The EV industry is becoming clogged with new arrivals who want a piece of pie, for no reason other than that the pie exists. The latest unlikely arrivals are the property developers.
Photo from CFP
By HUANG Yu
It’s pretty safe to say that the hottest topic in terms of investment and innovation in China today is the electric car. EVs are constantly in the headlines, most recently due to the huge traffic jam of unlikely companies lined up to get into the parking lot. It’s probably impossible to name a Chinese tech giant that doesn’t have several entries in the great EV race.
Tech companies are no surprise. EVs are almost nothing but technology, what property developers have to offer the market is anyone’s guess. Developers are overflowing with money, and seem to have piled in on very little basis, except that they think they will make a profit.
But will they? They were built to handle the property market where everything is quite predictable and one day is much like the next. Today’s tech jungle may not be the right place for an aging dinosaur.
Though the real estate market as we know it didn’t exist in China until the 1980s, the rules of land trading have not changed much. Money and government policy matter most, a company with cash in hand and friends in the right places is liable to make even more money with land and homes.
But with EVs, things are quite different. Property developers don’t know much about chips or automobile driving, and they are not going to become experts overnight. There are more than 20,000 components in an EV. One simply can’t buy all of them, but that’s not to stop some from trying. In EVs, the software is every bit as important as rubber and metal. There is no such thing as a universal system that applies to all kinds of EVs. This reliance on chips and data explains why smartphone makers see opportunities in the industry.
R&D takes time and demands a lot of money: enter property developers. They’ve got plenty of money.
Work begins on a typical real estate project within three weeks of the land being acquired. Homes are on sale within four months and the proceeds of sales go to the next land auction, usually within thirty days. The snowball rolls ever onward.
It will take at least four years to prepare a new EV for the market. Elon Musk founded Tesla in 2003 but didn’t make a car until 2012, and it wasn’t until last year, after selling 500,000 cars, that Tesla finally began to make a profit.
Domestic EV startups Nio, XPeng, Lixiang and Weltmeister are all losing money, having sold only 22,500 vehicles last year between them.
“We can’t afford to take five years to produce a car,” said a senior real estate executive. “We’ll miss all the opportunities, so we’ll just buy from others and cut our research cycle.”
Gross profit in property is usually around 30 percent, a lot more in some urban renovations. Last year, Nio’s gross profit rate was 11.5 percent, XPeng’s only 4.6 percent.
HE Xiaopeng, CEO of XPeng said many crossover property developers have a good reputation and plenty of money, which could be their biggest problem. “They can afford a big loss before they bail out,” He said.
Cost control is not something real estate industry has to worry about, but it matters a lot for EV makers. Everything down to a single screw has strict cost control in the EV industry. But in real estate, the budget is often just a matter of coming up with a few numbers and seeing how things progress. Property developers make money by increasing the value of land, automakers make their money from their products.
When Evergrande Group set out to make an EV, it recruited overseas engineers Magna, Edag and FEV and announced that 14 models were on the way, nine of them to be released within six months. The company’s stated goal is to make a million EVs in 2025 and 5 million in 2035.
Even if Evergrande managed to design and sell the most popular and successful EV ever, any money the car made would go unnoticed against the 700 billion yuan the developer makes from housing each year. Launching several new models simultaneously is a huge risk. Vehicle development moves slowly, on a trial-and-error basis. New models are already designed and constructed with improvements in mind.
“Launching nine models all together will only damage each model’s sales, I can’t see any possible profit in such a strategy,” an analyst said.
Domestic EV startups only have two or three models on sale, with new models along every three years, if R&D goes well. The market needs time for anticipation to grow.
An interesting feature shared by many property developers sidling up to the EV market is that they have already built their factories! Before they even have plans to make anything specific.
CUI Dongshu from the China Passenger Car Association reckons the true goal of the developers is the land. The government allows them to buy plots at a much cheaper price if they claim to be building a factory, even if the factory turns out to be fancy apartments.
Surveys show that when buying a house, it’s all about location and layout. Chinese buyers simply expect the price to continue rising indefinitely. Branding is the least of their concern. Apartments are quite homogeneous: regulations don’t leave much room for developers to improvise and customers want a standard product.
The car market is nothing like that! When it comes to a car, the badge on the front is everything. The top ten brands accounted for almost 90 percent of sales last year.
Carmakers have clear positioning that brings them loyal customers. Property developers don’t position themselves at all. To car lovers Evergrande means nothing more than a hollow slogan about wanting to be the “biggest and best” EV maker in the world. Doesn’t everyone?
It’s not hard to work out that most of the founders and CEOs of EV brands came from the Internet business. Although the property developers are poaching talent from automakers, it is still the real estate side that is calling the shots.
Companies like Evergrande have already poured billions into EVs, and are likely to expect some returns.
One engineer who worked for a property developer said they tried to evaluate him as if he was a salesman – unreachable goals, impossible deadlines and huge pressure. This may work when selling hundreds of apartments but doesn’t seem quite right when designing a car’s braking system. And for a company building a business from scratch, it may not work at all.