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Waymo’s $2.25 billion could hint at the self-driving industry’s correction

On some fronts, the splashy investment actually highlights an industry struggling to match its own hype.

A Waymo self-driving car in California

Alphabet's Waymo may be one of the closest autonomous-vehicle companies to commercialization.

Photo: Glenn Chapman/AFP via Getty Images

It's not often that you can consider an investment of $2.25 billion a warning. But Waymo's splashy funding news on Monday could be seen as just that — about internal attitudes to the company and the wider driverless car industry.

Waymo said that it raised $2.25 billion in a funding round led by Silver Lake, Canada Pension Plan Investment Board and Mubadala Investment Company. Additional cash came from Magna International, Andreessen Horowitz and AutoNation, as well as the autonomous vehicle outfit's parent company Alphabet.

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The grab for outside cash reflects both internal dynamics at Alphabet, which is sidelining projects without clear paths to profitability, and an overall slowdown in the race to create truly self-driving cars, according to Sam Abuelsamid, principal analyst at Navigant Research.

For a long time, Wall Street and Silicon Valley had a rosy view about the future of self-driving technology, but development hit technological and regulatory speed bumps over recent years.

"What we've seen is a significant slowdown in plans for when and where they're going to deploy autonomous vehicles while they work to figure out both the technological challenges and how to prove that they are in fact safe," Abuelsamid told Protocol.

Waymo did not reveal the total valuation for the round, but Abuelsamid guesses it was "no more than $50 billion." That would be a big step down from previous estimations: Morgan Stanley analysts valued Waymo at $175 billion in 2018, but latterly cut that by 40% last September to $105 billion.

Proponents of self-driving technology say the benefits could be huge, both to public safety and to profit margins: Dan Ammann, the head of GM's autonomous driving subsidiary Cruise, recently valued the industry potential at $8 trillion. But there are lots of people fighting for that market, from legacy automakers to challengers like Alphabet and Uber, and development of the technology is taking longer than many expected.

Waymo got an early start and is likely one of the closest players to commercialization, according to Mike Ramsey, senior research director for automotive and smart mobility sectors at Gartner.

"The Waymo Driver has driven more than 20 million miles on public roads across over 25 cities, and over 10 billion miles in simulation," Waymo said while announcing the new cash infusion. It also touted Waymo One, a public ride-hailing experiment in Phoenix that it says "has already provided thousands of fully driverless rides to our riders, in a high-speed mixed usage market area larger than San Francisco."

But the rides offered to the public still feature safety drivers. And the overall industry has suffered a number of public safety setbacks, including fatal crashes involving vehicles with assisted driving features from Uber and Tesla that have drawn the scrutiny of government safety watchdogs like the National Transportation Safety Board.

There have been other multibillion-dollar investments in the market — in fact, more than $250 billion in capital investments have been made in the market across more than 450 companies already, according to Pitchbook data.

"I expect you'll see a lot of consolidation over the next year and a half. Smaller companies will get acquired or fade away, and we're going to end up with a dozen or fewer companies that have a major stake — including Waymo," Ramsey said.

There have also been delays — like GM pushing back its expected launch of an autonomous commercial service, which was originally scheduled for 2019. And many automakers promised that 2021 would be the year that autonomous vehicles go mainstream, a prediction that now looks unimaginable.

And at Alphabet, the development of the market may not be moving fast enough for Ruth Porat, its chief financial officer. Since assuming that role in 2015, she has reined in Alphabet's "other bets" — the non-Google parts of Alphabet's business that lean toward the experimental.

Because Alphabet's financial statements lumps all those other bets, including Waymo, together, it's hard to get a good idea of the project's financial particulars. But pulling in outside funding is likely a sign that Waymo's costs caught Porat's eye, according to Abuelsamid.

"My guess is that she took a look at what's going on with the automated driving market and realized 'this will take many more years before we start to get to some significant scale, and Alphabet doesn't want to put many billions more into this,'" he said.

Some of the funders behind this new round, including AutoNation and Magna International, are already partners with Waymo. Bringing them in now could help strengthen relationships while building some independence within Alphabet as the sector nears commercialization, Ramsey said. That's something that Waymo's chief executive, John Krafcik, wants: He has said that becoming an independent company "has always been the evolutionary path."

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But the fact that Waymo went to existing business partners may also suggest that the company turned to them to maintain the project, according to Abuelsamid.

"My guess is that Porat basically told them if you want to keep going, you'll have to go elsewhere for money," he added.

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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