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Wednesday, November 19, 2014 9:29:30 AM
Kandi Technologies: 'Boots On The Ground' At Kandi
Nov. 19, 2014 8:00 AM ET
http://seekingalpha.com/article/2694755-kandi-technologies-boots-on-the-ground-at-kandi
"Boots on the Ground." You've all heard the term. Usually reserved to cannote an engagement of some kind where the flesh of man is exposed to his most primal fear; death. To engage, however, one must physically participate or else it's not your war. Plain and simple. And, of course during wars, before a winner or loser emerges, the combatants in it must fight a series of battles. Often long and bloody they leave us drained to the core at the end; if there is indeed an ending. The war, however, that I'm about to tell you about will have an ending. For those of you who appreciate opera think of Faust by Gounod. Hint: Triumph of good versus evil….
…..which brings me to my largest holding in the American equities market, Kandi Technologies (NASDAQ:KNDI). Ever since I sold my position in Tesla (NASDAQ:TSLA) three years ago at $30.00 - see how smart I am? - and switched to this formerly non-descript electric vehicle company named Kandi, of Chinese origin, I have been actively involved in a series of battles in what I call a "war to the death." On one side we have the protagonists and on the other the antagonists, namely the longs and the shorts of Kandi. Unfortunately, at least for me, each time I have entered the battleground it was defensive in nature. Initially a novice writer in this space, it was not an easy task to refute some of the very talented authors, hired or not hired by the "short" contingent, who know how to turn a phrase with the best of them. And, surely as day turns into night, they created panicked fear primarily to the uninformed/unsophisticated small retail investor with limited resources and staying power. Many of these people have lost and or continue to lose part or their total investment savings as a result of this apparent never ending "war of the words." So, I entered the fray and have pressed on through five published articles on SA during the past couple of years to present factually based information to present an alternative perspective to these short sellers and hopefully refute their damaging articles. . Note: SA, in its policy of "open" discussion, permits proponents and detractors alike their free forum, by which each side can present its case regarding any specific equity. On the surface this policy appears to be fair and should level the playing field, but does it? The only thing I will say is that the potential exists for one side or the other to misrepresent, utilize innuendo, or outright present falsehoods and have their article published. I as a shareholder, have read every one of these, my perception, negative/attack articles on Kandi and felt I had to respond with the truth on behalf of the small shareholders, and of course myself.
In the end, however, I recognized the instability factor created by this war of the words for what it is...stalemate!...So, until something new was done, not another of the he said/she said arguments, this confusion created by these "shorts" would, with certainty, continue their attacks ad nauseum. I have seen it before.
That is how the genesis of my "boots on the ground" strategy was formulated. Instead of reporting on what my DD came up with, why not see it for myself?
So, I organized a group of six investors, including myself, who would take a trip to China to find out what was the truth and what were the fabrications, if any, regarding Kandi. Personally, I had too a disproportionate share of my holdings invested in this company to let this continue any further. The trip would last nine days of "boots on the ground", and would take us from Shanghai to Hangzhou, Hangzhou to Changxing=, Hangzhou to Shanghai again, Hangzhou to Jinhua, and finally back to Hangzhou. To say the least the trip was intense. Not much time for R&R except in the evenings. By and large we were either traveling, attending Q&A sessions, visiting manufacturing facilities of Kandi and the JV, interviewing customers, talking to companies integrally involved in China's EV industry but not affiliated with Kandi, and the like. My mandate, of course, was to finally put to an end, once and for all, that Kandi was a company that was illegitimate, complicit in fraud, and destined to fail by Kandi's detractors (shorts).
I would report, on what I saw, heard and learned, first-hand, in an article to be published by SA. No holds barred! If I discovered discrepancies, based on my due diligence process back in the states, I would report on it. If I found failings on behalf of Kandi management I would report on it. If I discovered that Kandi exaggerated its claims of growth, I would report on it. On the positive side I would also report on the current state of affairs for Kandi, and if warranted. I would also provide my personal take on Kandi's future possibilities. As I have said more than once in past articles, let the chips fall where they may!
Let's get started….
Members of the China Group:
Harris Goldman (Organizer)
Frank Blatterman (with significant other Daisy)
Steve Fowler
Rich Fitzpatrick
Tom Harrison
Monday, 9:30 AM, September 15 (Q&A with China Group)
After being met by an assistant of Mr. Hu in the lobby of Kandi Headquarters in Hangzhou, the China Group were led to a conference room and seated five across on one side of the table. In a minute or two Mr. Hu entered and sat across from us with his assistant. To his right sat our hired driver/interpreter, Zhu Xiao Bo (Gerry). Note: His hiring by us is unquestionably the best decision made by us regarding our investigative trip. Kudos go out to Steve Fowler for finding him. He not only provided us with a "voice" but also a clear understanding of what was being said to us.
(click to enlarge)
Left to Right: Harris Goldman, Rich Fitzpatrick, Steve Fowler,Tom Harrison, Frank Blatterman
Mr. Hu and Gerry
Before I go into the actual "highlights" of the Q&A session I must tell you that the my plan was to divide all of our major areas of interest into segmented parts whereby each member of the China Group, in order, would ask questions directly of Mr. Hu. Aside from introductions I was utilized mainly as a back-up questioner as each one of our participants questioned Mr. Hu. I wanted to make this an inclusive trip, and it was. Most, not all, of our questions were answered with a confidence and determinedness, but most importantly, that Mr. Hu's vision for Kandi was moving forward at an accelerated pace, without skipping a beat, as he hurdled every obstacle which confronted him.
Mr. Hu's Introduction to the China Group:
"The major cities of China have experienced an ever increasing amount of ICE's (internal combustion engine autos) in the past few years. Along with this increase, environmental concerns, pollution levels, have become more of a problem for each of those cities residents. As this trend continues the major cities have been slowly enacting policies and laws in order to deal with these problems; ie., first being the restricting of new ICE registrations (subject to a lottery). Not enough but something. Smaller cities are soon to follow.
"More effective reform, however, is necessary for urban transportation in cities, such as Hangzhou, or the environment will worsen to a degree of it being untenable for its residents. In ten years, if more restrictive policies are not enacted the transportation systems will fail completely. There are now over a million cars going in and out of the central business district of Hangzhou daily. In ten years there will not be enough parking spaces to handle any increase of autos as the population continues to grow. Even if you tear down every house in Hangzhou there will not be enough parking because there is only so much space which can be allocated to parking."
The cities, such has Hangzhou, have four major problems confronting them regarding urban expansion:
Traffic jams
Parking spaces
Pollution
Energy efficiency
(click to enlarge)
Pollution: The crisis continues FB Photo
"We must also address the waste factor regarding current urban life and the future expansion of our cities":
Auto driving inefficiencies - 10% is driving and 90% is finding a parking space.
Waste of road resources - One way trips. Mr. Hu gave the example of him going to the airport. No return trip by the driver with passengers. Think of how many times this happens each day.
Waste efficiency factor re: re people being transported:
70% one person
25% two or three people
5% four or five people
He also believes that there are five major barriers holding back the development of EVs in China:
Prices for EVs are too high for the masses.
Battery limitations:
cost too high
lack of recharging infrastructure
costly recycling procedures
long charging cycle times
Limited mileage
Limited Range
Battery pollution
If we analyze the current state affairs, re EVs, it is obvious that solutions must be firmly in place and enacted upon if China is to successfully implement its goal in transitioning from ICE's to EVs. EVs are not going to supplant the ICE for a long time. And, the primary reasons for the lag in EV development are that the cities have not been aggressive enough in limiting the number of passenger cars as their populations grow. You don't want to hinder economic development so there is really only one answer; build out the public transportation systems of the cities; ie., buses, subways and taxis, etc. Then again, each part of the public transportation system has its own drawbacks. Taxis are too expensive and inefficient and subways/buses lack the accuracy of where people want to go (not enough locations throughout the cities). Mr. Hu calls these limitations not being enough pipes and capillaries.
Mr. Hu says, however, that his urban transportation model will provide the ultimate solution. The only way that it will work, however, is by the government supporting it. Micro-bus, Kandi's solution, will not only provide cheaper transportation than taxis, elimination of waste of both ICE and EV passenger cars, provide more pinpoint destination targeting, but most importantly, zero discharge of pollutants to the environment. And, this can all be done by leasing/renting instead of selling the car directly to the end user. .
He gave examples of how his micro-bus model was expanding throughout Hangzhou. What initially rolled out as the Kandi Garage, the CarShare distribution model in his vision, has been expanded to include HotelShare, StreetShare, and CommunityShare (enterprise and neighborhood) models. Not only are the newer micro-bus models cheaper to locate and build but they can be done quickly. So, until the national utilities dramatically increase their spending in the build-out of recharging infrastructure the newer distribution models will be located and built at a rapid pace.
He then addressed new EV models which are currently being developed by the JV (Joint Venture of Kandi and Geely). "There will four to five of these new models released in 2014 and 2015." Note: We already knew of two new models named the Urban Beauty and Urban Cowboy for release in 2015 which would make for a total of four EVs in the Kandi stable of offerings in the passenger car category. The possibility of three more took our group by surprise.
Some of the newer models will have upgraded technology packages, including "touch" computer dash screens and other upgrades. Aside from the JV having its own R&D division, Volvo has contributed its proprietary technology to the new models too.
He also said that in the future there might be additional cooperation agreements, didn't specify, that would not include the JV. He continued by saying that it was too early in the process to publicly announce. It sounds promising but I honestly don't know what he is referring to.
"Big News": Mr. Hu formally announced at our meeting that he is now the Chairman of the Board of the JV as of September 1st. This upgrade in Mr. Hu's stature in the company is quite revealing. I will discuss my take at the conclusion of the meeting.
He predicted, in his brief remarks earlier, that unless government gets more proactive in setting and implementing restrictive policies on the growth of ICE's the public transportation system will ultimately fail. Kandi, of course, will benefit as that date gets closer at hand but it's the government which needs to do much more in promoting the micro-bus system. "I can only do so much. Governmental decisions are out of my hands." So far the government hasn't set out policies and or laws which detail a management system for public transportation." He does, however, expect the governmental agencies to increase their activity shortly. The public transportation system cannot continue to serve the public without these policies. In essence the government needs to act at a faster pace, with increasing restrictions, and more money.
Kandi, Mr. Hu noted, continues to develop its own system of the public transport system. As Kandi grows in Hangzhou, more and more people recognize the increasing number of Kandi EVs on the streets. They are no longer hidden from view. National media in China, and some in the US, have expanded coverage, seen on television with regularity, about how Kandi is starting to make a real impact in the lives of the Chinese for now and into the future. So, in spite of the government lagging in its responsiveness Kandi keeps on surging ahead.
He referred to the Minister of Science and Technology coming to Kandi headquarters on Sept. 19th to talk about some of the things that Kandi is presently doing that will be codified into law. That's quite an honor for Kandi...FYI: Unfortunately, at the last minute, the minister was called away, but a new visit will be rescheduled... As each month passes Mr. Hu says that he is being approached by more and more cities wanting Kandi to implement its business models in their cities. Mr. Hu, however, won't agree to expand to those cities unless they enact the policies and laws, at a local level, that he believes are necessary for the success of his business models. In other words before Kandi will come into their cities only under his conditions. This is a significant Mr. Hu decision.
He talked about Kandi expanding into Nanjing, Jiangsu Province. Already there is a 3000 unit order for his EVs before the newest EV manufacturing assembly plant of the JV is finished in Rugao. Nanjing is a medium sized city of only 3.6 million people; second or third tier by Chinese standards. As per his comments, Nanjing will be the first city in China whereby Kandi successfully negotiated favorable policies and subsidies that will be in accordance with Mr. Hu's standards.
He says that many people ask him, "If Kandi is successful will many companies try to imitate Kandi?" He goes on to say, "If business is not good then nobody will copy him." Continuing, says he expects many companies to copy him but it is not that easy to copy what it has taken him years to learn. The copycats will be at least two years, as of today, behind Kandi in getting all the bugs out and by that time he foresees Kandi being one of the leading car manufacturers in all of China. So, he doesn't worry about the competition, and yes, he expects many people to copy him (chuckling).
He also addressed production/sales for the rest of the year. All he would say is that there will be many more thousands of EVs manufactured by the JV for the balance of the year. He also said, "In 2015 the amount of Kandi products produced/sold will shock the world."
He also feels fortunate that he partnered with Geely. They have provided him everything he could have asked for in his post dealings with them. Not only have they provided upgraded technology for the newer models, have transferred key people from Geely's R&D dept. to the JV, but have also provided the JV with four of Geely's top management people. That group includes Li Shufu's VP of Marketing and Sales, who is attributed in making Geely #1 re: passenger car sales in China in 2013.
He then transitioned his introductory remarks, quite unexpectedly, to comment on the Kandi PPS. Yes, he is aware of the "shorts" and how they have cannibalized the stock price for the last few weeks. He hoped we would understand that his way, the traditional Chinese business culture of doing business, is based on results rather than purposefully exaggerating what Kandi is doing currently and what he predicts for its future. He hoped that we, the Kandi American investor would recognize this and support Kandi in any way they can...He then smiled.
Now it's our turn:
Frank Blatterman - QBEX (Quick Battery Exchange), Batteries, and Technology
FB: QBEX is the only system, to my knowledge, which addresses all the drawbacks of the EV recharging process. Why does it appear that it has been de-emphasized by State Grid (China's largest utility) at the moment?
XH: Even though it is not a focal point at the moment both State Grid and the Central Government are very much aware of its importance. The Minister of Science and Technology wouldn't be coming here to Kandi if it wasn't of import.
FB: Do you know of any plans for the immediate future to add additional re-charging stations for QBEX?
XH: There is no doubt that many cities throughout China will adopt this system of battery swapping. There will be many new stations being built.
FB: Will those stations be built for both plug-in EVs and QBEX?
XH: Yes, of course, they will be able to do both methods. As you know, the preferred method of re-charging EVs is long charging (approx. 5 hours). It's also more efficient and cheaper if it is done in the evenings when electricity is cheaper. In the daytime QBEX has the major advantage of swapping the spent batteries for newly charged ones without taxing the grid during peak hours.
FB: The Central Government has recently announced a new policy directive as an add-on to the New Energy Policy. It consists of funding $16 billion dollars for infrastructure. Will a portion of that be spent on QBEX stations?
XH: Yes. It will also be utilized for the construction of cubic garages (CarShare garages). You must understand, however, that $16 billion dollars for infrastructure doesn't go very far in China. There will be other financial resource channels that will participate such as local governments and or others (there has been talk of private funding too by SG). He doesn't know what percentage of funding will be allocated to CarShare garages but he is not concerned. He believes there will plenty of funding available in the near future.
Mr. Hu also wanted to point that there is a common misperception regarding charging stations. They may not be as necessary in the vast numbers many people think are needed. To prove his point he experimented with a new innovative business model named CommunityShare in May of this year. He offered an outlying community (Xiangshan suburb) of Hangzhou a very cheap rate to lease Kandi EVs with one major proviso. The community would be responsible for their own charging, insurances, maintenance, etc.. Kandi would only supply the EVs. A total of 300 EVs were offered to the community initially. To his surprise they all were subscribed to immediately by the residents. Note: you must understand that this community was mostly residential so the residents, by and large, could do the re-charging in their homes in the evening. Very soon after this offering was subscribed to the application list swelled to an additional 1000 EVs. After hearing that the initial lease deal went so well and that another 1000 apps had surfaced he quickly raised the lease price (he smiled when he said that). So, he proved his point that a CommunityShare business model didn't necessarily need many power stations for re-charging and or QBEX. The residents could do the re-charging cycle by themselves.
So, he says, "we come to the chicken and the egg question". Which should come first, the power station or the EV? Mr. Hu then visited a village in Shanghai. There were many charging stations available (Jinshan suburb) there. Unfortunately, however, very few were utilized by the residents. Some had grass growing around them. His conclusion: He believes in many situations that most people can do the re-charging process by themselves; outside of dense urban areas.. Kandi's responsibility, he says, is to manufacture a quality product and then request the charging stations as needed.
Harris: Could we visit one of the CommunityShare locations?
XH: Of course. You can visit on your own. I will give you the address and make arrangements.
FB: At one point in time Kandi had a cooperation agreement with Zoyte. I understand that they have redesigned their passenger EVs with QBEX capability. What is the status of that cooperation agreement and will Zoyte continue to have QBEX capabilities in their cars?
XH: Kandi actually doesn't have anything to do with Zoyte now. The combination of Kandi, Geely, and Volvo have strong backgrounds on batteries. He believes that puts Kandi in a more advantageous position than Zoyte. He feels that advantage will continue for newer battery technologies, QBEX, and CarShare. He really doesn't care what Zoyte does. He is only concerned with his own R&D and constantly improving the products he has to offer.
FB: I see where Kandi has selected quality battery manufacturers for its batteries. Are you concerned about battery issues as EVs become more popular?
XH: Good question. Kandi has very strict quality controls for the batteries it uses. As the quantity need increases there might be quality control issues along the line. But it doesn't affect us as it might other manufacturers. Why? Because our business model is rent/lease. Other manufacturers sell their EVs so if you buy one the end user inherits the possibility of a bad battery. It becomes more of a customer problem as the time of ownership and usage increases. All our customers need to do is replace the battery as needed. No additional worries or cost.
FB: So, as we grow to 100,000 to 200,000 EV production numbers per annum are you concerned about shortages?
XH: Yes, it might create a problem for the near future. So we are planning now that this may happen. The battery industry is moving very quickly which is also to our advantage. Rent/Lease versus purchase. I am expecting a major breakthrough in battery technology in the near future. Again, that is to our advantage. And, when this breakthrough occurs there will be plenty of battery supply available…More in my take segment.
Harris: There has been significant reductions in the cost of batteries in the last few years. Do you expect this trend to continue?
XH: One of the main components of EV batteries is lead. I see, however, a potential major breakthrough in the material mix for batteries in the near future that will lower costs, improve reliability, and safety. From manufacturer to manufacturer I don't see large fluctuations in pricing.
Next is Tom Harrison - CarShare
TH: Any updates on CarShare?
XH: Still building 32 flat share sites (StreetShare) in Hangzhou
TH: What about garages?
XH: 14 garages. Four operational and 10 under construction. It's easier to apply for StreetShare sites versus vertical garages. The cost, of course, is much higher for the garages than StreetShare locations. Our plans are for 632 of the StreetShare sites in Hangzhou with maybe 100 built through 2014. We are, however, finding it more difficult to execute our business plan in Hangzhou because of local government behavior (sic...not aggressive enough).
TH: Tell us some CarShare information regarding other cities?
XH: We recognize this and are currently extending our energies to other cities with more receptive policies and laws for EV expansion. I wouldn't be surprised if some of the cities we are currently involved with overtake our initial successes in Hangzhou. Actually several cities that we are closely working with right now are larger than Hangzhou (Hangzhou population 8.1 million). As I said before, when we receive aggressive government support, expansion is much easier and faster than what is occurring in Hangzhou at this point in time.
TH: But it is still in the planning stages now?
XH: Yes
TH: What is the serviceable life of a CarShare EV?
XH: About the same as a traditional car. The battery, however, must be replaced every four to five years due to the restrictions of current technology.
TH: Is there a desire or potential for the JV to take over ZZY?
XH: Although it was stated by us that there was interest on behalf of the JV to acquire a 70% stake in ZZY the reality is that currently the company, ZZY, is operating at a loss. So, the JV will not take further steps at this time.
Harris: Other than being the funding arm of the operational network, re: CarShare and the JV's other business models, isn't it true that the operational part of ZZY is essentially being run by the JV? And, if that be the case why does the JV need ZZY at all?
XH: As a matter of fact, ZZY's operation is experimental at this time. So, it might take up to three years for the business to stabilize and be profitable. Of course this is all dependent on government behavior no matter where we expand to. But when all the pieces are set up properly there will be a big splash re: ZZY. So, as of right now the Kandi/JV manufactures the EVs and ZZY runs the operations. I anticipate that in approximately three years that ZZY will be listed on a Chinese Stock Exchange. Right now, we won't take a controlling position in ZZY but it will, in fact, happen in the not too distant future.
Harris: Recently there was a $71 million take-down of funding, direct placement, from the latest shelf-offering that was announced a few months ago. Would some of that funding be utilized to acquire a controlling interest in ZZY?
XH: As a matter of fact, the $71 million dollars will be utilized by the JV for operations and R&D rather than the purchase of ZZY. Designing new EV models requires additional funding from both Kandi and Geely. So, that is where most of that money will be spent.
Rich Fitzpatrick - EV Leasing
RF: Enterprise Leasing...Any feedback for the companies that signed up? (Mr. Hu didn't quite understand the question. CommunityShare, in reality, is comprised of two components; actual communities and enterprises. They are both treated as one business model with the same costs and requirements for the end users.
XH: Yes, the first CommunityShare program (Communities). Initial 300 EVs at approximately at $135.00 a month up to 1000 EVs. Lease is for three years (can be renewed). End user is responsible for their own charging costs, etc. Kandi is only involved, other than the original lease, if there are warrantee issues. If those issues arise Kandi will replace the EV for the end user.
RF: So, to drive 100KM, the cost to the end user is approximately $820.00, which is just the cost of the electricity….versus the cost of a traditional car which can cost up to $17,000.00.
Harris: I think he is talking about the community versus the corporate group lease specifically (Trying to sort it out for clarification purposes)…
XH: It really doesn't matter because the organization we are dealing with makes the lease payments; not the end user. (Whether enterprise or community. Mr. Hu groups them together as "Group Lease.").
RF: Positive feedback?
XH: Yes, of course. Our Lease is a much cheaper alternative to purchasing a traditional car. The JV now has several thousand EVs in the Group Lease Program (CommunityShare).
You must understand the Chinese culture. The Chinese like to compete with themselves (keeping up with the Jones's). When most lease the same car any social burden ceases to exist. Our micro-bus business model is quickly moving forward based on the increasing acceptance of leasing versus purchasing by the end user.
RF: Has Alibaba (NYSE:BABA) signed up yet?
XH: We are still negotiating with them. We might sign leases with some of their individual divisions. Right now they have signed up with some of the village communities as part of the group lease program. ZZY has done this several times with Alibaba.
Mr. Hu then added as an aside (Took me a little bit by surprise but he wanted to get this in right now). On the issue of why the JV has so much inventory on site is because of the new "purchase tax" exemption for pure EVs, which was recently announced, starting September 1st, by the Central Government is yet to be implemented. As soon as that occurs the EVs will be shipped and picked-up by their end users...When we visited Changxing (JV manufacturing facility) I understood the import of what he said.
RF: When do you expect that to happen? (Referring to the finished inventory when we visit the plants)
XH: The tax law is established. We are just waiting for it to be fully implemented...FYI: Bureaucracy is everywhere, including China.
RF: There was a goal stated by Kandi that there would be 10 operational CommunityShare programs and 25,000 cars sold by the end of 2014. Is that goal still attainable?
XH: It's not about the 10 CommunityShare programs specifically, but the 25,000 units is approximate enough. It's for the total business this year. Then again, there is not a lot of time remaining in 2014, so there is not much time left to achieve that goal. The only reason that Kandi may not reach that goal is that the city of Hangzhou has not, as of yet, either implemented the Tax exemption or the final subsidy package. All these factors have slowed down EV sales. There is only so much I can do. There are some things which are beyond my control. I can build the EVs, find customers for them, but certain things are beyond my reach.
Steve Fowler - New Markets and New Production Facilities
SF: We are currently building new plants in Hainan and Rugao City as part of our expansion program. Will they be making "parts" or be focused on assembly of EVs for the JV?
XH: Firstly I chose Hainan because the Central Government pays a lot of attention to that island (important tourist destination). Hainan is also symbolically important because of environmental concerns and what it would mean to its economy and people, if pollution became a tourist problem. In fact, the local government is currently considering a permanent ban of ICE's on its roads.
SF: When?
The JV will build the parts at its current manufacturing facilities on mainland China and complete (assemble) the EVs in Hainan. The Urban Beauty and Urban Cowboy will be completed in Hainan. We are hopefully anticipating that the facility will be completed and operational sometime in 2015. The only reason it might not be is because of extreme weather problems.
SF: What about Rugao City? (Jiangsu Province)
XH: The plant, which is near Nanjing (3.6 million population), will assemble EVs for Nanjing and other cities in the province. You must understand that some of the cities in China are larger than some countries (we all laughed).
SF: What about the 30% mandate of the Central Government in that cities (local government) must purchase EVs, (30%) as part of their new vehicle purchase programs?
XH: Yes, all new vehicle purchases must be 30% EVs. Governments will rush to buy EVs and Kandi will benefit from that policy. Mr. Hu said he was confident that Kandi will have a large market share, in all sectors, throughout China.
Harris: Any plans for the van?
XH: A few of our light truck models have been approved by the MIIT (Ministry of Information and Informational Technology). We have already sold some to the government.
Harris: What about the van specifically?
XH: Originally we thought the van idea would be perfect for deliveries and the like. However, we ran into obstacles because of limitations on the batteries, re: range and longevity. The van to us in the final analysis was but a transitional EV; not for production.
As lunch was about to be served, one of our participants asked questions of Mr. Hu which included whether he would visiting the US, November in NY?, conferences?, talking to US government officials?, visiting Elon Musk, any questions for us, etc...He gave no definitive answers.
Harris Goldman - JV Expansion into China's Largest City Shanghai
HG: I started, not by asking him a question, but by providing him with a brief bio on myself. I next asked him if he had ever read any of my articles on Kandi in seekingalpha.com? I wanted him to know that we were both entrepreneurs. I then said that I believed that Kandi's emergence in the Chinese marketplace was just the beginning.
XH: No recognition to the first part of what I said, oh well, but did say that we should come back next year and witness the "skyrocketing growth" of Kandi's business. Kind of surprised me with that answer for someone who is usually very tight lipped in his PR's, re: guidance, of any kind.
HG: As a former Tesla (TSLA) investor, who sold out at $30.00, I hold you directly responsible to get me back where I would have been had I not switched to Kandi.
XH: He smiled and chuckled and then said, "no problem."
HG: What are your plans for the opening up of Shanghai marketplace?
XH: I'm sure you know that Shanghai is China's largest city, 23 million people, and that the possibilities are endless. All of what we have learned and done in Hangzhou is adaptable there. All our different business models.
You are aware that we also, the JV, have the former Shanghai Maple plant under our umbrella now. We are currently building the Panda EV model here. Also much R&D too for future models.
The Kandi JV has already started many projects in the Jinshan District, including CommunityShare, both community and enterprise sectors. Plans are already in progress for CarShare too. We are very excited to be here and I am confident that Kandi will make a large impact.
HG: I then asked him if he could make arrangements for our group to visit all of the Kandi/JV plants, all the ZZY CarShare garages, operational and in construction, and CommunityShare.
XH: He said he would make the arrangements.
HG: A short time passed when I saw his assistant come back into the conference room and whisper something into his ear. I sensed that my Q&A would be cut a bit short and I was right. He was about to excuse himself for a phone call or the like, so I immediately thanked him for his hospitality and the time he devoted to us at our meeting...Aftermath: All told we spent four hours together...I was exhausted and excited at the same time.. I thanked him for the time he had spent with us, and he responded that he hoped we'd enjoy the rest of our trip. He then turned around and left the conference room.
End of meeting.
My Take: The Man (Mr. Hu) and What He Said
You may have noticed, while reading, that there weren't any of the typical links you are encouraged to "click" for corroboration on what has been reported. It wasn't necessary. What you have read is straight from the Chairman of the Board; Kandi and the JV. More than that I can't provide.
When talking about this meeting in its entirety, I am left with some distinct impressions. Mr. Hu is a super intelligent human being, confident, resourceful, persevering, focused, and some might say is maniacally dedicated to his vision for Kandi. A lone wolf to some degree. Not very trusting. Someone who permits very few people into his circle of trust. A leader nonetheless who instills confidence in those who work with and for him. His life story, up to this point, has been one of rapid advancement in whatever he has done; successful on all levels. Respected by his peers (Geely, China's largest traditional car manufacturer partnered with him), and equally important, has traversed the complexities of the Chinese political arena, both national and local, to bring him and his company to the threshold of an historic breakthrough in the revolution taking place in the Chinese EV industry.
Not an Elon Musk in personality or possessing his charismatic allure, but simply a man who provides exceptional intelligence, coupled with creative vision in pursuing his dreams. He is one who abides by the protocols of Chinese business culture. No choice. He also is one who projects that indefinable "look" of getting things done; the right way. When he looks at you, it's straight in the eye, and you believe what he says. He doesn't answer all the questions that you ask, which is not unusual for any head of a company, but he is not a chief executive who "pumps" his company to make you, his visitor, feel starry-eyed. This is not to say he isn't gracious or friendly, only that his style is one that gets straight to the point.
Regarding what I heard, I came away thinking that this man should not be taken lightly by anyone. Most everything he has said in the past has come to fruition, albeit later than what he initially projected in some cases. Some issues he has avoided in delivering; Beefing up his IR Dept. and appointing an Chinese American to interact with the American investment community. Yes, I also want him to be more transparent in his dealings with shareholders! But, in a period of less than three years he has taken Kandi from nowhere to the undisputed #1 pure electric car manufacturer in China as of today. Numbers don't lie...only detractors? That may change of course, who knows, but there is no doubt in my mind that Kandi will remain one of the major forces in the future of EV development, manufacturing, and sales in all of China.
When asked if he was concerned of the expected competition that will surely be clicking at his heels, he responded, "I don't care." His responsibility, as he sees it, is to concentrate on what Kandi was doing and not his presumed competition. With four to five new EV models being introduced in 2104/2015, as per Hu, that will bring his stable of offerings to a minimum of six pure electric passenger cars. Nobody, to my knowledge, comes close to having Kandi's diversity of offerings in the lower end of the EV marketplace in China. I repeat, no one.
Mr. Hu also made the point that his rent/lease business models are essentially the ultimate solution for the end consumer. Why? The end user is not responsible for replacing the batteries after four or five years of EV operation. When the batteries of an EV break down, or need to be replaced, the JV replaces them at no cost to the end user. If an end user, however, purchases an EV from another EV manufacturer he alone is responsible for its replacement. That's a very costly scenario. Batteries currently average $5000.00 for a pair. At the lower end of the market, imo, that doesn't make practical sense.
CarShare Garages: He commented that there were four completed, and operational, re: the vertical garages. Ten under construction. I had hoped he would have given explanation as to why his projections of thirty to forty of these garages would be completed by year end 2013, in August of 2013, but it didn't come to pass. Suffice it to say that he didn't comment directly on that issue. What he did say was that "he could only do so much. There were things, that he wouldn't elaborate on, that were not under his control." Two possible reasons popped into my brain. One is that ZZY didn't have the required funds to complete more ofthe vertical garages or that the Hangzhou Government, for some reason, has held things up. Even China has a bureaucracy. Hurry up and wait! He did say, more than once, that he has not received enough local governmental support evidenced by the City of Hangzhou's slow implementation of policies and or laws that would speed up Kandi's expansion. This is why, in a follow-up question, Mr. Hu exhibited his business acumen and learning experience when he said, "Kandi has received numerous requests to expand its EVs and business models to cities all over China, but Kandi would NOT, I repeat would NOT, entertain those requests until those cities enacted policies and or laws which will permit Kandi to expand more freely." That's significant. Yes, he has indeed learned, the hard way, by experience.
Being elevated to Chairman of the Board of the JV from CEO is monumental for Mr. Hu. I say this because Li Shufu, CEO/COB of Geely and formerly COB of the JV, has, in fact, relinquished the reigns of control to Mr. Hu to drive the future of the JV. Knowing the personality of Mr. Shufu and his dealings of the past with other companies (100% buy-outs) it is significant that Mr. Hu now runs the JV as Chairman and Kandi retains 50% ownership.
On the issue of batteries: In hindsight I remembered Mr. Hu stating that an imminent breakthrough in technology was about to occur. Well, no more than seven weeks later, after the conclusion of our trip, that breakthrough was announced. Tianneng Battery, Jinhua, has announced a new graphene manganese lithium-ion battery which purportedly reduces cost of EV batteries by half and increases range to 300km. It is currently not in mass production but indications are that Kandi will introduce this battery sometime in 2015.
One last observation: Previous rumors/reports in the media re: the Kandi/Alibaba connection were clarified recently. Yes, there will be more long-term leases of EVs in the future by Alibaba, currently being negotiated, but that really wasn't the "big" news. The big news is that Alibaba, through its sophisticated IT system, re payment system for goods and services on it's website, will now offer a complete solution for ZZY...Ali-Pay, for the rental/lease of Kandi EVs; PC and mobile apps. Without going into too much detail, the end users requirements of deposits will be dramatically reduced (if not all), paperwork essentially eliminated at pick-up points, essentially providing a streamlined convenient process on behalf of the renter/lessee. Yes, it's back to his vision; build the EVs and market them. Welcome to the 21st century Kandi!
Nov. 19, 2014 8:00 AM ET
http://seekingalpha.com/article/2694755-kandi-technologies-boots-on-the-ground-at-kandi
"Boots on the Ground." You've all heard the term. Usually reserved to cannote an engagement of some kind where the flesh of man is exposed to his most primal fear; death. To engage, however, one must physically participate or else it's not your war. Plain and simple. And, of course during wars, before a winner or loser emerges, the combatants in it must fight a series of battles. Often long and bloody they leave us drained to the core at the end; if there is indeed an ending. The war, however, that I'm about to tell you about will have an ending. For those of you who appreciate opera think of Faust by Gounod. Hint: Triumph of good versus evil….
…..which brings me to my largest holding in the American equities market, Kandi Technologies (NASDAQ:KNDI). Ever since I sold my position in Tesla (NASDAQ:TSLA) three years ago at $30.00 - see how smart I am? - and switched to this formerly non-descript electric vehicle company named Kandi, of Chinese origin, I have been actively involved in a series of battles in what I call a "war to the death." On one side we have the protagonists and on the other the antagonists, namely the longs and the shorts of Kandi. Unfortunately, at least for me, each time I have entered the battleground it was defensive in nature. Initially a novice writer in this space, it was not an easy task to refute some of the very talented authors, hired or not hired by the "short" contingent, who know how to turn a phrase with the best of them. And, surely as day turns into night, they created panicked fear primarily to the uninformed/unsophisticated small retail investor with limited resources and staying power. Many of these people have lost and or continue to lose part or their total investment savings as a result of this apparent never ending "war of the words." So, I entered the fray and have pressed on through five published articles on SA during the past couple of years to present factually based information to present an alternative perspective to these short sellers and hopefully refute their damaging articles. . Note: SA, in its policy of "open" discussion, permits proponents and detractors alike their free forum, by which each side can present its case regarding any specific equity. On the surface this policy appears to be fair and should level the playing field, but does it? The only thing I will say is that the potential exists for one side or the other to misrepresent, utilize innuendo, or outright present falsehoods and have their article published. I as a shareholder, have read every one of these, my perception, negative/attack articles on Kandi and felt I had to respond with the truth on behalf of the small shareholders, and of course myself.
In the end, however, I recognized the instability factor created by this war of the words for what it is...stalemate!...So, until something new was done, not another of the he said/she said arguments, this confusion created by these "shorts" would, with certainty, continue their attacks ad nauseum. I have seen it before.
That is how the genesis of my "boots on the ground" strategy was formulated. Instead of reporting on what my DD came up with, why not see it for myself?
So, I organized a group of six investors, including myself, who would take a trip to China to find out what was the truth and what were the fabrications, if any, regarding Kandi. Personally, I had too a disproportionate share of my holdings invested in this company to let this continue any further. The trip would last nine days of "boots on the ground", and would take us from Shanghai to Hangzhou, Hangzhou to Changxing=, Hangzhou to Shanghai again, Hangzhou to Jinhua, and finally back to Hangzhou. To say the least the trip was intense. Not much time for R&R except in the evenings. By and large we were either traveling, attending Q&A sessions, visiting manufacturing facilities of Kandi and the JV, interviewing customers, talking to companies integrally involved in China's EV industry but not affiliated with Kandi, and the like. My mandate, of course, was to finally put to an end, once and for all, that Kandi was a company that was illegitimate, complicit in fraud, and destined to fail by Kandi's detractors (shorts).
I would report, on what I saw, heard and learned, first-hand, in an article to be published by SA. No holds barred! If I discovered discrepancies, based on my due diligence process back in the states, I would report on it. If I found failings on behalf of Kandi management I would report on it. If I discovered that Kandi exaggerated its claims of growth, I would report on it. On the positive side I would also report on the current state of affairs for Kandi, and if warranted. I would also provide my personal take on Kandi's future possibilities. As I have said more than once in past articles, let the chips fall where they may!
Let's get started….
Members of the China Group:
Harris Goldman (Organizer)
Frank Blatterman (with significant other Daisy)
Steve Fowler
Rich Fitzpatrick
Tom Harrison
Monday, 9:30 AM, September 15 (Q&A with China Group)
After being met by an assistant of Mr. Hu in the lobby of Kandi Headquarters in Hangzhou, the China Group were led to a conference room and seated five across on one side of the table. In a minute or two Mr. Hu entered and sat across from us with his assistant. To his right sat our hired driver/interpreter, Zhu Xiao Bo (Gerry). Note: His hiring by us is unquestionably the best decision made by us regarding our investigative trip. Kudos go out to Steve Fowler for finding him. He not only provided us with a "voice" but also a clear understanding of what was being said to us.
(click to enlarge)
Left to Right: Harris Goldman, Rich Fitzpatrick, Steve Fowler,Tom Harrison, Frank Blatterman
Mr. Hu and Gerry
Before I go into the actual "highlights" of the Q&A session I must tell you that the my plan was to divide all of our major areas of interest into segmented parts whereby each member of the China Group, in order, would ask questions directly of Mr. Hu. Aside from introductions I was utilized mainly as a back-up questioner as each one of our participants questioned Mr. Hu. I wanted to make this an inclusive trip, and it was. Most, not all, of our questions were answered with a confidence and determinedness, but most importantly, that Mr. Hu's vision for Kandi was moving forward at an accelerated pace, without skipping a beat, as he hurdled every obstacle which confronted him.
Mr. Hu's Introduction to the China Group:
"The major cities of China have experienced an ever increasing amount of ICE's (internal combustion engine autos) in the past few years. Along with this increase, environmental concerns, pollution levels, have become more of a problem for each of those cities residents. As this trend continues the major cities have been slowly enacting policies and laws in order to deal with these problems; ie., first being the restricting of new ICE registrations (subject to a lottery). Not enough but something. Smaller cities are soon to follow.
"More effective reform, however, is necessary for urban transportation in cities, such as Hangzhou, or the environment will worsen to a degree of it being untenable for its residents. In ten years, if more restrictive policies are not enacted the transportation systems will fail completely. There are now over a million cars going in and out of the central business district of Hangzhou daily. In ten years there will not be enough parking spaces to handle any increase of autos as the population continues to grow. Even if you tear down every house in Hangzhou there will not be enough parking because there is only so much space which can be allocated to parking."
The cities, such has Hangzhou, have four major problems confronting them regarding urban expansion:
Traffic jams
Parking spaces
Pollution
Energy efficiency
(click to enlarge)
Pollution: The crisis continues FB Photo
"We must also address the waste factor regarding current urban life and the future expansion of our cities":
Auto driving inefficiencies - 10% is driving and 90% is finding a parking space.
Waste of road resources - One way trips. Mr. Hu gave the example of him going to the airport. No return trip by the driver with passengers. Think of how many times this happens each day.
Waste efficiency factor re: re people being transported:
70% one person
25% two or three people
5% four or five people
He also believes that there are five major barriers holding back the development of EVs in China:
Prices for EVs are too high for the masses.
Battery limitations:
cost too high
lack of recharging infrastructure
costly recycling procedures
long charging cycle times
Limited mileage
Limited Range
Battery pollution
If we analyze the current state affairs, re EVs, it is obvious that solutions must be firmly in place and enacted upon if China is to successfully implement its goal in transitioning from ICE's to EVs. EVs are not going to supplant the ICE for a long time. And, the primary reasons for the lag in EV development are that the cities have not been aggressive enough in limiting the number of passenger cars as their populations grow. You don't want to hinder economic development so there is really only one answer; build out the public transportation systems of the cities; ie., buses, subways and taxis, etc. Then again, each part of the public transportation system has its own drawbacks. Taxis are too expensive and inefficient and subways/buses lack the accuracy of where people want to go (not enough locations throughout the cities). Mr. Hu calls these limitations not being enough pipes and capillaries.
Mr. Hu says, however, that his urban transportation model will provide the ultimate solution. The only way that it will work, however, is by the government supporting it. Micro-bus, Kandi's solution, will not only provide cheaper transportation than taxis, elimination of waste of both ICE and EV passenger cars, provide more pinpoint destination targeting, but most importantly, zero discharge of pollutants to the environment. And, this can all be done by leasing/renting instead of selling the car directly to the end user. .
He gave examples of how his micro-bus model was expanding throughout Hangzhou. What initially rolled out as the Kandi Garage, the CarShare distribution model in his vision, has been expanded to include HotelShare, StreetShare, and CommunityShare (enterprise and neighborhood) models. Not only are the newer micro-bus models cheaper to locate and build but they can be done quickly. So, until the national utilities dramatically increase their spending in the build-out of recharging infrastructure the newer distribution models will be located and built at a rapid pace.
He then addressed new EV models which are currently being developed by the JV (Joint Venture of Kandi and Geely). "There will four to five of these new models released in 2014 and 2015." Note: We already knew of two new models named the Urban Beauty and Urban Cowboy for release in 2015 which would make for a total of four EVs in the Kandi stable of offerings in the passenger car category. The possibility of three more took our group by surprise.
Some of the newer models will have upgraded technology packages, including "touch" computer dash screens and other upgrades. Aside from the JV having its own R&D division, Volvo has contributed its proprietary technology to the new models too.
He also said that in the future there might be additional cooperation agreements, didn't specify, that would not include the JV. He continued by saying that it was too early in the process to publicly announce. It sounds promising but I honestly don't know what he is referring to.
"Big News": Mr. Hu formally announced at our meeting that he is now the Chairman of the Board of the JV as of September 1st. This upgrade in Mr. Hu's stature in the company is quite revealing. I will discuss my take at the conclusion of the meeting.
He predicted, in his brief remarks earlier, that unless government gets more proactive in setting and implementing restrictive policies on the growth of ICE's the public transportation system will ultimately fail. Kandi, of course, will benefit as that date gets closer at hand but it's the government which needs to do much more in promoting the micro-bus system. "I can only do so much. Governmental decisions are out of my hands." So far the government hasn't set out policies and or laws which detail a management system for public transportation." He does, however, expect the governmental agencies to increase their activity shortly. The public transportation system cannot continue to serve the public without these policies. In essence the government needs to act at a faster pace, with increasing restrictions, and more money.
Kandi, Mr. Hu noted, continues to develop its own system of the public transport system. As Kandi grows in Hangzhou, more and more people recognize the increasing number of Kandi EVs on the streets. They are no longer hidden from view. National media in China, and some in the US, have expanded coverage, seen on television with regularity, about how Kandi is starting to make a real impact in the lives of the Chinese for now and into the future. So, in spite of the government lagging in its responsiveness Kandi keeps on surging ahead.
He referred to the Minister of Science and Technology coming to Kandi headquarters on Sept. 19th to talk about some of the things that Kandi is presently doing that will be codified into law. That's quite an honor for Kandi...FYI: Unfortunately, at the last minute, the minister was called away, but a new visit will be rescheduled... As each month passes Mr. Hu says that he is being approached by more and more cities wanting Kandi to implement its business models in their cities. Mr. Hu, however, won't agree to expand to those cities unless they enact the policies and laws, at a local level, that he believes are necessary for the success of his business models. In other words before Kandi will come into their cities only under his conditions. This is a significant Mr. Hu decision.
He talked about Kandi expanding into Nanjing, Jiangsu Province. Already there is a 3000 unit order for his EVs before the newest EV manufacturing assembly plant of the JV is finished in Rugao. Nanjing is a medium sized city of only 3.6 million people; second or third tier by Chinese standards. As per his comments, Nanjing will be the first city in China whereby Kandi successfully negotiated favorable policies and subsidies that will be in accordance with Mr. Hu's standards.
He says that many people ask him, "If Kandi is successful will many companies try to imitate Kandi?" He goes on to say, "If business is not good then nobody will copy him." Continuing, says he expects many companies to copy him but it is not that easy to copy what it has taken him years to learn. The copycats will be at least two years, as of today, behind Kandi in getting all the bugs out and by that time he foresees Kandi being one of the leading car manufacturers in all of China. So, he doesn't worry about the competition, and yes, he expects many people to copy him (chuckling).
He also addressed production/sales for the rest of the year. All he would say is that there will be many more thousands of EVs manufactured by the JV for the balance of the year. He also said, "In 2015 the amount of Kandi products produced/sold will shock the world."
He also feels fortunate that he partnered with Geely. They have provided him everything he could have asked for in his post dealings with them. Not only have they provided upgraded technology for the newer models, have transferred key people from Geely's R&D dept. to the JV, but have also provided the JV with four of Geely's top management people. That group includes Li Shufu's VP of Marketing and Sales, who is attributed in making Geely #1 re: passenger car sales in China in 2013.
He then transitioned his introductory remarks, quite unexpectedly, to comment on the Kandi PPS. Yes, he is aware of the "shorts" and how they have cannibalized the stock price for the last few weeks. He hoped we would understand that his way, the traditional Chinese business culture of doing business, is based on results rather than purposefully exaggerating what Kandi is doing currently and what he predicts for its future. He hoped that we, the Kandi American investor would recognize this and support Kandi in any way they can...He then smiled.
Now it's our turn:
Frank Blatterman - QBEX (Quick Battery Exchange), Batteries, and Technology
FB: QBEX is the only system, to my knowledge, which addresses all the drawbacks of the EV recharging process. Why does it appear that it has been de-emphasized by State Grid (China's largest utility) at the moment?
XH: Even though it is not a focal point at the moment both State Grid and the Central Government are very much aware of its importance. The Minister of Science and Technology wouldn't be coming here to Kandi if it wasn't of import.
FB: Do you know of any plans for the immediate future to add additional re-charging stations for QBEX?
XH: There is no doubt that many cities throughout China will adopt this system of battery swapping. There will be many new stations being built.
FB: Will those stations be built for both plug-in EVs and QBEX?
XH: Yes, of course, they will be able to do both methods. As you know, the preferred method of re-charging EVs is long charging (approx. 5 hours). It's also more efficient and cheaper if it is done in the evenings when electricity is cheaper. In the daytime QBEX has the major advantage of swapping the spent batteries for newly charged ones without taxing the grid during peak hours.
FB: The Central Government has recently announced a new policy directive as an add-on to the New Energy Policy. It consists of funding $16 billion dollars for infrastructure. Will a portion of that be spent on QBEX stations?
XH: Yes. It will also be utilized for the construction of cubic garages (CarShare garages). You must understand, however, that $16 billion dollars for infrastructure doesn't go very far in China. There will be other financial resource channels that will participate such as local governments and or others (there has been talk of private funding too by SG). He doesn't know what percentage of funding will be allocated to CarShare garages but he is not concerned. He believes there will plenty of funding available in the near future.
Mr. Hu also wanted to point that there is a common misperception regarding charging stations. They may not be as necessary in the vast numbers many people think are needed. To prove his point he experimented with a new innovative business model named CommunityShare in May of this year. He offered an outlying community (Xiangshan suburb) of Hangzhou a very cheap rate to lease Kandi EVs with one major proviso. The community would be responsible for their own charging, insurances, maintenance, etc.. Kandi would only supply the EVs. A total of 300 EVs were offered to the community initially. To his surprise they all were subscribed to immediately by the residents. Note: you must understand that this community was mostly residential so the residents, by and large, could do the re-charging in their homes in the evening. Very soon after this offering was subscribed to the application list swelled to an additional 1000 EVs. After hearing that the initial lease deal went so well and that another 1000 apps had surfaced he quickly raised the lease price (he smiled when he said that). So, he proved his point that a CommunityShare business model didn't necessarily need many power stations for re-charging and or QBEX. The residents could do the re-charging cycle by themselves.
So, he says, "we come to the chicken and the egg question". Which should come first, the power station or the EV? Mr. Hu then visited a village in Shanghai. There were many charging stations available (Jinshan suburb) there. Unfortunately, however, very few were utilized by the residents. Some had grass growing around them. His conclusion: He believes in many situations that most people can do the re-charging process by themselves; outside of dense urban areas.. Kandi's responsibility, he says, is to manufacture a quality product and then request the charging stations as needed.
Harris: Could we visit one of the CommunityShare locations?
XH: Of course. You can visit on your own. I will give you the address and make arrangements.
FB: At one point in time Kandi had a cooperation agreement with Zoyte. I understand that they have redesigned their passenger EVs with QBEX capability. What is the status of that cooperation agreement and will Zoyte continue to have QBEX capabilities in their cars?
XH: Kandi actually doesn't have anything to do with Zoyte now. The combination of Kandi, Geely, and Volvo have strong backgrounds on batteries. He believes that puts Kandi in a more advantageous position than Zoyte. He feels that advantage will continue for newer battery technologies, QBEX, and CarShare. He really doesn't care what Zoyte does. He is only concerned with his own R&D and constantly improving the products he has to offer.
FB: I see where Kandi has selected quality battery manufacturers for its batteries. Are you concerned about battery issues as EVs become more popular?
XH: Good question. Kandi has very strict quality controls for the batteries it uses. As the quantity need increases there might be quality control issues along the line. But it doesn't affect us as it might other manufacturers. Why? Because our business model is rent/lease. Other manufacturers sell their EVs so if you buy one the end user inherits the possibility of a bad battery. It becomes more of a customer problem as the time of ownership and usage increases. All our customers need to do is replace the battery as needed. No additional worries or cost.
FB: So, as we grow to 100,000 to 200,000 EV production numbers per annum are you concerned about shortages?
XH: Yes, it might create a problem for the near future. So we are planning now that this may happen. The battery industry is moving very quickly which is also to our advantage. Rent/Lease versus purchase. I am expecting a major breakthrough in battery technology in the near future. Again, that is to our advantage. And, when this breakthrough occurs there will be plenty of battery supply available…More in my take segment.
Harris: There has been significant reductions in the cost of batteries in the last few years. Do you expect this trend to continue?
XH: One of the main components of EV batteries is lead. I see, however, a potential major breakthrough in the material mix for batteries in the near future that will lower costs, improve reliability, and safety. From manufacturer to manufacturer I don't see large fluctuations in pricing.
Next is Tom Harrison - CarShare
TH: Any updates on CarShare?
XH: Still building 32 flat share sites (StreetShare) in Hangzhou
TH: What about garages?
XH: 14 garages. Four operational and 10 under construction. It's easier to apply for StreetShare sites versus vertical garages. The cost, of course, is much higher for the garages than StreetShare locations. Our plans are for 632 of the StreetShare sites in Hangzhou with maybe 100 built through 2014. We are, however, finding it more difficult to execute our business plan in Hangzhou because of local government behavior (sic...not aggressive enough).
TH: Tell us some CarShare information regarding other cities?
XH: We recognize this and are currently extending our energies to other cities with more receptive policies and laws for EV expansion. I wouldn't be surprised if some of the cities we are currently involved with overtake our initial successes in Hangzhou. Actually several cities that we are closely working with right now are larger than Hangzhou (Hangzhou population 8.1 million). As I said before, when we receive aggressive government support, expansion is much easier and faster than what is occurring in Hangzhou at this point in time.
TH: But it is still in the planning stages now?
XH: Yes
TH: What is the serviceable life of a CarShare EV?
XH: About the same as a traditional car. The battery, however, must be replaced every four to five years due to the restrictions of current technology.
TH: Is there a desire or potential for the JV to take over ZZY?
XH: Although it was stated by us that there was interest on behalf of the JV to acquire a 70% stake in ZZY the reality is that currently the company, ZZY, is operating at a loss. So, the JV will not take further steps at this time.
Harris: Other than being the funding arm of the operational network, re: CarShare and the JV's other business models, isn't it true that the operational part of ZZY is essentially being run by the JV? And, if that be the case why does the JV need ZZY at all?
XH: As a matter of fact, ZZY's operation is experimental at this time. So, it might take up to three years for the business to stabilize and be profitable. Of course this is all dependent on government behavior no matter where we expand to. But when all the pieces are set up properly there will be a big splash re: ZZY. So, as of right now the Kandi/JV manufactures the EVs and ZZY runs the operations. I anticipate that in approximately three years that ZZY will be listed on a Chinese Stock Exchange. Right now, we won't take a controlling position in ZZY but it will, in fact, happen in the not too distant future.
Harris: Recently there was a $71 million take-down of funding, direct placement, from the latest shelf-offering that was announced a few months ago. Would some of that funding be utilized to acquire a controlling interest in ZZY?
XH: As a matter of fact, the $71 million dollars will be utilized by the JV for operations and R&D rather than the purchase of ZZY. Designing new EV models requires additional funding from both Kandi and Geely. So, that is where most of that money will be spent.
Rich Fitzpatrick - EV Leasing
RF: Enterprise Leasing...Any feedback for the companies that signed up? (Mr. Hu didn't quite understand the question. CommunityShare, in reality, is comprised of two components; actual communities and enterprises. They are both treated as one business model with the same costs and requirements for the end users.
XH: Yes, the first CommunityShare program (Communities). Initial 300 EVs at approximately at $135.00 a month up to 1000 EVs. Lease is for three years (can be renewed). End user is responsible for their own charging costs, etc. Kandi is only involved, other than the original lease, if there are warrantee issues. If those issues arise Kandi will replace the EV for the end user.
RF: So, to drive 100KM, the cost to the end user is approximately $820.00, which is just the cost of the electricity….versus the cost of a traditional car which can cost up to $17,000.00.
Harris: I think he is talking about the community versus the corporate group lease specifically (Trying to sort it out for clarification purposes)…
XH: It really doesn't matter because the organization we are dealing with makes the lease payments; not the end user. (Whether enterprise or community. Mr. Hu groups them together as "Group Lease.").
RF: Positive feedback?
XH: Yes, of course. Our Lease is a much cheaper alternative to purchasing a traditional car. The JV now has several thousand EVs in the Group Lease Program (CommunityShare).
You must understand the Chinese culture. The Chinese like to compete with themselves (keeping up with the Jones's). When most lease the same car any social burden ceases to exist. Our micro-bus business model is quickly moving forward based on the increasing acceptance of leasing versus purchasing by the end user.
RF: Has Alibaba (NYSE:BABA) signed up yet?
XH: We are still negotiating with them. We might sign leases with some of their individual divisions. Right now they have signed up with some of the village communities as part of the group lease program. ZZY has done this several times with Alibaba.
Mr. Hu then added as an aside (Took me a little bit by surprise but he wanted to get this in right now). On the issue of why the JV has so much inventory on site is because of the new "purchase tax" exemption for pure EVs, which was recently announced, starting September 1st, by the Central Government is yet to be implemented. As soon as that occurs the EVs will be shipped and picked-up by their end users...When we visited Changxing (JV manufacturing facility) I understood the import of what he said.
RF: When do you expect that to happen? (Referring to the finished inventory when we visit the plants)
XH: The tax law is established. We are just waiting for it to be fully implemented...FYI: Bureaucracy is everywhere, including China.
RF: There was a goal stated by Kandi that there would be 10 operational CommunityShare programs and 25,000 cars sold by the end of 2014. Is that goal still attainable?
XH: It's not about the 10 CommunityShare programs specifically, but the 25,000 units is approximate enough. It's for the total business this year. Then again, there is not a lot of time remaining in 2014, so there is not much time left to achieve that goal. The only reason that Kandi may not reach that goal is that the city of Hangzhou has not, as of yet, either implemented the Tax exemption or the final subsidy package. All these factors have slowed down EV sales. There is only so much I can do. There are some things which are beyond my control. I can build the EVs, find customers for them, but certain things are beyond my reach.
Steve Fowler - New Markets and New Production Facilities
SF: We are currently building new plants in Hainan and Rugao City as part of our expansion program. Will they be making "parts" or be focused on assembly of EVs for the JV?
XH: Firstly I chose Hainan because the Central Government pays a lot of attention to that island (important tourist destination). Hainan is also symbolically important because of environmental concerns and what it would mean to its economy and people, if pollution became a tourist problem. In fact, the local government is currently considering a permanent ban of ICE's on its roads.
SF: When?
The JV will build the parts at its current manufacturing facilities on mainland China and complete (assemble) the EVs in Hainan. The Urban Beauty and Urban Cowboy will be completed in Hainan. We are hopefully anticipating that the facility will be completed and operational sometime in 2015. The only reason it might not be is because of extreme weather problems.
SF: What about Rugao City? (Jiangsu Province)
XH: The plant, which is near Nanjing (3.6 million population), will assemble EVs for Nanjing and other cities in the province. You must understand that some of the cities in China are larger than some countries (we all laughed).
SF: What about the 30% mandate of the Central Government in that cities (local government) must purchase EVs, (30%) as part of their new vehicle purchase programs?
XH: Yes, all new vehicle purchases must be 30% EVs. Governments will rush to buy EVs and Kandi will benefit from that policy. Mr. Hu said he was confident that Kandi will have a large market share, in all sectors, throughout China.
Harris: Any plans for the van?
XH: A few of our light truck models have been approved by the MIIT (Ministry of Information and Informational Technology). We have already sold some to the government.
Harris: What about the van specifically?
XH: Originally we thought the van idea would be perfect for deliveries and the like. However, we ran into obstacles because of limitations on the batteries, re: range and longevity. The van to us in the final analysis was but a transitional EV; not for production.
As lunch was about to be served, one of our participants asked questions of Mr. Hu which included whether he would visiting the US, November in NY?, conferences?, talking to US government officials?, visiting Elon Musk, any questions for us, etc...He gave no definitive answers.
Harris Goldman - JV Expansion into China's Largest City Shanghai
HG: I started, not by asking him a question, but by providing him with a brief bio on myself. I next asked him if he had ever read any of my articles on Kandi in seekingalpha.com? I wanted him to know that we were both entrepreneurs. I then said that I believed that Kandi's emergence in the Chinese marketplace was just the beginning.
XH: No recognition to the first part of what I said, oh well, but did say that we should come back next year and witness the "skyrocketing growth" of Kandi's business. Kind of surprised me with that answer for someone who is usually very tight lipped in his PR's, re: guidance, of any kind.
HG: As a former Tesla (TSLA) investor, who sold out at $30.00, I hold you directly responsible to get me back where I would have been had I not switched to Kandi.
XH: He smiled and chuckled and then said, "no problem."
HG: What are your plans for the opening up of Shanghai marketplace?
XH: I'm sure you know that Shanghai is China's largest city, 23 million people, and that the possibilities are endless. All of what we have learned and done in Hangzhou is adaptable there. All our different business models.
You are aware that we also, the JV, have the former Shanghai Maple plant under our umbrella now. We are currently building the Panda EV model here. Also much R&D too for future models.
The Kandi JV has already started many projects in the Jinshan District, including CommunityShare, both community and enterprise sectors. Plans are already in progress for CarShare too. We are very excited to be here and I am confident that Kandi will make a large impact.
HG: I then asked him if he could make arrangements for our group to visit all of the Kandi/JV plants, all the ZZY CarShare garages, operational and in construction, and CommunityShare.
XH: He said he would make the arrangements.
HG: A short time passed when I saw his assistant come back into the conference room and whisper something into his ear. I sensed that my Q&A would be cut a bit short and I was right. He was about to excuse himself for a phone call or the like, so I immediately thanked him for his hospitality and the time he devoted to us at our meeting...Aftermath: All told we spent four hours together...I was exhausted and excited at the same time.. I thanked him for the time he had spent with us, and he responded that he hoped we'd enjoy the rest of our trip. He then turned around and left the conference room.
End of meeting.
My Take: The Man (Mr. Hu) and What He Said
You may have noticed, while reading, that there weren't any of the typical links you are encouraged to "click" for corroboration on what has been reported. It wasn't necessary. What you have read is straight from the Chairman of the Board; Kandi and the JV. More than that I can't provide.
When talking about this meeting in its entirety, I am left with some distinct impressions. Mr. Hu is a super intelligent human being, confident, resourceful, persevering, focused, and some might say is maniacally dedicated to his vision for Kandi. A lone wolf to some degree. Not very trusting. Someone who permits very few people into his circle of trust. A leader nonetheless who instills confidence in those who work with and for him. His life story, up to this point, has been one of rapid advancement in whatever he has done; successful on all levels. Respected by his peers (Geely, China's largest traditional car manufacturer partnered with him), and equally important, has traversed the complexities of the Chinese political arena, both national and local, to bring him and his company to the threshold of an historic breakthrough in the revolution taking place in the Chinese EV industry.
Not an Elon Musk in personality or possessing his charismatic allure, but simply a man who provides exceptional intelligence, coupled with creative vision in pursuing his dreams. He is one who abides by the protocols of Chinese business culture. No choice. He also is one who projects that indefinable "look" of getting things done; the right way. When he looks at you, it's straight in the eye, and you believe what he says. He doesn't answer all the questions that you ask, which is not unusual for any head of a company, but he is not a chief executive who "pumps" his company to make you, his visitor, feel starry-eyed. This is not to say he isn't gracious or friendly, only that his style is one that gets straight to the point.
Regarding what I heard, I came away thinking that this man should not be taken lightly by anyone. Most everything he has said in the past has come to fruition, albeit later than what he initially projected in some cases. Some issues he has avoided in delivering; Beefing up his IR Dept. and appointing an Chinese American to interact with the American investment community. Yes, I also want him to be more transparent in his dealings with shareholders! But, in a period of less than three years he has taken Kandi from nowhere to the undisputed #1 pure electric car manufacturer in China as of today. Numbers don't lie...only detractors? That may change of course, who knows, but there is no doubt in my mind that Kandi will remain one of the major forces in the future of EV development, manufacturing, and sales in all of China.
When asked if he was concerned of the expected competition that will surely be clicking at his heels, he responded, "I don't care." His responsibility, as he sees it, is to concentrate on what Kandi was doing and not his presumed competition. With four to five new EV models being introduced in 2104/2015, as per Hu, that will bring his stable of offerings to a minimum of six pure electric passenger cars. Nobody, to my knowledge, comes close to having Kandi's diversity of offerings in the lower end of the EV marketplace in China. I repeat, no one.
Mr. Hu also made the point that his rent/lease business models are essentially the ultimate solution for the end consumer. Why? The end user is not responsible for replacing the batteries after four or five years of EV operation. When the batteries of an EV break down, or need to be replaced, the JV replaces them at no cost to the end user. If an end user, however, purchases an EV from another EV manufacturer he alone is responsible for its replacement. That's a very costly scenario. Batteries currently average $5000.00 for a pair. At the lower end of the market, imo, that doesn't make practical sense.
CarShare Garages: He commented that there were four completed, and operational, re: the vertical garages. Ten under construction. I had hoped he would have given explanation as to why his projections of thirty to forty of these garages would be completed by year end 2013, in August of 2013, but it didn't come to pass. Suffice it to say that he didn't comment directly on that issue. What he did say was that "he could only do so much. There were things, that he wouldn't elaborate on, that were not under his control." Two possible reasons popped into my brain. One is that ZZY didn't have the required funds to complete more ofthe vertical garages or that the Hangzhou Government, for some reason, has held things up. Even China has a bureaucracy. Hurry up and wait! He did say, more than once, that he has not received enough local governmental support evidenced by the City of Hangzhou's slow implementation of policies and or laws that would speed up Kandi's expansion. This is why, in a follow-up question, Mr. Hu exhibited his business acumen and learning experience when he said, "Kandi has received numerous requests to expand its EVs and business models to cities all over China, but Kandi would NOT, I repeat would NOT, entertain those requests until those cities enacted policies and or laws which will permit Kandi to expand more freely." That's significant. Yes, he has indeed learned, the hard way, by experience.
Being elevated to Chairman of the Board of the JV from CEO is monumental for Mr. Hu. I say this because Li Shufu, CEO/COB of Geely and formerly COB of the JV, has, in fact, relinquished the reigns of control to Mr. Hu to drive the future of the JV. Knowing the personality of Mr. Shufu and his dealings of the past with other companies (100% buy-outs) it is significant that Mr. Hu now runs the JV as Chairman and Kandi retains 50% ownership.
On the issue of batteries: In hindsight I remembered Mr. Hu stating that an imminent breakthrough in technology was about to occur. Well, no more than seven weeks later, after the conclusion of our trip, that breakthrough was announced. Tianneng Battery, Jinhua, has announced a new graphene manganese lithium-ion battery which purportedly reduces cost of EV batteries by half and increases range to 300km. It is currently not in mass production but indications are that Kandi will introduce this battery sometime in 2015.
One last observation: Previous rumors/reports in the media re: the Kandi/Alibaba connection were clarified recently. Yes, there will be more long-term leases of EVs in the future by Alibaba, currently being negotiated, but that really wasn't the "big" news. The big news is that Alibaba, through its sophisticated IT system, re payment system for goods and services on it's website, will now offer a complete solution for ZZY...Ali-Pay, for the rental/lease of Kandi EVs; PC and mobile apps. Without going into too much detail, the end users requirements of deposits will be dramatically reduced (if not all), paperwork essentially eliminated at pick-up points, essentially providing a streamlined convenient process on behalf of the renter/lessee. Yes, it's back to his vision; build the EVs and market them. Welcome to the 21st century Kandi!
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