In a dynamic and rapidly evolving electric vehicle (EV) market, the rise and fall of China's Nezha Automobile exemplifies the fierce competition that new energy car manufacturers face. Once celebrating its position as a leading player in the burgeoning EV sector, Nezha now finds itself struggling. In an attempt to secure its future amidst fierce competition, the company is pursuing additional financing and eyeing an initial public offering (IPO). Recently, Nezha has managed to secure a remarkable 5 billion RMB in funding, a strategic move aimed at navigating the challenging landscape of electric vehicle production and sales.

As demand for electric vehicles surged over the past few years, the market has also begun to experience intense internal competition, known in China as "involution." This term is commonly used to describe contexts where competition leads to diminishing returns—for example, when many automakers engage in price wars, largely to attract customers who are driven by fluctuating prices rather than brand loyalty. Having to deal with this phenomenon, Nezha Automobile's recent capital injection is considered a lifeline, especially as it grapples with its performance following a difficult fiscal year.

On April 15, prominent Chinese investment firms including Tongxiang State-owned Capital Investment Operation Company, Yichun Jinhuh Equity Investment Company, and Nanning Minsheng New Energy Industry Investment Partnership (Limited Partnership) all signed a high-quality collaborative investment agreement with Nezha's parent company, Hozon Auto. This agreement is part of a concerted effort to raise the necessary capital for Nezha to flourish, reflecting the increasing backing from state capital in China's economy.

The amount pledged exceeds 5 billion RMB and is critical for Nezha, particularly as the company is seen to be in its "first year of bloodbath competition." However, it is arguably insufficient for Nezha to dynamically reposition itself in the rapidly developing electric vehicle sector. The challenge is compounded by the fact that even substantial investments might not guarantee market success in this fiercely competitive environment.

A notable investor, Zhou Hongyi, the founder of 360 Corporation and one of Nezha's key backers, harbors high expectations for the company, clearly stating that its performance has not yet lived up to its potential. Despite seeing a calculated roll of investments, Zhou was candid about the current state of the business, suggesting that 10 efforts yield only 3 or 4 results, pointing to a gap between expectations and reality.

State Capital to the Rescue

The strategic involvement of state capital is not uncommon in China, especially in high-tech industries like electric vehicles. The involvement of government-backed entities in Nezha is indicative of Beijing's ambitions to propel its domestic EV sector further.

Among the firms participating in this new round of financing, both Tongxiang and Yichun are fundamentally aligned with state interests. Tongxiang State-owned Capital Investment Operation Company is fully owned by the fiscal bureau of the region, while Yichun has state government oversight through its controlling shareholder, Yichun Economic and Technological Development Zone's finance bureau. Meanwhile, Nanning Minsheng's significant government ownership displays a similar alignment with national objectives.

Particularly, both Nanning Minsheng and Yichun Jinhuh are crucial stakeholders in Hozon Auto, owning about 35.65% and 25.9% of the shares, respectively, making their investment a key factor in Nezha's potential rebound.

Nezha Automobile was founded in October 2014 and operates primarily in the design, manufacturing, and sale of electric vehicles as well as related technological services. The recent investment marks a substantial wealth influx, with the intention to not only secure the company’s financial stability but also to enhance its research and development capabilities, expand its intelligent connected vehicle research center, and promote the growth of its export business.

However, the Chinese electric vehicle market has changed considerably over the past few years. After a near-explosive growth period, the sector appears to be normalizing, facing more routine customer behaviors and market saturation. Data from the China Association of Automobile Manufacturers predicts that total sales of new energy passenger cars are projected to reach about 11.5 million units in 2024, an increase of around 20% from the previous year. Companies like BYD have already started price wars post-Lunar New Year, putting pressure on many competitors, including Nezha.

This year, Nezha has begun to lower prices, with its flagship model Nezha X now retailing below 100,000 RMB. However, sales figures have not significantly improved, indicating that lower prices are not a guaranteed remedy for its sales struggles. The recent influx of capital will surely help the company stay afloat amidst prevailing challenges.

Three Years of Losses in the Billions

Interestingly, Nezha's pathway to securing financing has been relatively smooth, raising a notable sum over its lifetime. Historical data indicates that prior to this investment, Nezha has gone through over ten funding rounds, totaling over 22.4 billion RMB from various investors including Shenchuang Investment, CRRC Capital, CATL, and 360.

Just recently, Nezha received a boost from the Hong Kong government, becoming a key enterprise partner and receiving 200 million HKD in subsidies while also assisting in cornerstone investments totaling 200 million USD.

Despite having a seemingly favorable balance sheet, the substantial cash burn rate poses a looming threat. Between 2020 and 2022, Nezha's revenues jumped from 1.297 billion RMB to over 13.329 billion RMB, but it also accrued substantial losses, with cumulative losses reaching approximately 11.15 billion RMB, raising concerns over its operational sustainability.

On the sales front, following its landmark success in 2022, Nezha's figures have taken a downward turn. Data shows that sales numbers from 2020 to 2023 fluctuate as follows: 15,100 vehicles in 2020, 69,700 in 2021, 152,100 in 2022, and a decline to about 127,500 in 2023. Particularly shocking is the year-over-year drop of over 16%, highlighting a stark contrast to many competing brands that are still finding success.

As for the first three months of 2023, Nezha's performance reflected continued challenges, delivering 10,000, 6,085, and 8,317 vehicles in January through March, respectively. These challenges, combined with inconsistent product strategies and poor pricing decisions, have contributed to the company's struggles, as outlined by CEO Zhang Yong, who pointed towards several systemic issues hindering growth.

For Nezha, the key to overcoming these hurdles may not solely rest on external investments. Rather, the pursuit of an IPO emerges as a critical strategy. Nezha is one of the few remaining players in the new energy vehicle sector that has yet to go public. The company began preparations for an IPO in Hong Kong in the fourth quarter of the previous year, with cornerstone investment exceeding 2 billion RMB already lined up.

The Ambitions of the Red Robe Master

Zhou Hongyi's unwavering ambition for Nezha indicates not just financial interest but personal aspirations tied to advancement in the EV domain. Thus far, Nezha's performance this year has left him visibly frustrated as it underperformed against expectations. Zhou's remarks, which included both encouragement and criticism directed at CEO Zhang Yong, have driven the company into the spotlight.

Since its inception, Nezha has sought to firmly establish itself in the consumer's consciousness. The release of the animated film "Nezha" provided a serendipitous marketing reprieve, capturing attention and facilitating fan engagement, thereby boosting sales. In this manner, Zhou, who invested in Nezha back in 2021 after its partnership with the 360 Group, has viewed the electric vehicle segment as a critical pillar in his investment portfolio.

Despite Zhou's significant investments, even with every effort to bolster their standing, Nezha has yet to deliver consistent returns. As capital continues to flow into the electric vehicle sector, the hurdle for success remains considerable. While Nezha's recent funding and foray into international markets present promising avenues, whether or not the company can distinguish itself amongst a growing sea of players in the EV market remains an open question.