Key investment thesis

A main player in Chinese electric vehicle market. As a key representative of the emerging forces in EV, Xpeng launches influential electric car models annually. It is one of the leading Chinese electric vehicle manufacturers, along with NIO and Weltmeister (a.k.a. WM Motor).

Fast-developing autonomous driving technology. Xpeng considers autonomous driving development as its key competitive attribute. With a 300-employee R&D team, the rapidly updating autonomous driving system is bringing Xpeng favor from users and the capital market.

Development of self-production. After acquiring Guangdong Foday Automobile, Xpeng is on the way to replace the contract manufacturing mode by fully self-production. The Tesla-like independence of manufacturing is unique compared to other Chinese electric vehicle emerging companies.

Key investment risks

Weak quality control. Due to EV production regulations in China, startups outsource manufacturing to third parties. Until 2020, Xpeng outsourced its vehicle manufacturing to FAW Haima Automobile. The durability of its car products is something users frequently complain about. 

2020 is a hard time for the electric vehicle market. 2020 1H is the first time that sales of electric vehicles have decreased since statistics began to be measured. The COVID-19 crisis is depressing Beijing’s subsidy policy for new energy vehicles. As a startup-stage electric vehicle company that cannot produce stable cash inflow, Xpeng has a higher pressure compared with traditional manufacturers.

Business overview

Xpeng Motors (Guangzhou Xiaopeng Motors Technology Co Ltd) is an emerging Chinese electronic vehicle manufacturer. Founded in 2014, it has received USD 1.5+ billion funding from top VCs and tech giants including IDG China, Alibaba, Xiaomi, etc. Xpeng’s first volume-production car G3, a middle-level SUV, was published in 2018. Its latest passenger car – P7 – is targeting Tesla Model 3.

In the Chinese electric vehicle market, Xpeng is pictured as the follower of NIO (NIO: NYSE). Inspired by the business model of Tesla, they are both emerging forces that focus on electric vehicles + autonomous driving technologies. Both NIO and Xpeng independently develop their car products and have contracted with traditional Chinese vehicle manufacturers as their OEM. 

The key feature of Xpeng (and also NIO) is that it runs on an asset-light model. The automotive industry is a sector that requires a long development cycle and deep industrial accumulation. Choosing contract manufacturing can enable Xpeng to make up for its disadvantages in productivity and improve its efficiency as a tech-oriented company. Xpeng has published 2 models  – G3 and P7 – since 2018. And G3 has 2 upgraded models since then. 

Xpeng targets Tesla in product design. Xpeng’s latest model – Xpeng P7 – is directly competing with the Tesla Model 3. With a similar design and target user groups, Xpeng P7 set a much lower price to attract its customers.

The recent changes in the market trends may bring more uncertainty to Xpeng’s business development. Beijing has announced it will not subsidize new energy vehicles with prices over CNY 300 thousand from 2020 to 2022. Another industry-affecting event is that Tesla has launched its factory in Shanghai, which creates a significant tax benefit for its sales in the Chinese market. These events made Tesla decrease the price of Model 3 by more than 20% early this year, narrowing the price gap of Xpeng P7 and Model 3 to less than USD 10 thousand. With less price advantage, Xpeng P7’s sales will suffer more pressure due to Tesla’s stronger industrial capability and better brand image.

Autonomous driving as the key highlight

Xpeng focuses heavily on autonomous driving technology.  Its autonomous driving research teams that located in California and China have 300+ employees. According to the founder, Xiaopeng He, Xpeng has always given the intelligence system and the electric power system equal weight. The insightful long-term plan has thus helped Xpeng build the image of the trailblazer and attract fans to form the user community.

Xpeng’s autonomous driving system, Xpilot, is developing at a high speed. Since reaching the commercialization stage in 2018, Xpilot has released significant updates almost yearly. Xpeng has an active plan in the near future to launch a series of advanced autonomous driving functions. Many of them are considered hard to commercialize by most manufacturers due to technology or regulation reasons.

As a startup with relatively short industrial accumulation, Xpeng’s autonomous driving technology is not as strong as world leading players like Tesla. But compared with Tesla, NIO and most of its competitors, Xpeng is more aggressive in the application of autonomous driving systems. Xpeng P7 has claimed to be equipped with a Level 3 (L3) autonomous driving system, while most manufacturers including Tesla, are at the stage of L2 to L2.5.

Xpeng’s rush to enter autonomous driving is mainly backed by the capital market and the ‘fan’ community. According to Xpeng’s report, the Daily Active User (DAU) of its app’s community is 10,000+. While picturing itself as the vanguard of car intelligence, Xpeng integrates a series of fashion and user-friendly technologies into its car models. The innovation spirit attracts followers who are interested in fresh technologies, which allows Xpeng to build the fan community.  Users’ willingness to pay for Xpeng’s new models, in return, enables Xpeng’s products to be more aggressive. 

Contract manufacturing to self-production

Most emerging electric vehicle manufacturers have problems in vehicle quality control at their starting stage. Xpeng also received some negative feedback, mostly about the vehicle’s durability. Compared with traditional automobile manufacturers, emerging forces start with almost zero accumulation in car production techniques and supply chain. The contract manufacturing model inevitably sacrifices Xpeng’s control over production details. Compared with Tesla, which has already owned independent product lines, Xpeng and other Chinese emerging electric vehicle companies are still at a disadvantage in competition.

Xpeng is now in the transition stage from contract manufacturing to Self-production. In early 2020, Xpeng acquired Foday Automobile, which will help Xpeng to gain the qualification of self-production. In May 2020, Xpeng claimed that it had established a manufacturing department in Zhaoqing, Guangdong, and would be able to produce the latest P7 model independently. Now Xpeng is the only manufacturer in the Chinese automotive industry that applies both contract manufacturing and self-production models. With stronger production power and more polished car products, Xpeng will be closer to market leaders.

Conclusions

In the Chinese electric vehicle market, Xpeng is one of the leading domestic players that is able to challenge Tesla’s dominance. With its signature model P7 released, Xpeng’s sales are likely to rise to a higher stage.

In 2019, Xpeng sold 16,609 electric cars, compared with NIO’s 20,946 and Tesla’s 42,715. As the world’s largest electric vehicle market, the Chinese scene is fragmented and competed over by various forces. With solid autonomous driving technology and distinctive company image, Xpeng will earn a larger market share and hold its own position.