Mingming Huang, founding partner of Future Capital Discovery Fund, talks about its investment in Chinese electric sport utility vehicle maker Li Auto Inc., which raised $1.1 billion in its U.S. initial public offering. He also discusses the investment opportunities he sees in the country amid the coronavirus outbreak. He speaks with Tom Mackenzie and Rishaad Salamat on “Bloomberg Markets: Asia.” (Source: Bloomberg)

Q: Tom Mackenzie and Rishaad Salamat, Bloomberg
A: Mingming Huang, Future Capital Discovery Fund

Q: Congratulations on the IPO. You made a good bet it seems. What is the appeal behind this company?

A: OK, thanks. Yeah, it’s a really exciting listing. I think if you look at the market, China has the world’s largest auto market, and so will be the EV market. So five years ago the only question left for us as an early-stage VC is how to choose entrepreneurs and the product strategy.

So as you can imagine most of our peers are telling a Chinese Tesla story by just providing pure battery electric vehicle. But as an ex-entrepreneur, we would like to choose the entrepreneur who can think different and act different.

So Li Auto is the first one who commercialized extended range electrical vehicle which we believe help solve the challenge of the lack of inadequate charging infrastructure and also the battery constraints which ultimately help the customer solve their range anxiety.

I will give you more numbers. Less than 25 percent of the Chinese family in the top-tier city have a parking slot so that they can install a home charging equipment. Compared to that number is 70 or 70 percent of the families in the US.

So it is a totally different market and customer behavior. So eventually the market prove Li Auto made a very right decision, very bold decision. Their first the six months they delivered over 10,000 units to their Chinese customers across 20 different countries. Yeah. Thank you.

Q: Mingming, a big question, of course, revolves around competition. It is an incredibly competitive market. You’ve got the incumbents rolling out their own electric vehicles. You’ve got Tesla, of course, that is doing incredibly well here in the Chinese market. Companies like NIO have struggled. Companies like Byton have struggled. Xpeng is also a competitor. WM motor. I could go on. The list is long. Why does Li Auto stand out for you and can it continue to hold off against the competition?

A: Sure. I think the No.1 reason, like I just described, they adopt a very bold and different product strategy which we think are very practical for Chinese market.

As technology VCs, of course, we study a lot of international products in this market. And the you know China is a highly highly competitive market. So we believe in the end the company who can win the market will be the company who offer a product who can solve the localized issues.

So like I mentioned, more than 75 percent of the family, they don’t have a parking slot. So they don’t have the condition to install the charging equipment. So the range anxiety is a top 1 concern for the EV potential buyers.

I think Li Auto’s product strategy perfectly addressed these issues. So that’s why they had a very success in their first six months, and taking into account there are two months they have to completely shut down their manufacturing production line and off line shops due to the COIVD-19. So that number is a huge success from my view.

Q: Okay. As an early investor, when you have conversations with the founders of this company, do you push them to turn profitable, or do you want them to carve out market share? What’s a priority for you? And when do you expect to see profitability for this company?

A: That’s a really good question. I think if you look at the numbers on their financials I think they are among the top. With delivering only 3,000 more units, they already have a positive 8% gross margin. And as I said the customer demands across China is super strong. So I will expect this will be continued to be growth.

But as an investor and also as a long term investor, we never push them to turn profit at a very near term, because it’s a very long range game. And like you mentioned, we need to compete with all the top-tier players including Tesla, BBA, all the top-tier players in this market. So I think the company will focus…

Q: You were saying with the pandemic, and how is that changing your philosophy as to where you invest as a venture capitalism? Is the pandemic, or has the pandemic thrown up a lot of opportunities for you?

A: Yeah. I should say it depends on the sector. If you are focusing… if you’re a VC focusing on the consumer side, I think for some sectors like hospitality and retail, it’s still in the bottom. But Future Capital, we’re focusing on the technology companies which providing technology to help company move their business online.

That’s actually after the pandemic, most of our portfolios are performing really well, because all the sectors in China, even including the government, are pushing to move their business online. So give an example, even this listing last night we’re doing this on the cloud. Before, we need to travel to US, Europe and Hong Kong to do the roadshow. And now we just do it in Beijing. So it’s a it’s a great push for the online digital companies. Yeah.

Q: Mingming, also in your portfolio, many companies which assist with… how could you say… business continuity. Tell us a little bit about that, and how those companies are faring because it must be very very good for them. What’s been happening?

A: Yeah exactly. Because for example, we invest a lot of enterprises, source and RPA and AI type of company. If you look at … during the pandemic all the offline business are shut down. So they have to have the technology to help them to move their business online.

So for example the RPA company we invest is Encoo Tech in Shanghai. It helps Shanghai municipal government to provide 24 hours time sampling, customer service for those potential COVID-19 patients, and to track their conditions and ask to provide the help to those patients. So all these technologies are helping the whole society to act to the business and continue their business.