend that is going to continue because the government wants to prioritise electric cars in a bid to make China a world-beater in the industry. Plug-in vehicles now account for 6.6% of China’s total car sales and a betting man like Xu (a man known to enjoy high-stakes cards) is staking his future on this proportion growing rapidly and Evergrande selling a big chunk of the new EVs.

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