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Electric car start-ups face uphill battle

China’s Nio provides cautionary tale for those seeking to enter increasingly tough market

Nio’s banner, draped over the New York Stock Exchange last September to mark its US listing, proclaimed: “Blue Sky Coming.”

But since then investors in the Chinese carmaker have witnessed storm clouds growing darker each quarter as losses spiral.

Once the shining hope for Chinese electric car start-ups, Nio is flirting with collapse with losses piling up, cash flowing out of the door and the share price plunging.

Last month the group was forced to raise $200m from its own chief executive William Li and one of its biggest shareholders, Tencent, to keep afloat. The company still needs more funds, with analysts giving the group weeks to recapitalise in order to survive.

Nio’s disastrous year is a cautionary tale for dozens of small would-be car pioneers looking to gain a toehold in the industry as they try to compete with established giants such as Volkswagen and Toyota.

“You have to be really brave to try and come into [the] automotive [sector],” said Volkswagen chief executive Herbert Diess.

Scores of electric car start-ups have been launched over the past few years, attracted to the market because battery-powered vehicles are comparatively cheap to develop and manufacture.

Electric vehicles are in effect a battery and chassis on wheels in contrast to the thousands of complex moving parts in the internal combustion engine.

China has seen the biggest influx of new groups, helped by subsidies and cheap financing. But there have also been several launches in the US, Europe and Japan.

“Before Tesla, there was I would say an unwritten rule, but I think it was probably a written rule, that you couldn’t start a new car company and succeed,” said Peter Rawlinson, the founder and chief executive of Californian electric start-up Lucid Motors who is a former senior executive at Tesla. “It was impossible.”

But although Tesla, the Californian pioneer, has given other groups the confidence to take the plunge, the electric car market is now more competitive and the environment is tougher for delivering profits.

Many manufacturers failed to recognise the costs involved in creating supply and retail chains, which can run into the billions.

“Probably the biggest challenge is . . . the investment is so big,” said Mr Diess.

Nio’s problems have been exacerbated by overspending.

Last December at a company-branded jamboree called “Nio day”, the group splashed out with the booking of chart-topping singer Bruno Mars to entertain customers.

“Nio have been spending beyond their means for years and their losses have been largely due to unnecessary expenses,” said a senior executive at another Chinese electric car start-up.

As well as high costs, start-ups have struggled with the rigours of scale manufacturing.

At one point Tesla was manufacturing cars without computer units or even seats, requiring its dealers to install them before delivering finished cars to customers. This was in part because of difficulties with its supply chain.

Many new groups also underestimated the challenge of building a brand in a sector where established rivals have spent years developing a loyal customer base.

“A key challenge for the likes of Nio and Byton [another start-up] will be convincing consumers that these new brands are legit,” said Michael Dunne, a former General Motors executive who runs Chinese automotive consultancy ZoZo Go.

“Nio’s disappointing sales reflect not a failure of product but an inability to persuade consumers that a Nio should be considered alongside an Audi or a Tesla.”

Robin Zhu, analyst at Bernstein, added: “Ultimately, our biggest problem with Nio is the lack of traction its vehicles have generated among Chinese consumers to date. Nio’s volumes have not been enough to support anything close to profitability for the company, even at the gross profit line.”

Existing carmakers also have the advantage of a deep well of combustion engine vehicles that allow them to offset the losses from battery cars.

BMW, which is rolling out hybrid options on most of its models, has launched an X7 model to rival Range Rover as well as the 8-series super-saloon specifically to top up the thin profits likely to trickle in from its cheaper battery models.

“We need to compensate with those cars for the smaller electric vehicles,” Harald Krüger, replaced as BMW chief executive over the summer, said earlier in the year.

Still, despite the challenges and risks, scores of start-ups continue to pile into the market, willing to risk failure.

“We know the enormity of this task,” admitted Mr Rawlinson at Lucid. “I’ve been there and done it, and a lot of my team have. But we are under no illusion that this is a marathon.”

If the real Gotham City turns troublesome, Prudential cannot call in Batman

Like sunlight breaking through Gotham City darkness, a shaft of optimism lifts the City of London. Insurer Prudential’s investment arm has defied the Brexit Joker, announcing a £875m investment in a City office development. A tiered complex at 40 Leadenhall, with one tower reaching 34 storeys, is already informally named after the sinister-comic fictional city. It may yet vanquish swirling dark forces.

Brexit has cast grey uncertainty over the City. Who will occupy its steel and glass offices of the future? Trade barriers with the EU will diminish its status as Europe’s financial centre. The global finance cycle is anyway teetering. UK-headquartered HSBC is slashing jobs globally. Companies shun London listings. Kazakh fintech group Kaspi.kz on Monday became the latest to shelve flotation plans. 

Spending on real estate has slumped. Investment in central London commercial property dropped 50 per cent in the first nine months of 2019, according to property agents CBRE. Broader effects are harder to disentangle. Rents have risen but WeWork’s aggressive expansion has distorted market prices. Almost 7 per cent of London office space is “flexible,” compared with less than 4 per cent in New York, reckons Jones Lang LaSalle. A WeWork slowdown will leave a big hangover.

M&G Prudential is taking a longer-term bet, however. Scaled-back construction plans will squeeze office supply by 2023 when the Leadenhall project is completed. WeWork, by then, will be either WeWon or WeWent. Brexit might not be catastrophic; an exodus of bankers has not materialised so far.

Meanwhile, price weakness could boost returns. M&G Prudential believes prime London offices generate yields at least one percentage point higher than in rival financial centres. But latest CBRE estimates put them at less than 4 per cent, near a cyclical low and below New York — although higher than Paris and Berlin. The risk is that WeWork — or Brexit — results in over supply. If the real Gotham City turns troublesome, Prudential cannot call in Batman.

- The psychology seems to be better headed into this week's meetings after China has made purchases of US agricultural goods

- The psychology seems to be better headed into this week's meetings after China has made purchases of US agricultural goods

New listings underperform the market in reversal from early 2019

The IPO market has gone from hot to not.

Shares of newly public companies, earlier this year one of the hottest investments on Wall Street, are now in a slump after investors soured on unprofitable startups from Uber Technologies Inc. to WeWork.

Shares of technology startups and other companies that went public in the U.S. this year are trading roughly 5% above, on average, their prices at their initial public offerings, well short of the 18% gain in the S&P 500 index, according to Dealogic data. That is a reversal from earlier in the year, when IPO shares were big outperformers.

IPO-stock performance is the worst it has been since at least 1995, according to a recent research note from Goldman Sachs, whose analysts measured it relative to a broad stock-market index.

That and recent market gyrations have helped bring IPO activity to a virtual standstill heading into what is traditionally one of the busiest times of year for new issues, as companies planning debuts wait for conditions to improve.

The stall upends expectations that 2019 would be a record year for IPOs by money raised. It also highlights the risks for private investors who have endured long periods of losses funding a crop of companies that are older and bigger than IPO candidates in previous cycles. That could put a chill on a private-funding market that has been red hot and hamper the ability of the next generation of startups to raise seed capital.

The slowdown could also hit fees at the banks that underwrite IPOs and push some companies to rethink plans for traditional IPOs in favor of alternatives such as cheaper direct listings.

“I don’t see a lot of deals that are likely to go out the rest of this year,” said Rick Kline, the co-chair of law firm Goodwin Procter LLP’s capital-markets practice. “The market sentiment has changed.“

Bankers and lawyers now say it is unlikely that 2019 will be the record year that many had envisioned. So far this year, 158 companies have raised $53.1 billion on U.S. exchanges, according to Dealogic, the fourth-busiest year on record behind 1999, 2000 and 2014. Should activity taper off as expected, 2019 could fall behind other years too.

After a hiccup caused by the government shutdown, 2019 got off to a fast start with the well-received debuts of Pinterest Inc. and Zoom Video Communications Inc. Even after ride-hailing apps Uber and Lyft Inc. stumbled in their debuts, the new-issue market stayed strong. But a failed flirtation with public ownership on the part of WeWork, together with other soured listing plans, appears to have changed that.

We Co., as the WeWork parent is officially known, abruptly postponed its highly anticipated IPO last month after prospective investors revolted against the office-sharing company’s governance and big losses. The New York company and its underwriters had already lopped off some $30 billion from its expected valuation in anticipation of weak demand. Two other companies with sizable losses—entertainment firm Endeavor Group Holdings Inc. and biotechnology concern ADC Therapeutics SA—also postponed listings within the past two weeks.

Companies that had raised record amounts of money in private began lining up to go public, eager to tap what seemed like insatiable demand from stock-market investors. But the weak performance of many of these companies in the public market is making it clear that private investors often were too optimistic.

This year’s crop of IPOs is expected to be the least profitable since the technology boom, according to another Goldman research note, and investors have taken notice.

In March, Lyft was valued in its IPO at $24 billion, far above its previous valuation in the private markets of $15 billion. Since then, its stock has fallen 46% as investors grew increasingly worried about the company’s steep losses.

Uber followed a similar trajectory. It had been valued at roughly $68 billion in the private markets and went public in May at a price that gave the company a fully diluted valuation of some $80 billion. Since then, its stock has dropped 34%, putting the company’s market capitalization far below where it was last valued privately. Uber incurred a $5.2 billion loss in its latest quarter, hurt by billions in costs related to its IPO.

Slack Technologies Inc., which is also unprofitable, made its debut in June through an unusual method called a direct listing. As such, the company didn’t raise capital and simply used $26 as a reference price for when its shares started trading on the New York Stock Exchange. Despite surging initially, Slack shares now trade 4% below that reference price.

“Some companies became convinced that the public market would welcome them with high cash burn and long runways to profitability,” said Paul Hudson, founder and chief investment officer of Glade Brook Capital Partners LLC, a pre-IPO investor in Uber, Lyft and We. “The reality is the public market rewards profitable companies that generate cash flows in addition to growth.”

Indeed, Pinterest, the fast-growing and nearly profitable platform for online image searches, is up 44% from its April IPO price. Datadog Inc., a cloud-based software-management platform with limited losses that made its debut in September, is up nearly 30% since then.

Once the present market volatility passes and would-be public companies have a chance to adjust to the current environment and recalibrate their pitches to investors, the IPO market could stage a comeback. There are still a number of successful startups planning IPOs as soon as next year, including Airbnb Inc. and possibly a retooled We.

“I see a lot of exciting companies gearing up for the first half of 2020,” said Goodwin Procter’s Mr. Kline.

When the IPO market does come back to life, more companies are expected to stage direct listings, in which no money is raised and banker fees are smaller than in traditional IPOs.

Airbnb, set to go public as soon as the first half of 2020, might do so via direct listing, according to people familiar with the matter. The home-rental app doesn’t have an urgent need for capital, but it likely has enough name recognition to successfully bypass the traditional new-issue marketing process.

None of that is good news for banks, which reap big fees from underwriting IPOs, but it reflects a belief among some in Silicon Valley that Wall Street has mishandled this year’s troubled IPOs.

Record companies worry they will lose revenue as iPhone maker looks to create 1 monthly price

Apple’s hopes of creating a super-bundle of media content for one flat monthly fee have run into early opposition, with some record labels nervous about the prospect of offering their music for a lower price. 

The iPhone maker has recently approached the big music companies about bundling together Apple Music and Apple’s upcoming television service, but the two sides have not yet discussed a pricing formula, said people familiar with the negotiations. Talks are at an early stage, they added. 

While some labels are open to the idea, people at one big record company said they had concerns, and that the industry was growing more wary about its relationship with Apple, which strong-armed labels a decade ago into selling individual songs for $0.99 on iTunes.

In recent years, the success of streaming services such as Spotify and Apple Music has helped a recovery in the music business. But executives fear that margins may be hurt if Apple undercuts the $10 monthly price that Spotify, Apple Music and others charge.

Apple TV+, a streaming video service, launches on November 1 and will cost $5 a month, in an effort to undercut its rival, Netflix. 

Analysts have suggested that Apple would eventually create a super-bundle for the 420m people who subscribed to some Apple service in the past year. 

Such a bundle could have several tiers, including apps such as News+, which aggregates magazine and newspaper content for $10 a month, or Arcade, which offers more than 100 games for $5 a month. Last year Apple allowed users to pay for hardware warranties over time with an “AppleCare+” subscription.

In theory, Apple could offer consumers a bundle of Apple Music and Apple TV+ at a notional $13 a month, without compelling music rights holders to offer a discount. 

While Apple has to license music rights from the record labels, it owns the rights to content on its video streaming service and does not have to share revenues. 

Analysts said the company was more interested in building a huge number of subscribers than in short-term profit. 

Toni Sacconaghi, an analyst at Bernstein, said it was a “genius” move for Apple to give away 12 months of Apple TV+ for free to new buyers of iPhones, iPads and Macs. “The upshot is that by the end of 2020 [or] early 2021, Apple could accumulate millions or tens of millions of paying subscribers,” he wrote. 

Music companies have complained that Steve Jobs strong-armed them into accepting a $0.99 price for digital songs with the advent of the iTunes store back in the 2000s. But in the streaming era Apple has positioned itself as the friendlier partner. 

While licensing negotiations with Spotify have typically been contentious, record executives say talks with Apple have been more harmonious, with the iPhone maker traditionally giving rights holders a higher royalty rate than its Swedish rival. 

Apple declined to comment.

• States investigating Google for anticompetitive practices — including Texas and New York — sent representatives to meet with top DOJ officials in July to discuss tech antitrust issues.
• The Justice Department and FTC split jurisdiction over major tech companies for competition concerns earlier this year, with the FTC taking up an antitrust investigation into Facebook. But, as Bloomberg reported, Barr prodded his agency to begin its own Facebook inquiry, prompting concerns from both FTC Chairman Joe Simons and Republican Sen. Mike Lee about overlapping investigations.

• A move by the states and DOJ to join forces would mirror the antitrust investigation of Microsoft in the ‘90s, in which the Justice Department and several state attorneys general together sued the company.