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‘Tesla Killer’ Xpeng completes IPO

In recent years China has the epicentre of a boom in technological advancements in the Electrical Vehicle (EV) landscape, headlined by its major player, Xiaopeng (Xpeng) Motors. Xpeng Motors, touted as the “Tesla killer”, looks to disrupt the exploding sector with their line of products that merge the latest technologies in the EV and Artificial Intelligence (AI) spaces by leveraging their strong relationships with the US chip maker, Nvidia.

The EV Industry

Since the establishment of the Paris Agreement, in which global leaders agreed to attempt to limit this century’s climate change to just a 1.5°C increase, EV infrastructure has experienced rapid expansion as conventional fuel-burning modes of transport look to be replaced. After a series of direct subsidies, numerous central governments including China and the US are beginning to phase them out as the EV sector grows in strength and no longer needs to rely on such short-term monetary aid. Recently, a new, regulation-driven set of policy approaches has emerged, such as zero-emission vehicle mandates and new fuel economy standards. The European Union (EU) for example, has revealed its own set of new fuel standard ambitions such as an EU fleet-wide average emission target of 95 gCO2/km from 2020 onwards and super credits, where zero to low-emission car manufacturers receive additional incentives. Such regulatory and fiscal measures are anticipated to accelerate EV deployment further, setting clear objectives and a long-term vision for this rising industry.

Xpeng IPO

The incredible surge in share price witnessed by Tesla over the last year – with over 1,000% appreciation – has prompted early expansion from Chinese start-ups like Xpeng. Xpeng’s IPO was the third largest listing by a Chinese EV manufacturer in the past two years, after its rival Li Auto which raised $1.1 billion at $11.5 per share. Upon listing, Xpeng raised an enormous $1.5 billion at $15 per share, an increase from their original target of $1.1 billion at $11 – $13 per share thanks to high enthusiasm from large, long-term investors such as Alibaba who invested $215 million. The capital raised from the floatation is expected to be put towards further R&D to continue to integrate the latest technology within their products while the remainder will go towards a scale-up of manufacturing, deploy new charging infrastructures and launch their new model by the end of 2021.

Xpeng VS Tesla

Xpeng has striven to meet the growing demand of Chinese consumers for cars with the latest technologies. The key distinguishing factor between Xpeng’s and Tesla’s business model is their customers – while Xpeng currently have two models in production: the £17,761 G3 SUV and the £27,809 P7 Sedan with ranges of 520km and 706km respectively. Despite its economical pricing, the latter model outperforms the best performing Tesla by 110km, and equipped with the DRIVE AGX Xavier, the best in-vehicle computer on the market, Xpeng vehicles have huge processing capacity which enables key functions such as autonomous driving. Due to their strong relationship with Nvidia, the American computer chip giant, Xpeng are expected to have access to the advanced version of Xavier, the DRIVE AGX Orin, for their new models – with a processing speed seven times faster than the current version, it will introduce a significant competitive advantage. Xpeng have also managed to secure an automobile manufacturing license in China, a task which has proven to be very difficult for their competitors, thus enabling them to have their own highly automated manufacturing plant in Zhaoqing, Guangdong Province, which is set to increase production rates considerably.

Xpeng Financials

Xpeng’s financials also provide significant cause for high investor interest. They have shown dramatic increases in revenue year on year from 2018 to 2020, indicating the high growth of both the company and the industry in which it operates. Xpeng, along with Li and NIO, has failed to remain consistently profitable but this is expected for a relatively new start-up in such a crowded EV space. Promisingly, they have managed to trim annual losses from 1.9 billion RMB to 796 million RMB all while continuing to integrate best-in-class technology within their products. On average, battery costs account for 57% of total EV costs, however, Xpeng has managed to reduce their battery costs by 20%, with further decreases expected in the future it may be argued that Xpeng is on the right track to achieving profitability in the near future. Moreover, with the opening of several new mines, the cost of lithium, a large component in the expensive manufacturing process of EV batteries, is also set to reduce Xpeng’s production costs.

Ethical Issues Within Supply Chains

Cobalt is an essential component in the production of lithium batteries used by many major Tech companies, with EV batteries known to contain 10% cobalt. The majority of cobalt (59%) is mined from the Democratic Republic of Congo (DRC), however recently cobalt mining practices have been revealed to be in violation of many basic human rights. Perilous working conditions often cause serious injuries or even fatalities, and with a pay of less than $2 a day, underage Congolese workers continue to be exploited. Whilst there is no legal requirement for companies to carry out any due diligence on their supply chains, it is a necessary step to help mitigate such ethical issues. By tracing raw materials back to their source, companies could identify and address any human rights violations, however, it must be observed that simply abandoning the use of cobalt mines would be an inappropriate strategy to bypass such social issues since mining is a large contributor to the Congolese economy and represents the livelihood of many.

Overall, Xpeng represents the archetypal ESG investment destination, tackling the issue of climate change through their environmentally friendly EV products and is set to become a major competitor to Tesla, however, some of the ground they gain on the environmental front seems to be forfeited on the social front due to malpractices of cobalt mining likely present in their supply chain raising questions on the company’s ESG status.  

Analytics by Jacob Armstrong