Spin-off rather than sale, the China team at self-driving company Tucson is valuing $1 billion for financing

"There is no action that can avoid the current situation."

Wen 丨 Zhang Jiahao

Edited by Cheng Manqi

Tucson, a self-driving heavy-duty truck company that landed on the NASDAQ last April, ushered in the biggest change since the company's founding.

Tucson is a global company with a presence and teams in both China and the United States, with operations primarily in the U.S. with the goal of enabling unmanned logistics on highways. Tucson has an important Chinese shareholder, with a technical team of more than 500 people in China and a team of 1,000 people in the United States, with 80% of the technical personnel. Tucson's U.S.-China R&D system has always been two sets of centaurs and two sets of algorithms, led by two co-founders.

In late February, Tucson announced that two of its largest shareholders, Sun Dream Inc., would step down from Tucson's board after their term ends, Sina would no longer increase its stake in Tucson, and the Chinese team would no longer have access to the U.S. team's self-driving source code and data. Conditionally on these commitments, CFIUS closed a nearly year-long security investigation into Tucson.

Less than ten days later, Tucson issued another announcement: Tucson co-founder Chen Mo will resign as chairman and continue to serve as a director; former CEO Lu Cheng resigned from all positions; Tucson co-founder and former CTO Hou Xiaodi became tucson's new chairman and CEO, and Hou Xiaodi lived in San Diego for many years.

"LatePost" learned that Tucson is planning to spin off the Sino-US business: the Chinese subsidiary plans to introduce new investors at a valuation of $1 billion, so that the US listed entity no longer controls the Chinese subsidiary, the Chinese business does not want to be sold, but plans to operate independently, Tucson co-founder Chen Mo, Tucson co-founder and chief architect Hao Jiannan and Tucson chief scientist Wang Naiyan and other core teams remain unchanged.

Four cases, four filings

"There is no action that can avoid the current situation." Chen Mo told LatePost.

A month before Tucson went public, in March 2021, CFIUS launched an investigation into Tucson, initially about whether Sina's affiliates' investment in Tucson affected U.S. national security. But by Last November, the focus of the investigation had shifted to technical collaboration between the U.S.-China team and the risk of sensitive technologies and data being leaked.

CFIUS did not ask Tucson to spin off or sell its China operations, but it did not want the two teams to have a technical exchange. According to "LatePost", before tucson, the Chinese and American teams used Slack as communication and collaboration software, and now the Chinese team has switched to Feishu, and the Chinese and American teams cannot communicate and work normally and transfer files.

This means that it is difficult for the Chinese team to contribute to the listing entity, but it will bring tens of millions of dollars in costs every year.

Chen Mo said that after recognizing this fact, he took the initiative to propose to spin off the Chinese team, which is the most reasonable way to keep the Chinese business running and protect the interests of listed companies. The proposal was submitted to the Board of Directors in early March.

Tucson's current total market capitalization is less than $3 billion, after major business moves in the United States, where a $1 billion valuation of the Chinese subsidiary is acceptable to shareholders. Compared with similar head companies in China's primary market, The current valuation of Yingche is about 2 billion US dollars, and Zhijia is about 3 billion US dollars, and Tucson China's valuation has a certain gap with these companies. Tucson management believes that in the case of a bad financing environment and a long commercialization cycle of autonomous driving, a lower valuation is conducive to subsequent financing.

Tucson doesn't seem surprised by today's situation. An Investor in Tucson told LatePost that when it conducted its due diligence on Tucson in 2019, Tucson gave a detailed plan to deal with changes in Sino-US relations. From light to heavy, Tucson deduced four scenarios, including:

Have core personnel change their nationality. By the time of the listing, tucson had no Chinese members on its board.

Dismantle the VIE structure (i.e. change the interest entity structure, with an overseas entity agreeing to control the Chinese company and the listed entity being the overseas entity). After September 2020, Tucson changed from the parent company in the Cayman Islands to controlling the two Chinese and American companies, to the structure of the US parent company holding the Chinese subsidiary, and the listed entity is the US company.

In a worse case, consider shutting down, spinning off or moving the Chinese team as a whole. Australian authorities have expressed willingness to provide visa support.

In the most extreme case, Tucson as a whole will turn to the European and Australian markets. Since 2020, Tucson has also had a presence in both areas.

In the past, Tucson spanned China and the United States, two sets of systems, two sets of people and horses used to be its strengths, the two teams in the context of globalization worked closely together, to play their respective advantages: the United States has more cutting-edge technical talent and achievements, China has cheaper, a large number of R & D personnel and flexible, complete supply chain.

However, more and more non-market factors have forced a large number of commercial companies to face the choice of the lesser of two evils. It won't have a simple correct answer.

Self-driving companies with Chinese backgrounds, such as Xiaoma Zhixing, Wenyuan Zhixing, AutoX, Baidu Apollo, and Didi Autonomous Driving, also have R&D teams and test vehicles in the United States.

An investor who invested in the self-driving companies told LatePost that he didn't think the companies would be affected because they weren't doing commercial operations in the U.S.

Another practitioner believes that in the field of autonomous driving, Tucson's experience is an example, because the technological level and depth of business of other companies in the United States have not yet reached the level of investigation.

The U.S. and Chinese businesses are progressing separately

LatePost learned that the current process of introducing new investors by the Tucson China team has just started, and the final investor has not yet been finalized. One Tucson investor said they would consider investing in the spin-off Tucson China company.

A person close to Tucson said that the "motivation" of the top level of Tucson's Chinese team is that "the option that is about to mature cash out has now become a wordless book that does not know when to cash in, of course, everyone's share will also become more."

According to "LatePost", before the Sino-US spin-off officially takes effect, the expired equity of Chinese team members in the main body of the listed company will take effect normally.

A person who works for a tucson competitor said he believes Tucson China's technical capabilities are stronger than similar companies in China, and they have a 500-person technical team.

Tucson's predecessor is Zhitu Technology, which was founded in 2014, and its original business was to use AI technology to do native advertising, and then turned to self-driving heavy trucks in 2016. Chen Mo and Hou Xiaodi are the core personnel of Yuanzhitu.

In 2017, Tucson completed the development of prototype algorithms and the initial road test in China, which helped Tucson attract some important foreign partners, and Tucson's business focus has since shifted to the United States.

A former Tucson employee told LatePost that since then, Tucson's Research and Development System in China and the United States has diverged into two sets of centaurs and two sets of algorithms, and there is no reporting relationship between them. This is related to the scene characteristics of heavy truck automatic driving: the models of heavy trucks in China and the United States are different, the United States is a long-headed truck, China is mostly a flat-headed truck, traffic rules and road conditions are also different, so the algorithm will not be directly applied.

The U.S. team's support for China is to provide solutions to some difficult problems. The Chinese team's support for the U.S. includes providing data annotation at a lower cost while developing some hardware, such as in-car cameras.

But the disadvantage of preparing for the independent Tucson China team is that it has not actively promoted commercial implementation in China in the past.

In China, the only projects that Tucson has made public are the heavy-duty truck autonomous driving test projects in the Shanghai Lingang area, which started in 2018. In addition, the Chinese team mainly provides R&D support for the US team and has done some test projects in Europe such as Sweden, but there was no specific commercialization goal before.

In the future, Tucson China will continue to aim to realize a fully unmanned freight system on the highway, which is the company's long-term vision.

But at the same time, tucson China's team will also provide automakers with L2+ autopilot kits in addition to unmanned heavy trucks, the software part is the automatic driving algorithm, and the hardware part is based on the domain controller developed by NVIDIA Drive Orin chips - it can be understood as a more integrated, vehicle-compliant high-performance in-vehicle calculator. Tucson hopes to use the L2+ business to obtain revenue and even profit faster, so as to feed back the unmanned heavy truck business that lands more slowly in the business.

This will inevitably face many competitors, including Wincher Technology and Zhijia Technology, which also target L4 autonomous driving heavy trucks, and Baidu, Huawei, and Momenta, which can provide L2+ solutions for automakers.

These companies have received investment from important industrial parties, such as JD Logistics, Debon Express, and Momenta, which has also received investment from SAIC, General Motors, Toyota Motor and Bosch Group.

Tucson USA will continue to promote the commercialization of the all-unmanned heavy-duty truck logistics system as originally planned.

Tucson has been commercially operating the L4 logistics fleet since 2018 and received a front-loading production order from U.S. truck manufacturer Navistar in July 2020. The two companies plan to launch a mass-produced L4 autonomous driving heavy truck in 2024, and jointly provide "electronic drivers" for logistics companies such as UPS.

At the end of last year, Tucson completed the world's first heavy-duty truck "Driver Out" (fully unmanned) test, that is, without a driver and safety officer in the car, and without remote intervention in the vehicle and road conditions, let the heavy truck drive on the real highway.

Since then, Tucson's stock price has not risen but fallen, from about $36 at that time to a low of less than $10 in March this year.

Chen Mo believes that this is an important signal: as the United States enters the interest rate hike cycle, investment preferences change, and high-tech companies with no income and huge losses in the short term are no longer optimistic.

Outgoing CEO Lu Chengqiang is strong in financing and external communication: he joined Tucson in December 2018 and has a multi-year background in Wall Street investment banking, leading Tucson's financing and listing operations. Now, Tucson may have to use the $1.3 billion in his hand — Tucson's 2021 annual report shows the company's cash reserves exceed $1.3 billion — to achieve mass production without financing. In this case, Hou Xiaodi, the co-founder who leads the development of Tucson technology and has high management efficiency, is more suitable to be the CEO.

Hou Xiaodi released a letter from all employees after taking over as Tucson Future CEO in March, saying that Tucson had entered the stage of technology commercialization from the stage of technology creation, facing the multiple tasks of research and development, engineering and business cooperation, and that he would comprehensively manage the above matters.