Introduction

Some say that entrepreneurship is a marathon. However, from the perspective of Detective Cat, this is not the case, especially for startups in trending industries.

WM Motor in this article teaches us a vivid lesson: "If the path and strategy are wrong in entrepreneurship, the faster one starts, the faster they fail."

"Star CEO," "RMB 35 billion in massive financing," "the booming electric vehicle industry," "investment from internet giants with core technology support"… No matter how you look at it, WM Motor's startup was a golden opportunity for wealth creation.

However, this feast ended with a bitter fruit that was difficult to swallow – the hundreds of billions of wealth of investors vanished, and the star CEO was labeled a deadbeat.

How did WM Motor mess things up under abundant resources? Studying this topic can not only provide materials for millions of business operators to avoid pitfalls but also serve as a warning for existing electric vehicle startups.

In this regard, we will gradually reveal the details and reasons behind WM Motor's downfall.

01

The Cost of Taking Shortcuts

Electric vehicles might be one of the most challenging fields for startups on the planet. There's the heart-wrenching story of Iron Man chewing on glass and staring into the abyss for ten years, followed by Mr. Jia's frustration of spending over RMB 10 billion for just 12 cars.

As a durable product costing hundreds of thousands of yuan, electric vehicle startups are initially a money-burning game – manufacturing qualifications, factory production, core technology, sales channels, brand exposure, all requiring huge investments.

This led most traditional automakers to initially doubt this "new species." Their hesitation stems from the inability to calculate the returns – when will the profits earned from fuel vehicles justify investments in electric vehicles?

But entrepreneurs don't have such burdens. They bet that as long as they can grab a share from fuel vehicles, profits will naturally follow. That's why we see Tesla, NIO, Xpeng, Li Auto, WM Motor, NIOZ, and FF91, all fearless newcomers.

However, in entering the electric vehicle race, WM Motor chose a shortcut.

Founded in 2015, WM Motor's founder is Shen Hui, a seasoned veteran in the automotive industry who held key positions at BorgWarner, Fiat, Geely, and Volvo. His crowning achievement was helping Li Shufu's Geely acquire Volvo.

However, during the subsequent management of Volvo, a rift developed between Shen Hui and Li Shufu. The rift wasn't due to Li Shufu questioning Shen Hui's abilities but rather due to conflicting business philosophies.

Specifically, Li Shufu wanted Volvo to turn a profit as soon as possible, while Shen Hui preferred a slower, long-term approach. As a result, Shen Hui was soon sidelined by Li Shufu and submitted his resignation, choosing to study abroad in the US.

Just a year later, Shen Hui returned to the automotive industry by founding the WM Motor electric vehicle project. The project's initial form was a three-electric system R&D enterprise founded by Du Ligang in 2012 – Suzhou AG-Tech Machinery Co., Ltd. Du and Shen Hui met during Geely's acquisition of Volvo.

If the story ended here, one wouldn't see how the "well-connected" WM Motor took shortcuts.

WM Motor's true "scandalous move" was its frenzied "poaching" of former employer Geely's talent, which became a significant stumbling block hindering its subsequent successful listing.

Here's what happened: In 2018, WM Motor launched its first mass-produced electric vehicle, the EX5, ahead of other new forces. Soon afterward, Geely Automobile filed a lawsuit against WM Motor. Geely believed that the WM EX5 heavily copied its yet-to-be-released mass-produced car, the EX7, and demanded RMB 2.1 billion in compensation from WM Motor.

Geely's lawsuit wasn't frivolous but rather based on solid evidence. In the court documents submitted, Geely claimed that nearly 40 senior managers and technicians from one of its subsidiaries had resigned and joined WM Motor and its affiliated companies, with 30 of them joining immediately after leaving in 2016. Furthermore, some of these former employees used their former employer's new energy vehicle chassis application technology and related chassis component drawings and digital modeling technology information to apply for 12 utility model patents at WM Motor.

In response to Geely's lawsuit, WM Motor initially denied the allegations. Relevant analysts also believed that due to the difficulty in obtaining evidence, Geely's chances of winning the patent infringement case were less than 10%. Thus, on one hand, WM Motor was rushing blindly forward, while on the other, Geely was relentlessly pursuing it.

Although the lawsuit remained unresolved in the short term, it successfully blocked WM Motor's listing. After submitting IPO documents to the STAR Market and the Hong Kong Stock Exchange, the exchanges rejected WM Motor's listing applications based on various factors.

As WM Motor struggled on the brink of collapse due to excessive bleeding, Geely finally received its delayed justice. On June 14, 2024, the Intellectual Property Tribunal of the Supreme Court announced that "Geely had won the patent infringement lawsuit, and WM Motor needed to pay Geely approximately RMB 640 million in compensation."

However, could the already fallen WM Motor still afford to pay this compensation?

02

The Original Sin of New Wine in Old Bottles

If we only consider the lawsuit as the factor behind WM Motor's downfall, it would make WM Motor's vitality seem too fragile.

In subsequent research, we found that WM Motor's failure was not only due to its eagerness for quick success by "stealing patents from its former employer" but also due to strategic mistakes of putting new wine in old bottles.

First, let's talk about two significant differences between traditional automakers and new forces in terms of business models:

The first is manufacturing thinking versus product thinking.

Traditional automakers are accustomed to planning factories and production capacity to layout the market. For example, the year after WM Motor's establishment, it built its first smart factory in Wenzhou and later a second in Huanggang, Hubei, with a combined production capacity of 250,000 vehicles. WM Motor spent RMB 26.7 billion just on factories.

However, new forces prioritize products over production, which can be outsourced. For example, NIO's first mass-produced electric vehicle, the EP9, focused on performance. It first raced on international tracks, gained fame, and then entered the market, with production outsourced to JAC Motor, a third-tier brand.

The second is dealership thinking versus direct sales thinking.

Traditional automakers' main advantage is their dense dealership channels, usually located in suburban 4S stores, which serve as important places for consumers to interact with vehicles. In an era of supply shortages, the more dealerships a company has and the higher the rebates, the higher its sales.

However, new forces reject this approach. They believe that cars should be placed in shopping malls like smartphones, allowing users to experience them before placing orders directly on the official website. This model eliminates dealership rebates while bringing brands closer to users.

Currently, Tesla, NIO, Xpeng, Li Auto, Seres, and other new forces mainly adopt a direct sales model by opening stores in shopping malls. However, WM Motor followed the traditional dealership model, significantly reducing opportunities for products to face consumers directly and increasing intermediate costs (such as store subsidies, channel rebates, etc.).

However, the true harm of traditional automotive thinking to WM Motor lies in the misallocation of company resources – due to spending too much money on building factories and establishing dealership channels, WM Motor's investment in R&D was stretched thin.

As we analyzed earlier, the rise of new forces is mainly due to the superior performance of electric vehicles, not production capacity, and performance relies on R&D.

Thus, it's not difficult to understand why, despite being similarly mired in losses, NIO successfully listed on the Hong Kong Stock Exchange, while WM Motor was rejected. The Hong Kong Stock Exchange's main basis was WM Motor's lagging R&D expenses compared to peers and lack of independent innovation. It's worth mentioning that this was also a significant reason for the STAR Market's rejection of WM Motor's listing.

So, how far behind are WM Motor's R&D expenses compared to its peers?

WM Motor's prospectus shows that from 2019 to 2021, its R&D investments were RMB 893 million, RMB 992 million, and RMB 981 million, respectively, accounting for 50.7%, 37.1%, and 20.7% of revenue during the same period. During the same period, Xpeng Motors' R&D expense ratios were 89.2%, 29.5%, and 19.6%, while NIO's average R&D expense ratio for these three years was 30.6%.

Apart from numerical comparisons, another major weakness of WM Motor is that it entirely entrusted the lifeblood of electric vehicles – intelligent driving technology – to Baidu. According to their investment agreement, WM Motor would not develop autonomous driving and would use Baidu's Apollo autonomous driving system.

For users, this agreement isn't a problem, but for stock exchanges overseeing listings, entrusting core technology to a third party equates to lacking independent innovative technology, resulting in no significant product differentiation, and consequently, not allowing you to list.

Thus, due to the lack of differentiation in business models and core technology support, coupled with the company's accumulated huge losses, operating cash flow, and continuous net outflows of operating funds, WM Motor's IPO suffered repeated setbacks.

Without the support of capital market financing, WM Motor, which continued to bleed, was essentially pushed to the brink.

03

Chain Reaction of Lack of Funds

Some might ask, "If listing for financing doesn't work, can't the company generate revenue on its own?"

This exception is feasible for companies with strong product competitiveness but not for WM Motor.

Due to WM Motor's strategy of emphasizing production and sales over R&D, its electric vehicles severely lack competitiveness.

In 2019, WM Motor sold approximately 17,000 vehicles cumulatively, ranking second in sales among new forces that year. In 2020, WM Motor sold 22,000 vehicles cumulatively, dropping from second place in 2019 to fourth among new forces. By 2021, WM Motor's deliveries reached 44,000 vehicles, only half of NIO, Xpeng, and Li Auto.

Since then, as the company bled excessively, WM Motor's market presence has dwindled.

Throughout WM Motor's history, it has launched a total of five models, including XE5, EX6, W6, E5, and M7. Except for XE5, which leveraged market first-mover advantage to achieve a significant lead, the sales of the remaining models did not rank in the top ten of their respective segments.

Apart from weak R&D leading to inadequate basic performance, the lack of funds due to failure to list in time also brought quality issues to WM Motor's models. For example, multiple spontaneous combustion incidents involving the EX5, black screen malfunctions in multiple WM Motor series, vehicle system failures, and lack of auto repair parts.

In short, this is a chain reaction.

Resource misallocation leads to a lack of funds for R&D, which in turn leads to unremarkable product performance. Unremarkable product performance leads to a lack of economies of scale in production, which prevents self-sustaining revenue generation. The inability to generate revenue leads to a lack of funds to create competitive products…

As such, WM Motor fell into a vicious cycle of "always lacking funds."

The RMB 35 billion raised through financing, coupled with nearly RMB 20 billion borrowed through asset mortgages, eventually went down the drain. These huge sums of money resulted in stagnant production bases, consumer complaints, investor laments, and the uncertain fates of executives like Shen Hui.

In the view of Detective Cat, wealth evaporation can be divided into two types: one is visible consumption, such as the depletion of public resources due to wars and pandemics; the other is invisible loss, mostly due to decision-making mistakes, such as investment losses caused by irrational decisions and wealth loss due to misallocation of entrepreneurial resources.

WM Motor's failure falls into the latter category, which can be described in popular terms as: "A good hand played badly."

While startup failures are inevitable in business history, and failures often breed success, WM Motor's failure brings significant lessons.

04

Conclusion

Don Valentine, the founder of Sequoia Capital, famously said, "Bet on the racecourse, not the racer."

Guided by this principle, Sequoia Capital has indeed hit the jackpot in major sectors such as semiconductors, PC hardware, mobile internet, big data, cloud computing, and AI, earning substantial returns for its LPs.

As a joint stakeholder in WM Motor's failure, investors like Sequoia Capital need to realize that investing in startups means "the racer also matters."

Because human success often has limiting factors, just as Warren Buffett self-deprecatingly said, "If he were born in primitive society, he would likely be among the first to be devoured by wild beasts." But born in modern America, he became a prominent business giant.

Applied to WM Motor's founding team, Shen Hui's past resume, although impressive, primarily positioned him as a professional manager within a large, well-regulated platform rather than a chaotic "0-1" stage startup leader.

Li Xiang, Li Bin, He Xiaopeng, and Lei Jun have all been through this, knowing the taste and the abyss behind it, which might be an important reason why their respective automotive companies are still alive.

Running a business isn't easy, but some pitfalls can be avoided by studying failure cases.