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ALTe hopes this China investor is the real thing to produce EVs

March 28, 2013

I admire John Thomas. The CEO of ALTe Powertrain Technologies refused to give up in his search for a Chinese investor and it seems he may have found one at last.  Plus, his company is in a sweet spot technology-wise where the China EV market is concerned.  ALTe produces an extended-range hybrid electric powertrain,  the technology  China’s central government is currently promoting to grow the number of EVs in China in the near to medium term.  What could go wrong? Well, this is China so plenty.  But, at least for now ALTe has some momentum and some money.

ALTe CEO John Thomas won't give up on China.  He may have a real partner finally.

On March 20, ALTe announced it was forming a joint venture to produce medium-weight electric buses and light commercial electric vehicles. The partner is Henan Benma Co. Ltd, a state-owned company that produces a variety of vehicles, from three-wheeled agricultural vehicles to medium-weight trucks to low speed electric vehicles.  Henan Benma seems to be owned by the central government.  But, the ownership structure is confusing;  some elements may be owned by the provincial government, Thomas told me.  No surprise there. In any case, Henan Benma likely has good connections, which never hurts in China.

Wait a minute, you may be saying.  Didn’t you write a blog last September about ALTe forming a $200 million joint venture with S. Moody Alavi, a Dubai investor; and an unnamed Chinese private investor? Yep, that would be the case.  I also wrote that the deal with Alavi came about after Thomas had already been stiffed by two other Chinese investors. See my September 9, 2012 blog for full details.

This JV fell through after the Chinese investor lost access to funds.

This JV fell through after the Chinese investor lost access to funds.

Thomas thought the deal with Alavi and the Chinese investor was solid because Alavi was recommended by ALTe investor Simon Ahn, an Atlanta-based attorney and venture capitalist., Ahn had no control over the political situation in China.  After China’s change of leadership in November, the Chinese investor “was no longer in possession of the funds he was previously,” said Thomas.  When the Chinese investor was gone, Alavi also dropped out of the deal.

Fortunately, the EV policy tide in China has turned in ALTe’s favor.  Initially China’s central government was hot about battery-electric vehicles. But it has realized the technology is not mature, and is now keen on the kind of EV technology that ALTe has.

That must have been why Henan Benma, a small player in the original joint venture, stepped in and saved the day.   In fact, ALTe plans a second joint venture with another small player in the original JV.  “Now we have two smaller deals, much more realistic, practical and manageable,” than the original $200 million deal, Thomas told me.  More on that later.  First, the Henan Benma deal.

The JV — which has a Chinese name that I believe includes the Chinese character ti2, meaning rising,  but am not sure because Thomas couldn’t pronounce it very well – will be 65% owned by Henan Benma and 35% owned by ALTe, said Thomas.  Henan Benma’s contribution is cash, and it has already sent some money to ALTe, said Thomas.   Its initial contribution is $50 million, the most a Chinese company can invest in a foreign joint venture without central government approval, he said.

ALTe will contribute a license to use its technology and manpower plus some other things, said Thomas.   “In a sense we found the right-sized strategic partner“in Henan Benma he said,   “They are a strategic partner and investor because they already produce commercial vehicles.”

ALTe hopes the complexity of its software wil protect its intellectual property

ALTe hopes the complexity of its software will protect its intellectual property

Any time a company’s technology is used in China intellectual property protection is a big concern.  ALTe figures the coding in its software is too complex to be copied, which will provide some protection.   It has filed half a dozen patents in China, said Thomas.  Henan Benma has also taken “protective measures so no one can borrow the technology or be inspired by it,” he said diplomatically.

Though the JV has talked about producing 60,000 EVs annually, it will start with 10,000 and see what the market acceptance is, said Thomas.  According to its website, Henan Benma has a 300,000 unit production capacity.  I don’t know how much of that is utilized to produce its other vehicles.

The JV is not in a hurry to reach even 10,000, said Thomas.  That could take as long as three years.  But it might happen sooner, said Thomas.  The JV already has an order for electric buses – the majority of a multi-thousand-unit order, he said.  Thomas wouldn’t tell me who the customer but I’ll be it is a local government-owned company.   Creating business for a company you own part of is always good business.

Joint venture #2

ALTe is also setting up a second joint venture in China, and this is where it might run into the same kind of troubles with Chinese investors it has in the past.  The partner in the second venture is a retired government official in Beijing, said Thomas.  Setting up the second JV will lag the first JV by 30 to 60 days, he said, adding “We can’t say anything more.”

The second JV will manufacture electric powertrains.  Those might be used in the vehicles produced at the first JV.  Thomas doesn’t really want to say anything more until the money for the second JV arrives in ALTe’s bank account, it seems.  “We have learned to announce when the cash is moved, not when the deal is signed,” said Thomas.

For the time being, powertrains for the Henan Benma JV will be sourced from the U.S.  But part of the agreement is to begin locally sourcing as much as possible as soon as possible, said Thomas.  In early April, a team from ALTe will arrive in China to start vetting local suppliers.  ALTe wants to take small companies in China and turn them into qualified suppliers, said Thomas.  Of course, it will use Tier 1 suppliers in China when necessary.  And probably some of the suppliers those Tier 1 companies have already developed.  Thomas admits there is some benefit to not being the first EV powertrain company to set up in China.

The top Asia executive at a multination supplier once told me that even if the technology was mature, Chinese automakers simply lack the experience to produce an electric vehicle. It is too complex, he said.  ALTe figures it can solve that problem by sending the team that created its powertrain to work at the JV.  “That is the beauty of the symphony we conduct,” said Thomas.  “We worked on the software in partition diagrams, getting all the parts to interact.”  ALTe should be able to transplant that knowledge to China, he seems to assume.

Well, there is still a lot of integration that needs to take place.  And I wonder if Henan Benma’s experience with agricultural vehicles has given its workers the skills needed to assemble a functional REEV.   I guess we shall see.

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