As July saw three new major Chinese companies announcing potential delisting plans from American exchanges, electric vehicle (EV) maker Li Auto went against the tide and listed on the Nasdaq exchange on July 30, 2020. Li Auto defied expectations by raising a staggering USD 1.1 billion in its IPO, with an opening price that reached 34.7% above its original issue price per share.
Steering this unexpected but successful debut was Li Xiang, Li Auto’s eponymous founder, a free-thinking visionary who has drawn parallels to Elon Musk.
A rebel by any other name
Born in 1981, Li is a serial entrepreneur. Besides Li Auto, he also has another listed company already under his belt—Autohome (NASDAQ: ATHM), an online platform for automobile-related sales.
Li Auto, his newest project, is the first EV maker in China to specialize in extended-range electric vehicles (EREVs), namely, hybrid cars that can be operated using either electricity or gasoline. Hybrid cars, which were pioneered by Toyota and are popular in Japan and the US, are less popular in China due to a previous government push for purely electric vehicles. This is set to change as regulators shift their stance to embrace hybrids.
Li’s interest in electric vehicles partially arose from Tesla’s entry into China, with Li being among China’s first generation of Tesla owners. Li is also a fan of Musk himself. “Although Musk can be a little irascible […] other American entrepreneurs cannot match up to his ability to perform for the company at key points,” he said.
Like Musk, Li also has a healthy ego. This is easily represented by the Chinese name of his company, Li Auto (“Li Xiang”) which is a homonym of his own name and means “Ideal”. His self-assurance is not without substance. Locally, he is now one of the faces of China’s “Born after the 1980’s” group. Dating back to the early 2000s, this group consisted of four young Chinese entrepreneurs who showed extraordinary promise, including Mao Kankan, founder of digital game firm MaJoy, Gao Ran, now a founding partner of Fengyun Capital, and Dai Zhikang, founder of Discuz, one of China’s most popular Internet forums and now a controversy-laden conglomerate leader.
A serial entrepreneur riddled with setbacks
Li’s first company was a website specializing in IT products named Pcpop.com, which arose from a desire to prove himself after dropping out of school. “My teachers and relatives thought I was good for nothing because my academic performance was poor, so I started a personal website to avoid being looked down on,” Li stated on his public microblog Weibo in 2019.
Li was relentless, waking up at 5 a.m. daily to seize early-morning traffic from competitors, according to his own writings on Weibo. At the age of 18, Pcpop.com was already generating over RMB 100,000 (USD 14,350) yearly for Li, more than 10 times what his parents, a schoolteacher, and a director of a theatre troupe, earned.
Yet, his inexperience with managing a growing staff eventually led to the company reaching a bottleneck in growth, Li explained on Weibo. Li was not disheartened, however, and in 2005, he set up Autohome (NASDAQ: ATHM), a site peddling automotive products and services. By 2009, Autohome’s was the market leader in China in the automobiles vertical for online platforms, commanding 90% market share.
Success didn’t come without a bitter price. Aware of his inexperience with management, Li willingly gave his CEO role to Qin Zhi in 2008, who had better professional credentials. However, during the global financial crisis of 2007-2008, as defaults in advertising payments by manufacturers snowballed into financial difficulties, 55% of Autohome’s shares were sold to Telstra (TLS.AX), an Australian telecommunications company. Autohome continued to flourish after that, reaching a market cap of about USD 4 billion, but Li lost major control of the company he had founded.
A winding road to success
In an important foreshadow, Nio’s founder, Li Bin, sought out Li Xiang to become a co-founder of the EV firm in 2014. Fearing strategic differences, Li Xiang turned Li down but invested USD 15 million in Nio (NYSE: NIO) as one of its founding investors.
In 2015, Li resigned from Autohome’s presidency to pursue his next dream, and he set up Chehejia, which would be later renamed to Li Auto. However, it took a long and rocky four years for the new EV maker to deliver its first car.
According to Li, who live-streamed on Xueqiu in April 2020, financing Li Auto had “never been easy”. When it was founded in July 2015, China’s stock market bubble had just crashed, resulting in extreme scrutiny and conservative approaches to cash flow as Li Auto pursued financing.
Li Auto also had to go through a seismic strategic overhaul. It originally aimed to develop low-speed small electric vehicles (SEVs), followed by sports utility vehicles (SUVs) only at a later stage.
In the first quarter of 2018, Li Auto abandoned two years’ worth of SEV-related manufacturing facilities, battery packs, and intellectual property, as regulatory reluctance to approve SEVs and lukewarm market demand put their dream to bed. Faced with slim prospects of commercializing SEVs in China, they chose to cut their losses early and pulled out completely, despite prior significant investments, to focus on SUVs.
By December 2019, Li Auto finally delivered its first SUV model, the Li ONE, which has been gathering momentum since. With a starting price of USD 21,000, the Li ONE is relatively cheaper compared to other competitors. Importantly, it also circumvents the problem of inadequate EV charging infrastructure by utilizing a proprietary EREV technology, which enables it to run on both electricity and gasoline.
As of June 2020, Li Auto sold around 10,400 units of its flagship model. Following its July listing, the firm now has an estimated fully diluted market cap of between USD 7.9 and USD 10 billion. Certainly part of the firm’s success derives from the buzz surrounding the EV market bubble. However, it also holds innate appeal for a cocktail of factors, such as Li’s own reputation and the firm’s relatively more visible path to profitability compared to other EV makers in China, due to a healthier cost structure and improvements in second-quarter operating cash flow.
Challenges to overcome
Yet, Li Auto’s listing is just one milestone in a difficult journey ahead. Li Auto has not been profitable since its inception, and the competition in the market is intense with home-grown players like Nio, Geely Auto, Xpeng, and Berkshire-backed BYD. Industry pioneer Tesla and traditional automakers like Volkswagon and BMW are also ferociously throwing their all into this battle.
According to the Centre for Strategic and International Studies (CSIS), a Washington-based think tank, China had more than 450 electric car producers in 2019 vying for a total market of at most 1.8 million passenger vehicles. Yet, dwindling government subsidies and a gloomy economic outlook, especially in the aftermath of COVID-19, have resulted in the industry cooling down.
According to the China Association of Automobile Manufacturers (CAAM), for instance, the number of NEVs (excluding Tesla) manufactured and sold in China during March 2020 decreased by 56.9% and 53.2% year-on-year.
However, unlike Tesla and Nio, which are notorious for burning cash, Li is doggedly tight-fisted, a battle scar earned from his struggles financing Autohome and Li Auto during two financial crises.
“We have not touched the cash we received from our last series of funding [Series B-3],” said Li in April during his Xueqiu livestream. “We will not spend money randomly, because when you spend in areas where you should not, you will end up wasting even more money in those areas.”
Li is also very clear about his company’s market position and is confident about differentiating Li Auto from other Chinese EVs. Previously, he stressed that unlike Nokia, Apple’s success lies in a few core products, with profits generated from user premiums arising from brand perception.Â
Similarly, Li Auto currently produces only one model, the aforementioned Li ONE, which is a six-seat, large premium SUV. In a livestream to Chinese consumers in April 2020, Li emphasized that Li Auto would be focusing on only one model for at least another three years.
“The automobile market is sufficiently big, but it is extremely difficult. In the future, only three players will succeed amongst China’s hundreds of EV makers,” said Li on his Weibo in April 2020. “We will strive to become one of these three players, and we hope that our comrades-in-arms will be Nio and Xpeng.”
Bigger dreams ahead
Perhaps wary of his unhappy struggles controlling Autohome’s direction previously, Li retains 21% of Li Auto and 72.7% of the total voting rights after the IPO.
Clearly, he is determined to be the one steering Li Auto ahead, but yet, he remains modest about his leadership skills.
“To become the best leader […] I have only just started [as of 2018] and have yet to see actual results. In the red sea of the EV industry, becoming the best leader is the only way to win,” Li stated in 2019 on Weibo. “I am still in the painful process of fighting to this level of leadership; this is a road of no return. Give me a few years and I will show you some results.”
Many investors believe in him. Li Auto boasts a laundry list of backers across nine financing rounds, including Meituan-Dianping (3690.HK) and ByteDance. Meituan’s founder, Wang Xing, waxes lyrical about Li, stating publicly that he is one of the very few people who “think differently.”
“Those who think that Li Xiang’s goal is just to create a USD 100 billion company are underestimating this by one order of magnitude,” Wang commented after Li Auto’s successful listing.
For Li, bigger dreams remain afoot.
