Key Takeaways:

• Ecarx’s revenue grew 31% in the second quarter, apparently driven by sales to brands owned by its controlling shareholder Geely
• The company’s heavy reliance on Geely and its subsidiaries leaves it vulnerable if ties between the two weaken

By Warren Yang

An ongoing drive by Ecarx Holdings Inc. (NASDAQ:ECX) to move beyond the big shadow of automotive giant Geely Holding Group doesn’t seem to be going very far.

The smart car technology developer’s revenue grew 31% year-over-year to 1.3 billion yuan ($173 million) in the second quarter, according to its latest quarterly results released last Thursday. That’s quite decent top line growth for Ecarx — which was co-founded by Li Shufu, the billionaire entrepreneur who leads Geely. But it appears most of the revenue gains came from sales to brands owned by the automotive conglomerate.

“We are continuing to have a fantastic relationship with the Geely Group,” Peter Cirino, Ecarx’s chief operating office, said on the company’s latest quarterly earnings call.

For sure, a close relationship with a company like Geely is nice to have and unlikely to change soon. Originally founded by Li as a refrigerator parts maker in 1986, Geely has built an automobile empire since it became the first privately owned Chinese manufacturer of vehicles in the late 1990s. The group now controls over 10 brands, and is considered one of China’s top privately owned automakers.

Li, along with Shen Ziyu, founded Ecarx in 2017, with the latter currently serving as CEO. As of the end of last year, Li and his family owned 50% of Ecarx through a limited liability company, while Shen held 7.2%.

As long as Li maintains his equity investment in Ecarx, the business ties between the company and Geely will probably continue. The relationship makes good business sense, at least for now, because it provides Geely with a secure supplier of components for electronic dashboards, an important part of increasingly digitalized cars.

But that doesn’t mean the ties will endure indefinitely, especially if other companies with superior products to Ecarx’s emerge. Ecarx’s operations are also currently losing money, so future capital raising from new third-party investors could ultimately dilute Li’s ownership and erode his control, reducing his incentive to support the company.

Complex Relationship

A relationship like the one between Ecarx and Geely is also always prone to conflicts of interests, since it’s based as much on a shareholding relationship as it is on the quality of Ecarx’s products. The situation is further complicated by the fact that Li personally owns the Ecarx stake, rather than through Geely.

In a purely commercial relationship, Ecarx would try to charge Geely the most favorable prices for itself. But in reality, its heavy reliance on the relationship means it may not be able to be too aggressive with pricing. And, of course, Geely is always free to switch to a different supplier if one can offer better prices, technologies or both.

All this underscores that Ecarx’s relationship with Geely is solid but not necessarily guaranteed indefinitely, and that a breakup could lead to a sudden, large loss of revenue. Meantime, Ecarx, while benefitting from the relationship, also still needs to find a road to profitability.

That road looked increasingly distant in the second quarter, as Ecarx’s gross profit margin dropped more than 8 percentage points year-on-year to 23.1%. The company said the margin deterioration owed partly to a “penetration pricing strategy” to drive revenue growth from sales of computing platforms amid competitive pressure. And as operating expenses increased, the company’s net loss ballooned more than 60% to 306.4 million yuan.

Ecarx is well aware of the risk of relying too much on Geely and its subsidiaries, so it is trying to win more non-related customers both in and outside China. In the domestic market, the company is looking to bolster its relationship with FAW to increase the adoption of its products in a broader range of the group’s brands. Ecarx is also working on five global requests for quotes with non-Geely automakers, CEO Shen said on the company’s earnings call.

Ecarx’s revenue growth has been solid, but evidently that hasn’t been enough to impress investors. The company has previously indicated it’s trying hard to expand its customer base beyond the Geely family, though that drive has yet to yield big results. Better progress in that regard may be a good first step to win back investors and restore its valuation.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.