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Addressing losses at both companies, an unexpected but strategic move by XPeng, a leading Chinese electric car manufacturer, involves acquiring Didi’s electric car development business. This acquisition provides an opportunity for both companies to achieve profitability.
Didi can now conclude its years-long investment in the smart car sector and receive approximately 3.25% of Xpeng shares, valued at up to $744 million, in return. Xpeng intends to utilize this acquisition to introduce an electric A-class smart car model, under a new brand called MONA, in the following year. If this new brand achieves a target of 100,000 deliveries for two consecutive years, Didi has the option to increase its ownership stake in Xpeng.
This target is not unachievable, as electric cars are projected to make up one-third of all Chinese car sales this year. Xpeng has the potential to meet or exceed this number in about three quarters, considering that local competitor BYD sells a similar quantity of cars on a monthly basis.
Following this news, Xpeng’s shares listed in Hong Kong experienced a 16% rise on Monday morning, resulting in a 74% increase in gains for this year. However, even with this surge, shares are traded at an enterprise value that is only 2 times the forward sales. The decrease in investor confidence can be attributed to a larger-than-anticipated net loss of Rmb2.8 billion ($380 million) in the second quarter, with Xpeng’s vehicle margin plummeting to negative 8.6% due to intense price competition.
The collaboration with Didi has the potential to reverse this situation. In China, most EV manufacturers have focused either on high-end markets and international expansion or engaging in price wars. Few have chosen to differentiate their offerings through software and smart features while maintaining competitive prices.
XPeng’s targeting of the mass-market Rmb150,000 price range, combined with the integration of smart technologies, is expected to generate high demand.
For Didi, it may initially seem like a loss to part ways with a promising unit. However, considering the company’s recent challenges, including a prolonged investigation, US delisting, and a $1.1 billion regulatory fine, its priorities have shifted. With an upcoming substantial loss in 2022, Didi has limited flexibility in expenditure.
Didi has consistently emphasized the future potential of robotaxis, while XPeng has invested in autonomous car technology. This collaboration allows Didi to reduce research costs while retaining access to this technology. Driverless robotaxis are already operational in certain Chinese cities, and the alliance between XPeng and Didi can accelerate their widespread adoption.
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