Xpeng Pros & Cons

As I wrote last night (er, early this morning), Xpeng has made the next step in its IPO process by indicating its expected share price at IPO ($11–13) and sharing that it aims to raise $1.1 billion on the high end of that target.

There is more included in its SEC filing that I wanted to dig into as well. To start with, the company lists what it thinks are its strengths, strategies, and challenges. I’m pasting those bullet lists in below, and then will return to some of the items.

Our Strengths

We believe the following strengths position us well to capitalize on the opportunities of a rapidly changing passenger vehicle market and the anticipated consumer demand for Smart EVs in China:

• we are a leading Smart EV company;
• great to drive, great to be driven;
• deep software, hardware and data technologies;
• innovative software and content subscription model;
• scalable and efficient platforms; and
• the winning team for Smart EV.

Our Strategies

We pursue the following strategies to accomplish our mission:

• continue to invest in and advance our technologies;
• leverage common platforms to launch a new model every year;
• build the leading Smart EV brand;
• expand our sales and super charging network;
• drive operating efficiency by optimizing production management; and
• expand innovative subscription and value-added services.

Our Challenges

Our business and successful execution of our strategies are subject to certain challenges, risks and uncertainties including:

• our limited operating history;
• our ability to effectively manage our growth;
• uncertainties relating to our research and development efforts;
• our ability to offer a good mobility experience and meet customer expectations;
• our ability to attain profitability and positive operating cash flows;
• uncertainties relating to autonomous driving technologies;
• our ability to compete in our industry;
• changes to government subsidies, economic incentives and government policies relating to NEVs and domestically produced vehicles; and
• the impact of the COVID-19 outbreak.

In addition, we face risks and uncertainties related to the regulatory environment in China, including:

• further changes and interpretation of laws and regulations governing the EV market in the PRC; and
• changes in the political and economic policies of the PRC government.

First of all, one thing that stands out but is well known is that Xpeng’s success is to some extent dependent on the whims (policies) of the Chinese government. Major changes in policy can kill a company. That said, Xpeng’s positioning as a smart-tech company in the hot and heavily favored electric vehicle industry seems like it would put it in a solid spot. Additionally, it is already beginning to expand overseas, which I think is a direction the Chinese government appreciates in this era of the country’s growth. But who knows? These Chinese government, like many governments, is an intricate maze of power plays and personal relationships.

In the filing and in our communications with Xpeng staff, including its founder and CEO in years past, there has been a strong emphasis on “smart” — on innovative tech, data, a deep in-house software focus, and R&D. I don’t think it’s just marketing. Xpeng has some well established tech billionaires on its founding and early growth team, as well as younger tech nerds who are passionately trying to make top products. That said, how “smart” an auto company is compared to other auto companies that also trying to be smart is not a very easy matter to evaluate from outside. Will Xpeng’s full-stack software approach match what Mercedes-Benz and Nvidia are doing, what NIO is doing with its partners, what Tesla is doing? I’ll leave that to you, and the future, to judge.

One note in the middle of the SEC filing in the section on “Risk Factors” does mention some basic stats related to the company’s technological innovation: “We rely on a combination of patents, trademarks, copyrights, trade secrets and confidentiality agreements to protect our proprietary rights. As of June 30, 2020, we had 450 patents (including 52 invention patents), 1,047 pending patent applications, 451 registered trademarks and 86 pending trademark applications in China and certain other jurisdictions, which we have invested significant resources to develop.”

Furthermore, from the overview I published earlier, you can see that a large portion of Xpeng’s current staff is R&D staff. “As of June 30, 2020, we had 3,676 employees in China and the United States. As of June 30, 2020, approximately 43% of our employees focused on research and development, of which 66%, 17% and 17% were dedicated to automotive design and engineering, autonomous driving and intelligent operating system, respectively.”

Xpeng’s focus on “subscription and value-added services” is a noteworthy component of its self-identified strengths that speaks to the company’s focus on a 21st century tech lifestyle, being app/smartphone-based, and capitalizing on future services and value streams as the software allows. Like a Tesla, the point is that an Xpeng vehicle is a computer on wheels, not a car with some small computers tacked on. It is like changing from a flip-phone to a smartphone.

When it comes to challenges, the biggest challenge is clear: it’s young and small and needs to grow. The company needs to excite customers, be competitive in a hot and fast-evolving market, grow as efficiently as possible, and eventually start benefiting enough from economies of scale and consumer demand to become profitable. There are many potential death traps along the way, as there are for any startup, or any automotive startup more specifically, or any “smart EV” startup to be even more specific.

Regarding its output at the moment, the company notes, “We delivered a total of 2,451 Smart EVs, including 1,641 units of the P7 and 810 units of the G3, to customers in July 2020.” Multiplying that by 12, that’s 29,412. So, at a steady state, Xpeng would achieve approximately 30,000 sales a year. That’s a bit like Tesla when the Model S was still its only vehicle. How fast can Xpeng scale up to 100,000/year, 200,000/year, or 1 million a year (assuming it can at all)? That is the question, young grasshopper.

If you really want to dig into the many ways Xpeng could die, pages 16–66 cover “Risk Factors” in more depth. I skimmed through all of those pages and, after covering Tesla closely since 2012, I didn’t notice anything surprising — except there’s a bit in there about risks associated with the company being based in the Cayman Islands instead of the United States. I may read the section more carefully later on, though — if I decide I want to have nightmares.

You may also want to look into Xpeng’s high-level 2019 and 2020 financials on pages 83–85. Naturally, the main overarching point on its finances is that Xpeng has been losing money. It’s a super young startup with big plans in a capital-intensive industry. If it was making profits at this point, that would be astounding.

Again, if anything particularly interesting stands out to you in the 200+ page document, please let us know down in the comments.

All photos courtesy of Xpeng.