As Tesla's operational performance and Market valuation started skyrocketing in the late 2010s, entrepreneurs all around the world wanted to recreate Elon Musk's success and build the next Tesla In No place was this desire more present than China, which is the world's largest auto market according to Techwire. Asia By 2022, there were over 600 electric vehicle startups in the country. One of the earliest and most well-known these startups was Next EV, which eventually changed its name to Neo to get their name on the map. They created an electric Formula E race car and in 2016 they unveiled their limited edition Ep9 Supercar of which only 16 were built.

Neo quickly gained backing from institutional investors around the world, including the Venture arm of Chinese Tech Giant Tensent, the American Venture Capital Giant Sequoia Capital, and the Singaporean Sovereign Wealth Fund. TASC. In 2018, Shortly after the company began deliveries of its first production vehicle, they ipoed on the New York Stock Exchange raising $1 billion at a $6.4 billion valuation during the Pandemic stock Market bubble. Neo became a favorite among retail investors with influencers making entire YouTube channels dedicated solely to bullish videos about Neo stock.

In early 2021, Neo stock market valuation surged to a peak of $100 billion as investors bought into the vision that this was a Tesla of China. That same year, they delivered 91,000 Vehicles generated $5.7 billion of Revenue and posted an operating loss of $700 million. However, in 2023, it appears that the business is imploding. based on the first half run rate, Neo's deliveries are on track to decline by 11% compared to 2022.

Revenue is on track to decline by 31% and its operating losses on track to Surge to over $3 billion. While Neo has gained critical Acclaim for the performance and quality of their cars, they are currently losing $35,000 for each car they sell. Its Home Market of China is now being flooded by millions of electric vehicles made by established automakers as well as hundreds of EV startups. With all of these headwinds, the stock price has fallen almost 90% since its all-time high just 2 years ago.

In this video, we'll look at the meteoric rise and fall of Neo and whether it still has a chance to become the Tesla of China Next. EV which eventually changed its name to Neo was founded by the Chinese entrepreneur William Lee In 2014, Lee made his name in the technology World by founding Bit Auto.com a price compared website for automobiles. You can think of it like the auto trader of China Lee had zero expertise in manufacturing, but with his Bit Auto business, he gained a deep understanding of consumer preferences for automobiles from a design and marketing perspective. In 2013, he sold Bit Auto.com and invested the sale proceeds in his own electric vehicle.

Venture Next EV Now Neo The idea was for Neo to design and Market its cars, but it wouldn't build them itself. They outsourced the manufacturing to Jaac Motors a large and established automaker. In China By Outsourcing manufacturing, Neo would save billions of dollars of capital expenditures that it could instead use in research, development and marketing. It would also save them from the production held that many EV makers find themselves in as they attempt to ramp up production.

Neo Plan to follow a similar strategy as Tesla. Starting off with high priced luxury cars and eventually moving down to mass market price points, they released the Es8, their first production car in 2018. In China with a starting price equivalent to about 6 $50,000 It's always difficult for a startup to break into the luxury car market because they're competing against brands with Decades of Legacy. So Lee thought of three key ways to differentiate Neo's offering and drum up demand.

Firstly, they would create a battery swapping Network to help people overcome range anxiety. Secondly, they would put tons of new technology into the car. And finally, they would turn Neo into an aspirational Lifestyle brand. One of the biggest pain points of electric vehicles is their limited range.

If you want to take a long road trip, you would have to stop somewhere to charge your battery, which can take hours to solve this problem. Neo Created a network of battery swap stations. A Neo driver can drive their car into the station. An automated mechanical device will dislodge the battery from the bottom of the car and replace it with a fully charged battery.

Each station can hold 13 batteries at a time and it recharges them in the meantime. Currently, Neo has almost 2,000 battery swapping stations in China as well as 27 in Europe. Up until 2021, Neo Owners could receive Unlimited battery swaps for free up until 2023. All Neo models also came with a free fast charging dock to be installed in the customer's home.

There was no extra charge for this. it was included in the purchase price of the car. When you consider these two perks, the $60,000 starting price begins to look a lot more reasonable. The second differentiator with Neo is their emphasis on technology.

William Lee was an Interet entrepreneur before he founded Neo and he wanted Neo to make the most technologically advanced cars on the market. They've invested it significantly in proprietary autonomous driving technology. They already have Advanced Driver assist features including adaptive cruise control, automatic Lane changing, and parking. It's similar to Tesla's Autopilot, but there's still a long way away from Level Five Autonomy, which would allow a car to drive safely without a human driver.

Additionally, they created an AI powered assistant called Nomi which provides the driver with navigation, assistence, climate control, music, and other features via voice command. It's similar to Amazon's Alexa device, but it is integrated into the functionality of the car. They also have a Neo app which allows you to control some features such as climate control remotely. The final piece of the strategy is turning Neo into an aspirational Lifestyle brand.

Neo owns and operates its own dealerships which they call Neo Houses. In addition to having cars on display, Neo Houses include coffee shops, gift shops with neo- branded merchandise, children's play areas, and conference rooms where they host various events. The Neo Houses have been a huge success in cementing Neo as a luxury true Lifestyle brand. They have 125 Neo houses mostly in China and a few in Europe each.

Neo house has a different selection of merch that is exclusive to that one Neo House Some Neo customers have become so obsessed with the brand that they travel around to the various Neo houses just to collect the exclusive merch. In September of 2018 Neo Ipoed on the New York Stock Exchange Raising $1 billion. they spent this money to build out their network of battery swapping stations and Neo houses as well as working on new designs. By 2021, it became clear that their strategy was gaining traction.

Neo had successfully established itself as a luxury brand and high income consumers in China couldn't get enough! When they launched their first model in 2018, they sold 11,000 cars. in 2019, they sold 20,000 In 2020, they sold 44,000 In 2021, they sold 91,000 and in 2022, they sold 122,000 To go from nothing to selling over 100,000 cars is an impressive feat no matter matter how you look at it. In 2022, they expanded internationally, first starting to sell cars in Europe. They also plan to eventually launch in the US, but for now, the vast majority of their sales still come from the domestic Chinese market.

This is about when the hyp peaked: Neo reached a valuation of $100 billion worth more than Ford GM Or damler investors saw the meteoric growth of Neo's deliveries as the world switches to electric vehicles, it was thought that Neo would be the key beneficiary. While Neo's growth between 2018 and 2022 was surely impressive, one thing we have to note is that the company has never been profitable in its 5 years as a publicly traded company. It has burned roughly $8 billion of operating losses. Neo has always relied on the debt and Equity markets to fund its cash.

bur. In 2020, as the Pandemic halted production, the municipal government of Hu China bailed out Neo with a $1.4 billion investment for a 25% stake in the company. This allowed the company to narrowly avoid bankruptcy. To be fair, almost all automakers struggle during the pandemic in 2021.

With the pandemic largely over. Neo generated 5.7 billion of Revenue $1 billion of gross profit, and their operating loss narrowed to $700 million. It looked like things were headed on the right track In 2022, Revenue grew to a record $7.1 billion. but despite the growth in Revenue, gross profit actually decreased to $750 million.

The operating loss expanded to $2.3 billion. 2023 is where things really imploded. Based on the Run rate from the first half of the Year revenue is on track to Fall by more than 30% Compared to 2022, the gross profit is on track to be negligible and the operating loss is on track to explode to over $3 billion. In light of these disastrous Financial results, Neo's share price has been crushed like a sulle under a sledgehammer, losing almost 90% of its value over the past 2 and 1/2 years.

So what happened? It looked like Neo was doing everything right. They developed highquality, good-look cars with Advanced Technologies and by all accounts, consumers in both China and Europe love the luxurious and exclusive atmosphere of the Neo houses. Why, despite all of this, has the company's financial performance imploded so disastrously. One reason why Neo is losing so much money is their battery swapping.

One of the key drivers in the early growth of Neo was that if you bought a Neo car, you could also get unlimited battery swaps free of charge. This was a great deal for Neo's customers, but also a huge EXP ense for the company. Neo has two distinct Revenue segments: vehicle sales and other sales. Other sales consist of the battery swapping, the sale of regulatory credits, and a few miscellaneous things.

China has an incentive program whereby all automakers are required to sell a certain percentage of their Total Car Sales as electric. Otherwise, they have to pay a fine. EV Only companies like Neo are well above the required percentage, they can sell the excess as credits to traditional automakers who don't sell enough. EVS These regulatory credit sales have 100% profit margins.

Despite this, the gross profit of the other segment is almost always negative. This is because it includes the battery swapping, which incurs massive costs while generating almost no Revenue because the battery swap services are given to Neo customers for free. They need to make up for this by selling the cars themselves for a very high price. That's why their first car, the Es8, was priced at $60,000 which is very expensive for the Chinese market.

In recent years, the number of electric vehicle startups in China has exploded, with dozens of companies offering high performance and technologically advanced. EVS for a fraction of the price of Neo. As one example, Xun's cheapest EV model, the P5 starts at the equivalent of just $20,000 Almost all of these startups are losing money, and it's an open question whether this level of pricing is sustainable, but either way, this is what Neo has to compete against. Even the Tesla Model 3 is far cheaper than Neo's cars starting at just $35,000 in China.

In light of the increasing competition, Neo had no choice but to release new car models at much cheaper prices. In 2021, they launched their cheapest model to date, the Et5, which starts at around $42,000 In Neo's first year, they generated $63,000 per vehicle sold As they rolled out their lower priced models, Revenue per car decreased to just $49,000 Introducing low priced cars did help them increase vehicle deliveries, but this was at the cost of their average selling price in Gross margins. There's nothing inherently unprofitable about selling low priced cars. In fact, Tesla only became profitable after they achieved Mass Market production of their Model 3, which sells for a far lower price than their previous model's s and X Neo was trying to follow the same Playbook as Tesla starting off with a premium luxury car and eventually moving down to lower price points.

So why didn't this strategy work for them? Tesla's accomplishments were no easy feat and are not easy to replicate. Tesla's success hinged on vertical integration, bringing most of its value chain inhouse, a move that was both risky and complex. The company faced potential bankruptcy in 2018 due to manufacturing delays, a period that Elon Mus described as production hell. This buold strategy ultimately paid off Tesla streamlined its production, constantly, refining processes to reduce cost and enhance efficiency, significantly lowering the production cost of the Model 3.

This eventually allowed them to achieve profitability. When founding Neo William Lee knew that he had neither the expertise nor the capital to build out his own manufacturing capabilities, so he took a shortcut by Outsourcing the manufacturing to Jaac. This did allow Neo to grow very quickly in the beginning, but it put them at a permanent cost disadvantage with no direct control over manufacturing. Neo has limited ability to drive efficiency improvements.

Also, Jaac itself needs to make a profit, so they sell the finished cars at a markup over their own cost. This means that Neo will probably never be able to make cars as cheaply as Tesla. The only way that Neo could hope to make a sustainable business model was to build a strong enough brand such that they can sell luxury cars for very high price points. But with intensifying competition in the Chinese EV Market, this strategy was not viable.

The only way to survive is to mass-produce cars at a cheap price. This is something that Neo simply isn't structured to do. The Chinese EV Market is extremely competitive and will likely remain so for the foreseeable future. With Neo's revenue and gross margins imploding in 2023, their cash burn is accelerating.

With their lack of manufacturing competitiveness, it's frankly hard to imagine how they can possibly turn things around. All right guys, that wraps it up for this video. What do you think about Neo Let us know in the comments section below. as always, thank you so much for watching and we'll see you in the next one.

Wall Street Millennial Signing out.