Wheels of Change: the story of JAC Group (Part 2)

Paving new paths: contract manufacturing for NIO

Developing a strong passenger vehicle business has been a strategic focus for JAC Group since the tenure of Mr. Zuo Yan’an. However, the underperformance in this segment has significantly contributed to JAC’s declining financial results in recent years.

Mr. Zuo Yan’an, a pivotal figure in JAC Group and the broader Chinese automotive industry, led the company from near bankruptcy to becoming a large automotive group with assets worth tens of billions RMB. After Mr. Zuo's retirement in 2012, JAC enjoyed a few more years of market momentum, but as China's car buyers’ preferences evolved, JAC began to lag behind. To address its lack of core competitiveness, JAC started exploring new strategies, including seeking external partnerships. Among these, the collaboration with new energy vehicle startup NIO has been the most notable and profitable.

In April 2016, JAC and NIO signed a strategic cooperation framework agreement, establishing the JAC-NIO manufacturing plant. The initial agreement outlined a production and sales target of 50,000 vehicles annually for five years. This marked JAC’s official entry into contract manufacturing for NIO.

Photo credit: JAC Group

In 2018, JAC began producing NIO’s first mass-produced model, the ES8. In March 2021, NIO and JAC deepened their collaboration by establishing Jianglai Advanced Manufacturing Technology (Anhui) Co., Ltd., with each company holding a 50% stake. They also signed a joint manufacturing agreement through this new entity. However, this phase of cooperation lasted only two years. By the end of 2023, NIO had obtained its own production license, ending the seven-year contract manufacturing partnership with JAC on amicable terms.

In the 378th batch of new vehicle catalogue issued by China’s Ministry of Industry and Information Technology, eight new NIO models were listed, including the ES8, ES7, ES6, EC6, EC7, ET5, ET5T, and ET7. The main change was the removal of "JAC" from the tail marks, leaving only "NIO." During the NIO Day on December 23, 2023, NIO launched its flagship sedan, the ET9, priced over 800,000 yuan, as the first model produced independently after obtaining its production license.

JAC Group received a substantial "breakup fee" by selling its contract manufacturing facilities. In October 2023, JAC announced plans to transfer some assets through public listing. By December, NIO was confirmed as the buyer for asset packages one and three, totaling 3.158 billion RMB. Hefei Hengchuang Intelligent Technology Co., Ltd. acquired asset package two for 1.418 billion RMB, bringing the total transaction value to 4.577 billion RMB. NIO’s acquired assets included JAC's third and Xinqiao passenger car factories, which were the first and second advanced manufacturing bases for NIO vehicles.

NIO’s financial reports revealed that the company paid JAC Group a total of approximately 3.038 billion RMB in contract manufacturing fees over the five years from 2018 to 2022. Acquiring the former contract manufacturing facilities allows NIO to save on these fees, optimize production capacity planning, and enhance quality control.

For JAC Group, selling these assets provided much-needed funds to expand its new energy vehicle business. JAC is now focusing on its new all-electric brand, Yiwei, and its efforts in the plug-in hybrid electric vehicle (PHEV) market, with the QX PHEV model already released on the market. Additionally, JAC plans to revitalize its MPV segment, with the debut of the RF8, a large MPV based on a new MPV-dedicated platform, in January 2024.

RF8; photo credit: JAC Group

Beyond its internal business transformation, JAC Group is also exploring new cooperation models, strengthening partnerships with companies like Volkswagen and Huawei, and other supporting enterprises.

Further tapping into the potential of cooperation

In 2016, the same year JAC Group began its collaboration with NIO, the company also initiated a significant partnership with Volkswagen. In June 2016, JAC Group and Volkswagen (China) Investment Co., Ltd. signed a memorandum of understanding for a joint venture. By 2017, they had officially formed a new joint venture, JAC Volkswagen Automotive Co., Ltd., with a 50:50 ownership structure.

After 2020, as Volkswagen faced challenges in its electric transition in China and JAC grappled with its own transformation issues, the two companies deepened their ties. In May 2020, Volkswagen announced a €1 billion investment to acquire 50% of Anhui Jianghuai Automobile Group Holdings and increased its stake in the joint venture to 75%, gaining management control. By the end of the year, the joint venture was renamed Volkswagen (Anhui) Automotive Co., Ltd.

Photo credit: JAC Group

Volkswagen Anhui, born in the era of new energy vehicles, stands out from Volkswagen's previous joint ventures in China as it focuses solely on NEVs.

Volkswagen Anhui established Volkswagen Group's third MEB plant in China, and by the end of 2023, it had begun producing the all-electric Cupra Tavascan model for the European market. During the Auto China 2024 in Beijing, Volkswagen launched a new all-electric product range, the ID.UX, a member of the ID. family, featuring a gold emblem. The ID.UNYX, an A-segment electric coupe SUV, is expected to be Volkswagen Anhui's first offering for the Chinese market.

Though Volkswagen holds a controlling stake in Volkswagen Anhui, this underscores its significant commitment to the venture. Recently, Volkswagen Anhui's registered capital increased from 7.356 billion RMB to 13.856 billion RMB, zooming up 88.4%, with Volkswagen adding 5.52 billion RMB. During the seven years of establishment, Volkswagen and JAC’s joint venture failed to really present a product to the Chinese auto market. Despite the slow progress, the partnership remains promising as Volkswagen continues to support the venture.

For JAC Group, although it lost management control after the equity restructuring, the partnership with Volkswagen is pivotal for its strategic transformation. Collaborating with a global automotive giant enhances JAC's capacity to adapt to the new energy vehicle era.

In addition to the Volkswagen partnership, JAC's collaboration with Huawei has also made significant strides.

In December 2023, JAC Group announced an agreement with Huawei Device Co., Ltd. to develop luxury intelligent connected electric vehicles using Huawei's intelligent automotive solutions. By March 2024, JAC Group became a HarmonyOS ecosystem partner of Huawei, and plans for a new plant capable of producing 200,000 high-end smart electric vehicles annually were also revealed. The factory, with an investment of 3.9805 billion RMB, will use JAC’s new X6 platform empowered by Huawei's technology. In April 2024, JAC Group and Huawei Digital Power signed a comprehensive strategic cooperation agreement. Official announcement were made to disclose that Huawei and JAC Group will co-build a luxury smart new energy vehicle, which will be launched soon.

JAC's high-end new energy vehicle base; photo credit: Hefei Municipal Government

Although the contract manufacturing partnership with NIO has ended, JAC continues to collaborate with NIO in the battery swapping sector. The joint venture with Volkswagen progresses steadily with growing support. The production of Volkswagen’s collaborative models with another Chinese electric vehicle maker XPENG is also expected to commence in Volkswagen Anhui’s factory. JAC’s deepening ties with Huawei, from smart ecosystems to vehicle manufacturing, position it well to enter the premium vehicle market. All in all, the future looks bright for JAC Group.

Beyond vehicle manufacturing, JAC Group has been strengthening its partnerships in the intelligent and electric vehicle supply chains in recent years.

In June 2021, JAC signed strategic agreements with Horizon Robotics in April 2021 and iFlytek.

In 2022, JAC Group partnered with software company ThunderSoft in February to build a joint venture focusing on automotive software, vehicle-cloud platform, and autonomous driving. In May, JAC and Black Sesame Technologies reached cooperation in automotive autonomous driving AI chips, big data, and cloud computing aspects. In August, JAC Group and BOE signed an agreement to co-explore a new ecosystem for smart mobility. Then in December, JAC Group became a shareholder of ShineAuto to develop autonomous driving technology.

At the beginning of 2024, JAC also signed a strategic cooperation agreement with Chinese battery giant CATL to collaborate on battery supply, battery swapping technology, and the development of new technologies and products. Around the same time, JAC Group inked a strategic cooperation with NIO, joining NIO’s battery swapping alliance.

Overcoming challenges and embracing transformation

JAC Group experienced a golden era under the leadership of Mr. Zuo Yan’an, leaving an industry legacy in the Chinese commercial vehicle market. However, the company faced significant challenges, with the ambitious pivot from commercial to passenger vehicles became a burden, compounded by issues in management and team development. Adapting to change became an urgent necessity, and JAC is actively exploring solutions.

The new era of new energy and smart vehicles presents a transformation opportunity for JAC Group. Strengthening its own R&D capabilities while embracing partnerships with Volkswagen, Huawei, and NIO, JAC Group has formed strategic alliances with numerous companies in the automotive and technology fields. This proactive approach is helping JAC carve out a unique development path. Whether JAC Group can successfully transition to an electric, intelligent, and high-end market remains to be seen, but the market will soon reveal the outcome.