Ecarx Stuck At The China Gate In Global Smartcar Race

Key Takeaways:

• Ecarx has announced a number of big new sales since May, but all are to China-based car makers and brands tied to its controlling stakeholder, Geely founder Li Shufu
• The company’s revenue rose 45% in the second quarter, but a big part of that may have come from a recent acquisition

By Doug Young

Ecarx Holdings Inc. ECX is having some trouble getting out of the China starting gate, despite a recent string of announcements designed to show its autonomous driving technology is gaining momentum from a growing customer base that includes many global names. But a closer look at that list shows that most of the names are either tied to the company’s controlling stakeholder, the founder of China’s own Geely, or to other Chinese carmakers.

Nobody said it was going to be easy for Ecarx or any of its peers to find a market on the global stage. While China has come to dominate certain areas of the emerging smartcar market, most notably batteries, Western governments, led by the U.S., have made a point of saying they don’t intend to yield so quickly in other technologies that will power the cars of the future.

Western car makers may be taking that message to heart, and are so far largely avoiding homegrown China technologies like the ones made by Ecarx.

The company is 50.03% owned by Li Shufu, whose Geely is one China’s leading private car makers, with a stable of brands that includes such global names as Sweden’s Volvo and Polestar, as well as Britain’s Lotus and Malaysia’s Proton. Those and other China-linked brands are at the heart of a recent string of announcements trying to show off Ecarx’s global credentials, even though they really underscore how the company is having difficulty moving beyond its Chinese roots, even though the company itself is based in Britain.

The latest announcement at the end of September said the company would supply its cockpit computing platform for a model being produced by Lynck & Co., Geely’s luxury brand. Before that, Ecarx in late August announced it would work with Israeli powerhouse Mobileye MBLY on a device integrating automated driving and parking features for a Polestar electric SUV.

Just days earlier it announced it would supply intelligent cockpits to three models being produced by Dongfeng Peugeot-Citroën Automobile, a sputtering China-based joint venture between Dongfeng and global giant Stellantis. And in late May it announced it would supply its intelligent cockpits for a model being developed by another China-foreign car joint venture, this one between Changan Auto and Japan’s Mazda.

Of course, there’s always the chance that global names like Stellantis or Mazda might choose to use Ecarx’s products in their non-Chinese cars down the road if they work well in China. But for now, at least, the company seems stubbornly stuck in China.

Of the string of recent new deals, the most significant seems to be the Mobileye tie-up, since the Israeli company is considered a top global player in the kind of technology that is Ecarx’s specialty. Ecarx’s shares briefly rallied about 13% in the two trading days after that announcement, but have continued a broadly downward trend since then.

The company completed a backdoor U.S. listing using a special purpose acquisition company (SPAC) last December. Since then the stock has lost more than half of its value, which seems to be a common theme for Chinese companies that have made SPAC listings over the last 12 months.

Sagging Valuation

Following the steady selloff, Ecarx’s stock now trades at a price-to-sales (P/S) ratio of about 2. While anything above a 1 usually indicates investor favor, we should note that the ratio is well behind the 17 for Mobileye, and also the 5.4 for Chinese peer Hesai HSAI, which makes light detection and ranging (LiDAR) technology also used in autonomous cars.

Ecarx is still officially a “unicorn” with a market value of $1.2 billion, though it could just be a matter of time before it loses that status.

The company’s latest results show relatively strong revenue growth – a very important factor in a field of companies that are often strong on hype but much weaker in actual sales. The company’s revenue grew 45% year-on-year in the second quarter to 952 million yuan ($131 million), though that was partly fueled by an acquisition during the quarter. Ecarx reported more modest 16% revenue growth in the first quarter, which may better reflect its organic growth without the acquisition.

Sales of goods, mostly digital cockpits, jumped 87% year-on-year in the second quarter to 670 million yuan, accounting for 70% of the total. Software sales did even better, tripling to 113 million yuan, while the company’s service revenue actually fell 36% to 169 million.

In a slightly worrisome sign, the company’s cost of revenues jumped 77% to 655 million yuan, rising far faster than its revenue growth, though Ecarx attributed that partly to non-recurring costs related to strategic engineering contracts. As a result, the company’s gross profit rose just 3% year-on-year during the second quarter, while its adjusted EBITDA loss widened to 158 million yuan from 95 million yuan a year earlier.

Despite its attempts to move beyond Geely and China, numbers in Ecarx’s latest report underscored how reliant it remains on that pair. Its accounts receivable from non-related parties at the end of June fell to just 188 million yuan from 418 million at the end of December, implying it was getting less business from companies outside the Geely family. Its accounts receivable from related parties also fell over that period, but by a far smaller amount to 804 million yuan at the end of June from 835 million yuan six months earlier.

At the same time, the company appears to be burning through the $300 million in cash it picked up at the time of the SPAC merger. Its cash totaled 925 million yuan at the end of June, or less than half of the amount of cash it inherited at the time of the merger. That said, its strong ties to Geely mean it’s unlikely to suffer from a cash shortage anytime soon.

All things considered, Ecarx is certainly a company to watch due to its cutting-edge technology, its recent tie-up with Mobileye and indirect ties to some big global brands through their China joint ventures. But we’ll probably need to see the company sign one or more deals directly with some unrelated non-Chinese companies before investors will start to take it more seriously.