TuSimple Holdings’ abrupt replacement of Cheng Lu as CEO with co-founder Xiaodi Hou demonstrated that unexpected movements frighten investors, even for a fledgling public business known for transparency. And frightened investors sell their investment.
There is a lot of stock.
TuSimple is currently trading near an all-time low. It was down 32.65% for the week, with the majority of the damage occurring on Thursday, the day of the announcement.
With turbulent markets already scared by inflation fears and how much Russia’s invasion of Ukraine could further harm global economies, the timing and swift execution appeared to be a PR mistake.
Despite the fact that executive succession had been addressed at the board level and was known to senior management, TuSimple (NASDAQ: TSP) has never mentioned it in quarterly earnings calls or during analyst conference presentations.
Perhaps a more gradual transition would have resulted in a less ferocious investor reaction.
Consolidation of power
According to the terms of the agreement, Lu will continue to advise Hou for the next year. However, he is unlikely to stay that long. TuSimple may suffer as a result, because Hou, the company’s major shareholder, is more technically oriented and less experienced in external relations.
Hou, a computer scientist who grew up in China and received his Ph.D. in computing and neural networks from the California Institute of Technology in 2014, co-founded TuSimple in 2015 with partner Mo Chen. Chen is handing over the chairmanship of the board to Hou, but he will continue to serve as a director.
With Lu’s departure, inside directors will have two seats rather than three, reflecting a corporate governance trend toward more independent directors.
Hou and Chen possess 62.5 percent of the B-series shares, which have ten times the voting power of Class A common shares.
Is this short-term noise?
Hou’s initial formation of TuSimple in the Cayman Islands, as well as major funding from a subsidiary of Chinese technology giant Sina Corp., were important to an investigation by the US Committee on Foreign Investment.
The investigation was just ended by the intergovernmental agency, with TuSimple signing a national security agreement and two Sina-related Chinese directors pledging to retire at the end of their current terms.
The Sina subsidiary also agreed to a moratorium on its 20% interest in TuSimple.
The CFIUS agreement appears to have had little impact on the changes at the top. Hou might encourage further integration of TuSimple’s technology and marketing initiatives. TuSimple, as a technology business, with Hou as the public face, may generate trust in partners and investors.
“We are quite familiar with Dr. Hou and continue to have high trust in the TSP story,” said Ravi Shanker, an equity analyst at Morgan Stanley, in a research note.
Shanker has been positive on TuSimple, forecasting a stock breakout as a result of the company’s successful autonomous pilots. Based on the recommendations of ten analysts, TuSimple receives a “strong-buy” rating. Nine have purchase ratings that are either strong or moderate.
First and foremost, a technology firm
Jim Mullen, a former Federal Motor Carrier Safety Administration temporary administrator who worked with Werner Enterprises for 15 years, will continue to handle fleet connections. Pat Dillon, a former Morgan Stanley banker, is still the company’s CFO. In recent months, four other technology vice presidents have been promoted.
Lu took over as president and CEO of the company in 2018, succeeding Hou. He had 13 years of expertise in private equity and investment banking. His ability to generate funds and form partnerships allowed the technology to evolve without the stress of a short financial runway.
Lu’s undergraduate computer science degree enabled him to be familiar with technology, but not at a genius level.
He has no immediate intentions for the future, despite the fact that he will not work for an autonomous trucking competition at the age of 40. The father of infant twins doesn’t need to work because he is the third-largest individual stakeholder in TuSimple, with more than 2% of the company, even if the stock price has dropped to $11.45 from more than $79 at its peak.
Achieving milestones
The list of achievements under Lu’s leadership is lengthy. TuSimple is taking the lead in the battle to commercialize trucking without a human in the cab. Consider this:
- On December 22, the first “driver-out” pilot run, an 80-mile route from a railyard in Tucson, Arizona, to a freight terminal in Phoenix, was completed. (As chief technology officer, Hou, not Lu, chose the timing.) TuSimple has made the trip several times and intends to make the pilots permanent, expanding to Texas.
- Was the first self-driving trucking firm to go public, generating $1.1 billion in an IPO last April that valued the company at $8.1 billion. TuSimple’s balance sheet was at $1.3 billion at the conclusion of the year. It lost $411 million, owing primarily to continuous research and development costs. Revenue from freight hauling was $6.3 million.
- Is building an autonomous freight network that will cover the majority of the lower third of the United States, from Tucson to Orlando, Florida, and north to Charlotte, North Carolina. So far, it has developed high-definition maps for thousands of miles of road. Competitors are generally focused on test runs in Texas, which is mostly flat and dry.
- The company has attracted multiple significant fleets, suppliers, and two railways as investors and advisers, and it has 7,325 nonbinding reservations for a purpose-built Navistar LT Class 8 truck that it plans to sell in partnership with a Traton Group affiliate by 2024. TuSimple has adapted around 70 Peterbilt Model 579 and International LT trucks that will be utilized in human-supervised autonomous freight hauling.
“We effectively took an R&D startup and provided it the resources it needed over the last many years, and we met our primary milestones in our first year as a public company,” Lu told FreightWaves. “We’re a tech firm, and it was time for Xiaodi to resurface.”
