Drew Bernstein
Japan, traditionally seen as a land of large blue-chip companies, ultra-low interest rates, and a slowly declining economy, is now emerging as a promising hub for U.S. initial public offerings (IPOs). This shift is driven by several factors, including geopolitical tensions, increased innovation, and strategic investments by influential figures.
Changing Perceptions
ZEEKR's financial performance is characterized by rapid growth coupled with ongoing losses. In 2023, the company reported a 62% increase in revenues, reaching $7.3 billion. Despite achieving a positive gross margin of 15%, ZEEKR incurred an operating loss of $1.15 billion due to significant investments in research and development (R&D). The prospectus reveals that ZEEKR’s free cash flow was slightly positive for 2023, but the company anticipates a decline in both revenues and gross margin in early 2024, driven by weaker domestic demand and intense price competition in China’s EV market.
NASDAQ Conference in Tokyo
ZEEKR’s parent company, Geely, has a strategic focus on expanding globally. Geely owns majority stakes in several European automotive brands, including Volvo, Polestar, Lotus Cars, and Lynk & Co. This international portfolio, combined with a production facility in South Carolina for Volvo and Polestar vehicles, underscores Geely’s commitment to establishing a global presence. In 2023, Geely sold nearly 1.7 million vehicles, generating $24.8 billion in revenues. ZEEKR plans to enter six European markets in 2024, including Germany, Sweden, and the Netherlands, and aims to expand into 38 additional markets across Southeast Asia and the Middle East.
Geopolitical Tensions and Investment Shifts
The relationship between ZEEKR and Geely is complex, involving various related party transactions. Geely will retain a majority ownership of ZEEKR post-IPO, and CEO Conghui “Andy” An holds multiple leadership roles within the Geely group. ZEEKR relies on Geely-owned factories for manufacturing, operating under “cooperation framework agreements.” This arrangement allows ZEEKR to remain capital-light but also gives Geely substantial influence over ZEEKR’s production capacity and cost structure. Additionally, ZEEKR shares its technology platform with other Geely brands, which could create potential conflicts of interest.
Innovation Surge in Japan
ZEEKR is notable for its advanced technological features and collaborative approach to innovation. The company’s R&D team is based in Sweden, and it leverages autonomous driving technology from Mobileye and AI chips from NVIDIA. In partnership with Waymo, ZEEKR has developed a fully autonomous robotaxi. This global buy-versus-build strategy distinguishes ZEEKR from competitors like Tesla, positioning it as a formidable player in the EV market.
High-profile Investments
ZEEKR’s product range is designed to cater to various market segments. The ZEEKR 001 crossover, priced at $41,000, competes directly with the Tesla Model Y. The luxury ZEEKR 009 van offers a 500-mile range and rapid charging capabilities, appealing to families seeking a high-end EV. The more affordable Zeekr X compact SUV, priced at around $28,000, targets urban consumers. CEO An envisions vehicles evolving into “smart mobility spaces” that offer entertainment, productivity, and dining options while driving is automated.
Domestic IPO Activity
The ZEEKR IPO underscores the competitive landscape of the Chinese EV market, which is more advanced and cutthroat than its counterparts in the United States and Europe. Well-funded Chinese automakers like Geely and BYD are better positioned to withstand industry consolidation. ZEEKR’s sophisticated international strategy suggests that European and Southeast Asian markets will face significant competition from Chinese brands. The U.S. market, while currently not a primary focus for ZEEKR, will eventually experience similar pressures as Chinese EVs become more appealing due to their cost advantages and technological features.
The Demographic Challenge
Japan's looming demographic crisis is another factor driving the need for innovation. The country is expected to face a labor shortage of 11 million people by 2040, with an aging population that already sees 30% of its citizens over the age of 65. To maintain its status as a high-income nation, Japan must invest heavily in robotics and AI to compensate for the shrinking workforce.
Government and Corporate Cooperation
Unlike the Silicon Valley model of the rebellious garage founder, Japan's approach to innovation emphasizes cooperation between startups, the government, and large corporations. The Japanese government's J-Startup initiative aims to create 100 new unicorns and 10,000 startups by 2027. This collaborative approach is fostering a new wave of innovative companies that are eager to go global.
The Path to U.S. Listings
Listing on NASDAQ or the NYSE makes sense for Japanese companies with global products, global competitors, and a need to attract global talent. However, challenges remain. Few local investment banks, accounting firms, and law firms are familiar with the U.S. listing process. Language barriers and a lack of sophisticated understanding of global capital markets also pose obstacles.
Conservative Financial Practices
One advantage Japanese companies have is their conservative and substantive financial practices. Unlike some of their international counterparts, Japanese companies provide more reliable financial data, which can be appealing to global investors.
Conclusion
Japan is positioning itself as a significant player in the U.S. IPO market. The country's innovation surge, coupled with strategic investments and changing perceptions among local venture capitalists, suggests that Japan could become a hotbed for U.S. IPOs. As Japan continues to address its demographic challenges and foster cooperation between startups, the government, and large corporations, it is likely that more Japanese companies will seek the benefits of listing on Wall Street.
In conclusion, the ZEEKR IPO has the potential to reignite enthusiasm for Chinese IPOs and reshape the global automotive market. The success of ZEEKR will be closely watched by investors and industry players alike, as it represents a critical test of China’s strategy to dominate the global EV market.
