China’s electric car start-ups – NIO, Xpeng and WM Motor – each have a Big Tech backer. What is riding on their success?

Alibaba, Tencent and Baidu are supplying electric car start-ups technology in the hope of creating synergies between them and defining the future of mobility
China’s digital giants will dominate in-car connectivity features and operating systems, according to McKinsey

Electric & new energy vehicles

Daniel Renin Shanghai

Published: 8:00pm, 29 Dec 2020

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China’s electric vehicle (EV) industry may be witnessing intense rivalry among a handful of promising start-ups churning out new models and boosting production to cater to the demands of the world’s largest electric car market.

Behind this rivalry is an equally intense battle between the country’s top technology companies – e-commerce giant Alibaba Group Holding, social media juggernaut Tencent Holdings and search engine Baidu Inc. The trio has financially backed newcomers like NIO, Xpeng and WM Motor, plying them with technology which they hope will create synergies between them and define the future of mobility.

“At the end of the day, it is a competition of technological strength in the EV industry,” said Cao Hua, a partner at the private equity firm Unity Asset Management. “It is important for them to have powerful backers who can offer both financial and technological support.”

Although none of these EV start-ups has been profitable so far, each has raised billions of dollars from the online tech giants as they look to put their technology in internet of things, 5G, cloud services and artificial intelligence to use in autonomous driving, navigation and in-car entertainment. The race is to define and set the industry standard and generate a steady stream of revenues either through licensing their technology or through digital subscription services.

01:21

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In this pursuit, the EV makers and their backers have the support of the Chinese government, which wants the country to lead the world in such technologies by 2025 and wants to see 30 per cent of cars sold by then to have smart connectivity.

According to a 2019 study by McKinsey & Co, Chinese digital giants will dominate in-car connectivity operating systems, and develop the industry standard.

“Chinese consumers’ relatively high willingness to try new digital products and mobile services, and the advanced level of China’s mobile payments ecosystem, present a great opportunity for China’s digital giants to dominate in-car connectivity features and operating systems,” it said.

These digital services and products targeted at China’s car industry could be worth 1 trillion yuan (US$153 billion) annually, according to a forecast by the Ministry of Industry and Information Technology, which did not say when the milestone would be achieved.

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“EV is a strategically important industry because it goes beyond carmaking,” said Gao Ting, head of research at Nomura Orient International Securities. “Policy support to the sector, such as cash subsidy, is expected to have a long-term positive impact [on the economy] as related industries and technologies also develop.”

Tencent is one of NIO’s early backers, regarded as the bellwether of China’s electric car start-ups. Before NIO’s initial public offering in 2018, the kingmaker in the mainland’s technology sector had invested US$510 million in the company, and followed it up with a raft of additional share purchases. Tencent has successfully backed a slew of tech firms in China, including online food delivery giant Meituan.

In June 2019, before NIO’s finances came under strain and put it on the verge of bankruptcy in November, Tencent had invested another US$10 million to show its continued support for the embattled start-up.

As of July, Tencent owned a 16.3 per cent stake in NIO, the second-largest shareholder behind founder and chief executive William Li.

04:07

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NIO’s fortunes have since improved, with sales rebounding in the second half of this year. The surging stock price helped it surpass century-old Ford in terms of valuation last month and secure the No 6 place in the ranking of the world’s most valuable carmakers.

Apart from the financial windfall through the paper gains of NIO’s share price, Tencent is hoping that its self-driving system takes off.

Tencent is prioritising the development of advanced driver assistant system (ADAS) as it seeks to become a leader in self-driving technologies. ADAS uses automated technologies such as sensors and cameras to detect nearby obstacles or driver errors, and responds promptly to enhance driving safety.

Alibaba, the owner of this newspaper, owns the second largest stake in Xpeng. Its connection with the EV start-up dates back to 2014 when it acquired UCWeb, the Chinese mobile internet software and service provider co-founded by He Xiaopeng in 2004.

He was named as president of UCWeb and Alibaba Mobile Business Group after the acquisition. The entrepreneur left Alibaba in 2017 and joined Xpeng as chairman of the EV start-up.

Alibaba owned 13.3 per cent of Xpeng after its initial public offering in August, when the electric carmaker netted US$1.5 billion from its New York Stock Exchange flotation.

Alibaba’s development of the YunOS operating system is likely to help with Xpeng’s progress in making its own self-driving cars in the near future. At present, SAIC’s Roewe RX5 SUV uses YunOS, which includes an intelligent digital map, smart voice control, cameras and internet ID.

02:33

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Baidu is one of the largest shareholders of WM Motor, which is yet to go public. In September, Baidu was among a group of investors that injected 10 billion yuan into the EV start-up in the Series D round of funding.

WM is partnering with Baidu on Project Apollo, one of the world’s largest and most diversified open autonomous driving alliance platforms, set up by the Chinese internet search engine in 2017.

The tech giants expect to see some returns on their investment and widespread use of their technology eventually before they lose patience with these loss-making EV start-ups, said Ding Haifeng, a consultant with Shanghai-based financial advisory firm Integrity.

“In terms of use of technology in the EVs, those that can race ahead of rivals in making cars smarter will gain an upper hand,” Ding said. “Consequently, interactions with the shareholders in understanding and applying the new technologies will gain greater importance.”