New Tesla Plant to Charge Up China’s Electric Car Market? Not So Fast

Bottom line: Cars from Tesla’s Shanghai Gigafactory could pose a short-term challenge to luxury brands like Audi and BMW, and could help to revive the nation’s flagging NEV market longer-term if they move into more affordable terrain.

Tesla charges into China with new factory

This week I’m taking a few steps outside my usual comfort zone and exploring the high-tech realm of new-energy vehicles with a closer look at global superstar Tesla Inc. (Nasdaq: TSLA) I’ve actually followed this company’s drive into the world’s biggest car market for some time, starting with its earliest days when it tangled with a squatter who registered Tesla’s Chinese name.

I’ll review some of Tesla’s earlier bumpy road into China shortly. But I’ll spend the bulk of this piece looking at Tesla’s relationship with China’s currently sputtering broader new-energy vehicle market as it prepares to open a new chapter in its love affair with the world’s most populous nation.

The company has been in the news nearly nonstop here for much of the last year, as it prepares to open the first production base outside the U.S. for its pricey but high-performance electric cars. In this case the plant is in Shanghai, and will start cranking out lower-end versions of Tesla’s mainstay Model 3 sedans at the start of next year. Even the most basic Model 3 model isn’t exactly cheap, with a price tag of 355,800 yuan, or roughly $50,000.

The company made headlines this week when it announced that the China-made Model 3 cars would be eligible for local subsidies, unlike other Teslas that have been sold in the country so far, which have all been imported from the U.S. Such subsidies were quite generous when China was trying to supercharge sales to promote the industry’s development. But they’ve been sharply rolled back this year, and Tesla buyers in China will have to settle for a modest subsidy of up to 25,000 yuan, equating to a relatively modest discount of about 7%.

The much bigger back story here is that China’s electric vehicle market has lost direction since the middle of this year, when most of the generous subsidies for both manufacturers and buyers were canceled. China took the drastic action after earlier subsidies were heavily abused by companies looking to pocket government money, either by pumping out large volumes of very low-quality cars or exaggerating their sales figures.

The latest stats are telling: sales of the vehicles plunged 46% year-on-year in October to just 75,000, following a 34% dive in September. Industry bellwether BYD Co. Ltd., one of the largest domestic manufacturers, posted an even larger 63% decline in November sales.

What’s more, the vast majority of purchases now come from big fleet owners, such as taxi and bus operators. A top executive at General Motors Co.’s main Shanghai joint venture recently estimated that of the 900,000 NEVs sold in the first nine months of this year, just 100,000 were purchased by ordinary mass-market consumers. That’s important because to really succeed in China, NEV makers will ultimately have to convince mass market consumers to buy their products rather than rely on government-linked entities whose decisions often cater to the latest party line.

Tesla to the Rescue?

Amid all the clutter of names like BYD and BAIC Motor Corp Ltd., which rely heavily on such politically-motivated buying, Tesla stands out as a stark exception. Before starting to set up its Shanghai plant, Tesla had no real local backing due to its status as an importer that didn’t bring any major economic benefits to local governments or businesses.

Thus its sales to date have been almost all commercially driven, and most of its customers have been status-conscious consumers willing to pay prices mostly associated with luxury brands like BMW and Audi. I can personally testify that Teslas are a relatively common sight here on the streets of Beijing, and that the cars enjoy a high degree of status and brand recognition among the upwardly mobile Chinese who will be needed to help the company succeed.

That image has been built gradually over the last five years, and has definitely gone through some ups and downs in that time. As I mentioned earlier, the ride was initially bumpy due to a trademark row that was ultimately settled in August 2014. Around that time, Tesla’s founder Elon Musk wowed China by personally visiting the country to launch its first vehicles.

Tesla has encountered another few speed bumps since, including a handful of scandals involving car accidents and some strategy and personnel adjustments in the early years. But at this point, the company does appear to be hitting on all cylinders, so to speak, with its China revenue surging 64% in this year’s third quarter to $669 million – just over 10% of its total for the period.

I talked with a couple of analysts to gauge what the company’s future may hold, with rollout of its China-made Model 3 cars coming in January. Both agreed the company is unlikely to single-handedly recharge the struggling new-energy vehicle market right away, especially since its higher-priced cars don’t really compete with most domestic players. Instead, it’s luxury car makers like BMW and Audi that could feel a slight pinch if and when higher-end Chinese buyers decide to test out the trendier and certainly more politically correct Tesla brand.

One analyst pointed out that Tesla is likely to take a top-down strategy, aiming first at higher-end buyers and then moving to middle-end ones over the next few years as the market and technology mature. He predicted Tesla could roll out one or more models next year priced in the 200,000-plus yuan range, which would mark an important inroad to mid-market affordability at the equivalent of the $30,000-plus range.

The company certainly has the capacity to crank out lots of such mid-priced cars, since the Shanghai plant alone is designed to eventually produce up to 500,000 vehicles per year.

With all that infrastructure and brand recognition in place, not to mention government goodwill following the Shanghai plant opening, the market could well become a major growth engine for Tesla if it doesn’t make any major missteps. That means names like BMW and Audi should watch out in the short term, and that over the longer term Tesla could provide a significant boost to lift China’s struggling new-energy vehicle market out of its current doldrums.

INTERNET: Facing Stiff Competition, the Twitter-Like Weibo Looks to ‘Oasis’ for Relief

Bottom line: Weibo and its stock could remain under pressure for some time to come, potentially a long time if its new Oasis platform doesn’t provide the kind of relief that it is hoping for.

Weibo looks to Oasis for relief

With corporate earnings in the spotlight, I’ve decided to zoom in this week on the Twitter-like Weibo (Nasdaq: WB), following the release of its quarterly results a week ago. As a long-time China tech watcher, I particularly like Weibo for its ability to reinvent itself, and like to think of it as “The little company that could, then couldn’t, then could again, then couldn’t” and so on.

Hopefully I’m not dating myself with that reference to the American childhood classic “The Little Engine That Could,” about a train that overcomes various obstacles to show the world its true abilities. But the bottom line is that Weibo has reinvented itself at least once in its brief lifetime that began with a bang a decade ago. It’s currently trying to do that again with a new soon-to-launch product called Oasis, which I’ll examine more closely in the second half of this column. Read Full Post…

WeChat’s Hubris Could Open the Door to Needed Competition

Bottom line: WeChat’s growing hubris, reflected by increasingly aggressive content filtering, could open the door to a more user-friendly competitor.

WeChat gets overly agressive with word filtering

These days the following exchange seems to happen with growing frequency at companies around China.

Person 1, yelling across the office: “Did anyone see my message about [insert name of any random subject]?”

Colleague, yelling back: “Uh, don’t think we saw that one. Maybe it was blocked.”

Many in China will probably recognize what I’m talking about, but for those outside perhaps a bit more explanation is needed. The above dialogues are all talking about messages being blocked on the hugely popular WeChat instant messaging platform, which has become an integral part of most people’s social and work lives in China these last five or six years.

As readers can probably guess from the above dialogue, WeChat has become more aggressive over the past year in filtering its content for sensitive words. The service is hardly alone in such practice, since China’s cyber security law says all website and app operators must police themselves for and remove such content.

But when you talk about this kind of self-policing, it’s really up to the individual websites and apps to decide what to look for and remove. In WeChat’s case, it seems like the company has gotten lazy lately and begun filtering a growing number of keywords and topics, often without any obvious sensitive content. The result is that you often send a message or file and wait patiently for a response, only to later learn the post was never received by the intended recipients.

Rather than delve into the politics of what’s happening at WeChat, which declined to comment on its filtering policies, I want to focus the rest of this column on a more business-related topic that could have huge implications for WeChat and its parent, Tencent (HKEx: 700). The topic revolves around a basic question: Could WeChat’s recent policies turn off large numbers of its more than 1 billion users, and open the door for another more user-friendly rival?

To answer that question, I did one of my unscientific polls, putting a set of questions to my 2,000-plus friends and contacts on the very WeChat service that’s the subject of this column. The results were quite revealing, and seem to indicate that people aren’t quite ready to abandon WeChat just yet. But it could just be a matter of time if things keep up at their current pace.

More on that soon. But first I’ll quickly summarize WeChat’s current status to give people outside China a sense of how ubiquitous it has become in many people’s daily lives, mine included. I previously wrote about how entrenched WeChat has become as a work tool for many, providing convenient and cheap ways to hold all kinds of group and individual chats and calls over a wide range of distances.

Many people also use the platform these days for a big chunk of their online social interaction, including written and voice communications and group sharing through its Moments function that is similar to Facebook’s newsfeed.

And the survey says …

With all that background in mind, we’ll spend the second half of this column looking at my survey results and what they might say about whether WeChat’s filtering ways could provide a business opportunity for a smart rival app operator. My polling query returned 13 meaningful results, covering a wide range of industries that seemed somewhat representative.

Of the 13, seven said they had noticed the increased filtering and were frustrated by it. Three of those were from the media due to my own leanings, with others coming from such industries as education, international trade and other services. That does seem relatively significant, since it shows there’s a bit of discontent out there that a savvy alternate service provider could feed upon.

Most people who noticed the increased filtering said they were seeing it mainly in group chats, though one or two said they were seeing it in one-on-one messages as well. That said, no respondents said they were considering switching to other platforms as a result of their frustration. I would agree that at this point WeChat is so entrenched in my daily work and social routines that things would either have to get even worse, or an obviously better alternative would have to spring up for me to consider switching.

I particularly liked one response from a former student. She noted the change has been happening gradually over the last year and a half, and likened it to “using warm water to boil a frog” — in other words, a form of torture that’s so slow you may not even notice until it’s too late.

WeChat has certainly faced its challengers over the years, though in each case it fended off the competition with relative ease. One of the earliest assaults came from mobile giant China Mobile (HKEx: 941; NYSE: CHL), which accused WeChat of effectively being a rival network operator. E-commerce giant Alibaba (NYSE: BABA) would later try to mount a challenge with its Laiwang service, which ended in failure.

Last year a service called Bullet Messenger briefly surged into headlines as its downloads soared, though that also seems to have disappeared. And most recently, TikTok owner ByteDance in May launched a new challenger app called Flipchat.

So far I haven’t downloaded any of these apps, mostly because WeChat was providing me with perfectly good service at the time. But this latest behavior by WeChat is showing just how companies can abuse their position when they become near monopolies. Accordingly, I wouldn’t be at all surprised to see a new rival emerge in the next year — possibly quite suddenly — if WeChat continues in its current ways.

Offshore China Tech IPO Wave Should Peter Out by Next Year

Bottom line: The current wave of US and Hong Kong IPOs by Chinese tech firms may still have some power, but should peter out by the first quarter of next year.

I’ve been trying for quite some time to call the end of the current wave of China tech IPOs, which is the longest I can recall in my nearly two decades of covering the sector. That wave recently passed a major milestone with the second anniversary of the Hong Kong IPO for ZhongAn (HKEx: 6060), the online insurer backed by Alibaba (NYSE: BABA) and Tencent (HKEx: 700), which I consider the first major listing in the current wave.

But despite thinking the end was near on several occasions, the stream of new listings in both New York and Hong Kong has continued relatively strong. As if to hammer home that point, Chinese bitcoin-mining machine-maker Canaan, filed on Monday for a U.S. listing to raise up to $400 million.

But while Canaan looks for the Promised Land in New York, another high-profile trading debut late last week had me wondering once again if the end could be near for the current window. That deal saw Youdao (Nasdaq: DAO), a well-known and respected online dictionary operator owned by internet giant NetEase (Nasdaq: NTES), make a dismal trading debut on Wall Street, capping an equally miserable trip to market.

The first signs of trouble came when the money-losing company, which bills itself as an education services provider because its better-known dictionary and translation services are largely free, had to majorly downsize its IPO fundraising target from an original $300 million to about $100 million. It ultimately raised an even paltrier $95 million.

But the bad news didn’t end there. The company’s stock lost more than a quarter of its value on its first trading day last Friday, though the price did manage to stabilize on Monday, giving the company a skimpy market value of $280 million.

I polled a few of my contacts who work closely with these companies, and a couple of interesting points came out on what’s happening here, shedding some light on whether the end could finally be near for the current listing window. The more obvious of those points is that we’re really starting to scrape the bottom of the barrel with companies now coming to market, which may explain Youdao’s performance.

Put simply, investors are getting tired of the money-losing status of many of the companies now listing, especially ones without a clear roadmap to profitability. Youdao fits that description, having posted a net loss of 168 million yuan ($24 million) in the first half of this year, twice as wide as a year earlier.

Another company following down a similar IPO path is 36Kr, operator of a popular high-tech news portal. After initially saying it was aiming to raise $100 million in late September, the company has just come out with an updated prospectus saying the target has been lowered to $72 million — a 28% reduction. Like Youdao, 36Kr is also quite money-losing, posting a net loss of 313 million yuan in the first half of this year — more than 10 times its loss a year earlier.

IPO at any cost?

Having reviewed the more obvious point that many listings now coming to market are hardly cash cows, let’s move on to the more subtle message that came out in my discussions. Several of my contacts said many of the companies now coming to market are simply dead set on listing outside China, come hell or high water. Accordingly, they are willing to put up with this kind of humiliating publicity just to get their shares up and trading in New York or Hong Kong.

So why would anyone put up with such humiliation, not to mention risk losing huge money on a weak valuation? The answer lies in Beijing, which has spent most of the past two years tightening the noose on money leaving the country. Its reasons for doing so are tied to the nation’s slowing economy, which has put huge downward pressure on China’s currency, the yuan. In such a climate, restricting movement of yuan out of the country and into other currencies is one way to relieve pressure on the currency.

Thus the thesis becomes that many of the IPOs now coming to market are basically being driven by company founders and backers whose main interest is opening up a channel for getting their money out of the country as other channels dry up. That explains why many of the listings now coming to market are for $100 million or less, since simply opening the channel becomes the primary objective rather than real fundraising.

Once the channel is open, it’s relatively easy for China-based stakeholders to convert their shares to U.S. or Hong Kong dollars either by selling into the open market or through secondary offerings. The latter is what news aggregator Qutoutiao did, raising $100 million through a secondary offering in April after netting a more modest $84 million in its New York IPO last September.

As if to confirm that point, one of my sources told me that two listings now nearing completion, one for audio community operator Lizhi and another for “co-living platform” Phoenix Tree, are both aiming for modest fundraising targets of about $100 million. Two other online real estate-related listings expected to debut in the next couple of weeks, Q&K International and Fangdd, are also eyeing modest sums in the $100 million to $150 million range.

So what does this unusual dynamic mean for the current IPO wave? The answer seems to be that the wave may still have some power. But I do expect it to peter out by the first quarter of next year, as even the bottom-feeding investors tire of it.

INTERNET: Baidu Removes Millions of Ads, Shutters Travel Site

Bottom line: Baidu’s massive ad cleanup in May and shuttering of a site for travelers reflects ongoing pressure on its core ad-dependent search business while spotlighting its inability to branch into non-search areas.

Baidu search cleanup continues

Search giant Baidu (Nasdaq: BIDU) is in a couple of headlines as we head into the latter part of the week, reflecting two major challenges the company is facing. The larger headline says the company has just removed millions of ads, a whopping 237 million to be precise, for reasons including being misleading and promoting unhealthy topics like porn. The second has the company shuttering a relatively minor travel site, which made me laugh just slightly, since I wasn’t even aware the company had such a site.

The first story is certainly the most important, since Baidu still derives the vast majority of its money from ad sales related to its core search business. By comparison, the second story demonstrates once again Baidu’s inability to diversify into areas besides search. This particular travel investment, while probably quite small, follows a long stream of similar, and often much larger, investments into other areas like takeout dining, and e-commerce, just to name a few. Read Full Post…

INTERNET: Mogu, China Techs Learn Importance of Profits

Bottom line: Shares of recently listed loss-making Chinese tech firms like Mogu are likely to languish as long as they post losses, but could gain some new life if and when they can show sustained profits.

Wall Street tells China tech firms to “Show me the profits”

“Show me the profits.” That seems to be the message coming from Wall Street these days to a group of profit-challenged Chinese tech companies whose shares are languishing following IPOs over the past year. We’ll look at one such case involving online fashion site Mogu (NYSE: MOGU), which seems to typify the trend of shares that have tanked since their recent offerings.

But first we need to start with some broader background about what’s going on with Chinese high-tech IPOs in the US these days. The current wave of such listings not only in New York but also in Hong Kong dates back nearly two years, marking one of the longest-running windows I can recall in the two decades I’ve covered this group. Read Full Post…

TELECOMS: China Hits 5G Accelerator, But Will Telcos Bite?

Bottom line: China’s telcos won’t accelerate their 5G network building even if licenses are issued earlier than expected this year, though foreign equipment suppliers could benefit if Huawei is hobbled by the US-China trade wars.

5G coming to China sooner than expected?

What a difference a decade makes. That’s about how long has passed between China’s issuing of 3G wireless licenses and the upcoming issue of 5G licenses two generations later. I remember in the 3G era how China dragged its feet forever, and finally issued licenses several years after the rest of the world. This time around it appears to be moving more quickly, driven by what appear to be political and economic factors.

The topic has popped into the headlines again this week with word that China’s telecoms regulator will “soon” issue 5G licenses. (English article) The signals coming from the Ministry of Industry and Information Technology (MIIT) have been pointing to a release of licenses this year all along. But this could mean that will happen sooner rather than later, since many were previously expecting licenses toward the end of the year. Read Full Post…

INTERNET: Grindr Case Bodes Poorly for China Tech in US

Bottom line: The US decision to force a sale of gay dating app Grindr by its Chinese owner reflects a new environment where Washington is almost certain to veto China purchases of local firms with access to sensitive user information.

US forces sale of gay dating app Grindr by Chinese owner

A new report on the unhinging of a Chinese purchase of US gay dating app Grindr is shedding some interesting light on how Washington sees such deals, and offers insight into how far Chinese tech firms might be allowed into the country going forward. The picture isn’t exactly too encouraging, though perhaps some might over-interpret things in light of all the recent trade tensions.

The case also sheds some light on the near-hysteria that seems to be growing daily in the US over telecoms giant Huawei, which is rapidly shaping up as the Chinese boogeyman of the 21st century. The central theme in all of this is that Washington believes China is out to steal private information on Americans any way it can, including through the use of private Chinese companies. Read Full Post…

INTERNET: Loss Shakes Baidu to the Core

Bottom line: Baidu’s first-ever loss since going public reflects a long-anticipated decline for its core search business, which could mark the start of a longer-term decline due to lack of a strong new business lines.

Baidu in search of search replacement

It seems that profits are increasingly hard to come by these days on China’s Internet. That’s the major takeaway coming in the latest results from search giant Baidu (Nasdaq: BIDU), which has just posted its first loss since becoming a publicly listed company 14 years ago. Perhaps most worrisome, the biggest issue appears to lie in Baidu’s core search business, always a cash cow in the past, whose operating profits tumbled in the first three months of the year.

The surprise loss is one of the first-ever that I can recall for China’s three largest Internet companies or the BAT, namely Baidu, Alibaba (NYSE: BABA) and Tencent (HKEx: 700). That’s led many to wonder whether Baidu’s glory days are fast fading into the rear-view mirror, or whether perhaps this company has another trick pony beyond its search business that has sustained it for years. Read Full Post…

INTERNET: Money Losers Meituan, Luckin Search for Profits

Bottom line: Meituan’s opening of its delivery unit to more customers looks smart but will require execution to succeed, while shares of money-losing Starbucks challenger Luckin will move steadily downward in the months after its super-sized IPO. 

Meituan opens up delivery service

A couple of money-losers are in the headlines these last few days, casting a spotlight on how profits continue to evade many of China’s hottest tech companies and what they’re doing to try to change that. This kind of loss-making isn’t all that uncommon for such startups. But in at least one of the cases we’re looking at today, the company Meituan Dianping (HKEx: 3690), is already a decade old or more, depending on which piece of it you look at. That hardly qualifies as a startup by most people’s definition, even though the company is still losing massive money.

The news involving Meituan has it opening up one of its biggest money gobblers, which specializes in restaurant takeout delivery, to other third-party customers besides just restaurants. The other news involves Luckin, an app-only coffee chain that wants to challenge Starbucks (Nasdaq: SBUX). That news had the company significantly supersizing its IPO plan to $500 million despite the fact that it’s just two years old.  Read Full Post…

IPOs: Money-Burners DouYu, Luckin Look to Wall Street for Cash

Bottom line: Live streaming gamer DouYu should get relatively strong demand for its $500 million New York IPO, while a smaller listing plan by younger coffee specialist Luckin is likely to die on the vine.

Coffee specialist Luckin brews up Wall Street IPO

One of the longest runs I can recall for New York IPOs by Chinese firms continues to chug ahead, with two new filings, one by live streaming game operator DouYu and the other by a high-tech Starbucks (Nasdaq: SBUX) challenger called Luckin. This particular IPO window is now rapidly creeping up on its second anniversary and doesn’t seem to show too many signs of running out of steam.

The big difference between companies coming to market now is that many are younger and still losing big money, compared with companies earlier in the wave that were older and mostly profitable. That’s not too surprising, since usually the most profitable companies move to the front of the line because they’re naturally more attractive. Read Full Post…