ODM car, can Luxshare Precision surprise attack?

Wen 丨 Pie Finance, Author 丨 Wang Fei Shu, Editor 丨 Pie Gongzi

Luxun Precision and Chery jointly aimed at smart cars on the outlet.

Recently, Luxun Precision announced that the company and Chery Group signed a "Strategic Cooperation Framework Agreement" to jointly form a joint venture company, specializing in the research and development and manufacturing of new energy vehicles. In addition, the company's controlling shareholder, Lixun Co., Ltd., intends to purchase Chery-related equity for 10.054 billion yuan.

However, the goal of Luxshare Precision is not to build cars, but to cooperate with Chery to do vehicle ODM, which said that in the next 12-18 months, ODM will be put into production. As for the main target customers of the joint venture, it is expected to be foreign traditional brand car companies and domestic new SmartEV brands.

From ODM to smart cars, the angle is indeed tricky enough. The capital market also gave positive feedback on this, And Luxshare Precision's stock price rose slightly by 2.07% on February 14, and then soared by 8.28% the next day, which was the first time that Luxun Precision raised its eyebrows in the secondary market after the storm of reducing holdings.

However, can the sudden turn of Luxshare Precision support the imagination of the outside world? In the future, will Lixun Precision and Chery stir up the deep water of smart cars?

01, Luxshare Precision was forced to "change lanes"

Smart electric vehicles are the world's largest structural opportunity after smartphones and mobile Internet, and the scale of the track is even as high as tens of trillions or even larger. Under such a cognition, Internet giants at home and abroad have begun to make cars, not to do smart cars, but to become outliers. However, the respective implementation paths are not the same.

Luxun Precision's car manufacturing naturally has the above market prospect factors, but at the same time, it also has an unspeakable secret that outsiders know. On March 12, 2021, Apple unilaterally terminated its cooperation with OFILM, and until then, Apple has always been OFILM's largest customer. After the termination of the cooperation, OFILM's performance has declined sharply, and the annual loss in 2021 will reach 1.9-2.7 billion, and the cumulative market value has evaporated by more than 30 billion.

However, Luxshare Precision, which has nothing to do with this, has also been implicated, and the stock price has fluctuated. As recently as Feb. 7, the U.S. government added 33 Chinese entities to the Commerce Department's Unverified List, which Luxun was not on, but still fell to a halt during the session.

This actually shows the deep binding of Luxshare Precision and Apple, which has caused concerns from the outside world.

After winning the AirPods oem in 2017, Today, Luxshare Precision has become the largest manufacturer of AirPods. The largest customer (usually considered Apple) accounts for 70% of Luxun's revenue. At present, consumer electronics account for 88% of Luxun's precision business composition, which includes AirPods manufacturing, Apple Watch, Magsafe assembly business, and parts such as iPhone12 motors.

Being able to win so many orders from Apple is largely due to the willingness of Luxshare Precision. In 2011, Luxshare Precision cut into apple supply chain in one fell swoop by acquiring 60% of the equity of Kunshan Liantao Electronics, and then used the wrestling power between Apple and Foxconn to carry out multiple acquisitions around Apple products, which also made Lixun Precision's debt ratio soar by 40%.

In the golden 10 years after 2010, the binding between Luxun Precision and Apple has become deeper and deeper, which makes it enjoy the aura of the fruit chain dragon head at the same time, but also feel more and more threatened. At the end of 2020, Amphenol, one of Apple's core suppliers, filed an application with the US International Trade Commission, accusing Luxshare Precision and its subsidiary Dongguan Luxun Precision and other five companies of infringing their patent rights; in January 2021, the US ITC decided to launch a "337 investigation" against Lixun Precision.

Every time the wind is loud, Lixun Precision has to be afraid of it, and the main reason is that its own technical barriers are not strong enough, and the replaceability is too strong. Luxshare Precision of course knows this, in order to increase the irreplaceability, Luxshare Precision from 2017 began to significantly increase R & D expenses year by year, in 2017 only the first three quarters of 2021, R & D expenses reached 1.542 billion, 2.515 billion, 4.376 billion, 5.745 billion and 4.801 billion, respectively.

However, from the actual situation, this investment has not brought positive feedback to Luxshare Precision. In the third quarter of 2021, Luxun Precision's revenue of 32.9 billion yuan continued to grow, but the net profit attributable to the mother was 1.6 billion yuan, down 25.28% year-on-year and 8.01% month-on-month; the deduction of non-net profit was 1.47 billion yuan, down 21.4% year-on-year, and in recent years, its net profit has inevitably shown a downward trend.

This situation has begun since the first half of 2021, in addition to the automotive business, the gross profit margin of several major business segments of Luxun Precision has declined synchronously, while deducting non-net profit growth of 7.87%, which does not match the revenue growth of more than 30%. That is to say, Luxshare Precision can be regarded as "increasing revenue without increasing profits", and the income has not been effectively converted into profits.

On the other hand, other fruit chain companies with stronger technical barriers have no such concerns.

In the first half of 2021, the gross profit margin of Luxshare Precision Consumer Electronics was only 15.78%, and the overall gross profit margin of Shunyu Optics, which entered the Apple industry chain and was an iPhone 13 lens, reached 24.9%, of which the gross profit margin of optical parts such as mobile phone lenses remained at about 40% all year round, mainly because of higher technical barriers.

Such a fact proves once again that there is no future for simple foundry.

Therefore, this time, Luxshare Precision is determined to bet all its chips on smart cars. According to the financial report, in 2020, Luxshare Precision achieved sales revenue of 92.501 billion yuan and net profit attributable to the parent company of 7.225 billion yuan. The acquisition of Chery's equity has invested about 10 billion yuan in one go, exceeding the net profit attributable to the mother of Luxun Precision in 2020, and the determination is evident.

02, ambition and strength

For Luxshare Precision, is Chery a good partner?

This is a common question from the outside world since the two sides announced cooperation. Obviously, from the perspective of Luxshare Precision, Chery is undoubtedly a relatively high-quality choice among the options, and I believe Chery has the same judgment.

First look at Chery, in 2021, whether it is car sales or sales, Chery has achieved more than 100% growth, the momentum is strong, and the accumulated technical heritage for many years is also widely recognized by the industry. But for now, Chery is still facing some thorny problems, one is overcapacity, and the other is the development model.

It is reported that since last year, Chery has been looking for a partner in the field of technology manufacturing, hoping to seek help in software development and solve the problem of overcapacity. There are many companies on this list, Luxshare Precision is one of the options, and the old rival Foxconn is also among them. In fact, in order to solve the problem of overcapacity, chery has quietly begun to do OEM work in recent years, such as Qilu Automobile, Ruiteng and other newly emerged small brands, are Chery customers, but this obviously can not meet Chery's appetite.

Let's look at another issue – the development model. Founded in 2010, Chery New Energy has only carried out 3 rounds of financing so far, and the most recent financing occurred in January 2019, which means that Chery New Energy is likely to be facing tight financial problems, especially in the era of smart cars, and the investment of tens of billions of yuan is even more stretched.

To make matters worse, as early as 2016, Chery New Energy planned to "backdoor" conch profile listing, but at that time Chery New Energy finally missed the opportunity to land on the capital market due to its failure to obtain new energy vehicle production qualifications, and then in 2019, Chery New Energy also tried to land on the Science and Technology Innovation Board, but finally folded.

To sum up, Chery belongs to the car companies with steady technology and weak market control. Under such a situation, Chery's path to high-end new energy development has undoubtedly been greatly hindered, so finding a partner with money and technology has become Chery's urgent need.

So, the question comes to the side of Luxshare Precision, does Luxshare Precision have the ability to let Chery out of the predicament and win the ticket for itself in the era of smart cars?

According to the introduction of The senior management of Lixun Precision on February 13, Luxun Precision has been immersed in the automotive market for more than ten years, and the main products related to automobiles are connectors/connecting wires, low/high voltage vehicle wiring harnesses, special wiring harnesses, etc., and the main customers include domestic traditional car companies, new car manufacturing forces and some large Tier1 manufacturers (Tier1 is a first-tier supplier, referring to manufacturers that directly supply parts to vehicle companies).

In August 2021, Luxshare Precision said in an institutional survey that the company is leading the industry in automotive power solutions such as high voltage and high current, as well as related automotive wiring harnesses, electronic modules and other products and services. Its customers include Great Wall, Zotye, BMW and Mercedes-Benz and other brand customers.

But another fact can not be ignored, Luxshare Precision's automotive business still accounts for a small proportion of revenue. According to the semi-annual report of 2021, consumer electronics accounted for 83.9% of the main business, with revenue of 40.4 billion yuan, while the proportion of automobile-related enterprises was only 3.68%, and the revenue was 1.774 billion yuan.

That is to say, in more than 10 years of time, Luxshare Precision has only accumulated a very limited scale of automotive business revenue. In this regard, the management of Luxun Precision also believes that the breakthrough is very difficult, and is worried that if it continues the past model, it will miss the development opportunities of new energy auto parts.

Based on this consideration, Luxshare Precision is determined to play its own strengths with Chery to do ODM platform development and vehicle assembly. In terms of business, Chery is good at the vehicle business, the joint venture company will be led by Chery, and Luxshare Precision will coordinate in terms of business and customers. Regarding the main customers of the newly established joint venture company, the ODM business has a relatively clear landing project, and it will be put into production in about 12 to 18 months. The joint venture is expected to focus on the business of foreign traditional brand car companies and the new Smart EV brand business in China.

However, the goal of Luxshare Precision is far more than the ODM business, the company's chairman and general manager Wang Laichun said that the company does not build the whole vehicle, but cooperates with Chery New Energy to develop the ODM (original design and manufacturing) business for others to build a good car, and aims to seize the opportunity window to enter the world's leading Tier1 (first-tier supplier of the depot). In the early stage, when the ODM of the joint venture company formed by Lixun Precision and Chery New Energy was less than one million units, the main function of Luxshare Precision was to help Chery develop the ODM business, and after the future ODM caused the business development, the core components business of Luxun Precision also developed.

Luxshare Precision is indeed a clear idea, at present, the market size of Tier1 is very impressive, almost 70% of the total output value of all car companies, the industry is familiar with the world's four major Tier1 manufacturers - Bosch, Denso, ZF, Magna, the establishment time is more than 50 years, the revenue scale is more than 30 billion US dollars, but there are no Chinese companies in the four major manufacturers.

More importantly, the profitability of Tier1 manufacturers is what Luxshare Precision dreams of, and the latest financial report shows that Bosch's gross profit margin is as high as 38.96%, which is much higher than the level of 15.78% of Luxshare Precision.

03, the road ahead is not smooth

Starting from ODM and finally growing into a core Tier1 vendor, Luxshare Precision's plan looks very promising.

In this regard, CITIC Securities believes that Apple, Huawei, Millet, etc. have entered the game to build cars, even if some of them choose to build their own production lines in the early stage, but considering the economy and rationality of the long-term production line capex investment, it is expected to copy part of the mobile phone industry division of labor model (that is, ODM or OEM production) in the later stage, and reshape the industrial chain pattern.

In fact, after the continuous evolution of the industry, ODM is indeed starting to become a trend. Taking BYD as an example, it was previously an OEM vehicle manufacturer, but with the continuous investment in research and development and the continuous expansion of scale, its cooperation with various automobile brands has gradually tended to the ODM model, and the electrification supply chain business has made BYD a Tier1 in the automotive industry. Luo Zhongliang, chairman of BYD Fodi, also said bluntly in public that in the context of lack of cores and the rapid development of electric vehicles, semiconductor companies are more like Tier1 in the automotive industry.

Therefore, the industry believes that in the future, just like mobile phones, the emergence of the vehicle ODM model has become inevitable, and only ODM design and FOUNDC services are required to meet the requirements of intelligent car manufacturers.

If this trend can be confirmed, then Apple, Xiaomi, OPPO and other mobile phone manufacturers may indeed become potential customers of Luxshare Precision and Chery, after all, Wei Xiaoli and other pioneers or already have mature partners, such as Weilai and Jianghuai, or have built their own factories. Then, the most likely to become the largest customer of Luxshare Precision OEM is still Apple.

Previously, apple has discussed the possibility of cooperation with BMW, Daimler and other car companies since the "Titan Plan" surfaced in 2014, but in the end it failed to make the trip. Apple's latest cooperation partner is Hyundai Group, not long ago, it was reported that Apple has reached a cooperation with Hyundai Motor's Kia brand, Apple will invest 4 trillion won (about $3.6 billion) in it, and will produce an Apple-branded self-driving electric car at Kia's assembly plant in Georgia, USA, with a preliminary plan to produce 100,000 cars per year.

But this cooperation also seems to have encountered huge obstacles, Hyundai executives also said that there is a big disagreement with Apple to cooperate with Apple to build cars, Apple to Hyundai is like foxconn in the original, Hyundai executives said, "Hyundai is not a company that produces cars for others", it is clear that Hyundai is not willing to just become a vassal of Apple.

At a time when traditional car manufacturers have launched their own new energy intelligent car plans, Apple's options seem to be running out, and considering Apple's previous asset-light business model, the FOUNDC model may become Apple's final choice. In this situation, the ODM model of Luxshare Precision and Chery may be tailored for Apple.

However, this brings three other problems to Luxshare Precision.

First of all, continue to anchor Apple, Luxun Precision's fruit chain label will become more and more stable, and while revenue growth, it will continue to face huge cooperation risks. At present, Fruit Chain companies such as Wingtech Technology and Lens Technology have begun to diversify and try to reduce the risk from the United States and Apple, and Luxshare Precision continues to bet on this, and will undoubtedly continue the relationship between knife tricks and fish meat.

Secondly, it is still a question of capacity. Tesla CEO Elon Musk once said bluntly, "Compared to a mobile phone or a smart watch, the car is very complicated, you can't go to a supplier like Foxconn and say, 'Build me a car.'" An automotive observer also said: "Making mobile phones and cars, very different is that the degree of standardization of mobile phones is very high, can be outsourced in assembly lines, and the requirements for equipment research and development are not high, but car manufacturing is the innovation of machine tools, corresponding to the re-development and debugging of machine tools, the main difficulty lies in flexible innovation, timely adjustment of production lines, and even re-research and development of production lines."

This also means that Luxshare Precision and Chery have embarked on a track that needs to constantly spend money. Automotive oem products than mobile phone OEM product verification period is longer, consumer electronics only need 3 months, cars need 1 year to 1 and a half years. Luxun and Chery, whose financial strength and R&D strength are not strong, still need to go through multiple tests to what extent they can run through this model and successfully enter Tier1.

Finally, there is the question of the market outlook. At present, there are dozens of domestic car companies involved in the field of smart cars, including traditional car companies, local state-owned enterprises, new car-making forces, and even mobile phone companies, Internet companies and real estate companies, but like smart phones, it will inevitably enter the industry reshuffle period, and the industry generally believes that this time point will appear after 2025.

The founder of Xiaopeng Automobile believes that the convergence speed of intelligence will accelerate, and the intelligent car market will be more concentrated than the traditional automobile market. In 2025-2035, the top five companies in the smart car market will occupy 70%-80% of the market share. Holding a similar view is also the founder of Meituan, Wang Xing, who predicted in 2020 that the smart automotive industry will only have three new forces in the end, Ideal, Weilai and Xiaopeng Automobile, which are eligible to compete for the next two rounds.

From this point of view, Luxun Precision and Chery, which entered the market a little late, may not actually be able to win many high-value customers, and in this process, the newly established ODM enterprises also have to go through cumbersome procedures and development work such as production line adjustment and technical verification. The final effect is really difficult to predict.

Therefore, ODM to cut into the whole vehicle OEM, Lexon Precision is likely to be a high-yield investment, because it is aimed at the entire intelligent automotive industry, once the situation is opened, Foxconn and TSMC will become a peak that is not difficult to climb. But at the same time, high returns are bound to face high risks, especially if they enter the market a little late, and their own and partner Chery's not very strong financial and technical strength, will make the risk of this attempt increase sharply, not to mention that the inflection point of the smart automotive industry has been looming.

Lixun Precision, which sacrificed its life, may not be able to turn around calmly.