NIO: Why did Tesla's Chinese competitor fail to impress NYSE?

NIO could be considered the Chinese counterpart of Tesla: it started from zero, it only builds electric vehicles, and it is very interested in autonomous driving. The Chinese carmaker has filed for an IPO on New York’s Stock Exchange: despite setting its target price at $1.8bn, the pricing gave a share price of $6.26, raising total funding of approximately $1bn. Despite its average performance on the first day of trading, potentially encouraged by an “Underperform” rating by Bernstein, the stock fared strongly on its second day of trading, adding over 70% to its price. Such fluctuation makes one wonder: in the most important stock exchange in the world, what could be the reasons behind such a lukewarm welcome to NIO?

The Tesla effect is fading

Tesla started as a crazy idea - it gained momentum as it started delivering functional, working vehicles to its customers. In order for a stock to be long-term sustainable, though, the company has to tick two boxes: the business needs to become profitable at some point and the leadership needs to be serious about driving the change from “ideas” to “implementation”. While Tesla may be on its way to profitability and Elon Musk seems to have toned down his brash attitude (which led to the notorious rejection of “boring, bonehead questions” during a conference call with analysts last May), the markets seem to be turning increasingly skeptical of Tesla’s ability to pull through.

Admittedly, there are valid reasons for this skepticism. The main driver of sales for Tesla, the US market, is changing: Tesla has sold its 200,000th EV, which means future Tesla buyers will not be entitled to the $7,500 federal credit - they will receive $3,750 until next June, and just $1,875 until the end of 2019; after which point the incentive will be eliminated. Additionally, the electric vehicle revolution is just starting, which means one thing for Tesla: not only will its EVs become more -relatively- expensive for the average American, but they will now have to compete against other automakers’ EVs, which are just starting to hit the markets (and will receive the full $7,500 incentive until they reach 200,000 sales). Finally, leadership at Tesla is suffering in various ways. Elon Musk, the undoubtedly charismatic CEO of the Californian automaker, is showing as much volatility as Tesla’s stock price: after performing almost flawlessly at the last earnings call in August, Elon was seen smoking a joint on Joe Rogan’s live web show. As if Elon’s unpredictability is not enough, Tesla executives are abandoning the “electric ship” in heaps - Dave Morton, the company’s Chief Accounting Officer resigned after just one month at Tesla; today, another high-profile finance executive, Justin McAnear, announced his departure.

Furthermore, it has been eight years since Tesla’s own IPO and the market is undoubtedly more suspicious of companies burning through cash and overpromising: NIO has only delivered one vehicle, the NIO ES8. The Chinese automaker claims it has pre-sold more than 10,000 units, although it has only delivered 2,000 units so far; most of the pre-reservations are backed by a refundable deposit, which is not really a guarantee of a closed sale.

Is there a market for NIO’s cars?

The ES8, which is marketed as a direct competitor to Tesla’s Model X has a starting price of around $60,000 (after incentives), which is approximately half of what one would have to pay for a Model X in China. Although the ES8 may be outselling Tesla’s Model X, NIO has no proposition for the lower end of the market - where Tesla’s Model 3 seems to be king. A smaller SUV by NIO, the ES6, is expected to sell for a slightly lower price than Model 3 in China, but its sales/production have not started yet and there are no promises as to when it will eventually hit the market. Much like Tesla, NIO is burning through cash at a fast rate: in the first half of 2018, the company experienced net losses of over $500m. Although in the cash-intensive, automotive industry, negative cash flows upfront are not damning, the markets seem uncomfortable about placing another Tesla-like bet.

Furthermore, another issue with NIO’s range is that its prices may be too high for a Chinese automaker, yet not low enough to counteract the potential influx of similarly priced offerings from foreign automakers, particularly those having established plants in China.

Mercedes Benz, for example, sells the long-wheelbase version of E-Class for approximately $60,000 in China - the vehicle is manufactured locally. The classic E-Class (short wheelbase), available in the West, has a starting price of approximately $53,000 in the United States. Given that the Chinese version has a longer wheelbase and is better equipped than the base version in the US, it becomes evident that major automakers with the capacity to produce their electric vehicles locally, can price their cars almost as competitively as they do in the United States. Given that Mercedes Benz and BMW will be producing some of their EQC and iX3 SUVs in China, I would not be surprised to see a luxury electric SUV from a major German automaker offered at a similar price to the ES8. Given the relative lack of expertise and the clouds around the high-volume production capacity of NIO (see below), it is reasonable that the markets expressed doubts about the Chinese automaker’s ability to compete with the behemoths of the automotive industry in the mid-high price luxury SUV markets.

Not to be ignored, NIO is, at the moment, unable to compete in the budget market, which is expectedly home to the best selling electric vehicles in China. BAIC, a state-owned automaker, is the maker of EC180, an electric city-hatchback with a range of 100 miles / 160km which sells for approximately $19,000, and, depending on the purchase location, it can cost the buyer a mere $7,500 after incentives.

Admittedly, if the only market in which NIO is operating will soon be crowded with potentially similarly-priced, luxury vehicles from very well established manufacturers, one can explain why the market hesitates to support the Chinese automaker’s vision of profitability.

NIO is not Tesla.

A fundamental piece of the Tesla puzzle is its Apple-like approach to making hardware and software: the cars and their software are both produced by the Californian EV giant. Although this may have led Elon Musk to sleep deprivation, it has also allowed the Californian automaker absolute control over the production of their cars. Production is slow? Build a high-tech tent-factory to ramp it up. Automated manufacturing is not working as it should? Break it down and let humans do -part of- the job.

NIO, on the other hand, does not have its own factory. Instead, it has partnered up with Jianghuai Automobile Co., or as it is widely known, JAC, which produces NIO’s cars in its own factories in China. The companies struck a deal in 2016 for the production of NIO’s ES8, and despite rumours to the contrary, they recently reaffirmed their commitment to working together to produce NIO’s lower-cost ES6. With that said, JAC has recently unveiled the first product of its partnership with Volkswagen: the SOL E20X. Given that JAC will now be producing another SUV apart from the ES6, there may be questions about its ability to achieve the target production (NIO aims to achieve 60,000 sales/year with the ES6) and maintain the same quality levels it previously delivered with the ES8 (which has sold approximately 2,000 units so far). Although NIO is rumoured to be opening its own factory by 2020, the ES6, which has the potential to establish NIO as a credible threat (similarly to what Model 3 did for Tesla) will be produced by JAC. Even the NYSE filing document, as The Verge accurately notes, states that NIO’s “ability to develop and manufacture a car of sufficient quality and appeal to customers on schedule and on a large scale is unproven and still evolving.”

Bad Timing?

Finally, the timing of NIO’s IPO may be slightly unfortunate. Volvo, the Swedish automotive giant was gearing for an IPO this year but it has put it off for the time being. The reason? As Volvo’s CEO recently told Reuters, Volvo has come to the conclusion that “the timing is not optimal for an IPO right now”. The trade wars between the U.S. and China, as well as the escalation of tension between Washington, DC and the European Union are causing potential investors some discomfort. Although NIO may be less exposed to the trade wars, and potentially even benefitting from increased Chinese tariffs on US imports, investors are potentially uncomfortable buying into a company that may be forced to only sell its vehicles in China. Although the Chinese market is the fastest growing EV market in the world, will it be enough, if NIO has to face competition from foreign automakers that have established factories locally?

Will the market place a bet on NIO and increase its market cap, or will the low-initial-price enthusiasm of today’s trading wear off? Time can only tell.

Photo Credit: Jengtingchen