BYMOF - Geely Auto Holdings And The Electrification Of Transport

Summary

• Geely Auto Holdings is a leading Chinese ICE car maker transitioning from ICE to BEV by freezing ICE manufacture and rapidly expanding BEV production in new companies.
• New BEV companies under the Geely Auto Holdings umbrella include Zeekr, Geometry, Lynk & Co, Livan.
• Geely Auto Holdings has a complex story that might put off investors, but it is worth watching as ICE manufacturers seek a successful transition from ICE to BEV.

Around this time last year I wrote about Geely Auto Holdings (GELYF) as being a hard-to-make-sense-of enigma, but one that was worth watching. Not a lot has changed as the Geely story remains fast moving and chaotic. One needs to read carefully to make sense of what is owned by Geely Auto Holdings and what the (privately held) Zhejiang Geely Holding Group owns. To give a recent example Seeking Alpha reported at the end of September that Geely Holding took a 7.6% stake in Aston Martin Lagonda. The report referred to GELYF but further inspection indicated that the stake was taken not by Geely Auto Holdings, but by the parent company Zhejiang Geely Holding Group, which of course is the major shareholder of Geely Auto Holdings. Another recent example is the story about electric car company Zeekr filing for a US IPO. Zeekr is attributed to be a unit of auto giant Geely. While the ticker for Geely Auto Holdings is not used in the story, a reader might have the impression that GELYF is the majority owner of Zeekr and perhaps this is true. However, Zeekr is reported to be in the privately held Zhejiang Geely Holding Group stable. A recent filing (7 Dec 2022) from Geely Automobile Holdings has the production of Zeekr vehicles in 2022 listed as part of GELYF production and a recent release confirms that GELYF proposes to spin off Zeekr, but it states that Zeekr is a non-wholly owned subsidiary (without giving ownership details) and that it will remain a non-wholly owned subsidiary after listing. It seems that GELYF’s interest in Zeekr is ~58.31%.

Call me pedantic, but as an investor I like to understand what I’m investing in. The above isn’t entirely Geely’s fault (well maybe it is somewhat because the term Geely gets thrown around in relation to many corporate structures); stories about Geely companies need to be read very carefully. I think that Geely Auto Holdings is worth paying attention to because it is an ICE vehicle manufacturer that is taking seriously the need to stop making cars with an ICE and switch to BEV. This change is lightning fast compared with most legacy ICE manufacturers in the West. Here I try to shine some light on who owns what and what is changing. For most US investors this might create a yawn, but China is the country setting the pace for the switch to the BEV.

Geely Auto Holdings recent vehicle production

A recent press release provides some insight into Geely Auto Holdings vehicle production January through November 2022. Total sales in November were 145,070 and for the period January through November, 1,286,971. BEV vehicle sales for November 2022 were 31,278, while BEV sales Jan through Nov 2022 were 224,351.

I don’t fully understand how the above press release deals with sales from electric car companies Lynk & Co (premium BEV with Volvo) and Livan (Battery swapping BEV) (both 50% JVs), but all Zeekr (another BEV brand) and Geometry (Geely’s home BEV brand) sales are registered as GELYF sales.

The big deal for me is the dramatic changes that the above press release reports for BEV sales and how they have changed year on year. For the month of November 2022, BEVs comprised 21.6% of total GELYF sales, compared with 7.8% of total GELYF sales in November 2021. Jan-Nov 2022 data (BEVs were 17.4% of total GELYF sales) compared with Jan-Nov 2021 (BEVs were 4% of total GELYF sales) are similarly striking.

Plug-In-Hybrid (PHEV) sales in Nov 2022 were 10.7% of BEV sales and this was a dramatic fall in percentage of PHEV production compared with November 2021 (23.3% of BEV sales). Note that GELYF has launched HEV (Hybrid Electric Vehicle) and PHEV (Plug-In Hybrid Electric Vehicle) brands in 2022.

The above numbers are pretty astonishing for an ICE vehicle manufacturer entering the BEV transition. They reflect substantial increases in BEV manufacturers Geometry, Zeekr and new entrant Livan. The recorded GELYF sales in the December press release by Lynk & Co fell for November year on year. While sales of BEV vehicles increased dramatically year on year, sales of ICE vehicles were essentially unchanged from November 2021 (108,854) to November 2022 (108,544).

My conclusion is that GELYF has essentially frozen its ICE manufacturing operations and dramatically expanded BEV production through its BEV-specific operations. Another interesting finding is that PHEV sales are going nowhere.

Note that the GELYF BEV strategy is just a part of the overall Zhejiang Geely Holding Group strategy which involves an ever increasing number and complexity of new BEV brands. I don’t have the bandwidth in this article to try to make sense of the 7 brands (3 high end) mentioned in the linked Reuters article.

Why the platform on which a BEV is mounted matters

The above discussion addresses how Geely (both GELYF and the privately owned Zhejiang Geely Holding Group) is approaching electrification from a corporate perspective. It is much more chaotic and complex than other major BEV innovators such as BEV-only Tesla ( TSLA ) and transitioning-ICE manufacturer BYD (BYDDF). Both Tesla and BYD have a simple single company structure for their BEV developments; they all reside within a single company structure (TSLA and BYDDF respectively).

I find the complexity of GELYF’s business arrangements hard to follow, which makes for uncertainty in understanding what GELYF actually owns. To give a sense of the complexity of the corporate structures, GELYF’s 2022 Interim report lists 7 pages of related party transactions.

There are other issues about the transition from ICE to BEV that GELYF might be approaching more cleverly than a number of existing ICE manufacturers. Of particular relevance is the nature of the platform on which the BEV is mounted. Like Tesla, I get the impression that GELYF is largely focusing its BEV efforts on new (fully electric) vehicle platforms.

This is in contrast the companies like Toyota ( TM ), BMW (BMWYY), and until recently Volkswagen (VWAGY), where BEVs have been built on platforms that can be used either for ICE or BEV vehicles.

A recent article “ ICE-based BEVs: let’s talk scar tissue” gives a revealing insight into a significant issue for ICE manufacturers who seek to simplify the ICE to BEV transition by staying with a vehicle platform that is ICE-based rather than a new BEV architecture. It holds the clue for an issue that ICE manufacturers are confronting.

The article calls the superfluous materials in a BEV mounted on an ICE platform “scar tissue”. Of course using existing ((ICE)) infrastructure avoids the cost of starting from scratch and for companies sceptical about the pace of BEV adoption (eg Toyota, BMW) it delays the crunch of a completely new technology platform. Many things essential for an ICE (eg gas tank, radiator, automatic transmission, exhaust system) are absent from a BEV.

The key point is that an architecture capable of being used for both ICE and BEV means an increase in weight. The article compares the Tesla Model 3 (clean sheet BEV platform) with the BMW i4 (modified ICE platform). Both vehicles have almost the same dimensions; the Tesla footprint is 7,041 sq ins, while the BMW footprint is 7,069 sq ins. However the curb weight of the BMW i4 is 4,680 lbs and the Tesla is substantially lighter at 3,648 lbs…. more than 1,000 lbs lighter. The Tesla Model 3 is even slightly lighter than the ICE version of the BMW i4. The weight comparison makes clear that focusing on a heavy BEV battery (a common complaint about BEVs) misses the point that in fact a BEV is lighter than a comparable ICE vehicle (or a BEV built on a modified ICE platform). The BMW i4 BEV requires a bigger battery and costs more than the Tesla Model 3. The range of both cars is similar.

The author of the article has a personal view that in time everyone will have to go with a “clean-sheet” design.

Conclusion

There is little doubt that the electrification of personal transport is hotting up and Chinese BEV makers are leading the pack. Not only is full electrification now irreversible but the pace of the shift is accelerating. In this report I’ve relooked Geely Auto Holdings as this company is a major ICE manufacturer that is rapidly switching emphasis to BEV production. In a typically Geely approach, this switch is not without complexity as it involves multiple BEV brands which are mounted on BEV-specific platforms. It also involves expanding Geely’s Chinese market focus to include a global customer base.

The Geely Auto Holdings story continues to be difficult for an investor to grasp because of the complexity of the corporate structures and the related-party transactions, which might deter US investors. However, there are a number of aspects of the Geely Auto Holdings story that are relevant to investment in the BEV transition, not the least of which is the rapid pace of change that Chinese auto companies like Geely are embracing. The nature of the new BEV platforms and how they are being implemented is also interesting. I continue to be cautious about investment in GELYF, but I think it important for any investor considering investment in electrification of transport to pay attention to the company.

I am not a financial advisor, but I follow closely the dramatic changes happening as transport gets electrified and the car makers begin to stop making the Internal Combustion Engine. I that my comments help you and your financial advisor to consider your transport ( and oil) investments.

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