With 10 years of fast growth in the rear view mirror, Nio braces for a tough road ahead

Electric carmaker Nio founder William Li celebrated the company's 10th anniversary on November 25 with a letter to his 32,000 employees. What insights does it give us?

In the letter, the chairman and chief executive office reflected on Nio's achievements over the past decade.

One point: In the China market for all-electric vehicles, where the average price exceeds 300,000 yuan (US$41,370), Nio holds about a 40 percent market share.

Another point: The company has built 2,750 battery swap stations and more than 24,200 charging piles in China and Europe.

Additional points: Nio has completed its "full-stack technology" setup, filed over 9,300 patents, and accumulated 620,000 users.

In fairness, these are impressive feats for a carmaker founded only in 2014, but they may seem modest or even lackluster in the context of broader shifts in China's automotive market.

When Nio was founded, it was a pioneer in the global electric vehicle industry. Yet, a decade later, the company has lagged newer entrants like Zeekr, Aito and Leapmotor in terms of deliveries, and is far from catching up with industry leader BYD.

What's interesting about Nio, though, is that, despite widespread market skepticism, it has managed to offer a glimmer of hope when least expected.

Widening losses

According to its financial results for the third quarter ending September 30, Nio's revenue reached 18.67 billion yuan, down 2.1 percent year-on-year but up 7 percent from the previous quarter.

Meanwhile, vehicle deliveries rose to 61,855, compared with 55,432 units a year ago and 57,373 a quarter earlier. It doesn't take a rocket scientist to see that the sales growth was largely driven by price cuts.

Indeed, the average selling price of Nio vehicles was 270,000 yuan, lower than both market expectations of 276,000 yuan and Nio's own guidance of 282,000 yuan.

Ironically, Nio has fallen short of the target 300,000-yuan price Li originally set for the brand.

The carmaker attributed lower revenue to expanded September promotions aimed at offsetting a drop in orders. Deliveries fell from 21,209 units in June to 20,498 in July and to 20,176 in August, before rebounding to 21,181 in September.

On the minus side of the ledger, Nio's operating losses, its principal scourge, continued to widen. The company recorded 5.24 billion yuan in losses during the third quarter, up 8.1 percent over 2023.

Nio blamed the losses on the opening of new stores under its sub-brand Onvo, which led to higher sales and management expenses.

Fresh cause for concern

Nio's gross profit is the only bright spot amid a bleak report. It jumped 32 percent year-on-year and 19 percent quarter-on-quarter to 2 billion yuan, mainly on the back of lower prices for lithium carbonate, a key material for batteries.

These latest financial results offer fresh cause for concern, and indeed, investment banks are mixed on what the figures tell us.

Deutsche Bank, for example, raised its 2025 forecast for the company to a "buy" rating in a recent research note that cited the rollout of the Onvo L60 and the company's 2025 plans to double sales. The L60 is an electric sports utility vehicle launched by Nio's sub-brand Onvo.

Goldman Sachs, however, downgraded Nio to "sell" from "neutral," citing lukewarm order momentum, slow production ramp-up and delivery, and intensifying market competition.

Nio shares in Hong Kong and New York have dived by half this year. In Hong Kong, the stock price fell to HK$69 (US$8.87) this week from HK$35.45 (US$4.55) in January. On the New York Stock Exchange, they plummeted from US$8.50 to US$4.38 at the close of Wednesday's trading.

Where investor optimism remains, it seems based on Nio's "strongest-ever" quarterly earnings guidance. In the third-quarter reporter, the company forecasts deliveries of a minimum 72,000 vehicles in the fourth quarter, up 44 percent on the year.

The expected surge in deliveries, aside from price cuts, is also attributed to Nio's move to branch out into the 200,000-300,000-yuan price segment.

On September 19, its sub-brand Onvo launched its first model, the L60, which starts at 206,900 yuan. Since then, the company has been steadily ramping up production and delivery of the L60, an exchange filing shows.

In October, 4,319 units of the L60 found buyers, but the figure is only about halfway to the monthly delivery target of 8,000 units.

During the earnings call for the third-quarter results, Li stated that starting next year, Nio would enter a new product cycle, with new launches from Onvo and Firefly, another new sub-brand.

The first Firefly model, priced around 150,000 yuan, is expected to be launched in late December, targeting the high-end of the small car market.

Long-overdue step

Sitting at the helm, Li emphasized in his letter to employees that the next two years are crucial.

"We must keep launching competitive new products and improving our operational efficiency to double our sales next year and achieve profitability in 2026. These are goals we cannot afford to miss," he wrote.

Nio is apparently betting on a foray into all price segments with a multi-brand strategy. Its executive luxury sedan, the ET9, became available for pre-order at 800,000 yuan early this year.

But the company has a big test coming up, namely, to prove it can enhance its operational efficiency and stem losses.

In the letter, Li addressed investors' concerns about the lack of operational efficiency across all aspects of the company, including research and development, car production, stores and marketing.

"If the efficiency of these basic operational units improves, the entire company's efficiency will also improve," he stated.

This suggests that Nio may likely implement cost-cutting measures in the coming years, including layoffs and reductions in project expenses.

This is a necessary but long-overdue step. Nio's third-quarter financial statements reveal that spending on research and development and sales overhead costs eat up about 40 percent of its revenue. Without cutting those costs, the goal of doubling sales and achieving profitability by 2026 is all but a pipe dream.

Axing wasteful ventures

From a long-term perspective, I remain bearish on Nio's outlook. This is not just because the company's new product lines are on track to compete with those from BYD and Tesla amid an onslaught of price wars.

It's also because certain ventures, such as developing smartphones and chips, should be either scaled back or scrapped altogether to prevent a further drain on resources.

Moreover, Nio's battery swap stations are costly to build, and no industry player has thus far seemed willing to access the network and share the cost.

Worse, revolutionary battery technologies could deal a crushing blow. If solid-state batteries with considerably higher energy density do come to market, they could render Nio's battery swap investment virtually obsolete.

Nio House, a social space for vehicle owners that also doubles as a showroom, is another expensive venture I'd love to see axed from the company's extensive portfolios.

Moreover, Nio's exclusive focus on all-electric vehicles puts it at risk from more cutthroat competition down the road.

Traditional rivals like Xpeng and Zeekr are considering adding extended-range and plug-in hybrid models to their product lines. By focusing solely on all-electric vehicles, Nio could find itself an anachronism in current market dynamics.

The challenges Nio faces now are no fewer than those from five years ago. In 2020, it narrowly escaped being delisted from the New York Stock Exchange or from filing for bankruptcy, thanks to a 7-billion-yuan cash infusion from three state-owned investment firms in Hefei, the capital China's Anhui Province.

As Nio bounced back, the state backers reportedly made a fivefold return on their investment by cashing out part of their Nio shares at a high point. Since then, the story of Nio's dramatic turnaround has become a legend in the industry.

Despite its financial distress, Nio remains a darling for some investors. In December last year, the company received a US$2.2 billion investment from the Abu Dhabi-based CYVN consortium. Nio now holds 42.2 billion yuan in cash and cash equivalents. The key is how to spend the money wisely, aside from paying upstream supplier debts.

The autonomous driving race

Unlike many critics, I don't feel put off by some of Li's sometimes tactless remarks aimed at traditional combustion cars. To me, he is still one of China's most audacious and innovative leaders in the automotive industry, with a rare ability for "self-reflection."

In his letter, Li wrote that the most intense and brutal phase of the qualifying race for intelligent electric vehicles has already begun.

"In two or three years, only a few strong companies will remain standing," he wrote. "What we will face next is competition on a higher level; we cannot afford any weaknesses, and there won't be quick wins."

He is spot on about the looming transition to intelligent driving technology. The introduction of Tesla's "full self-driving" system into China earlier this year is a challenge for domestic automakers to develop their own smart driving solutions.

Nio's service quality and user experience, which it prides itself on, will become vulnerable in the face of this pivot toward self-driving cars.

Compared with rivals like Huawei and Xpeng, its smart driving technology, called "navigation on autopilot" is now at a disadvantage.

The best road ahead for Nio, I believe, is to adopt a "pick and focus" strategy, exercising financial discipline and prioritizing what really matters to its future.

(The author, a former Shanghai Daily opinion writer, now works as a business analyst and communication strategist. He has no conflict of interests to declare.)