Trump: global trade war
Everything you need to know about the looming global trade war – including what it is and how it could affect markets.
The NIO share price has climbed higher since listing in New York, but there are fears that the Chinese electric car maker could suffer from the same problems that have bogged down Tesla for years. Here is everything you need to know about NIO and the stock.
‘I learned that we can do anything, but we can't do everything...at least not at the same time. So think of your priorities not in terms of what activities you do, but when you do them. Timing is everything,’ – American author Dan Millman.
Let’s take a journey back to eight years ago, when Wall Street was getting excited about a landmark initial public offering (IPO) from a small but high profile company that was unlike anything that had come to market before.
Tesla was not only the first American car company to go public since Ford back in 1956, but it was the first one to exclusively produce electric cars and was boasting of how it had broken away from the methods of traditional automakers. Although investors had a rare opportunity to gain direct exposure to what had long been agreed was the future of transportation, it was also at higher risk. Markets may now have become accustomed to new companies listing even if they are still losing billions each year – 75% of businesses that joined the US market last year were in the red - but it was less common when Tesla joined the market.
By the time it had completed its IPO Tesla had sold about 1000 Roadsters, its first and only car at the time, and was preparing to spend big on its expansion plans and introducing new models, despite having burnt through over $300 million and never making a profit. The market still lapped up its IPO and Tesla shares rocketed over 40% on the first day of trading. That’s because Tesla was, and still is, all about the future.
Move forward to today and you may get a feeling of déjà vu. Having sold over 1600 vehicles and burnt through $1.6 billion of cash, NIO has become the first of what is thought to be over 300 Chinese electric car companies to list in the US, selling its ideas of how it will capture the huge opportunity in China over its accounts that are covered in red ink.
NIO’s IPO however, failed to spark the excitement that Tesla’s did back in 2010, and the market is in a very different mood. When Tesla listed, the hope that had buoyed its share price was the belief that self-sustaining profitability would come in 2012 – but six years on and having raised over $19 billion and burnt through $9 billion – Tesla shareholders are still waiting for the company to become cash flow positive. Patience has run out, investors are refusing to cough up any more cash and at the bottom line, those considering investing in NIO fear history could repeat itself.
Learn more about whether Tesla will ever make a profit
‘We design, jointly manufacture, and sell smart and connected premium electric vehicles,’ – NIO.
NIO is an electric car company that sells exclusively in China. The company’s current model and its upcoming one are both aiming to cater to the premium SUV market, where there is very little competition. This ‘multi-year’ lead that it holds over domestic competitors has been possible because, instead of spending big on building a new plant and securing costly manufacturing licenses, NIO has gained a jumpstart by ‘outsourcing the things we can’t do’, including making the actual cars. Using an established carmaker, JAC Motors, meant the company could get its first car to market at a quicker rate and at a lower cost.
JAC Motors is a Chinese car maker that has been in operation for over 50 years, selling its own range of sedans, SUVs, MPVs, trucks and vans across South America, Europe, Africa and Asia. Starting from April this year JAC has a deal to produce NIO’s ES8 model for five years and will also make the next model, which will start rolling off the production line next year.
One key reason why JAC has been open to producing cars for another company could be down to the gap in capacity, as it is able to manufacture about twice as many cars as it can engines. With NIO developing its own powertrain with suppliers the partnership puts JAC’s excess capacity to good use. The company’s global status in electric cars has been raised since releasing new models under a partnership struck with German giant Volkswagen.
JAC has spent ¥2.2 billion ($320 million) on the Hefei plant where NIO’s cars are made, alleviating a hefty cost burden for the company, which is still finding ways to spend its cash. NIO currently pays JAC for each vehicle made on a monthly basis, but has agreed to cover the company’s losses for the first 36 months which, considering it paid $14.5 million for the first of what will be 12 quarters covered by the agreement, suggests that the firm has had to pay the price for getting a head start over the competition.
With manufacturing in better hands, NIO is focused on what it knows. The three co-founders that remain at the helm today all come from an automotive background, but not from the manufacturing department. NIO’s chief financial officer (CFO) and vice-president Hsien Tsong Cheng has largely been involved in finance at FIAT and Ford. President Lihong Qin comes from a sales and marketing background, and chairman and chief executive officer (CEO) Bin Li, the lead founder, currently heads New York Stock Exchange (NYSE)-listed Bitauto Holdings which provides in-car services such as internet content and shopping.
NIO designs its cars and sells them directly through its own NIO Houses (‘brand centres’ that boast galleries, libraries, kitchens and bookable workspaces) and focuses on the interior of the cars, providing ‘worry-free’ ownership to its customers.
The experience its cars offer is handled by its own artificial intelligent (AI) assistant, NOMI, which feeds users services from its partners and shareholders. Tencent and Baidu, both investors, supply their music and video content streaming services to NIO users through NOMI, and it even has a deal with JD Sports that has trainers delivered directly to your car. This might seem an odd area to concentrate on but it is forward-thinking. When your car starts driving itself then you suddenly find yourself bored. This frees you up to stream your favourite tunes or films, shop online or browse the Internet – you could theoretically have a self-driving office or shop, or a home away from home. NIO estimates in-car ecommerce is currently worth $1.4 billion but set to double to $2.9 billion by 2022 as autonomous driving takes off. As far as NIO is concerned, this is the real opportunity and where it wants to take the lead, and why developing NOMI and its autonomous driving will be critical if it is to chase this model. There are currently five levels of autonomous driving, the fifth being the complete self-driving cars that we would even be allowed to sleep in, and both NIO and Tesla believe we can have cars drive us around a lot quicker than most.
Read more about how AI could make autonomous vehicles safer
Tesla, which has not earned a reputation for staying on schedule or delivering promises, said in 2016 it would launch ‘full self-driving’ capabilities by 2019, which is apparently still on schedule. NIO has more conservative ambitions and has (rightly) been more vague about what it can introduce and when, stating its current aim is to reach level four of autonomous driving ‘in the coming years’. No one is expecting to see a fully autonomous car zipping around next year – there may be self-driving pods following pre-programmed routes around the likes of Milton Keynes, but having an autonomous car capable of going anywhere like any other car is a whole different story. It is coming and NIO’s strategy is clear, but it could be premature to focus on the future before getting a grip on the present.
China is an unrivalled leader when it comes to adoption of electric vehicles, driven by the sheer size of its population and the government support. However, there is a big problem that NIO and others in China need to tackle.
Anyone purchasing an electric vehicle will only do so in the comfort of knowing they can charge their vehicle when and where they need to. This is again an issue of ensuring electric cars are in no way limited compared to traditional cars. In developed markets like the US and Europe the primary solution has been installing charging units at people’s home and then supplementing them with public ones in areas of high-density parking, such as train stations. Home charging gives users the confidence to complete all their everyday journeys, and, as long as the batteries and therefore the range continue to improve, they will increasingly be comfortable completing longer journeys.
Read more about what metals are needed for electric vehicles and energy storage
The story in China however, is different. The way electricity is wired means that most residential buildings can’t have a home charging unit installed, including NIO’s Power Home. More than half of China’s 450,000 charging units are privately owned, suggesting that the government is failing to roll out as many public chargers as fast as consumers are purchasing electric vehicles. But while building 214,000 public chargers may seem insufficient for 1.4 billion people, it is already more than double the amount of petrol stations in the country.
An even bigger problem could be the lack of standardisation. The type of plug connections vary across the country, as does the amount of output power, meaning the time it takes to charge vehicles and the cost both change depending on your circumstances (one output charges a car in one hour and another eight). NIO says a staggering 41% of Chinese consumers refuse to buy an electric vehicle because of this alone.
One admirable characteristic of Tesla was its refusal to wait for the infrastructure to be built. There wasn’t enough charging points so they built them. NIO, on the other hand, is taking a slightly different approach. While it provides home installation where possible, China’s unique challenges mean it has had to think outside the box. It has a three pronged approach to charging: Swap, Valet and Mobile. Swap allows users to swap their dead battery for one that is charged, Valet sees users request their car is picked up by NIO who then take it to the nearest unit (including public ones), charge it, and then drop it off where you want it and Mobile sees NIO trucks travel around to offer charging infrastructure where it is needed. By the end of this year it expects to have between 40 to 80 Swap stations open and 400 Mobile trucks whirling around the country, capable of refuelling a car for a 100 kilometre journey (about one-third full) in just ten minutes.
Customers can buy a complete service package covering everything from third-party insurance, basic servicing and maintenance, more mobile data and free use of its power solutions for a monthly fee (which can be cancelled at any time) or on a per-charge basis. Everything is requested and controlled through its mobile app which, with 520,000 registered users, has proven much more popular than its cars.
Read more about Chinese tech giant Xiaomi’s shaky start to public life
Expanding its power solutions is by no means cheap - through June 2018 NIO spent over $10 million - and the company openly admits it is untested not only when it comes to making cars but also providing the crucial services needed.
NIO has proven its pedigree through its first model, a concept supercar named the EP9 that was launched in 2016 and went on to become the fastest all-electric car round the famous Nürburgring Nordschleife track in Germany. NIO was also the title sponsor for the winning team of the first FIA Formula E season in 2015, which, just like traditional automakers and Formula 1, is a good place to be at the forefront of, regardless if you build internal combustion engines or high-power batteries.
NIO’s challenge is proving it can cope with producing and delivering a mass model. The first deliveries of the seven-seater ES8 SUV were made at the end of June this year, only months before its IPO, and in the first three months it has shipped over 1600 units and secured 16,000 reservations, with the latter outpacing the former.
NIO’s ambition is to release a new car every year and refresh each model every two years, but its focus on software and the inside of the car can evolve as like Tesla, it has the ability to automatically beam updates without the car having to be taken to a garage.
NIO’s next car will be launched later this year, when it will unveil a smaller and more affordable model. The five-seater SUV, the ES6, will be manufactured by JAC with deliveries starting in the first half of 2019 – likely the very backend of the period based on how the ES8 played out – and will be priced somewhere in the region of ¥270,000 to ¥300,000 compared to the price tag on the ES8 of ¥374,000. But the car is not intended to be a downgraded version of its predecessor: the ES6 range will be 28% longer at 455 kilometres. Still, that is not as far as the longest range of an electric car, a title held by Tesla which has broken the 500 kilometre mark.
According to NIO, the only company in the top ten electric vehicle makers in China serving the premium SUV market was Tesla, which, because it is imported from the US, is considerably more expensive. NIO believes there will be limited competition in this segment (which both the ES8 and ES6 cater to) for the coming years and is therefore looking to capture as much of it as possible.
|NIO ES8||Tesla X 75D|
|Average price (RMB)||373,933||1,048,081|
|Acceleration to 100km/h (secs)||4.4||5.2|
|Top speed (km/h)||200||210|
|Battery capacity (KwH)||70||75|
|Max torque (N.m)||840||660|
|Max power (kw)||480||386|
|Driving range (km)||355||406|
|AC charging time||Ten hours||Eight hours|
|DC charging time||1.1 hours||75 minutes|
|Autonomous driving level||Level two +||Level two +|
NIO undercuts Tesla in China because it is based there. It produces cars where the market is, avoids import tariffs and custom duties, and benefits from the generous subsidies on offer from the government. This obviously brings up the issue of US President Donald Trump’s trade war with President Xi Jinping. Both continue to retaliate to one another’s tariffs and earlier this year Tesla, shipping cars from its Gigafactory in Nevada, had to raise the price of its cars in China by $20,000 as a result of increased tariffs. That is significant as Xi has lowered tariffs for vehicles imported from everywhere else but the US from 25-15%.
Read more about how Trump has taken the trade war to the world stage
The costs of building a new car company from scratch are high and only rise when it’s focused on the newest technology that is still rapidly developing. To NIO’s credit, it has not been phased by the big barriers to entry, like the lack of a factory, skills to build a car or even a manufacturing licence, and has gained what could prove to be an invaluable lead over the competition. Its alliance with JAC has proven crucial, but it ultimately takes away control (although note NIO’s description of ‘jointly manufacture’) over what is the most important aspect of the business. For the next five years, anyone investing in NIO needs to pay an equal amount of attention to JAC, and securing information is not easy.
Tesla has had to bring a significant amount of production back in-house over the last couple of years because partners were either delaying the entire supply chain or providing shoddy goods. Issues like these have been fundamental drivers behind Tesla’s prolonged journey to profitability. That is a problem that NIO will undoubtedly have: it sources over 1700 components from 160 suppliers, ‘many of whom are currently our single source suppliers for these components’.
If one supplier runs into trouble then NIO’s production line could grind to a halt and it has no intention of addressing the issue anytime soon – it states that ‘this will be similar for the ES6 and any other future vehicle we may produce’. The most crucial partner in this context is Chinese firm Contemporary Amperex Technology Co (CATL), which is its only qualified supplier of battery cells. Other notable suppliers that investors need to watch out for is Mobileye (processors), Continental (air suspension system), Bosch (brake booster for driver assistance systems), ThyssenKrupp (steering systems) and Novelis (aluminium coils).
The reasoning comes down to cost, with NIO claiming it would be too expensive to secure backup or alternative suppliers due to the amount of testing and authentication work that would have to be done.
NIO has accepted that it will continue to spend cash over the foreseeable future as it introduces new models, opens more NIO Houses, ups its marketing efforts and most importantly, builds its own manufacturing plant.
The carmaker had $608 million in the bank at the end of June, after spending $461 million in the first six months of 2018, and in the 12 months to June 2019 it intends to spend another $600 million with a further $1.2 billion budgeted for the following two years.
|(RMB, billions)||FY 16||FY 17||H1 17||H1 18|
|Net operating cash flow||(2201)||(4574)||(2132)||(3634)|
|Net investment cash flow||117.8||(1190)||(1721)||(1153)|
|Net financing cash flow||2292||12,867||4694||1897|
|Total net cash flow||249.5||6934||821.9||(3051)|
Of the $1 billion raised from its IPO, 40% will be funnelled into research and development (R&D), 25% on marketing activities and NIO Houses and 25% on its new manufacturing plant. The remaining 10% has been earmarked as working capital.
Although revenue only started to properly come through the door after the end of June there are still concerns that NIO is going to run out of cash, and quickly. This wariness has only been encouraged by the lacklustre performance of its IPO, which raised just over half its maximum total and was priced at the very bottom of its price range. It believes it won’t have to address this problem for at least 12 months (when its new, $1.2 billion two-year budget will begin). There are no signs of whether it would opt for debt or equity, but it already has $720 million worth of debt and plans to fund half of its new manufacturing plant with borrowed funds.
|(RMB, millions)||Q1 17||Q2||Q3||Q4||FY16||FY17||Q1 18||Q2||H1 17||H1 18|
If it hits a wall with funding then NIO could fall flat before it even has the opportunity to manufacture its own cars or release a new model. Its ‘critical’ charging services and ambitions to lead in-car technology and services means spending big, and if the money isn’t there then it could be forced to cut back before it has got the chequebook out. The firm has already scaled back its global ambitions by stating that it only plans to sell in China for the immediate future, after telling the Financial Times last year that it was looking to become a ‘real global company’.
Tesla may have raised billions and, despite its troubles, grown into $50 billion company that still hasn’t made sustainable profit, but it is unlikely that those investing in NIO will be willing to spend the same sums for the same mistakes to be made all over again.
Read more about crunchtime for Tesla: where next?
NIO listed American Depositary Shares (ADS) on the New York Stock Exchange on 12 September 2018. The company priced each ADS at $6.26 each, the very bottom of its $6.25 to $8.25 target range. That raised just over $1 billion for the company, just over half the $1.8 billion it had hoped to raise, and valued NIO at $6.4 billion.
There are a few extremely important aspects of NIO’s structure and ownership that all investors must be aware of.
Firstly, NIO’s CEO and leading founder Bin Li has retained 48.5% of the voting rights in order to effectively keep control of company matters and Tencent, as its biggest institutional shareholder, will hold over 15%. Both hold different classes of shares which hold more voting rights than that of the Class A shares, the underline the ADSs offered under its IPO.
Secondly, NIO has a ‘discretionary proxy’ in place, which means if a holder of an ADS does not cast their vote on matters proposed to shareholders then the company can cast a vote in their place using the underlying Class A shares. Quite simply: you own a slice of the business when you invest in NIO but you have virtually no say or influence over how the company is managed. Management’s dominance has already been demonstrated as the company has said it will have ‘considerable discretion’ over how its IPO proceeds are spent, despite outlining a vague budget.
Thirdly, those that took up NIO’s IPO offering were paying a considerable premium: the $6.26 price and $6.4 billion valuation compared to its pro-forma net tangible book value at the end of June of just $1.07 and $882.4 million. Existing investors like Tencent paid an average of just $2.88 per share prior to the IPO.
While its IPO was a bit flat, NIO shares performed well on the first day of trading and have continued to rise since listing.
NIO is hoping to take manufacturing in-house with plans to build a $650 million factory in Shanghai by 2020. This will be the home of its third mass-manufactured model, the ET7 sedan, and be capable of producing up to 300,000 vehicles per year.
The company wanted to fund half of the development using IPO proceeds but, having raised less than it had hoped, it may have to re-allocate funds or source more debt, with access to ‘no interest or low interest’ government-supported financing. The factory is expected to be NIO’s key to securing its own electric vehicle manufacturing licence, allowing it to benefit from the NEV credit system.
NIO’s domesticated model may mean it can undercut foreign rivals like Tesla but that is all about to change. Tesla has announced it will build its own manufacturing plant in Shanghai, and one that overshadows NIO’s in every regard. Reports suggest the $2 billion Gigafactory, its third one and only one outside the US, will have a capacity of 500,000 cars. Tesla plans to use debt from local Asian markets, particularly as it is unlikely to secure the same favourable terms from US investors that were willing to buy its $1.8 billion junk bond last year with a coupon of 5.3%.
Tesla has said it hopes to start production in China within the next three years, with significant investment starting in 2019, aligning with NIO’s construction timeline. NIO has admitted that construction of its new plant, plus the second phase of its existing Nanjing plant, used for pilot production and to develop batteries and driving systems, is largely out of its hands as government entities are in charge of development. While it has left the door open to using JAC beyond the existing agreement, any delays in opening its new plant means NIO could have to delay the ET7 and new models, leaving it more reliant on older models for longer. Cost over-runs are also a possibility.
While NIO will hold its price advantage until Tesla opens its new plant, it will struggle to retain its lead once its US rival enters. Tesla already has strong foundations to build on – China accounts for 15% of its total sales and it is a fundamental part of the charging infrastructure with hundreds of Superchargers across the country already and a similar amount of new ones in the pipeline.
Tesla understandably found itself bogged down in issues as it was opening its purpose-built Gigafactory, and is still hitting trouble today. The real problems for NIO, openly inexperienced in manufacturing, are likely to occur when its new plant opens, if not beforehand.
|Market cap||$8.8 billion||$51 billion|
|Current models||ES8||Model S, X, 3|
|Other products||Power Home/Mobile/Swap, app||PowerWall/Pack, Solar systems|
|Latest production run-rate||1100 per month||17,800 per month|
|Sales||Over 1600||Over 300,000|
|Markets||China||US, Europe, China, Australia|
|Operating cash burn||$550,000 in H1 2018||$270 million in H1 2018|
|Financial losses||$1.1 billion in 2.5 years||
$5 billion in 5.5 years
|Management||Bin Li||Elon Musk|
|Institutional shareholders||Tencent and Baidu||FMR and Baillie Gifford|
‘Our growth depends significantly on the availability and amounts of government subsidies, economic incentives and government policies that support the growth of new energy vehicles generally and electric vehicles specifically,’ – NIO.
NIO’s ability to produce a premium SUV at a much lower cost than imported competition will be stretched when Tesla opens up shop in Shanghai. Tesla has been able to enter the market thanks to China’s decision to open up its markets to foreign companies. Until earlier this year foreign companies had to form a 50:50 joint venture with a Chinese firm to enter the market, but now it has binned those rules for numerous sectors. Electric vehicle companies were allowed in immediately, while traditional carmakers can enter from 2022.
That is not the only part of government support that is waning, with the country having lowered tariffs on imported cars (outside the US) to entice more competitors, and announced certain subsidies will be 20% lower in 2019 and 2020 relative to 2017.
With NIO likely to need significantly more funding and more likely to encounter problems from the vulnerable bottlenecks in its supply chain (as well as later when it opens its own manufacturing plant), the company is a risky opportunity but one offering big rewards. NIO has a foothold in the world’s largest and fastest-growing major market, with China accounting for over half of global electric vehicle sales, and has a unique forward-thinking model based on a vision of autonomous driving and in-car services.
Tesla’s future is still being debated eight years after its IPO, but the bulls behind NIO will be hoping to have proven the bears wrong much quicker than that.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.