ZAP Electric Vehicles Approved by China to Buy Jonway Automotive

ZAP has received some very significant news from the Chinese Government; an approval that could position your company as a pacific rim leader in the Electric Vehicle marketplace.

Today was a very significant day for ZAP. It's something we have been working on for a long time. It was something that all the experts-political, media, and otherwise-said couldn't be done, which is an American company having a controlling interest in a Chinese automobile manufacturing company. As of today, the Chinese government has approved the merger between ZAP and Jonway. It is really an acquisition. Today we officially own 51 percent of Jonway Automobile. We are following that up with another 49 percent acquisition. We are doing it in two stages because of the way we were paying for it. The significance wasn't the payment, the significance was getting the Chinese government to approve the controlling interest, and we did it in what is a first in China.

How did Zap actually win China's approval to acquire control of Jonway? What about your merger was compelling?

We believe this went forward because the Chinese government has mandated the reduction in carbon emissions by 40 percent by the year 2020, which is an extremely aggressive challenge. Especially for an economy that is growing ten percent annually-the fastest growing economy in the world. Trying to reach that challenge was one of the main reasons why there was flexibility in this particular arrangement, where there otherwise would not have been. At the Beijing Auto Show, 106 electric vehicles were introduced. When I met with the global automotive forum, the Chinese Chamber of International Trade, and all the government officials, they stated that out of all those 106 manufacturers, only a handful would be in production to help meet this mandate. The Chinese government is aware that China still needs Western influence to bring a mature technology to market in China. ZAP has been working on electric vehicles longer than any company in history. ZAP also owns the most famous brand in history, which is called the Detroit Electric-we too own that brand from the turn of the century. We have a 1906 Detroit Electric sitting in our show room. It is a wonderful piece of history, a wonderful story, and a wonderful car. ZAP has taken over where Detroit Electric left off.

We have been and still are the oldest manufacturer of electric. We have made a lot of mistakes along the way. My life story is very similar to the movie Tucker, and we have had everyone taking shots at us. A lot of powerful interests wanted to see us fail. That was one of the reasons we decided to pull out of the U.S., because the politics was completely different. There isn't any politics in China-it was just: "Let's get it done." The mandates were such, and the red tape was such, to get it done.

What is ZAP's niche target market in China and the United States?

The largest car market is the passenger car market. Every manufacturer that I am aware of builds mostly passenger vehicles. ZAP's niche market is corporate, fleet, and government accounts. We are the only manufacturer producing a full size electric pick up, a full size electric SUV, which is what Jonway manufactures, and a full size electric van. We have several other utility vehicles as well. No one else is doing those three core vehicles at the moment. Although they are a smaller part of the market, it's the market that is more mature for the technology available today.

Currently there is no practical infrastructure, and the consumer, it doesn't matter where in the world, will have the same issues, which is known as range anxiety. The average consumer may drive 25 miles a day in their average driving practice, but every so often they might want to drive 100 or 200 miles. In that case, they cannot make today's electric vehicle their primary vehicle. However in corporate fleets and government accounts, there is a pre-determined amount of mileage. We build vehicles to the spec of the agency that we are selling to. In the city of Hangzhou, for instance, the average taxi goes 200 km. We build the vehicle to spec, it gets back the station, they charge up, and they know what their route is going to be. It is very predictable, and there is no range anxiety. Today's technology is extremely mature for that type of application.

We recently won a postal contract award; that is another application that is very predictable. Taxis and postal vans sit at an idle, producing terrible emissions, all day long. That is an ideal application for electric vehicles. As you sit, you aren't using any power. Even though you might work all day long, you only go 25 or 30 miles. The U.S. Postal service has 156,000 of these long-life postal vans. They told us they want to convert 105,000 to electric.

We are one of five companies awarded the contract. We use Remy's motor. The CEO of Remy and the engineers at Remy were very helpful in helping this happen. We worked very well together, bringing American technology. As much as I wanted to pull out of the United States, all of a sudden we are getting DOE funding, we are getting U.S. Postal contracts, we were finalists in the automotive X-Prize, and we are one of the few approved for the TSA list. Economic development agencies in almost every state have contacted us offering all kinds of benefits. As much as I wanted to get rid of all the politics and pull out completely, here I am back to where I started. Now I am doing two weeks a month in the United States and two weeks in China.

Zap is headquartered in Santa Rosa, California. Elaborate on the origins of your operations in California and what the company's ambition is in China and the United States.

California is where we have our headquarters-in Santa Rosa. We have an 80,000 square-foot facility there. ZAP has been miscategorized as a sales and marketing company. What we really do is R&D, and that takes place up in Santa Rosa. We integrate better than most anyone in the world, and we do it on a very practical level. We build vehicles that are inexpensive, the Volkswagen Bug of electric vehicles-we are the car of the people. There are companies that are building vehicles for the rich and famous-that is not our mantra. We are doing mass numbers and we are building vehicles that common people can drive and use everyday, especially here in China. Ultimately we will bring that philosophy to the United States.

In our meetings today, we also visited Holley, a partner and collaborator with ZAP. Talk about that company and the potential for synergy.

We visited a legal and financial joint venture-we invested together. Holley is the largest holley meter company in the world. They have some of the most sophisticated technology in smart metering that is available, period. As you saw today, this is a major operation. We are basically a factory direct operation. There are no middlemen here. The nucleus of vehicle charging infrastructure is the smart meter. There is a little more electronics to go with it, but the smart meter is a sophisticated part of the charging station. When you think about how to get a piece of the pie, a charging station isn't any more than a glorified extension of that. Bringing a power meter, revenue sharing, and getting everyone a part of that revenue, that is where the sophistication comes in. I don't believe there is anyone in the world that can build a charging station with the technology that Holley has. Because of the lack of middlemen, there is lower cost.

The reason anyone comes to China is to get low cost manufacturing. Even when they do that, there are still several layers. This is factory direct on charging stations and factory direct on automobiles. In both cases there are no middlemen or brokers involved. We build charging stations for each market for the very lowest price and build an automobile also at the same level. We can put out a lot of products for the money. If you look at the cars today, they are very similar to a Toyota Rav4. And if you look at the finish and the creature comforts that most Americans are comfortable with, these vehicles have all of those things in retail for about $15,000. You couldn't do that in the United States.

The joint venture is working on the technology for the charging station and technology transfer from ZAP U.S. to China, and the integration is taking place. The two technologies are smart meters that are the new charge stations and the powertrain that is the nucleus for all of the vehicles we will build. The powertrain is a fairly consistent thing; it stays the same. We modify the battery pack to meet the needs, whether it is a corporate fleet or government account, of the specs we receive. Some places have hills and we need to build a more powerful motor; some people need more range, so we give them more battery packs. We build them to spec and the engineering takes place here in Hangzhou.

You moved the locus of your efforts to China more than 10 years ago having been frustrated by the California and US EV marketplace. Elaborate on the challenges and opportunities you have found in China.

I have been criss-crossing China on the electric vehicle side for ten years. Now, I have a wonderful partner, Dr. Priscilla Lu, who had a lot of fantastic relationships. She is an engineer, and we, needing each other, have combined our resources together. We absolutely needed each other to make this work. We needed the government relationships; we needed the corporate relationships; we needed the financial relationships; we needed all of it.

It is so complicated to do what we did even though we didn't have all of the challenges on the U.S. side, with the politics and the hidden agendas. Trying to figure out all of the nuances that a different culture has to offer was very challenging, and not speaking the language was even more challenging. Having a high-level partner involved that ensured my understanding and the understanding between the partners was essential, because communication can be so far off the train, and had been in many of our past deals. In this case, we minimized miscommunication. We maximized political support, and we had an awful lot of good luck with market timing. Currently the Hangzhou government is offering RMB 123,000 for every vehicle we build in the ramp. That is an unbelievable amount of money. The federal government on the U.S. side doesn't even come close. RMB 123,000 it makes a very great business space. I don't see any end in sight, especially with the mandate of 40 percent carbon emission reductions. As you know, China is fairly well funded.

If we are able to talk a year from now about ZAP and the implementation of your business plans, what will the interview focus upon?

First of all, it is two idealistic for everyone to jump into the electric vehicle business as a stand-alone business today-maybe ten years from now, but today, to survive as an electric vehicles business and bring enough revenues to pay your overhead is challenging, nearly impossible. The reality is that you have to partner up with something like Jonway.

Jonway comes to us completely debt free and profitable, right out of the gate. As a publicly traded company, we are going to be profitable right away and have tremendous revenues before we even start selling one electric vehicle. ZAP is bringing all of the technology; Jonway is bringing the platform. They are an automobile manufacturer; we are a technology integrator. We needed each other, equally.

Jonway knew that there was no way they were going to be the number one manufacturer in China with the number of car manufacturers already in existence. They knew the only way they could be recognized as world leader was to increase technology. ZAP knew that there was no way we were going to get to the next level unless we had our own platform, which wouldn't be taken away from us every time we had a level of success. As the new owner of Jonway, we know have a revenue-generating, 500-dealership distribution generating its own revenue, fully self sufficient, before we even have to worry about selling one single electric vehicle.

Now we have the comfort of doing it the right way. We don't have to worry about rushing, about making agendas that are sometimes misconstrued because of panic about financial capability. We can do everything properly, focus on target markets, focus on politics, focus on incentives, hit only markets that are available right now, and deliver cars right now. We are not talking about two years in the future. We are not talking about a year in the future. We are talking about delivering vehicles tomorrow. That is what we can do with this merger.

Is 2011 likely to be the year alternative fuel vehicles seriously enter the market?

Yes it is. Most of the manufacturers are targeting 2012. We at ZAP have a year jump on everyone.

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Except you don't have Jonway in California. What is the reality of ZAP coming back to the U.S. market without a Jonway?

Jonway is the largest exporter of motorcycles in China. Jonway is the largest importer of motorcycles to the U.S.A. Electric motorcycles and ATVs can now be a very big part of revenue source and our technology development. It is the same technology. Some of the benefit that ZAP has had in its integration capabilities are that we have built tons of electric bikes, scooters, and ATVs. All of those components are the same components that are carried through in an automobile, just scaled up in power and design. If something works in a scooter, we scale it up to the next level and so on.

A year from now, what will be a home run for ZAP?

The homerun today was completing the merger. Jonway and ZAP are on the cover of Popular Mechanics for the Automotive X-Prize. The White House is announcing the winner of Automotive X-Prize. There were initially a couple hundred vehicles entered, which is now down to four. There were four categories. We just recently won the Most Wanted, the Most Practical, the Most Stylish, and we were number two in the Most Innovative. We will bring that vehicle to market in the first quarter as part of this new merger, and now we have the manufacturing capability to bring it to market. We expect funding from the DOE, and we will start to build U.S. manufacturing. We are able to do that very easily with Jonway because we can start out with knock down kits, building all of our low-cost, expensive parts in China and assembling them in the U.S.

Is there a geographic requirement for the DOE grant?

Just the United States. Site location is being jockeyed for right now.

Lastly, will you be at the VERDEXCHANGE conference in January 2011?

I will be sure to be there. There will be some good synergy there.