by Last week, China’s Lidar maker Hesai raised a heightened US IPO at a time when the sector is reeling from layoffs, bankruptcies and consolidations. The Shanghai and California-based company, which makes sensing technology critical to increasingly advanced autonomous driving and driver assistance systems, raised $190 million with its Nasdaq public offering.
As my colleague Kirsten wrote in January, lidar makers are facing a make-or-break year as they enter 2023. The handful of players who have pursued special purpose mergers have not received the scale of promised capital. Of the nine Lidar companies that went public through SPAC, Quanergy filed for bankruptcy protection and Ouster merged with Velodyne. Ouster shares have been trading below $2 since last June, and Innoviz shares are around $4 apiece.
Founded in 2013, Hesai originally intended to go public two years ago. Its application for listing on China’s Nasdaq-style STAR board was approved in January 2021, when it planned to raise more than 200 million yuan ($30 million) at a valuation of 10 billion yuan. But the IPO plan was withdrawn two months later.
Hesai has gone ahead with a US IPO amid industry gloom. Defying concerns, its shares jumped nearly 11% to $21 on the first day of trading last Thursday. Its IPO also marked the biggest Chinese IPO in the US since Didi’s in 2021, which subsequently triggered China’s crackdown on overseas listings over data security concerns.
A slew of Chinese tech companies have pulled out of the US or sought secondary listings in Hong Kong as they get caught up in rising tensions between the two major economies. Hesai is not immune to the impact of geopolitics. Despite its bullish IPO, the company faces obstacles ahead, as set out in its IPO prospectus. The document is also a useful lens for understanding the state of China’s lidar industry and how it is caught between two superpowers.
caught in the middle
For Hesai, the challenges of operating in the midst of a US-China technology war are evident in the stability of its supply chain. Last year, the US government introduced a new round of restrictions on the export of high-end chips to China. “These sanctions and export controls could adversely affect us and/or our supply chain, business partners or customers,” warned Hesai in the prospectus.
While Hesai is working on its own application-specific integrated circuits, development of its in-house ASICS is “early days” and the company remains “reliant on third-party chips” for its lidar products.
The global chip shortage, which has hit industries from automobiles to consumer electronics, further exacerbates the manufacturer’s supply chain problems. “We have had difficulty securing sufficient and immediate chip supplies, including automotive receivers and field-programmable gate array (FPGA) chips, due to the continuing global chip shortage, and our business operation and financial performance has suffered as a result,” the company noted. .
Chinese companies looking to make cross-border stock offerings also face new pressure from Beijing, which has stepped up oversight of data-rich tech giants that could pose a threat to national security. Didi was pressured to leave New York after China determined it lacked a robust data security infrastructure. Since then, the government has instituted a set of rules to control offshore listings, such as requiring companies to seek China’s approval if they possess the personal information of more than a million Chinese users. Despite that, Hesai said it had received confirmation from the relevant authority that it did not need such a review for its IPO.
customer pressure
Frost & Sullivan’s estimates suggest that Hesai was the largest handle maker per shipment in 2022. Between 2017 and 2022, the company shipped over 100,000 units, with 2022 alone surpassing 80,000 pieces. But sales do not equate to profitability. The company has a history of substantial losses – 120 million yuan ($17 million) in 2019, 107 million yuan in 2020, 245 million yuan in 2021 and 165 million yuan in the first nine months of 2022.
Some factors can explain his string of losses. In recent years, China’s Lidar makers have entered a price war to make the once exorbitant hardware more affordable for mass adoption. That, in part, is a response to the rush by the country’s electric vehicle brands to promote smart driving as a key selling point. To win orders from major automakers, deal companies are often forced to sell at competitive prices – even at a loss.
As Hesai admits in its prospectus, “Cost-cutting initiatives taken by our customers often result in further downward pressure on prices. In addition, many of our customers, particularly automotive OEMs, have significant influence over their suppliers, including us, because they are large multinational companies with substantial bargaining power and the automotive component supply industry is inherently highly competitive, serving a limited number of customers and has a high fixed cost base.”
It doesn’t help that Hesai’s revenue depends on “a limited number of customers and products”. The company’s gross margin dropped from 57.5% in 2020, 53.0% in 2021 to 44% in the first nine months of 2022.
Lidar’s application goes beyond automated driving, but many players in China jumped on the EV boom when the government disbursed large subsidies to companies driving the electric transition. This means that Lidar manufacturers rise but also fall with cycles in the EV space. As Hesai wrote:
“Many of our customers in China focus on the development and production of NEVs (New Energy Vehicles) and are entitled to certain government incentives or subsidies… However, China’s central and local governments have started to remove these incentives. and subsidies… from our Chinese NEV customers may suffer as a result, which in turn may have a material and negative impact on us as a LiDAR provider.”
