Analysis: Normally transparent TuSimple bungles leadership change, rattling investors

For a young public company known for transparency, TuSimple Holdings’ sudden replacement of Cheng Lu as CEO with co-founder Xiaodi Hou showed that unexpected moves rattle investors. And shaken investors sell stock.

A lot of stock.

TuSimple is trading near its all-time low. For the week, it was down 32.65%, with most of the damage on Thursday, the day of the announcement.

The timing and immediate execution appeared to be a PR blunder with volatile markets already spooked by inflation fears and how much Russia’s invasion of Ukraine could further impact global economies.

Though executive succession had been discussed at the board level and was known to senior leadership, TuSimple (NASDAQ: TSP) had never mentioned it in quarterly earnings calls nor during presentations in analyst conferences.

Perhaps a timed transition would have brought a less extreme investor reaction.  

Consolidated power

Contractually, Lu will stay on as an adviser to Hou for the next year. But he is unlikely to stick around that long. That may prove unfortunate for TuSimple because Hou, the largest shareholder in the company, is more technically oriented and less practiced in external communications.   

Watch now: Dissecting TuSimple’s sudden shakeup

A computer scientist who grew up in China and earned a Ph.D. in computation and neural systems from the California Institute of Technology in 2014, Hou founded TuSimple with partner Mo Chen in 2015. Chen is giving up the board chairmanship to Hou but remains a director.

With Lu’s departure, inside directors will hold two seats instead of three, a nod to a corporate governance trend toward more independent directors.

Hou and Chen own the vast majority — 62.5% — of B-series shares, which carry 10 times the voting power of Class A common shares.

Near-term noise?

Hou’s original establishment of TuSimple in the Cayman Islands and significant investment from a subsidiary of Chinese technology giant Sina Corp. were central to an investigation by the Committee on Foreign Investment in the United States.

The intergovernmental agency recently concluded the probe with TuSimple signing a national security agreement and two Sina-related Chinese directors agreeing to retire at the end of their current terms.The Sina subsidiary also agreed to a standstill in its 20% stake in TuSimple. 

The CFIUS agreement apparently had no bearing on the changes at the top. Greater integration of TuSimple’s technology and commercialization efforts is something Hou could foster. As a technology company, TuSimple with Hou as the public face may inspire confidence in partners and investors.

“We are very familiar with Dr. Hou and continue to have high confidence in the TSP story but acknowledge that this sudden transition brings near-term noise/execution risk,” Ravi Shanker, an equity analyst with Morgan Stanley, said in a research note.

Shanker has been bullish on TuSimple, predicting a breakout for the stock because of its successful driverless pilots. Overall, TuSimple gets a “strong buy” rating based on the recommendations of 10 analysts. Nine have strong or moderate buy ratings.

A tech company first

Former Federal Motor Carrier Safety Administration interim administrator Jim Mullen, who spent 15 years at Werner Enterprises, will continue to manage fleet relationships. Former Morgan Stanley banker Pat Dillon remains CFO. Four other technology vice presidents have been promoted in recent months.

Jim Mullen, chief administrative and legal officer for TuSimple, manages fleet relationships at the autonomous trucking developer. He is the former interim administrator of the Federal Motor Carrier Safety Administration. (Photo: Alan Adler/FreightWaves)

Lu joined the company in 2018 as president and CEO, replacing Hou. He brought 13 years of private equity and investment banking experience. His ability to raise money and develop partnerships bought time for the technology to mature without the pressure of a short financial runway.

Lu’s undergraduate computer science degree helped him to be conversant in the technology, but not at a brainiac level.

At age 40, he has no immediate plans for what’s next, though he won’t work for an autonomous trucking competitor. As the third-largest individual shareholder in TuSimple at more than 2%, the father of young twins doesn’t need to work, even with the shrunken value of the stock price, $11.45 compared to more than $79 at its peak.

Meeting milestones

The list of accomplishments under Lu’s leadership is impressive. TuSimple is establishing a lead in the race to commercialize trucking with no human in the cab. Consider that it:

  • Completed the first “driver-out” pilot run, an 80-mile trip from a Tucson, Arizona, railyard to a Phoenix freight depot, on Dec. 22. (As chief technology officer, it was Hou, not Lu, who decided the timing.) TuSimple has repeated the trip multiple times and plans to make the pilots permanent, expanding to Texas.
  • Was the first autonomous trucking company to go public, raising $1.1 billion in an initial public offering last April that valued the company at $8.1 billion. TuSimple ended the year with $1.3 billion on its balance sheet. It lost $411 million, mostly due to ongoing research and development expenses. Freight-hauling revenue was $6.3 million.
  • Is developing an autonomous freight network that covers most of the lower third of the U.S. from Tucson to Orlando, Florida, and north to Charlotte, North Carolina. It has created high-definition maps for thousands of miles of roads so far. Competitors are mostly focused on test runs in largely flat and dryTexas.
  • Attracted numerous large fleets, suppliers and two railroads as investors and advisers and has 7,325 nonbinding reservations for a purpose-built Navistar LT Class 8 truck it is partnering with the Traton Group subsidiary to sell by 2024. TuSimple has retrofitted about 70 Peterbilt Model 579 and International LT trucks used in human-supervised autonomous freight hauling.

“Over the last several years, we basically took an R&D startup and gave it the resources it needed, and we hit our major milestones in the first year as a public company,” Lu told FreightWaves. “We’re a tech company. It was time for Xiaodi to come back into the forefront.” 

US takes limited oversight of TuSimple as foreign investment probe ends

TuSimple will make driverless testing permanent en route to commercialization

TuSimple watch party for driverless Ghost Rider feat left executives speechless

Click for more FreightWaves articles by Alan Adler.

Editor: Alan Adler