NIO (蔚来), China's answer to Tesla, is more than just a car manufacturer and focuses on user experience, especially when it comes to providing a holistic car ownership experience and providing services beyond the car.
The company’s approach is to start from the user’s point of view and sustain its price stability. We had an interview with NIO's co-founder and president, Mr. QIN Lihong (秦力洪), several days before NIO published its Q4 2018 Earnings. Mr. QIN shared insights about China's auto industry and the company.
Auto Market Trends
China's passenger car sales plunged for the seventh time in Jan 2019 since the market began to contract in Jun 2018, falling 17.7% year-on-year. The slowdown forced automakers and dealerships to resort to incentives and reductions to lure customers. On March 1, Tesla reduced prices of eight models in China, including Model S, Model X and Model 3 from CNY 113,000 (USD 16,808.75) to CNY 341,100 (USD 50,738.63).
NIO claims that it has no plan to lower prices for its cars, according to its founder LI Bin (William Li, 李斌). QIN confirmed this in the interview.
Trends in new consumption, new energy, and intelligence provide valuable opportunities for the auto industry, especially in China. Revenues from manufacturing and selling vehicles will only be marginally higher than they are today, and profits from car sales will shrink slightly. However, revenues from mobility services are projected to soar to almost EUR 1.2 trillion—with profits reaching as much as EUR 220 billion by 2030, according to Accenture.
Thus, traditional automakers are urging car manufacturing to transition to mobility services: Toyota intended to plan and provide new mobility services in 2017 in anticipation of a mobile society. Additionally, BMW and Daimler created a joint venture company to jump into the online ride-hailing and car sharing industry last year. Hangzhou-based Geely has its own car strategic chauffeur ride-hailing brand CaoCao Zhuanche and state-owned SAIC Motor Corp has an electric vehicle rental service company called EvCard.
Manufacturers aim to shape the mobility of the future and to be able to offer their customers unique experiences by moving towards new energy and smart vehicles.
New consumption trends, on the other hand, has changed traditional sales channels and marketing. The frequency of car sales transactions is relatively low, especially compared to fast-moving consumer goods such as food and airlines. Adding more contact points with consumers is critical for NIO, according to QIN.
Consumer preferences have changed as well: they prefer daily, fragmented information rather than a press release. We've talked about the company's unique way to connect to customers which fulfilled consumer demands before (see more in this article).
The company has determined that it is important to not only improve manufacturing efficiency and ramp up production capacity but also respond to changing consumer preferences. Therefore, fast but efficient marketing and flexibility are crucial in this once-in-a-century revolutionary period in the automobile industry.
"Elon Musk announced that Tesla would close most stores and shift to online-only sales. We don't think it would be 100% of offline stores, but it echoed that the whole auto marketing and selling circumstance has brought a profound innovation in the industry, " said QIN.
Subscription model & Iteration
ES8 production, a seven-seater high-performance premium electric SUV, reached 12,775 for 2018, 11,348 of which were delivered in 2018, according to NIO’s Q4 2018 Earnings Report.
NIO developed an innovative sales model compared to incumbent automobile manufacturers. Prospective users can make reservations with refundable deposits or non-refundable deposits through NIO’s mobile application, which fosters a dynamic and interactive online community.
NIO began deliveries of the ES8 in June and launched its latest production model, the ES6, a five-seater high-performance long-range premium electric SUV, in December 2018. Its six-seater ES8 is available for order last December and expected to deliver in late March 2019. NIO also announced the pre-subsidy price of the six-seater NIO ES8 variant which starts at 456,000 RMB (USD 67,855.08). NIO’s six-seater ES8 and second model ES6 is ready to for delivery this month and in June of 2019, respectively.
SUN Fangyuan (孙方圆), the PR director of NIO claimed the six-seater ES8 is a variant model of the original seven-seater ES8, which will inevitably bring up total costs. Additionally, the final price of the six-seater ES8 is based on the company's survey on consumer needs. It seems that the company does not expect more market share in the new ES8 compared to the previous model, according to iyiou.com.
QIN said that the company has an internal Order-to-Delivery management system to administrate the whole reservation and delivery process. For now, seven-seater ES8 has moved into a regular production stage and the company has been continuously receiving orders.
ES6 is the world’s first electric SUV with PM Motor (Permanent Magnet) and IM (Induction Motor). With an optical new 84-kWh LC battery pack, ES6 can give a long range of up to 510km (NEDC), a better parameter compared to ES8.
In addition to the limited Premier edition, NIO says that the ES6 is offered in Standard and Performance Versions with starting prices of CNY 358,000 and CNY 398,000, which is the equivalent of USD 52,000 and USD 58,000 respectively. Since NIO does not have dealers and it opens direct selling stores, NIO has full control on price. “NIO will guarantee the price stability, at least for a very long time,” said QIN, implied that NIO will not cut down ES8 price after ES6 coming out.
“I think the price and value of performance cars, the ES8 and ES6, are already the best in the market. That's why Tesla has been aggressively lowering their price because of its market share losses to NIO. And so I think there's no reason for us to lower our price,” said NIO’s CFO Tung-Jung Hsieh on the company's Q4 2018 Earnings Call.
The ES8 supports upgrading to the latest 84-kWh battery system (now is 70-kWh packs). The specific upgrade plan in Q2 2019, with 84-kWh battery will be made available for the ES8 in Q3 2019.
NIO is now upgrading the central control unit of ES8 for its users, only charging for the component costs and leaving alone installation or logistics fees. To conclude, NIO will keep the price of former models stable after new models launch. The company also will be in charge of current model upgrades.
Range Anxiety & Electricity Power Coverage
“Providing a charging experience beyond refueling” is a mission of NIO that LI Bin has put forward. QIN claimed that it is happening for ES8 owners in some areas of China thanks to NIO’s efforts.
NIO has a range of solutions to make range anxiety a non-issue, including the battery swap stations and the NIO Power van, a service vehicle with two 70-kWh battery packs in the rear that can come to where you are and recharge your car for you, either in an emergency or as a courtesy. This service is powered by the popular NIO app and its “One Click For Power” option, which LI stated the serviced had been used over 28,000 times while he was on stage during NIO Day 2018.
“Some ES8 owners are even relying on our One Click For Power service rather than their home charging stations, ” said QIN.
On NIO Day 2018, LI Bin claimed that 95% of customers driving their ES8 to commute to offices (range within 60km), 4.6% of them go for intercity road trips (range within 500km), and 0.4% are for long distance trips. With that being said, NIO divides their charging service into two parts: first, personal stations and One Click Service for Power for daily usage; second, the highway power swap station network and One Click Service will serve for long-distance travel.
China is accelerating its public charging stations coverage as well. There are 285,000 public charging stations as of September 2018, according to data collected by China Charging Alliance. While that number is rising, the efficiency of charging is lagging behind. If the station is charging several vehicles, it takes longer to be fully charged. It is a technology problem which is not caused by technology itself but the market volume. Only a limited number of drivers will drive EVs for a long-distance trip.
NIO decided to do its own swap station network, bidding on the day that it is convenient to drive EV for road trips.
“We accelerated our efforts to expand our highway power swap station network, covering both the G2 and G4 expressways as well as the majority of the G15 Expressway,” said Tung-Jung Hsieh on the Q4 Earnings Call.
Things are the same when it comes to charging trucks. NIO owned 100 charging trucks last year, which increased to more than 500 units for now, according to QIN.
NIO had no choice but to send a charging truck from Beijing to accompany a driver who wished to drive from Guangzhou to Xinjiang, where there was no charging truck. It changed this year. NIO is ready to serve customers who want to drive through the Beijing-Xinjiang expressway (G7) into a no man’s land this year as long as the customer call NIO two days before the travel. We see the huge growth in terms of NIO’s long term investment that increased 214.7% to USD 21.57 million in 2018 compared to 2017. It is hard to say when these investments can be turned into profits. Branch operations and swap stations located in certain areas cannot earn net profits.
However, national coverage of battery swap stations and charging trucks are essential for NIO, banks, and telecom companies. They have to consider overall efficiency and ignore local losses, according to QIN.
Traditional automakers have to give 15% of their total revenues to dealers, according to Qin. Data from the National Bureau of Statistics shows that total volume of car sales in 2018 is CNY 3.8 trillion (USD 565 billion), which means dealers earned USD 84.75 billion for providing selling, aftersales and other services in China last year.
NIO gave its answer towards the new market trends with NIO House and the NIO APP. To prevent and respond to range anxiety in both short-distance and long-distance, NIO is providing a wide range of power services with NIO Power. The company currently has 13 NIO Houses in 11 cities and 16 pop-up NIO Houses, according to the Q4 Earnings Call.
Size matters in the auto industry. Economies of scale makes it easier for automakers to earn profits from offering an ample range of products and gain strong bargaining power with suppliers. NIO’s heavy investment in its sales and services did somehow affect its short-term financial report. However, it is reasonable to project these factors into long-term success after NIO reaches economies of scale.
“Total subsidies for a EV ranged from CNY 67,500 (USD 10,040.96 ) to CNY 75,000 (USD 11,156.63) last year, which decreased around CNY 40,000 (USD 5,950.20) in 2019. Decreases only account for around 10% of the average NIO vehicle price, however, 30% for other entry-level brands and models, ” said QIN.
China’s EV market has already entered into a post-subsidy era. NIO claimed that it has foreseen the day when the brand was established and it realized that EV players cannot survive by only relying on marketing strategies or subsidies. NIO taps into the premium segment thus the company can receive a limited effect from decreasing subsidies.