Niu Went Public Four Years After Founding. What Does a New Manufacturing Company Go Through?

The internet and capital got it started. In the end it came back to competing offline and living with regulation.

A young couple made their way 30 kilometers to Kaiyuanzhong Road, a street of electric-scooter shops in Zengcheng, Guangzhou.

Zengcheng is more than 70 kilometers from downtown Guangzhou, and motorcycles aren't restricted there. Eighteen stores from different brands are packed along that not-very-long road — Yadea, Feiken, Wuyang, TAILG, Xiaodao, every name you see on the market. The couple didn't stop at any of them. They went straight to Niu.

The young man said he had already ridden a friend's Niu. He took an M-series model around the block twice, said "it rides steady," and ordered one on the spot. He had planned to ride it home to Dongguan, but the store didn't have the color he wanted. That night the owner drove it over in a van.

This, on October 29, was close to Niu's ideal sale: word of mouth, a test ride offline, delivery to a distant address.

Ten days earlier, its maker, Niu Technologies, had gone public on Nasdaq. Counting from June 2015, when it sold its first electric scooter, the company had lost money for three straight years. Setting aside the effect of equity incentives, it lost 46 million yuan in the first half of this year, 6 million more than in the same period of 2017.

For a manufacturing company, that is already no small thing. Even with a flood of venture money, the internet's help, and the big idea of consumption upgrading behind them, only four hardware makers have gone public in the past few years: Xiaomi, Huami, Viomi and Niu Technologies. Apart from Niu, that list is Xiaomi itself plus the so-called ecosystem companies that live off its traffic, its brand and its supply chain.

Niu had plenty of company at the start. Baidu's smart bicycle, 700Bike, Yunma's smart folding bike, LeEco and a dozen-odd other companies making mobility devices were all founded around the same time and rode the same trends. Niu is the only one still standing, and it is set to raise US$150 million (about 1.04 billion yuan) on the US stock market, with a real chance of becoming a big company.

Four years from founding to IPO: what does a manufacturing company have to get through?

The Xiaomi Model, the Investment Boom and the Spread of Lithium Batteries — the Openings Manufacturing Caught a Few Years Ago

Niu began as a personal hobby of the designer Hu Yilin. In 2009 he modified a Honda Zoomer electric scooter — 8,000 yuan to swap the lead-acid battery for a lithium one, redesign the body and add GPS tracking against theft — building himself a scooter that performed better. That was Niu's early prototype. With no professional supply-chain team and no contract manufacturer, and with the parts he needed ordered in quantities far too small, the modified scooter, which drew a little press coverage, never went into mass production.

But in 2014, when Hu Yilin took the improved scooter project to Beijing looking for money, investors saw another Xiaomi-style internet story in the electric two-wheeler market.

2014 was Xiaomi's fourth year in business, and it had already passed Huawei, Lenovo and LG to become the world's third-largest smartphone maker after Samsung and Apple — though it wouldn't hold the spot long. So much so that when Apple took back the lead in China sales, CEO Tim Cook made a point of naming this rival.

Xiaomi's speed came entirely from using the internet to remake the whole phone business: the internet reshaped the traditional supply chain, and it also handed the company its marketing tools. Xiaomi collected user feedback on forums and improved and updated its phone software every week; it put the whole company on Weibo to avoid paying for ads; it adjusted order volumes as online pre-order demand shifted; and it shipped from its online store, with no physical shops and no dealer commissions.

2014 was also the start of a rapid expansion in China's investment market. That year the amount invested by Chinese equity funds — early-stage investment, venture capital (VC) and private equity (PE) — grew 132% year over year, and the number of funded projects doubled. Then came the "mass entrepreneurship and innovation" push, and still more money went to startups.

Investors who had raised that money were all looking for a way to repeat the Xiaomi model, and electric scooters looked at the time like they might be the next "Xiaomi internet story."

The electric two-wheeler market hadn't changed in a long time. On one ranking of the top ten electric two-wheeler brands, names like Yadea, Aima, Lvyuan and Sunra had already been around for more than 20 years. Between them, those ten brands held more than half the electric scooter market. The scooters they sold mostly ran on lead-acid batteries, looked alike, performed alike and were relatively cheap; the public's sense that an electric scooter costs 2,000 yuan came from their prices. Disclosures from the listed Yadea and Sunra, and from Aima, which is about to list, show that from 2016 through the first half of 2018 their average price per scooter stayed between 1,800 and 2,300 yuan.

Lead-acid batteries became the choice for most scooters on the market because they cost little, but they are bulky and heavy, which constrained the design of the body and left no room for looks.

Breakthroughs in some battery materials brought down the unit cost of power batteries, and two companies that appear to have nothing to do with each other, Tesla and Niu, both rode falling raw-material prices to offer the best-performing product at a given price, or the cheapest product at a given level of performance. Bloomberg New Energy Finance data show that lithium-ion batteries still cost as much as US$1,000 per kilowatt-hour (6,928.2 yuan per kilowatt) in 2010, then fell 38.9% a year for the next six years.

Against that background, Niu Electric took an angel round from Meihua Capital and MSA Capital. According to 36Kr, Wu Shichun and Huang Mingming, who founded the two firms, sold the vision of "the Xiaomi of electric scooters" and talked former Huawei vice president Li Yinan into joining the Niu Electric project.

On June 1, 2015, Niu launched its first product, the N1. Up close the body looked more finished, without the assembly seams you see on ordinary electric two-wheelers. For the motor and the battery, the core parts, Niu worked with Bosch and Panasonic respectively, which lifted range and top speed while cutting the vehicle's weight. A hydraulic disc brake on the front wheel, the kind common on motorcycles, replaced the drum brake, the disc drilled with small holes for cooling. An FOC motor controller softened the sudden lurch electric scooters usually give when you twist the throttle. The second model, the M2, arrived the following year, kept the N1's shape and features, and cut the weight from 85 kilograms to 57.

At the N1 launch, Li Yinan said Niu's scooters would sell mainly through online channels, delivered whole to the customer's door, ready to ride out of the box. Beyond sales, Niu also began building fan groups and holding get-togethers, all copied from a Xiaomi that was then talking about the "fan economy" and a "sense of participation." Even the N1's cheap version was called the "Youth Edition," another marketing fashion Xiaomi had started at the time with a movie tie-in.

The crisis came fast. On June 3, Li Yinan, who held more than 40% of the company, was arrested on suspicion of insider trading. He went on trial three months into the following year and was sentenced to two and a half years. Both dates hurt Niu badly: the arrest came three days after its first product launched, the sentence two months before the new M1 went on sale.

Li Yan, who took over the company and formally became CEO in 2018, told QDaily that people inside knew about the investigation into Li Yinan in advance, but the core team was still there and morale held.

Capital kept coming, too. Meihua Capital, an early investor, brought in its sister firm Phoenix Xiangrui, which put US$30 million into Niu eight days after the sentencing.

The Internet Story Never Worked for Most Manufacturing Businesses, and Electric Scooters Were No Exception

In April 2016, when the M1 launched, Li Yan, then still COO, told Tencent Tech that the N1 had sold 50,000 units in five months and that at that pace, with the new model added, he was confident of selling 400,000 that year. In the end they sold 84,900 — 21% of his target. As of the first half of this year, Niu had sold 431,500 electric scooters in total.

This was not a capacity problem. According to reports at the time, Niu's own factory had a daily capacity of 600-800 units (up to 292,000 a year), later raised to 3,000 a day (1.08 million a year). In a recent interview with QDaily, Li Yan put the factory's annual capacity at 380,000 units. Whichever figure you take, it was well above sales.

Unlike phones, electric scooters leave the internet little to reinvent, and the Xiaomi model was hard to copy onto them. For one thing, there isn't much on a scooter to make smart — even now, all Niu offers is connectivity, location tracking and data, none of which matters much to riders. Safety, reliability and range are what a scooter is for, and the hardware iteration that keeps those improving moves nowhere near as fast as a phone's software updates.

For another, buying an electric scooter is far more complicated than buying a phone. Safety and trust mean people rarely take a chance on a brand they have never heard of. Competitors, meanwhile, had signed Hu Ge, Lee Min-ho, Andy Lau and Jackie Chan as spokesmen. When it comes time to buy, riders usually want a test ride, which means finding a physical store. Order online instead and shipping on Niu's own store currently starts at 200 yuan per scooter. A scooter also needs repair points nearby; the absence of one is itself a worry.

As Li Yan put it in the interview, "If we can't do it well, then we go offline and do service properly." In October 2016, Niu opened its first authorized experience store in Beijing's Sanlitun, repairs included, and more repair points and franchise stores followed. A business that had set out to learn direct selling ended up back offline, competing with the traditional electric-scooter companies.

Back to Fighting for Traditional Offline Channels

"Set brands and product performance aside for a moment; offline sales channels are definitely where the competition will be. Yadea has more than 9,000 stores nationwide. Assume three staff per store and the whole sales system is 27,000 people, selling several million units a year. Niu has just over 500 stores, and including factory workers only 800 people (selling just over a hundred thousand units a year). We need to open more stores," Li Yan told QDaily.

Niu doesn't open offline stores itself; "city partners" do it. They open and run Niu's franchise stores, selling the scooters and handling after-sales. In 2016 Niu started its "City Partner Program," which runs through provincial agents, city agents and franchisees, and which produced Niu's authorized franchise and experience stores.

Agents oversee the franchisees under them, helping with site selection, fit-out and hiring early on, introducing Niu's product line, drawing up sales plans, setting up user groups and running regular offline events. Niu has a team of more than 130 people to service this "system," walking first-tier agents through the whole process. Overseas markets work the same way, organized by country, with each country's agent overseeing Niu's sales there.

Materials obtained by QDaily show that for a franchisee running an authorized Niu store in China, and going by current average sales, the recommended store size is 80-120 square meters — a shop two storefronts wide — with franchise fees of 30,000-50,000 yuan depending on the local market, covering standardized fit-out materials, advice on where to open, and training on Niu's products and sales system.

Calculated from figures in the prospectus, Niu's average cost per scooter in 2018 was 3,817 yuan. Even if Niu sold to dealers at cost, and assuming 400 scooters a year, the franchise fee, initial fit-out and business license, plus running costs like rent, utilities and wages, put the money needed to open a store at around 1.5 million yuan.

To get dealers to open more stores, Niu, like the traditional brands, hands most of the gross margin to them. The profit on each scooter sold runs 10-15%, roughly matching the 14.3% gross margin Niu itself reported for the first half of 2018.

QDaily spoke with nearly 20 dealers in person and by phone. The price sheets agents receive can differ from one another. Some shops sell Niu alongside Yadea, Aima and other brands. They generally said Niu sells fewer units at a higher profit, while other brands earn less per unit but move far more. Niu Electric used to require franchisees to have some experience selling scooters and running distribution; this year it dropped that condition.

By this route Niu's stores grew from 19 in 2016 to 571 by the first half of 2018, while overseas 18 agents handled sales across 23 cities. The model looks like the one Yadea, Aima and other old brands have run for decades. Having gone in a circle, Niu ended up back inside the traditional market's competition.

Not selling direct also makes capacity harder to judge. Dealers say Niu currently asks them each February for a sales forecast for the following year. Such forecasts are never exact.

Where Niu does differ from the old brands is that it works on the people who buy its scooters. Its app now has more than 457,000 registered users, and there are NIU fan clubs in more than 50 cities. Many franchisees said they hold offline events regularly — mostly owners getting together to talk about features and improvements — all of which Niu encourages. Sometimes dealers try their own version of "big data" targeting: hot-pot restaurants, tutoring centers and the like give a discount to anyone who turns up with a Niu key.

Niu's rivals Yadea and Aima have in recent years launched products close in function to Niu's N and M series — the Yadea Z3 and the Aima U1S, which also use Bosch motors and lithium batteries. In theory two companies shipping at least ten times as many units a year as Niu should have more bargaining power with suppliers and lower costs from scale. But to protect their margins, the two models list at 8,688 yuan and 6,499 yuan.

Big companies are not against building better scooters; they just doubt it is worth doing now. As manufacturing costs come down, Yadea and Aima will cut their prices too. And in a market like this, a new challenger needs to take share faster.

This September Niu announced a second factory, again in Changzhou. The 170-mu site (about 28 acres) will be built in two phases; the first will bring annual capacity to 700,000 units, and the second will take it to 1.7 million. Niu's current 380,000 units a year already exceed what it can sell. Whatever the new factory's real output turns out to be, it is being built for growth that hasn't arrived yet.

Policy Is Hard to Pin Down, Too

Besides its competitors, changes in how electric vehicles are regulated also shape Niu. A new national standard issued in May 2018 defines an electric bicycle as one weighing no more than 55 kilograms in total, limited to 25 kilometers per hour, and fitted with pedals so the rider can switch between electric and pedal power. From next April, riding anything beyond that standard — faster than 25 kilometers per hour or heavier than 55 kilograms — counts as riding a light electric motorcycle: the vehicle has to be registered and the rider has to hold a two-wheeled motor vehicle license.

Before the new standard, in 2017, Niu launched the U1. It was a product that gave ground to both the market and the rules. It looked plainly different from the first two models: the steel frame left exposed, far less painted bodywork, pedals added. The steel wheel swingarm wasn't as supple as aluminum alloy, so going over a speed bump felt harder on the way up and rougher on the way down. The battery was smaller, with real-world range around 50 kilometers. It performed worse, but the price also came back down to the 3,000-yuan tier, and it met Shanghai's registration rules for electric scooters.

To meet the new standard, Niu launched the UM in 2018: the U1's design and performance carried over, with the weight cut again, to 39 kilograms, to satisfy the registration rules in Shenzhen and Guangzhou.

In the live ride data on Niu's website, Beijing is almost always first, close to the third- and fourth-place cities combined. Shanghai is second. If its products don't meet the rules in those cities, Niu stands to lose its main markets.

On November 1 someone posted on Niu's official forum that they had received Beijing's first temporary license plate for a Niu N1, a popular model that had been unable to register in the city because of its speed. In the replies, some asked whether they could still register a scooter whose speed they had raised above 25 kilometers per hour; some thought it better to wait for the new rules next April; others wondered what happens when the three-year registration under those rules runs out.

Niu raised roughly 1 billion yuan by going public. How appealing the scooters it builds under the new rules will be is still an open question.

Charts by Gong Fangyi

Cover image / smartshanghai Full-width cover image / unsplash