Drawing Capital Newsletter
September 18, 2020
How do similar companies in China and the US compare in terms of market share and growth?
This week, we compare and contrast tech-centric companies between the US and China to understand their differences and similarities.
Below is a summary table showing what companies can be considered similar for each industry.
Let’s discuss a few of these pairs.
Tesla and Nio are electric vehicle companies competing for market share in China. Tesla’s global availability outperforms Nio’s limited availability in China; however, Nio seeks expansion in Europe in 2021. Similarly, Tesla has expanded into China upon the completion of Giga Shanghai in October 2019 which will begin production of Model 3’s in 2020/2021.
Below are some basic metrics comparing the scale of both companies.
While both companies are primarily focused on selling electric vehicles (“EV’s”), they also appear to have larger scopes in electricity storage, power, and software businesses.
Nio offers a unique option for their cars called Battery as a Service (BaaS). It works by introducing modularity in their vehicles, which separates the car from the battery. The customer subscribes to BaaS to receive upgraded batteries on a cadence which serves 3 advantages:
Cars will not depreciate as much in monetary value because the battery will be refreshed.
Customers can enjoy improved mileage and charging times as battery research accelerates.
Batteries can be better recycled and refurbished by Nio instead of going to landfills, thereby allowing for a more environmentally-friendly and sustainable BaaS model.
According to their website, BaaS reduces the cost of any Nio car by 70,000 RMB ($10,347.38), but their subscription costs 980 RMB ($144.86) per month.
Tesla does not offer BaaS, however, it does offer over-the-air software updates that improve features such as autopilot, performance, and entertainment. A positive byproduct of Elon Musk’s plan to deliver world-changing sustainable energy and transportation products is to create a car that appreciates in monetary value over time. This challenges the status quo since 1885 where cars have depreciated in value due to degrading performance, aging parts, declining vehicle efficiency, and a supply of improved and enhanced vehicles over time. While it is true that Tesla’s EVs do degrade over time, the hope is that the software updates can outperform the time decay of other components.
Nio is working on software updates as well, but their technology stack still needs work. The company is young and has an advantage in learning from Tesla’s mistakes. Tesla has a first-mover advantage and benefits from economies of scale. We believe Nio has some challenges ahead but is a respectable competitor to Tesla.
Ridesharing services have transformed the automotive and transportation industries over the last decade as traditional taxis and personal cars have lost demand. People who do not want to deal with parking, traffic, or staying alert can opt into ridesharing these days. The industry has grown so quickly that various regions are spinning off their own versions of Uber and Lyft.
Below is a deeper comparison of what each company is like.
At a high level, it is clear that Uber is pioneering the path for other similar companies. Uber is not just a ridesharing company; it’s a transportation and logistics company focused on allocating resources from A to B. Some features such as Parcel Delivery are only offered in countries like Australia where Didi also operates. Interestingly enough, Australia imposes a 10% Goods and Services Tax (GST) on Uber while Didi pays a 10% Value Added Tax (Tax). These taxes trickle down to the consumer, which can reduce demand for these services while encouraging demand for Australian-based services that keep money circulating within the country.
Lyft only operates in the US and Canada, and they have not explored alternate transportation markets such as food delivery and package deliveries. The only advanced feature they offer that others do not is car rentals. In fact, it is quite surprising that Lyft has not entered any other booming logistics industries, especially food delivery. With the rise in work-from-home (“WFH”) and closing of dine-in restaurants, take out and food delivery have become a vital business.
It is important to note that Uber has one-fifth of the users of Didi yet is valued similarly to Didi. This may be due to Uber’s other booming businesses such as UberEats and UberFreight. Didi has the advantage of large market control in China, the most populous country in the world. In mid-2016, Uber fled China by selling off its $8B division to competitor, Didi. It appears that Uber has no operating business in China going forward due to various regulations that provide Didi with support to succeed.
In Q4 2019, Uber recorded gross bookings of $18.1B, a 28% YoY increase. Didi is projected to grow by a 25% compound annual growth rate (CAGR) totaling $27.6B in gross bookings by 2023 according to EqualOcean. Lyft no longer provides gross booking information because they believe it confuses investors.
E-Commerce is an exponentially growing sector, with the fastest growth occurring in China. US E-Commerce sales rose from 11.8% to 16.1% amid the global pandemic from Q4 2019 to Q1 2020. The companies above are giants in this space with impressive growth and market potential.
Below is a table of basic metrics for each of these companies.
Amazon, initially just an online book store, is probably one of the most popular companies in the world right now. Their primary business now is e-commerce acting as an online one-stop shop for millions of products with 2-day delivery (or sooner). Over time, Amazon has expanded into other sectors such as cloud computing, grocery delivery, AI assistants, video streaming, etc just like other US tech giants.
In China, there are 2 interesting competitors in this space with different business models. Alibaba started as a B2B marketplace that grew into a multi-technology giant with arms in finance, logistics, cloud computing, etc. Alibaba recently announced a 19% stake in Xpeng, a Chinese competitor to Tesla. Initially, Alibaba focused on large orders of manufactured items shipping from various regions in China. In 2010, Aliexpress launched to compete with Amazon, selling individual products with no minimum quantity.
However, despite Aliexpress having the first-mover advantage in China, Pinduoduo is now the fastest growing e-commerce company in China with 566M users (+55% YoY) vs Alibaba’s 874M users (+15.7% YoY). Pinduoduo also has a New Brand Initiative which offers discoverability of emerging brands which helps innovative products rise to the top, a similar feature to Amazon Launchpad. Pinduoduo’s focus is focused on social commerce, and as a result, some people consider Pinduoduo as a Chinese hybrid of “Pinterest meets Shopify”.
Overall, we believe e-commerce has massive room to grow. There are a handful of items that people prefer to purchase in-person such as fresh produce, clothing, antiques, and anything else where the texture or smell matters. However, as the friction in costs and time reduces for deliveries and returns, more people will shift to ordering online and returning items they do not like. Department stores will shift to warehouses and distribution centers and traffic may reduce due to fewer trips to the stores. Fundamentally, e-commerce represents a shift towards the “experience economy” in that e-commerce often improves consumer experiences. Going forward, companies that narrow the experience gap often can retain their pricing structure, have more loyal customers, have lower marketing costs, and provide positive consumer experiences.
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