Alibaba's (BABA 1.02%) electric vehicle (EV) joint venture, IM Motors, recently started mass-producing its first luxury sedan, the IM L7.
The L7 will start shipping in late March and have a starting price of 408,800 yuan ($64,670), which makes it cheaper than Tesla's (TSLA -0.21%) Model S but pricier than the Model 3. Its higher-end twin motor version, which pairs a 237-horsepower engine with a 340-horsepower one, can travel 615 kilometers (382 miles) on a single charge. The vehicle will also be able to park itself, drive semi-autonomously in the city, and drive autonomously on highways.
Alibaba's development of an EV might surprise investors who mainly recognized the tech giant as China's largest e-commerce and cloud infrastructure company. However, it also wouldn't be the first Chinese tech giant to pivot toward the booming EV market.
Image source: IM Motors.
Baidu (BIDU 0.29%) has launched its own EVs with the Chinese automaker Chery, and a growing number of automakers are now using its open-source Apollo platform for autonomous vehicles. Huawei has been holding talks with Chinese automakers to produce its own EVs, while Xiaomi (XIACF 0.49%) recently earmarked $10 billion for a 10-year expansion into the EV market through a new subsidiary.
But does it make any sense for Alibaba to expand into that crowded and capital-intensive sector while its core e-commerce and cloud businesses are still grappling with slower growth? Let's review the facts to find out.
IM Motors is just an investment for Alibaba
Back in 2016, Alibaba started developing smart cars with the Chinese automaker SAIC to test out AliOS, its Linux-based operating system for Internet of Things (IoT) devices and connected vehicles.
In 2020, Alibaba went a step further and established IM Motors as a joint venture with SAIC and Zhangjiang Hi-Tech, the real estate development company that built the Pudong New Area technology park in Shanghai. SAIC owns 54% of the JV, while Alibaba and Zhangjiang Hi-Tech each hold 18% shares. The remaining 10% has been reserved for the JV's employees and customers who assist the company in its future research.
Therefore, IM Motors isn't a consolidated part of Alibaba's business. It's merely part of its sprawling investment portfolio, which generated 21 billion yuan ($3.3 billion) in interest and investment income -- or 27% of its pre-tax income -- in the first nine months of fiscal 2022.
Alibaba doesn't disclose the gains or losses of its individual investments, but we can safely assume that IM Motors hasn't moved the needle in either direction since it only recently started to mass-produce its own vehicles.
IM Motors isn't part of its ecosystem (yet)
Alibaba's ecosystem might seem complicated, but its business model is fairly straightforward. It generates most of its revenue from its commerce business, which includes its e-commerce marketplaces, brick-and-mortar stores, and Cainiao logistics network.
This is Alibaba's only profitable business division, and its profits usually subsidize the expansion of its unprofitable cloud, digital media, and innovation initiatives divisions. They also subsidize the expansion of its investment portfolio, which currently houses more than 300 investments.
Alibaba's stake in IM Motors only represents a tiny part of that portfolio. The media might be calling the IM L7 "Alibaba's EV," but the Chinese tech giant isn't gearing up to compete against Tesla, NIO, BYD, or other EV makers.
Investors shouldn't worry about Alibaba's EV project
Alibaba's involvement in IM Motors isn't a red flag for investors, since it's a joint venture that is controlled by SAIC. It isn't about to produce EVs on its own and crush its own margins. But if the IM L7 sells well, it might just help Alibaba expand its digital ecosystem into the EV market, catch up to early movers like Baidu, and keep pace with newcomers like Xiaomi and Huawei.
