Baidu’s EV Announcement Ploughs The Seed For Its Auto Vision, Although It Is Still Too Early To Gauge The Upside
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Seeking Alpha Analyst Since 2020
Growth investor with a strong focus on financial services and technology sectors in the emerging markets. Prior experience at an international reinsurer's Principal Investments team covering financial services investments in APAC and the investments/M&A team of one of China's top 3 tech companies (BAT). You can also check out the stocks we cover that aren't listed in the US. (http://theeminvestors.com/).
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Summary
- Baidu's entry into the EV market is just a matter of time.
- Its auto vision is not just about building autonomous cars, but an intelligent auto ecosystem that will be the foundation of any smart city.
- The EV entry makes sense strategically and commercially, but it is too early to conclude how much upside this can translate into its valuation.
After almost a month of speculation, which has been well reflected in Baidu’s (NASDAQ: BIDU) recent share price movement, the company has officially announced its plan to enter the market of the electric vehicles (EV), through a strategic partnership with one of the largest auto manufacturers in China, or even in the world, Geely Holding.
According to the announcement, Baidu will provide the technology, or the software, that powers the EV, while Geely will be a strategic partner that helps with the design and the manufacturing of the EV, given its expertise in automobile production.
EV has, no doubt, been one of the hottest sectors in recent months as investors have witnessed by the jaw-dropping share price gains of Tesla (NASDAQ: TSLA) and the US-listed Chinese EV manufacturers. Despite this, Baidu’s EV decision has also drawn criticisms from the naysayers.
Baidu's CEO and co-founder, Robin Li (right), together with Geely's Chairman, Li Shufu (left)
Why EV? Why now?
Naysayers have been critical about Baidu’s EV decision as it faces potential competition that is not only coming from the existing EV manufacturers, but also from the tech giants such as Apple, which has been rumored to partner with traditional automakers to produce “Apple EV”.
They dismissed Baidu’s efforts as they simply regarded this as one of its latest trials to turn around its mediocre share price performance in recent years, by tapping into currently one of the hottest sectors.
Others argued that this is merely another potential monetization means for its autonomous driving unit, Apollo. As Baidu has already invested heavily in Apollo, there probably is no way back for it by now.
To me, the bigger question to ask is – does EV actually fit in well with Baidu’s existing vision?
Baidu’s auto vision
In my opinion, the concerns above are, to a certain extent, also due to the lack of understanding of Baidu’s or Apollo’s long term vision.
Baidu has started developing its autonomous driving technology (Apollo) as early as 2013. To many, it is only a matter of time that Baidu would develop its own EV as well. This is because full commercialization of autonomous driving is only possible by the complete adoption of the EVs, which are powered by software instead of internal combustion engines.
So, what is Baidu’s vision then? Simply put, smart city.
Smarty city would not be smart without full autonomous driving. And full autonomous driving would not be possible without the EVs. EV is actually the very core of what Baidu has been trying to do.
Hence, Baidu’s entry into the EV market should not be viewed as one of its erratic moves to turn around its share price performance. Previously, Baidu has also announced its vision to create an intelligent auto ecosystem that lies far beyond self-driving cars.
Autonomous cars are only the very first layer of Baidu’s envisioned intelligent auto ecosystem. Once autonomous driving has been fully achieved, self-driving cars can be connected and integrated to better manage the traffic on the roads in order to reduce traffic congestion. This could then lead to the future phase of Mobility-as-a-Service (MaaS), where one owns mobility, instead of automobiles.
Apollo is never just about building autonomous cars, but a smart city where cars, traffic, and people’s mobility are integral parts of it.
Baidu's envisioned intelligent auto ecosystem
Software vs. hardware
As we now come to understand the connection and the significance of the EV to Baidu’s long term vision, one might ask why Baidu does not outsource the EV part by partnering with an existing, established EV maker, such as, Tesla.
If we compare an electric car to a smartphone, then Baidu partnering with Tesla is similar to Google partnering with Apple and letting Apple develop its Android system for them, especially given that Apollo’s system has already been considered by many as the Android of the auto industry.
What defines a smartphone is not its design or hardware, but the software and the system, or the interface, that connects everything and makes everything work so seamlessly. Design and hardware can easily be replicated or copied, but not the software, as we can see in the case of smartphones.
Software is the juggernaut or the brain of smartphones or any hardware. The same goes for the EVs. The last thing any EV maker would choose to outsource or share is probably its software.
Under the new EV initiative, Baidu will focus on developing the software while the production part is “outsourced” to Geely. This actually makes a lot of sense, both strategically and commercially.
Baidu has years of experience in developing autonomous driving technologies that it could easily leverage to help develop the software that drives EVs. Software development also offers the highest margin, especially compared to the hardware, as we can see from the smartphone manufacturers, which usually run on a very thin margin.
Baidu's autonomous driving car
What now?
Baidu is not alone in this EV arms race. Alibaba (NYSE: BABA) has backed the Chinese EV manufacturer XPeng (NYSE: XPEV), while Tencent (OTCPK:TCEHY) is an investor in the other Chinese EV maker, NIO (NYSE: NIO). But none of them are as heavily invested in auto technologies as Baidu, thanks to its head start in autonomous driving initiatives since 2013.
For now, given the limited company disclosure so far, it is very difficult to gauge how much upside this can translate into Baidu’s valuation, or how much of that has already been priced in with its recent run.
But, this does showcase Baidu’s unshattered determination and vision towards building an intelligent auto ecosystem that will act as the foundation for any future smart city.
To me, this further enhances the investment thesis, where Baidu is more than just a search engine and Apollo, albeit still loss-making after years of development and investment, should be given more credit by investors as it executes gradually towards the long term vision.
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