The old saying that actions speak louder than words is one that Geely would have done well to remember in recent years. The ambitious carmaker has found itself backtracking on two of its biggest promises.
The first was made in 2015, when company founder Li Shufu confidently predicted that 90% of the group’s sales would be electric vehicles (EV) by 2020. The reality turned out to be just over 5% of sales, with start-ups like NIO, XPENG and Li Auto grabbing much more of the attention in terms of EV sales growth, newspaper headlines and share price appreciation.
This made a second claim from Geely look more ill-advised, when the Asia boss of Geely’s Volvo arm posted a message on WeChat in February last year announcing that “another world auto giant is about to be born”.
Yuan Xiaolin was referring to Geely’s plan to combine Volvo (which it acquired in 2010) with the group’s listed entity in Hong Kong. He predicted that an equity merger of the two companies would create a colossus with a “market value that may exceed all Chinese A-share listed auto companies”.
That hasn’t come to pass – on either count. After almost a year’s delay, Geely and Volvo have decided to stay as standalone companies, merging their powertrain and autonomous driving businesses instead.
Geely’s shares have still done well over the past 12 months. Its stock is up roughly 250% from a three-year low in May 2020. But that performance is nothing compared to the twentyfold appreciation experienced by New York-listed NIO over 2020 – in the wake of its rescue by the Hefei local government.
Geely’s management did not envisage a world in which a start-up like NIO would end the year with a market capitalisation more than twice as big as its own. Indeed, vertiginous share price appreciation has enabled all three of the leading EV start-ups in China to raise a staggering $20.46 billion from the capital markets since the beginning of 2020, according to figures compiled by the South China Morning Post.
This fundraising bonanza should help the newcomers to reach greater scale in their businesses, a crucial stage for any successful car manufacturer. But Geely started 2021 conscious that it had some catching up to do, not least in grabbing back some of the news headlines. During the course of January, the group made a flurry of announcements on partnerships with Baidu, Foxconn, Tencent and Faraday Future. And in late February, founder Li explained the rationale behind the dealmaking during an internal meeting that was widely reported in the Chinese press.
Li acknowledged how some investors are concerned that Geely is in danger of spreading itself too thinly. But he emphasised that innovation requires exploratory work with a number of different partners. “Our strategy is multi-faceted,” he explained.
There’s also a common thread to all four announcements: it is the SEA (Sustainable Experience Architecture) platform, which Volvo and Geely co-developed and launched last autumn. This open-source manufacturing platform for EV vehicles is Geely’s strategic lynchpin, absorbing four years of management time and Rmb18 billion ($2.78 billion) of capex. Geely says that the platform is now a generation ahead of international competitors like VW and Toyota, and Li wants to use SEA to make Geely into a unifying force for the EV revolution. As such, the company plans to become an OEM (original equipment manufacturer) for other brands, in addition to relying on the SEA to produce its own models of new cars.
This should help Geely to overcome declining utilisation at its plants over the past three years and to boost its unimpressive EV sales. In fact, in 2020 Geely bucked the market trend by recording a 40% drop in sales of EVs to 68,100 units, although this should reverse in 2021. The Lynk Zero Concept car, for example, will be the first EV model to complete production on the SEA platform in the third quarter.
SEA is also the main reason why Baidu chose Geely as a partner for its Apollo Self Driving platform. Together, the two companies are planning to make the first Baidu-branded car within the next three years (see WiC524).
Foxconn is the other half of Geely’s OEM joint venture. The Taiwanese company will bring its electronics manufacturing expertise to bear in the hope that the partnership will see it emerge as a major player in EV production, rather as Foxconn’s Taiwanese peer TSMC has become the leading foundry for semiconductor production.
Reuters has also reported that Faraday will become the partnership’s first client. In a sign of just how far Faraday’s reputation has fallen (see WiC428), the news pushed Geely’s share price down 16% over the following few days. But Baidu and Foxconn have shown signs of benefiting from their foray into the world of electric vehicles. Over the past 12 months, investors have started to buy into the growth potential of Baidu’s EV strategy, supporting a tripling of the search giant’s share price. So far this year, Foxconn’s share price is also up by a quarter.
By contrast, some of the air has come out of the tyres of the new breed of EV brands. NIO, XPENG and Li Auto have all seen their share prices drop year-to-date (XPENG has fallen almost 40% from its January peak). In part that was because the previous run-up in share prices had been so spectacular.
In late February, it was also reported that private equity giant Hillhouse Capital had liquidated its remaining stakes in NIO, XPENG and Li Auto. It redeployed some of the cash to become the lead investor in a Rmb24.9 billion private placement for rival electric vehicle and battery maker BYD instead.
The domestic media has welcomed Geely’s return to headline-grabbing form, with 36Kr taking the unlikely step of citing the Austro-Hungarian poet Rainer Maria Rilke to describe the re-emergence of the “madman who once described a car as simply a ‘sofa and four wheels’ ” (a phrase we first quoted in WiC22).
The talk is of a transformative storm ahead for the car industry, with the website saying of Li: “He understands Rilke’s poem Premonition: ‘I sense the winds that are coming and must live through them. I already know the storms and I’m as restless as the sea.”
Geely’s boss used a similar analogy recently in his description of the EV sector. In a Chinese New Year message, he advised that Geely would be led by “self-subversion” as it “rides the wind and the waves” of the EV revolution.
In his late February address Li also said that the industry is characterised by “three constants and two changes”. Some truths will remain the same: a car will fundamentally still be seen as a car, while commercial success will still depend on scale and manufacturing expertise. But what is changing is the way that vehicles will also be defined by their software (hence the partnerships with Baidu and Tencent) and by manufacturing processes that combine mechantronics and communications technology.
Geely is no longer trumpeting a series of long-term sales targets in EVs, learning from its mistake in 2015. Instead it is focusing on plans to launch a completely new company, with a sole focus on pureplay EVs.
That would be a break with practice amongst established carmakers in which EVs have typically been marketed and sold alongside traditional cars.
Lingling Technologies – the rumoured name of the newly created manufacturer – will take the lead in making new models based on Geely’s SEA chassis platform, as well as assuming responsibility for commercial sales of SEA-based EVs under Geely’s Lynk & Co brand and its mass-market Geometry marque, Reuters has reported.
Geely’s Li concluded his February address by saying that traditional auto companies now have two choices. They can be drivers of the EV revolution or they can sit in the passenger seat. Clearly, he intends to be sitting behind the wheel. But Li added that he expects it to be a long and difficult journey. “This is a marathon,” he concluded. “There’s no end in sight, just a beginning. And no detailed map – only the direction the track is heading in.”
© ChinTell Ltd. All rights reserved.
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.