Nio: China’s EV Answer to Tesla or Just Another Bust?

Nio is an electric vehicle (EV) company that has been making waves in the Chinese car industry. It is one of several new electric car companies that have emerged since the rise of rival Tesla Motors, founded by Elon Musk. Its first car, the all-electric ES8 SUV, began production for the Chinese market in 2018. The smaller ES6 SUV is planned to begin shipping in the second quarter of 2019. Nio also markets its EVE and EP9 cars; the EVE is a concept car and the EP9 is a low-production supercar. Currently, its flagship cars have yet to go into full production and its main income comes from eager investors. As of April 15, 2019, Nio was valued at $5.1 billion, and its stock price was at $4.77.  Clearly, this company has made impressive strides in the industry, but will it be sustainable?

Nio was founded by William Li in 2014. Li, a 45-year-old entrepreneur, has already garnered the apt nickname “The Elon Musk of China” due to his charismatic personality and activity in the electric car industry. In addition to establishing Nio, he is also the founder and chairman of BitAuto, a company which provides internet content, marketing and transaction services for Chinese automotive companies. In 2017 alone, Li was named GQ China’s entrepreneur of the year, China Automobile Dealers Association Person of the Year, and one of the Top 10 Economic Personages of China.

Along with having a charismatic founder, there are also more tangible reasons as to why Nio has generated such a great deal of excitement. First, China’s market for electric vehicles is expanding at an astounding rate. In 2019 alone, it has been projected that 814,000 electric cars will be sold in China, compared to 602,000 sold in the rest of the world. Additionally, the Chinese government stated that one out of every five cars sold in the country will run on alternative fuel by 2025, further increasing demand for EVs. Multiple large investors have also backed this startup, including Lenovo, TPG and massive Chinese tech company Tencent. These companies see the potential in the technology that Nio promises to deliver, including fully autonomous capabilities, a range of 600 miles and an extremely fast wireless charging system, all of which have yet to exist in the EV market.

Although it does promise amazing innovations and is full of potential, Nio’s market history tells another story. The company recently went public at the New York Stock Exchange in September 2018. It raised $1 billion, an impressive amount, but significantly short of its own $1.8 billion prediction. The stock price is also volatile—originally starting at $6.6, peaking at $11.6 early on, and currently priced at $4.75.

Moreover, Nio’s market evaluation is damaged by the fact that one of its major promises to investors has just fallen through. Nio previously planned to build a production facility—one that it would own itself and use to build cars in Shanghai. However, it recently announced in a stock exchange filing that these ambitions have been abandoned. The company did not release clear reasons as to why. This failure means that Nio will continue to work with its current contracted manufacturer, the state-owned company JAC Motors. While the partnership has been fruitful for Nio so far, it may not be sustainable. Nio’s current agreement requires it to pay a fee to JAC Motors for every car it produces as well as compensate them for any operating losses during the first three years of the deal. Nio already paid JAC Motors around $14.5 million before it went public. Nio’s initial plan was to transition to its previously mentioned self-owned facility around 2020, but with this recent development, the future location for building the cars seems much more uncertain. The company’s production woes are common for electric car industry. Elon Musk constantly references Tesla’s “production hell.” Faraday, a fellow electric automobile start-up, recently failed to build its $1 billion factory in Nevada, and is now facing a deteriorating financial situation. Nio’s decision to scrap plans for its production facility is a sign that it might be following in the footsteps of its competitors; the company may be headed for more serious financial trouble.

On top of abandoning its factory plan, Nio is also starting to show symptoms of being an unprofitable business. For example, the company struggles with the cost of buying its car batteries from third-party retailers. This is in stark contrast to Tesla, which built its first Giga factory to produce its own batteries. Nio’s business model may hurt the company in the long run, due to difficulties with maintaining its supply chain and creating economies of scale. Furthermore, the startup is projecting a slowdown in the number of cars it delivers in early 2019. This decrease is likely due to three main factors. First, China is reducing EV subsidies in 2019; Nio already increased the number of EVs delivered at the end of 2018 to beat the reduction but is nevertheless looking at a decrease at the beginning of 2019. The second factor is the general decrease in car sales in the months of January and February, which Elon Musk himself similarly has mentioned. Both of these problems are mainly short term, but the third, larger issue is car sales dropping in China for the first time in 30 years. If this is the case, then investing in Nio may be making a macroeconomic bet.

Overall, while it may market itself as the EV for China’s future, more signs continue to emerge that Nio may just be another failed “Tesla killer.” It is undeniably notable for its visionary founder, promises of innovation and ideal position to take on the expanding Chinese market, however, its serious production issues, questionable profitability and unpredictable future sales raise enough red flags for possible investors to question Nio’s true viability.