Leveraging intelligent technology to reshape the automotive industry's ecosystem is Huawei's greatest ambition, and Intelligent Automotive Solution is the "high-speed train" that leads to this goal. AITO and SERES have already boarded, but who will be the next?

Following AITO, Huawei Intelligent Automotive Solution will welcome its second automotive company shareholder.

On August 25, SERES Group issued multiple announcements, stating that its wholly-owned subsidiary, SERES Automobile, plans to acquire a 10% stake in Shenzhen Intelligent Automotive Solution Technology Co., Ltd. (hereinafter referred to as "IAS") for RMB 11.5 billion in cash, and secure one board seat. The transaction amount and equity stake are consistent with the earlier deal with AITO Technology (Chongqing) Co., Ltd. (hereinafter referred to as "AITO"). The relevant signing ceremonies have been completed, indicating that IAS's valuation has reached RMB 115 billion.

Public records show that IAS was established on January 16, 2024, and was wholly owned by Huawei at that time. Within less than a year, IAS's valuation surpassed RMB 100 billion, attracting two automakers to invest billions for just a 10% stake. To understand the underlying reasons, we must delve into Huawei's spin-off of its Intelligent Automotive BU (Business Unit).

Spinning off the Intelligent Automotive BU for a win-win situation

Last November, news of Huawei spinning off its Intelligent Automotive BU swept the media circles. At that time, Changan Automobile announced that it had signed a Memorandum of Investment Cooperation with Huawei. The memorandum clarified that Huawei intended to integrate the core technologies and resources of its Intelligent Automotive Solution business into a new company. This new company is now known as IAS.

It's worth noting that Huawei's move was not aimed at selling its entire Intelligent Automotive BU but rather at spinning off the intelligent automotive-related business from the parent company to form an independent new company. Huawei would then refrain from engaging in businesses that compete with the target company's scope, while other automakers could participate as investors and shareholders.

The benefits are evident. Firstly, spinning off the Intelligent Automotive BU reduces its dependence on Huawei, allowing for greater flexibility and freedom in business operations. In the past, as part of Huawei's business, the Intelligent Automotive BU relied on Huawei to seek partnerships. This caused hesitation among automakers, as the underlying technologies still belonged to Huawei, leading to concerns about losing autonomy in the long term.

With IAS operating independently, these concerns dissipate as the technologies become an integral part of the partner's company. This approach enables Huawei's automotive business to collaborate with more automakers, driving rapid market expansion in line with Huawei's initial vision of "not building cars but helping automakers build better ones."

It's important to note that Huawei's Intelligent Automotive BU encompasses multiple business segments, including intelligent driving, intelligent connectivity, intelligent cockpit, intelligent in-vehicle lighting, intelligent vehicle control, intelligent electric drive, and intelligent vehicle cloud, among others. These segments also cover component supply (component model) and HUAWEI Inside model (HI model).

The Smart Selection model, on the other hand, falls under both the Intelligent Automotive BU and Consumer Business Group (BG). The Intelligent Automotive BU is primarily responsible for the ToB business of Smart Selection, offering intelligent automotive solutions to enterprise customers. Meanwhile, the Consumer BG focuses on the ToC business, leveraging Huawei's channel advantages to generate profits from automobile sales.

For example, under the HI model, Huawei provides intelligent driving and cockpit solutions tailored to specific vehicle models, such as ARCFOX αS HI and BYD FANGCHENGBIAO BAO 8 equipped with Huawei's ADS and HarmonyOS cockpit. The Smart Selection model builds upon the HI and component models, with Huawei deeply involved in vehicle definition, product design, and channel sales. This includes pre-launch promotions, sales channels, and the integration of as many Huawei Intelligent Automotive BU solutions and components as possible based on vehicle models. For instance, WENJIE M9 features five major solutions, while WENJIE M5 primarily incorporates ADS, HarmonyOS cockpit, and ADS Cloud.

Migration expected to complete within 6 months

Due to the intricate connections between various businesses, the spin-off of the Intelligent Automotive BU through IAS is expected to clarify Huawei's business segments for outsiders. According to reports, the establishment of IAS and the introduction of shareholders were personally overseen by Ren Zhengfei, Chairman of Huawei Technologies Co., Ltd.

According to Changan Automobile's earlier announcement, IAS's board consists of seven members, with board seats determined by shareholders' equity ratios. Huawei has the right to nominate six directors, while AITO has the right to nominate one. Following equity transfers, SERES will also secure a nomination right.

It's crucial to note that although cooperation has commenced, Huawei's Intelligent Automotive BU operations have not fully transitioned to IAS. SERES's Major Asset Purchase Report (Draft) outlines a three-phase payment plan for the RMB 11.5 billion cash acquisition, with payment ratios of 20%, 50%, and 30% per phase. Upon completing the second transfer price payment, corresponding shareholder rights will be granted. IAS will also complete the transfer of Huawei's Intelligent Automotive BU, including assets, personnel, and intellectual property rights, before the final transfer price payment. Specific business scopes and transfer plans will be outlined in the final transaction documents.

However, the market may adopt a cautious stance regarding SERES and AITO's respective investments of RMB 11.5 billion in IAS. Affected by these announcements, SERES's share price has continued to decline, falling from RMB 81.0 per share to RMB 71.36 per share (a decrease of 11.9%) from August 26 to August 28, with a total market value of RMB 107.7 billion. Similarly, Changan Automobile's share price dropped from a high of RMB 12.27 per share to RMB 11.52 per share by August 28, erasing nearly RMB 10 billion in market value.

This phenomenon may be attributed to the companies' recent situations. According to the Equity Transfer Agreement, all parties shall make reasonable efforts to complete the prerequisites within six months from the agreement's signing date. This implies that SERES and AITO will complete their equity transfer payments within six months at the earliest.

The equity transaction is expected to increase SERES's asset-liability ratio from 89.02% to 90.73%, posing certain risks. Meanwhile, AITO is also incurring long-term losses. The RMB 11.5 billion investment represents a significant amount, and there is a possibility that it may not be fully recovered, given the company's current unprofitable status.

Will there be new entrants?

Essentially, automakers' subscription to IAS equity can be seen as a major redistribution of Huawei's automotive intelligence technologies among domestic traditional automakers. Changan Automobile's Investment Cooperation Memorandum from November last year mentioned that "Changan Automobile and its affiliates plan to invest to acquire equity in the target company, with a shareholding ratio not exceeding 40%." This indicates that few automakers will participate in this equity distribution.

To date, AITO and SERES have each invested RMB 10 billion to acquire 10% stakes. The remaining 20% equity ownership has become a focal point for industry insiders. Besides these two companies, other automakers have also expressed interest in or responded to the opportunity to invest in IAS. For instance, in March this year, You Zheng, Deputy General Manager of Dongfeng Motor Corporation, stated in a media interview that they were actively working with FAW Group to participate in Huawei's Intelligent Automotive BU equity.

Moreover, Beijing Automotive Group, Chery Automobile, and JAC Motor, which form the "Four Worlds" alliance with SERES, are potential investors. Yu Chengdong, Executive Director of Huawei and Chairman of the Intelligent Automotive Solution BU, has publicly stated that invitations for equity participation have been extended to these companies. Therefore, further equity releases from Huawei cannot be ruled out.

"We have always believed that China needs to build an electric and intelligent open platform with the participation of the entire automotive industry, led by a 'locomotive.'" In Yu Chengdong's view, IAS encapsulates Huawei's core technologies in the intelligent vehicle business, and Huawei will fully support IAS to maintain its leadership and serve the intelligent transformation of the automotive industry.

Leveraging intelligent technology to reshape the automotive industry's ecosystem is Huawei's greatest ambition, and IAS serves as the "intelligent train" to achieve this goal. However, as more automakers join, balancing technology empowerment and resource sharing among multiple partners, coordinating decision-making mechanisms and benefit distribution within the new company, and addressing the increasingly competitive domestic automotive market are all unknown factors in IAS's open ecosystem. Additionally, a more pressing question is whether automakers that have not yet boarded the "train" have sufficient resources to purchase this not-so-cheap "ticket"?

Note: This article was originally published in the "Hot Topics" section of the September 2024 issue of Automotive Horizons magazine. Please stay tuned.

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