Is Ehang IPO the Best Bet for Urban Air Mobility?
Remember Taxi Magic? No, it’s not a strain of cannabis. (You’re probably thinking of Somali Tax Ride, which itself sounds like a questionable sex act that shouldn’t cost you more than a fiver.) Taxi Magic was an app that allowed you to hail a taxi on demand. That was back in 2008, about a year before a company called UberCab came on the scene. The point is that being the first out of the gate with any technology doesn’t guarantee you success, bringing us to today’s topic: The impending IPO from EHang, a Chinese company that is the first to begin commercialization of autonomous aerial vehicles (AAVs) in a nascent market that’s become known as urban air mobility.
What is Urban Air Mobility?
Before we dive into whether EHang is a good bet to emerge as the leader in urban air mobility (spoiler alert: meh), let’s briefly talk about what the term even means. We’ll turn to the big brains at NASA, which has started its own urban air mobility program, for the nuts-and-bolts definition: Urban air mobility refers to a “safe and efficient air transportation system where everything from small package delivery drones to passenger-carrying air taxis is operating above populated areas.” In other words, someday soon
electric helicopters drones will regularly move people and stuff around cities without too many of us dying. These aerial acrobatics will mainly happen autonomously, thanks to advances in artificial intelligence, and will feature rechargeable electric propulsion systems.
Urban Air Mobility Market
The space agency even commissioned a study last year to look at the market viability of an urban air mobility system. The report claimed that such a market could be worth upwards of $500 billion. That’s downright bearish compared to an analysis from Morgan Stanley that says that autonomous urban aircraft could create an economy worth $1.5 trillion by 2040.
The first phase of the urban air mobility economy has already taken off, as we’ve noted that delivery drones are finally a thing as companies try to solve the last-mile equation for logistics. The next step is delivering people from point A to point B – and that brings us back to EHang.
AAVs for Passenger Services and Smart City Solutions
We first covered EHang in 2016 when the company released what it touted as the world’s first passenger-grade AAV, the single-seat EHang 184. In March 2018, Ehang sold its first AAV, the dual-seat EHang 216, to a customer for testing, training and demonstration purposes. Since then, Ehang has delivered 38 passenger-grade AAVs, with another 28 orders to fill. EHang’s AAVs are autonomous unmanned aerial vehicles (UAVs) that use deep learning-based object detection systems, advanced artificial intelligence algorithms, and other technologies, in order not to hit the side of a building. The machines have been put through 2,000 flight tests in all sorts of conditions, including against winds of more than 40 miles per hour and in fog with a visibility of about 150 feet. The company has two production models, EHang 216 and EHang 116, which is the successor to the EHang 184:
Founded in 2014, EHang has raised at least $52 million in disclosed funding and proposes to raise $100 million when it eventually lists on the NASDAQ. In addition to its line of passenger AAVs, EHang offers small-and-medium-sized multi-rotor AAVs that are designed to operate below 3,000 feet and that can be used for last-mile delivery or industrial inspection of assets like power lines. It also has a couple of fixed-wing AAVs in development.
EHang is also attempting to build a complementary smart cities business that provides command-and-control centers to manage a fleet of AAVs that can monitor and assist municipalities in a range of tasks, including traffic management and disaster response. Another side hustle is what EHang calls aerial media where it choreographs a fleet of AAVs into a series of moving images. Basically, it’s an aerial light show using drones to create three-dimensional configurations, brand logos, or messages in the sky.
So EHang is a company that’s trying to diversify its products and services around its core autonomous drone technology. Let’s see how that’s working out.
Can EHang Hang On?
Not so well. These days we expect companies to expand and grow profits rapidly while also bleeding cash along the way. Uber (UBER) is the poster child for that paradigm at the moment. Unfortunately, EHang isn’t even doing the first part all that well. In the first half of 2019, its net losses increased by more than 40%, from $3.8 million to $5.5 million, while revenue also dropped by more than 15%, from $5.5 million to $4.7 million. Here’s a bigger look at the financials:
One positive is that EHang significantly boosted revenues from its core urban air mobility business to $3.5 million, representing more than 73% of its total revenues:
But there are enough risks to ensure that the company will have a turbulent ride ahead of it. While EHang is attempting to diversify its services and products, it hasn’t diversified its customer base. In 2018, EHang’s largest customer accounted for about 30% of its revenues. In the first half of 2019, the percentage was 45% of its total revenues. Last year, it deployed two smart city command-and-control systems for two medium-sized cities in China. This year: zero. So that’s a revenue stream with a great deal of uncertainty.
And while we’re stridently apolitical here at Nanalyze, one can’t ignore the current political climate when it comes to China and technology. Just last month, the Department of Interior grounded nearly its entire fleet of 810 drones because most are made in China and officials are worried that they might pose a threat to national security, according to an article in Forbes. However, that shouldn’t affect EHang in the short-term, as it’s squarely focused on the Chinese market where it is working to shape the regulatory landscape for AAV operations.
Competition in the AAV Market
What may turn out to be a bigger threat to the company’s long-term health is the range of competition in the AAV market for both passenger and non-passenger drones. The NASA report claims there are more than 70 manufacturers working on urban air mobility solutions, including big aerospace companies like Boeing (BA) and Airbus (AIR). We profiled the efforts of both companies, along with several startups, in our article on autonomous aerial vehicles. Let’s catch up with what a couple of German manufacturers have been up to.
Founded in 2011, Volocopter has raised a total of about $90 million, quite a jump from when we first profiled the company at the end of 2016 when it had only completed a $1.5 million Seed round. The latest infusion of capital came in September from a $55 million Series C. Investors include Intel (INTC), Daimler AG, and the Geely Holding Group, which owns Volvo. Currently, Volocopter’s electric vertical takeoff and landing (eVTOL) passenger aircraft, VoloCity, is an air taxi that requires a pilot to operate. However, Volocopter is working with companies like AirMap to adapt drone air traffic control management for eventually automating its air taxis.
The company is still testing its aircraft in Singapore, where it also recently unveiled the first VoloPort, an air taxi version of a heliport.
Founded in 2015, Lilium is a Munich-based startup that is building fixed-wing eVTOLs for urban air mobility applications. It has raised more than $100 million, including a $90 million Series B in 2017 led by Chinese tech giant Tencent. In May, the company revealed its new five-seater air taxi prototype powered by 36 all-electric jet engines that allow it to take-off and land vertically without rotors. Lilium plans to be the Uber (which is working on its own urban air mobility service) of the skies, where customers can use an app to locate their nearest landing pad and plan their journey. The company claims its service will be comparable in price with a taxi, yet four times faster. Lilium expects to be fully operational in various cities around the world by 2025. Its jet appears to be a sort of hybrid between drones and fully electric airplanes.
Urban air mobility is poised to change how we travel around cities in the near future, whether it’s in an AAV or a flying car. Though whether EHang will lead the revolution or become a victim in the coming battle for air supremacy is difficult to say. We see few silver linings at this point. The company hopes its technological advantage will be enough to see it through the turbulence of the next few years, but we know that smart management and strategy are just as important. We’ll see if EHang’s leadership team can pilot the company to success. If the IPO is a success, shares will trade under the ticker “EH.”