China's Houdini returns

Can Faraday Future deliver after finally going public on the Nasdaq?

Many people have tried to sum up Chinese entrepreneur Jia Yueting over the course of a colourful and tumultuous career that’s seen him bankrupt one firm after another. In 2016, a tech journalist famously called Jia and his electric vehicle (EV) company, Faraday Future, “the Donald Trump of start-ups”.

It wasn’t meant as a compliment (that same year the Washington Post reported that Trump had filed for bankruptcy six times).

At that point, Jia had just unveiled Faraday’s prototype super car, the FF91, at San Francisco’s Consumer Electronics Show. He had lofty ambitions to get a first car on the road in half the time it had taken Telsa.

Bloomberg said it would have been impressed had this been 2008, not 2016. Fast-forward five years, and the car is still not for sale.

But Jia and Trump share more in common than a propensity to rack up debts and bankruptcies. They both have a habit of confounding their sceptics as well.

In 2016, Trump went on to win the US Presidency. And on July 22, Faraday listed on the Nasdaq with a market capitalisation of $4.8 billion.

This remarkable debut came seven months after the California-based company ended 2020 with just $1.1 million of cash in the bank. Faraday managed to survive last year thanks to a $9 million loan from the US government’s Paycheck Protection Programme to help small businesses get through Covid-19.

Still, many in China ask how has such a turn-around been possible? Faraday’s market cap is now higher than Hong Kong-listed auto manufacturers BAIC and Brilliance China.

The answer lies in the fact that the company, now named Faraday Future Intelligent Electric (FFIE), was able to get onto the Nasdaq using a special purpose acquisition company (SPAC). These backdoor listing vehicles are controversial because they enable companies to list on public exchanges without having to go through the full rigours of a publicly marketed IPO first. Instead they just buy an empty shell.

Retail investors, eager to buy into the hot EV sector, can now easily purchase Faraday’s stock. They may well be comforted by the legitimacy they feel that a New York listing confers.

But if they looked up the Faraday’s founder on the company’s website, they’d see that Jia no longer sits on the board. He ceded control to his Chinese creditors in early 2020 after putting Faraday into Chapter 11 bankruptcy.

Jia pushed a button he’d long resisted in order to restructure roughly $3.6 billion in personal debts he’d incurred through the collapse of LeEco, his tech conglomerate. Its creditors, which include Ping An Bank and Guotai Junan Securities, agreed to swap their debt for a Faraday stake. Chinese website Phoenix News says they now own 17.2% and will recoup their capital if Faraday’s market cap hits $17.2 billion.

Another big investor is Evergrande, which is believed to own a 20% stake. As we wrote in WiC459, the property group’s founder Xu Jiayin (or Hui Ka-yan as he’s known in Cantonese) threw Faraday a $2 billion lifeline in 2017.

By this point, Jia was living in the US. He was ostensibly there to make Faraday the first US-based, Chinese-funded EV start-up. The reality was that he was avoiding a debtor’s blacklist in China thanks to LeEco’s troubles.

However, Evergrande’s Xu (no stranger to debt himself: see WiC550) was keen to diversify into EVs and initially decided the best way to do this was by piggybacking on Jia. It ended acrimoniously in the Hong Kong courts after Jia blew through the money and refused to cede any control.

S&P Global Market data shows that Faraday’s previous shareholders, including Evergrande and the LeEco creditors, now own a combined 66% stake. According to Phoenix News, their number also includes Jia’s ex-wife, Gan Wei. She is believed to hold a 7.2% stake.

The two private equity specialists behind the SPAC, which Faraday purchased, own a further 9.4%. The pair – Jordan Vogel and Philip Kassim – gain board seats too.

The final 24.6% is owned by roughly 30 investors, who paid $10 per share to take part in a $775 million equity deal ahead of the shell’s takeover. This investment, along with the $230 million, which Vogal and Kassim brought to the table via the SPAC’s original IPO proceeds (held in a trust since its July 2020 flotation) provide Faraday with another lifeline to get an electric car into mass production.

The company now plans to launch the FF91 in the first quarter of 2022 with a $180,000 price tag. It hopes to follow this with an FF81 mid- to large-size SUV for about $70,0000 in 2023 and an FF71 entry-level SUV for about $50,000 in 2025.

Auto analyst Zhang Xiang tells Jiemian.com that the FF91 won’t be a success because “the price is high, so sales will be low and the company won’t be able to achieve economies of scale.”

This isn’t how CEO, Carsten Breitfeld, sees it. The former BMW exec joined Faraday in late 2019. This week he told Reuters that “our strategy starting from the top as a halo project is not only the right way to define a premium brand, but it puts us in a very safe position to launch at high quality at the beginning.”

The company’s slick website makes much of the car’s zero gravity seats, which are designed to NASA specifications to “enable the ideal distribution of your body’s weight”.

Jia gets a full page of his own where he’s described as the company’s founder, partner, chief product and user ecosystem officer. His bio goes on to describe him as a trailblazer, a world-class strategist and a serial entrepreneur who excels in disruptive products.

The man that Jia has always modelled himself on is not so much Donald Trump as Steve Jobs, even down to wearing the turtleneck jumpers. His bio cites “world renowned equity investors” who claim that FF needs his “great vision” and that Jia is “more like Steve Jobs, a true revolutionary.”

Jia would probably be less keen on comparisons with another maverick auto entrepreneur, John DeLorean, who tried to build a futuristic sports car in Belfast during the 1980’s (a documentary about him titled Myth and Mogul begins on Netflix tonight). The American once said that he thought that: “God stuck me here to be part of the solution to the crisis in Northern Ireland.”

The Western media hasn’t been kind to Jia. But that’s nothing to the pounding he’s received in the Chinese press. Jiemian.com was typical in asking how a laolai (deadbeat) like Jia always seems to get the money he needs in spite of past failures. I36Kr added that his SPAC-driven Nasdaq listing may be the last chance for a man “who walks between dreamers and scammers.”

One thing that Jia won’t be doing is holding a directorship in China anytime soon. This April, the CSRC issued him with a lifelong ban for fraudulently inflating LeEco’s profits.

Will he return to his native land? It’s not clear: he said he would be back within a week of leaving in 2017. The Chinese press says that everyone’s still waiting.

Jia appears more eager to maintain with his homeland now. In his weibo, which has rarely been updated since he left China, Jia recently published two posts: one to flag Faraday’s listing and one to announce a Rmb1 million donation for flood relief in Henan.

What Faraday does want to do is sell cars in China. Can this Sino-US hybrid company pull it off at a time when relations between the two countries are at a multi-decade low?

Meanwhile Faraday’s stock market debut has probably reminded investors more of a crash test than a company in the fast lane – the shares lost 32% in just five days trading.