Can this billionaire drive Lotus better than Richard Gere?

When Richard Gere starred in the movie Pretty Woman in 1990, his character inexpertly careened around Hollywood in a silver Lotus Esprit because, legend has it, Ferrari and Porsche balked at being associated with such a racy script.

The buyout boss Gere depicted, Edward Lewis, has something in common with Lotus’ present day co-owner, China’s Li Shufu: both have an eye for hidden value.

Having paid £50m (roughly R1.1bn) to acquire 50% of Lotus in 2017, his Zhejiang Geely Holding Group is preparing to list an electric car company bearing the Lotus name on Nasdaq for a cool $5.4bn (roughly R95.4bn). But reinvigorating a storied western car brand is one thing; delivering the cash flows and cost synergies to sustain the holding company’s 165 billion yuan (roughly R423.8bn) debt is quite another.  

Pretty Woman’s release marked the apogee for Lotus, which celebrates its 75th anniversary this year. James Bond, the spy who loved his submersible Lotus Esprit, reverted to Aston Martin; Lotus’s success on the Formula 1 racing track faded; and lightweight, low-slung roadsters like the Elise, while offering superb handling, didn’t chime with consumers’ growing taste for comfort. Today, Lotus sells around 1,600 vehicles a year, mostly to enthusiasts.

Lotus Technology — the business being listed via special purpose acquisition company L Catterton Asia Acquisition Corp. — is a very different beast. Though it’s the global distributor for Lotus sports cars, including the impressive $2.2m (roughly R38.8m) Evija, Lotus Tech’s headquarters are in Wuhan, China, and its core product is a luxury electric sports utility vehicle. Costing around $100,000 (roughly R1.77m), the Eletre targets wealthy Chinese, European and US consumers, most of whom might never have considered a Lotus before. A luxury electric sedan is set to join the line-up next year. (Lotus UK’s revamped Norfolk sports car factory isn’t part of the transaction).

Thanks to regulatory loopholes, SPACs often publish very bullish financial projections, unlike in a regular IPO, and this transaction is no exception. Lotus Tech predicts annual sales will reach 76,000 vehicles by 2025 while revenues will expand 90% a year to reach almost $9bn (roughly R158.9bn) in the same time period  — from very little today (Lotus Tech has not yet disclosed 2022 financials). That’s quite a stretch. 

It’s a classic Li manoeuvre: Geely acquired the unloved Volvo car brand from Ford in 2010 for $1.8bn (roughly R31.8bn), polished it up, and then listed it in Stockholm in 2021. A SPAC listing of Volvo’s electric affiliate Polestar followed last year in New York. Volvo and Polestar are now worth a combined $29bn (R512bn), and Li’s fortune has swelled to more than $16bn (R282.3bn). Geely’s sprawling car empire sold 2.3 million vehicles last year, with Volvo accounting for about a quarter of the total.  

The shift to electric provides new entrants with an opportunity to prise consumers away from more established brands — Porsche has been slow to offer electric versions of its popular Macan and Cayenne SUVs due to software problems, for example. Repurposing the Lotus badge should help win over Western customers who may be nervous about buying a Chinese-made car, though such quality concerns are generally no longer merited. Investors also remain willing to apply nosebleed valuations to still unprofitable luxury electric brands — Lucid Group is worth more than $20bn (R352.9bn) despite producing just 7,000 cars last year.

L Catterton, which controls the SPAC involved in the transaction, also knows a thing or two about building brand luxury brands: the private equity firm is backed by LVMH Moet Hennessy Louis Vuitton SE billionaire Bernard Arnault, the world’s richest person.    

So far, though, Lotus Tech has booked only around 5,000 Eletre pre-orders, and deliveries are only scheduled to commence this quarter, so it’s hard for potential investors to gauge whether the brand and technology are sufficiently appealing.

After expenses, the transaction will initially provide only $335m (roughly R5.9bn) of fresh capital, and the total could be less if the SPAC investors exercise their right to ask for their money back. That’s pretty modest by motor industry standards; Volvo’s IPO raised around $2.6bn (about R45.9bn). 

So scepticism is warranted — but Li has achieved such breakneck growth before. Zeekr, another of his luxury car brands, shipped a staggering 72,000 units in 2022, its first full-year of sales. Zeekr filed confidentially for a US IPO in December. And having started deliveries in 2020, Polestar’s vehicle sales jumped 80% to more than 50,000 last year, besting US electric brands including Rivian and Lucid, which have encountered production difficulties.   

Unfortunately, his automotive empire has yet to prove it can turn top-line growth into bumper profits. S&P Global Ratings downgraded its outlook on Zhejiang Geely to negative in November to reflect rising battery costs and increasing sales of lower margin EVs. The holding is rated just once notch above junk, reflecting “considerable leverage pressure”. 

Volvo Car’s adjusted operating profit margin declined to just 4.4% in the third quarter due to a mixture of input cost inflation, intensifying competition and inferior pricing power; to put that in context, Mercedes-Benz’s car unit achieved a 14.5% margin. Meanwhile, Polestar continues to burn heaps of cash despite having a supposedly asset-light business model, similar to that claimed for Lotus. (A Geely factory in Wuhan will manufacture Lotus Tech vehicles, while Volvo builds cars on Polestar’s behalf.)

Lotus Tech hasn’t disclosed how rapidly it’s consuming cash, but doesn’t expect to report positive earnings before interest, tax, depreciation and amortisation until 2025. Hence there’s a lot of hope embedded into the mooted $5.4bn (roughly R95.3bn) valuation. To sustain it, Li will need to prove he’s a more careful Lotus driver than Gere was.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.

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