Caixin
Apr 19, 2021 07:50 PM
BUSINESS & TECH

China to Examine Airworthiness of Battered Drone-Maker’s ‘Flying Car’

China’s civil aviation authority has set up a working group to establish the airworthiness of a “flying car” from passenger drone startup EHang Holdings Ltd., in a step forward for the company whose shares have continued to slide since a downgrade from Morgan Stanley last week.

The Civil Aviation Administration of China (CAAC) established a type certificate (TC) team last week to evaluate the two-seat EH216, which the Guangzhou-based company calls an “pilotless air taxi” or “autonomous aerial vehicle” (AAV), according to statements from CAAC’s central south regional office and the firm on Friday.

The news came as EHang posted an unaudited full year loss of $14.1 million that morning, and after its Nasdaq-listed shares slid 2.5% on April 13 when Morgan Stanley said the stock was overpriced in a note that cited regulatory uncertainty and growing competition.

The success of companies like EHang hinges on such regulatory approvals and the timetable remains uncertain, wrote the investment bank’s team led by equity analyst Tim Hsiao.

“EHang currently runs its business via special permits and still lacks formal airworthiness certificates or official permits for commercial operations globally,” Hsiao and his team wrote in a note explaining the downgrade.

Flying cars are hot, and competition is intensifying. Morgan Stanley predicts that by 2023 the flying car market will be worth $49 billion, and will reach $1.5 trillion by 2040. Other firms are crowding into the space, including more established aviation veterans like Boeing Co., Airbus SE, and Bell Helicopter, as well as auto companies like Hyundai Motor Co., General Motors Co., Toyota Motor Corp. and Geely Automobile Holdings Ltd.

The main difference between traditional aircraft and flying cars is that the former are mostly powered by internal combustion engines, while flying cars generally use electric motors.

While EHang has trumpeted the establishment of the CAAC group as a bright spot, analysts told Caixin that “type certification,” which is undertaken by aviation regulators everywhere to establish the airworthiness of a particular “type” of aircraft, is a long and costly process. 

One drone industry insider told Caixin that even for traditional small civilian aircraft made by companies with an established record, such certificates typically take about two years to obtain. Other approvals, such as a production certificate to actually make the vehicles, will also be needed before the EH216 can hit the market.

Morgan Stanley’s analysts said they had expected Ehang to get a formal airworthiness certificate in mid-2021 — later than EHang’s own prediction of 2020 — but the analysts said they now estimate the firm will not get certified until late 2021. The company submitted its EH216 type certificate application in December.

The analysts said the early mover could benefit from its growing traction and endorsements from local governments after State Council guidelines in February called for the nation to expedite the development of “intelligent general aviation vehicle applications” alongside the launch of pilot zones.

There were further signs of government support, including from Wei Chen, CAAC’s central south regional deputy director, who was quoted in an EHang press release last week saying that the EH216 passenger drone was “highly innovative project that calls for breakthroughs in the conventional certification process while preserving standard promulgation.” It was unclear whether that meant certification might be fast-tracked.

CAAC Chief Engineer Yin Shijun was quoted in the same press release saying unmanned aviation might become the primary form of transportation in the future. “The Government and companies should work together to promote the development of unmanned aerial vehicles and adhere to high-quality standards when building the civil aviation infrastructure," Yin said.

“Both the applicant and CAAC should have innovation mindset in the certification process while benchmarking international standards.”

None of that will matter if a litany of damaging claims aired in a short-seller report two months ago turn out to be true. EHang furiously denied claims by Wolfpack Research that centered on the contention that its relationship with its primary stated customer, Shanghai Kunxiang Intelligent Technology Co. Ltd., was an “an elaborate stock promotion, built on largely fabricated revenues based on sham sales contracts.” The report, released Feb. 16, also claimed that Ehang’s technology lagged behind that of its competitors.

That sparked a selloff that saw EHang shares lose more than half their value, falling from $124.09 to end the trading day at $46.30 on more than 10 times its typical volume. The shares regained some ground after EHang issued its own response the next day, but have since continued to slide. The stock closed below $28 a share on Friday.

Morgan Stanley also noted the issue of client concentration risk, saying more than 70% of the company’s revenue comes from its top three Chinese clients.

The emergence of passenger drones and “flying cars” has brought new challenges and safety risks which make traditional airworthiness standards difficult to apply. Civil aviation departments of countries all over the world are formulating new ones. No flying car company anywhere is known to have obtained a formal airworthiness certification.

Contact reporter Flynn Murphy (flynnmurphy@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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