Now one may ask, what possessed me to ask such a question regarding NASDAQ listed Kandi Technologies (KNDI)? The simple answer is the upper echelon of the PRC (Peoples Republic of China) Government. Let me explain.
While still unreported by the Company, on Sept. 25, an "EV Policy": document of immense significance to Kandi was issued by the PRC top level "State Council Development Research Center Enterprise Institute." (SCDRCEI) Upon a close reading of the translated document, was a statistic that I found almost startling. China currently has over 120 million electric bicycles. The following is an excerpt from this policy statement addressing this fact. (Please note that I have paraphrased the Google translations for purposes of easier understanding by the reader.)
"Market demand for products in China vary from those in many Western countries. China has a multi-tired system for products, so any product which might be considered having a limited "niche market" in Western countries can and will be marketed to the masses ("mass market") in China. The electric bicycle is a typical example. In Germany and other Western countries, their governments would very much like to be able to promote the electric bike, but due to various reasons, only a small niche market exists for electric bicycles. China, however, is different - As of 2010, China's electric bicycle ownership has risen as high as 120 million. So, what is considered a "niche market" product in the Western countries is, in reality, a "mass market" product in China. The same market forces in Europe and the United States are in existence, "niche market", when it comes to the EV (pure electrical vehicles not hybrid); especially ones possessing short distance limitations. China, however, sees things differently. They believe that EV's, of limited distance constraints, will become part of a "mass market" in China. The PRC has instituted a new business model of innovation, exploring the development of short-distance electric cars in "pilot test markets", by assisting in the funding of research and development of electric vehicles in order to make the EV a mainstream product which can and will be mass marketed."
The reasons for this policy statement are many. In no particular order, they are:
- Pollution widespread in many cities and getting worse as populations increase.
- Needing to lessen dependence on foreign oil suppliers (currently at 50%)
- Political: China's burgeoning middle class is wanting more (cars vs bicycles)
And from this article, "Tipping Point For Electric Scooters In China?", add another 31 million motorcycles and scooters by 2014. Reading all this, what comes to mind is tens of millions of shivering weather beaten riders in the North of China, and sweltering in the South, "dreaming" about riding around in an enclosed two or four passenger Kandi mini-ev with air conditioning. It of course would not be unreasonable to surmise that the vast majority of these riders could not come close to purchasing a 15,000 rmb ($2500) to 50,000 rmb ($9000) cost (dependent on what car, battery, and subsidy program is available to those lower income groups) of a Kandi EV. On the other hand is it unreasonable to believe that at least 1%, or 1.5 million could?
Now where does Kandi fit into this equation? First, be sure to read closely the above extracted paragraph from the EV Policy Paper and you will see it is attempting to make an analogy between past growth of the electric bikes, and future small, limited distance, EVs. Then, read the SCDRCEI EV Policy ruling the extracted paragraph above came from.
Did you read it? OK, I know it is very long, but what would you expect from a document by bureaucrats from the top levels of the Chinese government making new "EV Policy"? So, if you want to read it later, and if you have any inclination to invest at the very beginning of a pre-destined giant in a future trillion dollar sector, I suggest you do, I will just give you a synopsis right now.
This new EV Policy is really all about just one tiny, former non-descript company, $140 million market cap, and its stunning success in leaping to the lead position in China's "emerging revolution" for EVs, with truly innovative models. And even more stunning for US investors, Kandi is much more investment accessible for US investors than China investors. (China Nationals cannot buy US listed stocks except through frowned upon off shore accounts)
Yes, it is all about not just one, but two Kandi total solution business models for mass EV deployment in China. Neither one involves the direct purchase of the vehicle by the consumer. The first,, a longer term leasing model combining a medium speed (<85kph= max of about 50mph) small EV with Kandi's multi-patented Quick Battery Exchange, and the second a short term automated self-serve car sharing rental model. (Similar to a Zip Car (ZIP) on steroids). Both concepts were conceptualized, developed and executed by Kandi's founder, and majority shareholder, Chairman and CEO Hu Xiaoming:
"Mr. Hu Xiaoming serves as Chairman of the Board, President, Chief Executive Officer of Kandi Technologies Corp. He has been the company's Chief Executive Officer, President and Chairman of the Board of Directors since March 2002. From October 2003 to April 2005, Mr. Hu served as the Project Manager (Chief Scientist) in the WX Pure Electric Vehicle Development Important Project of Electro-vehicle in the State 863 Plan. Prior to that, from October 1984 to March 2003, Mr. Hu served as: (I) Factory Director of the Yongkang Instrument Factory, (ii) Factory Director of the Yongkang Mini Car Factory, (III) Chairman and General Manager of the Yongkang Vehicle Company, (iv) General Manager of the Wan Xiang Electric Vehicle Developing Center and (V) the General Manager of the Wan Xiang Battery Company. Mr. Hu personally owns 4 invention patents, 7 utility model patents and 11 appearance design patents."
In the "EV Policy" statement, you will see they give examples of three modes (business plans); the "Hangzhou Condi lease and for power mode (different business models)", the "Shenzhen Putian finance leases mode (model)" and the "Hefei Jianghuai directional buying patterns(alternate business model)". Don't let the fact they mention three modes (models) confuse you. The second two are only mentioned briefly in the new Policy. The Shenzhen Putian is primarily for buses and other large commercial EV's where Putian is a company that just leases the very large and expensive batteries to the bus and truck owners. The Hefei Jianghuai really isn't really a business model at all. It doesn't have either Quick Battery Exchange or leasing involved. It is simply given as an example of how the combination of national and local subsidies, along with a substantial rebate from PRC owned JAC auto, can bring down the high cost of a small lithium battery powered JAC Q3EV from 135,000 rmb (US$21500) to around 60,000 rmb (US$9500). Fact of the matter is that the "mass market" couldn't afford to purchase this car, pay for insurance, maintenance, electrical power, in any workable scenario. On the other hand, the Hangzhou Condi model with its leasing, renting, free battery exchange and its small car/medium speed concept is featured, all favorably, throughout some 80% of the "EV Policy" directive.
It must be noted that neither KNDI, nor any other EV manufacturer in China for that matter, has been designated as a sole supplier of EV's, re the Hangzhou Condi Model, as per the policy directive. The selection process for EV manufacturers is reserved for the 13 provinces their respective cities within, where those EV's will be marketed. These "pilot test" provinces/cities are the forerunners of what is hoped to be the eventual transition from ICE's (internal combustion engines) to EV's throughout China.
At this point in time, however, logic must prevail. No other auto maker has even one mini EV approved by the PRC for sale with national and province subsidies, KNDI has three as per a recent PR. Nobody has built anything resembling QBEX (quick battery exchange) access in China except Israel based "Better Place" which has one test facility in Shanghai. KNDI, with State Grid (SGCC), China's largest electric utility servicing over one billion people, has built 62 QBEX stations in Zhejang Province of which 12 are fully automated. Twenty-five more are to be completed by the end of the year as per a recent press release by SGCC. These facts lead me to believe that KNDI (Kandi) is indeed the "golden child" of the PRC going forward. They even named this model for the future of EV's after Kandi; The Hangzhou Condi Model.
Six days after the aforementioned EV Policy directive was released on Sept. 25; Kandi finalized and announced the delivery schedule of its first 5000 EV units (end of Sept-Dec 2012), part of the 20,000 EV program with "China Air Lithium Battery" (CALB), a division of giant China State Owned Enterprise (SOE) "Aviation Industry Corp of China" (AVIC), who will buy the EVs from Kandi over the next eleven weeks and pay cash on delivery. This PR is a follow-up to Kandi's initial announcement of this project on July 16th. Total value to Kandi between now and year end is approximately $31.5 million. .$.40 per share added directly to its bottom line year end. Based on demand, the balance of 15,000 EV's are scheduled to be delivered in further increments no sooner than August, nor later than December of 2013. This "pilot" leasing program is for the City of Hangzhou which now has a population of around 9 million. (Name sound familiar? Like in; "Hangzhou Condi lease and for power mode"?)
To the EV knowledgeable skeptic reading this, I know what you are thinking. "He's painting an incredibly rosy picture but what if a couple things, just a couple of things, go wrong?". To answer that question honestly could be dangerous. Kind of like falling off a cliff with no net, but I'll try. Think Tesla (TSLA). (And, truth be told, I am a former TSLA shareholder who changed his allegiances over a year ago after reading a Kandi SA article.
A couple of months ago Tesla projected they would have 5000 of their new EV's sold by this year's end; that is until last week when they had to lower expectations to half that amount. Could this happen to KNDI? Theoretically the answer is yes, but let's take a quick peek at the target market, manufacturing capabilities, governmental support, power infrastructure for Tesla.
While making the most technically advanced and beautifully styled car I have ever seen, Tesla is by no means is a "mass market" maufacturer of EV's, or, IMO, will ever be for that matter. Too many obstacles to overcome. And as much as a genius Elon Musk is, he made the fatal mistake of selecting the "high end" market as his launch point; especially in an environment which precludes continuous governmental support, limited acceptance by the affluent sector of our public (some call it resistance to change; I call it the "Little Boy's Toy Syndrome") , state of the art manufacturing facility costing millions upon millions with limited capacity, and with no city or national infrastructure in reality or future plans to make owners feel secure as to their next charge stop...except, of course, the owners home base. I'm sure you have heard the term Trickle Down Economics. In Tesla's case it should be called Trickle Down Stupidity. So, after 100's of millions of dollars in losses Mr. Musk has already publicly acknowledged that for Tesla to survive they will need a massive infusion of money. From whom and to what end? More losses? Where are the new buyers going to come from? Current Mercedes, BMW, Audi, etc., customers? I'll believe it when I see it.
Believe me when I say that I am not here to bash Mr. Musk or Tesla. As Mark Murkalah once said to Steve Jobs in a mentoring session, requested by Steve Jobs,"There are three things you must consider before you build something and subsequently sell it successfully. They are: empathy, focus, and impute."
1. Empathy - Know that what you are about to build is what the public wants and needs.
2. Focus - Minimize your ideas from the many that are swirling around in your head to maybe two or three.
3. Impute - Realistically you only have one shot in presenting your product to the public. Make it count.
Unfortunately, for Tesla and Mr. Musk, they failed miserably on all counts. Didn't have all his ducks in a row and he used the wrong business model. If only he would have envisioned an EV without so many incredible bells and whistles, competitive pricing for the middle class vs ICE cars, had made connections/deals with regional utilities to build a "smart grid" infrastructure, and by using his government grants and loans (shareholder monies too) more judiciously, instead of building the first rocket ship on wheels, He could have gone down in history as one the saviors of our planet. Maybe Mr.Musk should have read Job's bio. .....
As discussed in my opening, there are "niche market" and "mass market" products of the same genre; EV's in this case. Whatever approach is utilized is dependent, of course, on the marketplace you target. What will work in the USA won't necessarily work in China.
Tesla has already proved they will not be a "mass market" player in the US because of their top to bottom business model. The electric bicycle was the example I used in the new PRV policy directive, discussed earlier, clearly supports a "mass market" approach in China. Kandi, to its credit, created a plan in what I call the "bottom up business model" for the "mass market" of China. This model not only included the manufacturing of EV's but the development of an "energy policy" which, is highlighted above, Mr. Hu, CEO of Kandi, first started the company in 2002. His plans for aggressively growing the company were temporarily put on hold when he was called into the service of his country by the PRC from October 2003 to April 2005 as the Project Manager (Chief Scientist) in the WX Pure Electric Vehicle Development Important Project of Electro-vehicle in the State 863 Plan in which he played a key and instrumental role. Working in conjunction with the government his responsibilities expanded to include working with the electric utilities of China, which are PRC owned, in developing the methodology for building an infrastructure to support the use of EV's for the future. Mr. Hu then created, developed, and then patented the QBEX (quick battery exchange) system by which spent batteries can be replaced, fully charged, with new ones. No one at that time, at least publicly, thought about how revolutionary this invention was and is. The housing of the batteries in Kandi's EV's is centrally located in an undercarriage at the bottom of the car. Slide out the "old" and slide in the "new". It takes about 1 minute from start to finish. The system can be worked manually or by robotics. Both methods are currently in use. It should be noted here that a transition from manual to a robotics operations takes a couple of days. State Grid (SGCC) is working towards that end. The system is remarkably efficient and cost efficient. It can be said unequivocally that the QBEX has solved the recharging problem, both from a psychological and practical perspective, in Chinese cities where the majority of the populous live in apartments.
State Grid (China's largest utility) then developed the "smart grid" system where charging stations, utilizing QBEX, would be built and operated by State Grid in order to more effectively control and manage the recharging process of batteries in an organized manner. By controlling this process State Grid can recharge the spent batteries at night where consumer and business demand are at their lowest. The batteries at these stations are housed in "pods" which are directly connected to the grid. The "smart grid" methodology is not only cost efficient as an energy provider for these spent batteries but can also be used in reverse by providing electricity as a back-up or as an added energy supplement in times of grid strain caused by excessive consumer/business demand for power. Potential brownouts or even blackouts can therefore be avoided. IMO, this is pure genius. This process is called V2G (vehicle to grid)
What to make of all of this? That China, in it's wisdom, prepared and committed massive amounts money and other resources to build an infrastructure which would someday support their goal of transitioning from ICE's to EV cars. Here's my brief commentary: We, as citizens of the US have been let down by our government in not creating an energy policy to promote and implement a cheaper and cleaner method of fueling our cars. Conversely, Tesla will never become a "mass marketer" of EV's, IMO, no matter how sophisticated and technologically superior their EV's because of their glaring mistakes and also our country's inability to see the forest from the trees. Tesla in the final analysis will survive as a tiny "niche marketer" at best. It saddens me to say that China has passed us by in the EV category. Not in the technology portion just yet but certainly in the commitment to provide our people with the cheapest and cleanest source of energy to run their cars. We will continue to contend with oil companies who suck us dry every day and pollute our environment. It must be understood by our people that 'green energy" is a good thing for America. It would have created thousands if not millions of jobs, put more money in our people's pockets, and let us breathe clean air. IMO, that's not a bad trade when it comes to choosing clean energy over oil going forward.
Next Kandi advantage over Tesla: Kandi's target market is the burgeoning middle class which is clamoring for their first ever car...Tesla's misinterpreting of what their target market should have been is their biggest biggest mistake. I still can't figure out whether it was ego or some other factor that guided their decision of targeting the upper end of income earners..Continuing Kandi's story...they then went about its business to design a simple mini EV car for the masses, containing, however, AC and electric roll-up windows. Pretty nice exterior styling too. It also has the largest cargo space for an EV it's size because the batteries are not housed in the back of the car but underneath it in a protected carriage. Designed for the city dweller who for the first time can ride back and forth to work, store packages in the cargo area, not be rained on...haha, and most importantly feel that their lives are indeed getting better. Much better, in fact, than riding a single passenger motorized bicycle I would say. It should also be noted that the EV's are not being sold directly to the consumer to but to the battery company (CALB) for less than 1/9 the price of the Tesla S sedan. Again we back to the affordability factor vs Tesla. CALB, via a separate entity, will in turn lease the EV's to consumers for 800 rmb (US$126) a month which includes free unlimited QBEX usage, including insurance, maintenance, taxes, and public parking for the term of the lease, 3 years or 60,000 km. Additional subsides are available, between 30% - 50% of a family's apartment rent, for lower wage earners, so they too can take advantage of having a car for the first time in their lives. In just the first few days after announcement of the program, more than 4,000 Hangzhou consumers registered for this opportunity, as you can see from this August article in China. And if your concern is that Kandi might not be able to deliver; contrary to Tesla, Kandi has been an ongoing mass manufacturer of various vehicles, ATV's, UTV's, go-carts,etc., for nine years now. As can be seen in various SEC filings as far back as 2008, Kandi manufactured and delivered over 50,000 various vehicles annually. Regarding Kandi's emerging EV business, due to a recent acquisition, Kandi vertically integrated its production potential by acquiring an in-house motor, EV AC, controller, and generator manufacturing company leaving only minor and easily attainable parts to outsourcing ( tires, seating and interior finishes, etc.)
While the first 20,000 EV contract for leasing contract in Hangzhou is a good start towards legitimacy, the PRC has unofficially quantified Kandi status as the EV leader in China. Kandi is also well on its way in Hangzhou to delivering an additional 100,000 EV's via its second "EV Policy" model, The Renters Sharing Program. In contrast to the longer term lease plan, the second model, which is also highlighted in the EV Policy, is a short term automated self-serve car sharing rental model. Full development of this model is estimated to take up to five years for the full 100,000 cars in just Hangzhou; with construction of the first automated vertical rental garage station is underway, to be completed by year end as reported by the CEO at the September Shareholders Day in Atlanta. The kick-off of this project was first reported by KANDI in a PR dated Aug. 13 with the signing of an agreement with Zhejiang Guoxin Vehicle Leasing Company. And here it is reported in the China media. (See a video animation of how this model operates) And here is the PRC government's reference to it in their new EV Policy:
"Hangzhou intends to implement another leasing model plan. This plan can be defined as a new type of public transport plan, rent not buy, shared billing based on use of vehicles. The Condi Company is preparing this model for the Hangzhou rental promotion. The.model provides for use of an all pure electric car, stereo, garage facility for pick-up and drop-off. Car rental stations are to be located at the city's airport, railway stations, commercial centers, and residential areas. Staff will be provided at these rental locations with the intent of making the system work smoothly and easily for renters. This model solves the practical problem of longer leasing requirements and eliminates processes such as charging, maintenance and battery recycling. The staff is also responsible management of the stations, recharging of vehicles, maintenance, and renter assistance in drop-off or pick-up at station.
Each car rental station is but one piece of a network. They will provide information re other rental locations in the network, delivery of car to renters at station, take care of processing on returned cars, and provide any and all services to insure fast and high quality service. This model will provide to its renters freedom of movement, convenience, and the fun of just driving it at an affordable cost . At the same time this renters plan will hopefully provide a high quality, high efficiency, low pollution, low energy, low cost solution with the benefits of having a car at his'/her disposal.
While it is great to envision Kandi delivering 120,000 EV's over the next five years in its home city of Hangzhou, that's only 1/10 of 1% of just EV bicycle riders referred to in my title line. While a decent sized city, Hangzhou is ranked as only the 11th largest city in China. With the urban population now exceeding 50% of the total 1.3 billion population, China desperately needs a clean, less congestive mode of transportation at least for its almost 700 million urbanites. The "golden son" treatment shown to Kandi PRC EV Policy directive should make it quite clear many intelligent investors that Kandi's path to leadership in this potential trillion dollar industry is now set in China.
Disclosure: I am long KNDI.