The latest electric vehicle startup to cash in on a new wave of hype and investment in the space is Li Auto, a five-year-old Chinese company that started trading on the Nasdaq on Thursday after raising $1.1 billion in an initial public offering. It’s the second Chinese EV startup to become a publicly traded company in the United States, following Nio’s 2018 IPO and subsequent listing on the New York Stock Exchange. Another, XPeng, will reportedly be next.
With Tesla recently becoming the world’s most valuable automaker, there is suddenly a renewed focus on funding EV startups. Fresh money has been rushing into the likes of Rivian, Nikola, Fisker, Karma, and even suppliers like Velodyne and Hyliion over the last few months from both the public and private sectors.
While most of the ones going public are taking advantage of what’s known as a reverse-merger (where they combine their business with an already publicly traded company that exists solely as a placeholder on the stock exchange, thus eschewing a traditional IPO), Li Auto went the standard route. It filed to go public earlier this year and spent months working with banks and investors. This week, regulators approved Li Auto’s filing, and shares of the company started trading on the Nasdaq exchange.
Li Auto’s IPO comes at a strange and tense time, in that both the Trump administration and a number of lawmakers in the Senate have spent months laying the groundwork to either increase oversight on Chinese companies on US stock exchanges or take them off (or “delist”) them altogether. In addition to the general tensions of Trump’s trade war with the country, there are concerns about transparency with Chinese companies that go public in the US — especially because the watchdog that’s supposed to keep tabs on them, the Public Company Accounting Oversight Board (PCAOB), has had trouble getting Chinese banks to agree to proper audits.
Li Auto is also taking a different approach to electric vehicles than startups like Nio. The company’s SUVs are hybrids of a sort. They use electric motors to move (one on the front axle and one on the rear), but those motors are powered by a combination of a 40.5kWh battery pack and a 1.2-liter turbocharged engine paired to a 45-liter fuel tank (about 12 gallons) and a 100kW electric generator, which can feed power to the battery pack in real time. The idea is that the car can be driven for about 180 kilometers (about 112 miles) on the battery power alone, but it has a total range of around 800 kilometers (nearly 500 miles) when leveraging the combustion engine. (There are different driving modes that can blend the power sources, too.)
The company says this approach helps get around China’s “inadequate private and public fast charging infrastructure” while also keeping costs lower than all-electric vehicles. It also argues that the approach will “contribute to wider and earlier adoption of electric vehicles in China.”
Li Auto is looking to sell a variety of SUVs built on its hybrid technology that range from around $21,000 to about $70,000. The company started shipping its first model in late 2019 and has delivered a little more than 10,000 so far. It’s a midsize SUV is well-appointed and stuffed with lots of touchscreens and other technology, like an advanced driver assistance system. A full-size premium version is set to be released in 2022.
Like many of its peers, Li Auto sells its SUVs directly to consumers. But unlike Nio, which pays a state-owned automaker to contract manufacture all of its cars (and scrapped plans last year to build its own factory), Li Auto builds its own vehicles. The startup’s revenues are modest for an automaker ($120 million in the first quarter of 2020) and it lost about $344 million in 2019 and about $214 million in 2018. But it may have a quicker path to profitability than Nio because of that in-house production, as it lost just $11 million in the first quarter of 2020, its first full quarter of deliveries.
Sales of Li Auto’s first model were boosted in these early days by China’s generous subsidies for “new energy vehicles” (including hybrid, all-electric, and even hydrogen-powered cars), and the company admits in filings with the Securities and Exchange Commission that changes to subsidy policy could affect future sales.
An even greater policy risk, though, could be the hybrid technology approach itself. The Chinese government has different regulatory regimes for internal combustion vehicles and new energy vehicles. Since Li Auto’s vehicles are powered by both a battery pack and gasoline, the company — by its own admission in these filings — is vulnerable to the whims of both regimes.
Another notable risk the startup admits to is that the accounting firm it hired to prep its IPO, the Chinese arm of PricewaterhouseCoopers, found that Li Auto lacks “sufficient competent financial reporting and accounting personnel with appropriate understanding of US GAAP.” (GAAP stands for “generally accepted accounting principals,” and it’s a common set of standards by which companies have to define their financial reporting.) Per PCAOB guidelines, Li Auto had to admit there’s “a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis.” Li Auto says it has hired additional staff to address this but admits that other accounting problems may have gone unnoticed.
On top of that, Li Auto is classified as an “emerging growth” company because it generated less than $1 billion in revenue last year, per the Obama-era Jumpstart Our Business Startups (JOBS) Act. This means it is already exempt from certain transparency requirements set out in the Sarbanes-Oxley Act of 2002.
Risk factors like these are partly why lawmakers have raised issues with Chinese companies becoming publicly traded in the US. Li Auto is aware of this, too: the company admits in its SEC filings that the PCAOB would not be able to inspect any audits that have been done of its finances. As a result, Li Auto says, “[i]nvestors may lose confidence in our reported financial information and procedures and the quality of our financial statements.” And if legislation is passed that more closely regulates Chinese companies from listing on US exchanges, Li Auto admits that its share price may drop or it may have to leave the Nasdaq altogether.
Should any financial problems ever surface, shareholders won’t have much recourse. Li Auto’s founder, Li Xiang, holds 73 percent of the voting power.
Despite all this, Li Auto generated enough interest to pull in $1.1 billion and has seen its share price rise throughout the first morning of trading on the Nasdaq stock exchange. Perhaps that’s a result of the new momentum in the global electric vehicle startup space, or maybe it’s simply a side effect of the US stock market’s current volatility and unpredictability. Whatever the answer, Li Auto’s initial success — and the money being raised by the other companies mentioned above — must have the stalled EV startups that remain, like Byton and Faraday Future, wondering how they can ride this wave as well before it crests.