Nio In Diversification Drive As It Tries To Stem Its Flood Of Red Ink

Key Takeaways:

• Nio’s loss widened 9.5% year-on-year in the first quarter to 5.26 billion yuan 
• The company focuses on higher-end electric vehicles, but plans to tap the middle and lower parts of the market with the launch of two new brands

By Lau Chi Hang

Nio Inc. NIO delivered another money-losing report card for this year’s first quarter, begging increasingly impatient investors to hang in there as the buzz rapidly drains from its electric vehicle (EVs) dreams. The company is trying to up its game with a brand diversification strategy, even as a growing number of foreign markets levy hefty new tariffs on Chinese EVs over accusations of unfair government support.

Founded by Li Bin in 2014, Nio has been bleeding red ink for its entire 10-year history, with cumulative losses of more than 80 billion yuan ($11 billion) between 2018 to 2023. Last year alone it lost 21.2 billion yuan. Without Li’s financing acumen, the brand might have already followed a growing number of its Chinese peers that have sputtered and been sidelined from China’s overcrowded EV sector.

In its first quarter results announced earlier this month, Nio reported revenue of 9.91 billion yuan, down 7.2% from a year earlier and 42.1% below last year’s fourth quarter. Its loss widened by 9.5% year-on-year to 5.26 billion yuan, though the figure narrowed by nearly 6% from the previous quarter.

Supercharged Spending, Low Margins

Nio’s constant losses reflect shortcomings in a number of its major metrics. Its gross margin is especially lagging, coming in at 4.9% in the first quarter – down 2.6 percentage points from the previous quarter and well behind the 12.9% and 20.6% for rivals X PengXPEV and Li Auto LI, respectively. Its gross margin for automobiles was just 9.2%, down 2.7 percentage points from the previous quarter, and well below Li Auto’s 19.3%.

Low margins aside, the company is also rapidly burning through its cash. It had 28.7 billion yuan in its coffers at the end of the first quarter, down by 9.8 billion yuan at the end of last year. It has been living off new cash injections, including the latest from Abu Dhabi’s CYVN Fund last December in the form of a $2.2 billion infusion.

The company’s vehicle deliveries are also sputtering. Nio managed to deliver just 30,053 units in the first quarter, down 3.2% year-on-year and off by 40% quarter-on-quarter. The company boasted that its deliveries of 15,620 and 20,544 units in April and May, respectively, averaged month-on-month increases of about 32%. But that acceleration owes mostly to price adjustments and promotions involving its BaaS (Battery as a Service). 

Its ability to maintain that momentum could soon run out of juice as the promotions and discounts ended at the beginning of June. After all, sales growth fueled by lower prices can only take you so far.

Nio’s Hong Kong-listed shares tumbled 7.6% to close at HK$38.25 the day after the latest report came out, as investor impatience grew over the continuing tide of losses. The stock is now down more than 70% over the last year from a high of HK$123.80. 

Multi-Brand Strategy

Like its peers, Nio’s big losses are a direct result of its heavy investment in R&D and infrastructure. Founder Li likes to point out that no matter how difficult things become for the company, Nio always aims to spend between 3 billion yuan and 4 billion yuan on R&D each quarter. The company also invested more than 3 billion yuan on infrastructure last year for 1,035 new power stations to increase coverage of its charging and battery-swapping networks. It expects to build another 1,000 stations this year.

Li was well aware that losing money year after year would lead to nowhere, and realizes his company needs to show a road to profitability to keep support flowing from its backers. He set two major goals to show his determination, namely steadily boosting sales, and, more importantly, optimizing the company’s profit margins.

The company traditionally focused on the higher end of the EV market. But after considering the limited potential of that segment, which accounts for only about 10% of the overall market, Li decided to take Nio into a new lane with a multi-brand strategy aimed at more mainstream buyers.

Last month the company unveiled its second brand, Onvo, which aims to start deliveries in September. It also recently unveiled a lower-end third brand, Firefly, which is still in the pipeline, with its first products set for delivery in the first half of next year. Onvo will cater to the family market, while Firefly is positioned as a small car for the mass market. The three brands, which all allow owners to switch out their batteries for newly charged ones at designated stations, saving charging times, are priced starting at 300,000 yuan for Nio, 200,000 yuan for Onvo and 100,000 yuan for Firefly.

Into A Blue Sea, Or Sea Of Red?

Only time will tell if Li’s ambitious plans will take the company into the promised land of profitability. But one thing that’s far more certain is the fierce competition that has already claimed a number of smaller players in China’s EV market. Onvo cars will face stiff competition from Tesla’s TSLA Model Y, Li Auto’s L6, and AITO’s M7, while Xiaomi (1810.HK) is also coming on strong with its new similarly priced SU7. Accordingly, Onvo will hardly be jumping into a blue ocean, but more likely a deep red sea with little space to grow.

The low-end market targeted by Firefly is another bloody battlefield. Here, the Firefly brand will also find itself boxed in by Geely’s similarly named Geometry E Firefly, with a suggested selling price of 69,800 yuan to 89,800 yuan; Leapmotor’s (9863.HK) AYA, costing just 65,800 yuan; and the even cheaper Wuling Bingo starting at only 59,800 yuan.

Previous rumors said that Nio’s Firefly would initially launch in Europe, part of a recent trend for Chinese brands to export their wares as growth in their home market slows. But such plans are coming under fire as major Western countries set up roadblocks to keep Chinese models from flooding their markets. Last week, the EU said Chinese-made EVs will be subject to tariffs of up to 38% starting in July after determining such cars were developed with unfair state support. Last month the U.S. also quadrupled its tariffs on Chinese EVs for similar reasons. 

Facing similar obstacles in the past, Alibaba founder Jack Ma once said: “Today is cruel, tomorrow is even crueler, and the day after tomorrow will be wonderful. But the vast majority of people will die tomorrow night and won’t live to see the sun the next morning.” That reality begs the question: Will Nio live long enough to see a thriving EV landscape of tomorrow bathed in brilliant sunshine, or will it die in the overheated environment of today?

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.