Where Will NIO Be?
COVID-19 and China

As China's economic slowdown dampens new-car sales and consumers grew tightfisted given the uncertainty around U.S. trade relations, the Chinese auto market in June slumped for a 12th straight month.

The deliveries in the Q2 2019 was 3,553, Chinese new car manufacturer NIO said in a statement on July 10. Shares dropped 1 cent to close at USD 3.68 apiece after it reported second-quarter deliveries that were well above expectations but still lower than in the first quarter.

In the Q1 2019, NIO delivered 3,989 vehicles on losses of USD 395.2 million. The company said that the results exceeded the company's previous guidance range of 2,800 to 3,200 deliveries.

Erratic sales

NIO announced a recall of 4,803 ES8 cars because of the defective battery on June 27. As a startup, this recall issue will certainly bring NIO many challenges and doubts. The share price of NIO fell to USD 2.55 after the recall statement.

As of May 2019, NIO ES8 has delivered 17,600 vehicles, accounting for 27.29% of the total, which means that for every four NIO ES8 vehicles delivered, at least one will be included in the recall. According to the average price, the battery cost of new energy vehicles is about 100,000 yuan, which roughly means that NIO will lose at least 800 million yuan due to the recall.

NIO has undergone a dramatic change in fortunes this year. After its share price surged to near all-time highs in March, investors lost their enthusiasm, and in recent weeks, this is inseparable from the company's sales volume.

New energy vehicle manufacturing is a highly concentrated and intensive market with capital, which has shifted from the period of capital + imagined the growth of grass and grass to the period of fine and deep cultivation with management and operation + industrial chain integration ability.

Some people hold different views on this matter that new car companies are in their infancy, their products gradually began to mass production. Therefore, these safety risks in NIO can serve as a warning and demonstration for other automobile enterprises, including traditional automobile enterprises. He thinks that manufacturers have to pay for the transition from traditional cars to electric cars. Treating accidents as an alternative 'wealth' will be very good for the industry in the long run."

NIO in throng

NIO was founded by William Li (李斌), the Chairman of Bitauto (易车网) and NextEV (NIO's previous name). After launch, several companies invested in NIO, including Tencent, Temasek, Baidu, Sequoia, Lenovo and TPG. Its first model, the NIO EP9 sports car, debuted the same day the brand was established.

In October 2016, NIO announced that it had been given an "Autonomous Vehicle Testing Permit" by the California Department of Motor Vehicles and it would begin testing on public roads under the "Autonomous Vehicle Tester Program" guidelines as part of its autonomous vehicle program. According to the company, it planned to launch vehicles with level-three and level-four autonomy. 

In May 2018, NIO opened its first battery swap station in the Nanshan District of Shenzhen, Guangdong, China, dubbed the "Power Swap Station". Only batteries for ES8 cars would be available from this station. In September 2018, the company filed for a USD 1.8 billion initial public offerings on the New York Stock Exchange.

It raised USD 1 billion from the offering and gone public on Sep 2018, well short of the earlier USD 1.8 billion targets NIO had set. The stock was priced at USD 6.26 per share, just a cent above the bottom of the range NIO was hoping to achieve. It quickly fell below USD 6 when it began trading, but later bounced back to close up more than 5% at USD 6.60. The IPO valued the company at USD 6.4 billion.

Diversity of roles

NIO is in the midst of a recall after three fires in two months. The company's share price has plunged 75% since it went public. Its in its biggest crisis since it listed on the New York stock exchange last September.

It took NIO less than four years to go public and build an ecosystem that is different from that of traditional car manufacturers and to make this huge ecosystem work successfully. However, NIO is still far from its ideal state, and there is still a lot of room for improvement in terms of products, services and capital. In addition to taking money from the capital markets, NIO has also started investment business。

NIO and NIO Capital held an agreement signing ceremony on December 11, 2016, in Wuhan, to announce they had reached a strategic cooperation agreement with Hubei province. According to the official agreements signed between NIO Capital, the Hubei Yangtze River Industry Fund, and officials representing the Wuhan East Lake High-tech Development Zone, NIO Capital will be established in Wuhan, and fund the construction of the Yangtze River NIO New Energy Auto Industrial Park in the Wuhan East Lake Development Zone.

At present, the investment strategy of NIO capital is to take the mobility platform as the basis to jointly develop the entire automobile industry form. Its investment mainly involves three major automotive sectors: energy, technology and vehicles. In the field of autonomous driving, it has invested in Momenta, Pony. Ai and black sesame. In terms of mobility, it has bet on the first car and the first tick.

The NIO Capital was co-established by NIO, Sequoia Capital (红杉资本), and Hillhouse Capital (高瓴资本). Its initial fund raised CNY 10 billion, with a life span of seven to nine years and will primarily invest in innovative supply chain enterprises in the electric vehicle industry. The Fund also signed a cooperation agreement with the Hubei Yangtze River Industry Fund, considered one of the biggest domestic government industry leading funds. This agreement makes the Hubei Yangtze River Fund a cornerstone investor of NIO Capital.

"2019 will be the last year for new car manufacturers in China, with none of the more than 100 companies worth investing in." At the beginning of the year, Co-Stone Venture Capital (基石资本) chairman Zhang Wei's remarks directed at the new car companies including NIO, Xpeng Motors, also let the new energy car once again involved in the public opinion storm.

NIO Capital management partner Zhang Junyi thinks this view is biased. The automobile industry is an industry with a large amount of capital, at least three successful products in a row are required for enterprises to be able to stand, which requires new enterprises to have the ability of sustainable development.

"The industry has gone to the state where only the top enterprises can survive. In recent years, many automobile enterprises will die out, not as traditional manufacturers or new manufacturers, mainly depending on the self-development ability and follow-up sales of these enterprises." Zhang Junyi said.

Multiple challenges

NIO has faced mounting pressure on its business since the beginning of the year. Apart from a slowdown in the Chinese auto market and economy, the company has fallen victim to government measures to battle overcapacity in China’s bloated automotive sector.

Besides,NIO has just lost two of its top executives recently, according to the 'Technode' reported. Zhuang Li, vice-president of software development, and Angelika Sodian(安格利卡·索迪亚), UK managing director of the company, have both left. 

A company spokesman confirmed the pair's departure. Zhuang Li joined NIO in July 2016 as Vice President of software development. Software is crucial to the operation of electric cars, so Zhuang’s departure is kind of "a big deal". According to a person familiar with the situation, Zhuang li was "pushed out of the NIO because the software was always very bad".

In January this year, when an NIO ES8 drove to the intersection of Chang 'an street in Beijing, the information of the car's upgradable system popped up. After the owner of the car hung the P block and agreed to upgrade, the car screen suddenly stopped working went dark and the car did not move. The driver had no choice but to sit and wait for the software update, as the car was parked in the middle of the road and attracted the police.

Software is one of NIO's weaknesses and a major source of customer complaints, according to a person in charge of NIO's operations. NIO has cut its U.S. workforce in the past few months. Padmasree Warrior(伍丝丽), the company's chief development officer and chief executive of North America, left late last year.

Risky corporate structure

"It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide," NIO said in its prospectus.

Like many Chinese Internet companies with listings outside of China, NIO is a variable-interest entity (VIE), a structure created in the 1990s as a workaround for Chinese companies that are not allowed to have direct foreign ownership. VIE refers to a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights.

Under the VIE structure, the Chinese company creates two entities, one in China that holds the permits and licenses needed to do business there and the other an offshore entity, in this case in the Cayman Islands, in which foreign investors can buy shares. The Chinese entity, which is usually owned by top executives, pays fees and royalties to the offshore company in contractual arrangements.

The risk with this setup is that foreign investors don't actually own stock in the company, and local management or even the Chinese government could decide or force a split with the listed company, leaving U.S. investors high and dry.

Bet on ES6

In the first half of the article, we mentioned that NIO delivered 1,360 new vehicles in June, including 927 ES8 vehicles and 413 ES6 vehicles. For the NIO brand, the sales figures seem to have improved as a result of the ES6 delivery, but this is a big gamble by the company.

In fact, the launch of ES6 has undoubtedly put NIO in an awkward position. ES6 has almost all the configuration of ES8, except the size is slightly smaller, its product force and actual experience are even better than ES8. However, the starting price of ES6 is much lower than that of ES8, which will further reduce the market size of ES8. Combined with the adverse effects of recent recalls, ES8 sales are likely to decline further in the future.

The market performance of ES6 is not bad so far. However, it can be imagined that ES6 is currently in a period of ramping up production capacity, and its delivery volume does not reflect the actual growth of orders. Whether ES6 can save NIO or not should be observed again after all existing orders are consumed.

In May this year, NIO announced CNY 10 billion in financing. The company will also produce its second generation model, the ET sedan, which will debut at the 2019 Automobile Shanghai. ET will go on sale in NIO Day at the end of this year.

Facing the cruel market competition and the pressure brought by limited resources, as an "emerging growth" company, where will NIO be?

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