Now we have finally put to rest the whole BYD doesn't make profits on BEVs, we can move
on.
And who is next on the list of non-profitable Chinese EVs?
NIO, and a lot of you tell me that NIO does have the highest chance, so I thought we could
go through what is going on with the company and accompany and take a look at their financials
too.
NIO INVESTMENT Now I hope are you are sitting down for this,
as it may feel a little bit unexpected, but I was actually one of the early NIO investors.
I bought a few thousand shares shortly after the IPO, very close to doubled my investment
shortly after that.
Why, you might ask.
Well I believed electric vehicles were the future.
I didn't study Tesla anything close to like I do now, on top of that, there just wasnt
the information back then there was now.
Instead we had to listen to talking heads saying that there is competition coming.
Lots of other authoritative people, I say authoritative not necessarily credible, posting
their theories as to how the Chinese will be able to make lower cost EVs, and we didn't
really have the Model 3 in volume production then.
So you might say, I diversified my portfolio, keeping it an EV portfolio still, but invested
in the potential of a Chinese EV company perhaps also being successful.
I mean it was a small investment relative to my Tesla investment, but perhaps some diversification
was necessary, or at least I thought back then, but these days what a better a diversified
company to invest in other than Tesla.
Anyway, after the stock price high, it started crashing, and I ended up selling out with
a loss of about 40%, at around $4 a share, and then it crashed to nearly $1, sure it
recovered a lot after that, but I was done, and learned a lesson not to invest in companies
you dont know much about, just for the sake of it.
Of course I placed all those funds into Tesla and they increased about 20 fold.
COPY But they thought was that perhaps the Chinese
could easily copy Tesla, and they are so good at manufacturing, replicating, and reducing
costs.
And we didn't know to what level Tesla were at this stage, they had very little experience.
It wasn't until later when we had Munro tearing down the Model 3, to see what truly amazing
job they were doing.
Thanks very much Sandy you truly helped with my conviction back in the early days.
Of course it was plain to see that the specs of the NIO did not match Tesla either, and
that Tesla really had done something uniquely special.
However, we were still unsure back then of the barriers to entry.
Can't the Chinese just tear these down and reverse engineer Tesla's technology for less
cost?
It turns out no, not some small Chinese start up, nor some juggernaut legacy auto company.
Tesla do amazing things that no on else appears to copy.
Similar to how Microsoft couldn't make a better version of Google, or the iPod.
LOOKS As for looks, I think NIO are doing an alright
job, they look tidy, smooth, and nothing too much that will date.
Compared to the likes of Hyundai, that are designed for the fashion of that moment, and
will date very badly.
Tesla is obviously the champion of timeless car designs, hence the Model S still selling
with a huge waiting list with a design from over 10 years ago.
NIO even have nice interiors, with minimal buttons.
However, I don't understand why they are not using widescreen and going for portrait, this
is not the way.
Also the computer AI assistant is gimmicky.
Even if they make it cute by calling it Nomi, there is no need for that, it adds to cost
and more production complexity.
BATTERY SWAPPING And if we want to talk about over engineered,
then it has to be the battery exchange stations.
Ok I understand that China is a different market, and people live in high dense areas
in apartments where they may not be able to charge their batteries.
And NIO also want a unique selling proposition away from Tesla, to give customers a reason
to buy a NIO over a Tesla.
But wow its a complex thing, and also means that all those extra batteries that are in
the exchange, are not in cars being sold to customers.
Charging will become more ubiquitous and faster over time, that this was not necessary, and
will soon be antiquated.
Meanwhile all NIOs has to be designed with this in mind, and thus compromising the design
for the car, and obviously can't have structural battery packs as a result.
And again adding to cost and manufacturing complexity.
But like I said it may be for a certain market, that do want this However, the process isn't
the quickest and often you have to wait and queue, its simply not scalable.
CELLS Now NIO is different from the majority of
the other Chinese EVs, in that they are not using the lower cost LFP cells, therefore
they actually do make cars that have a decent range.
Decent range compared to other Chinese EVs, not compared to Tesla.
Well actually though, NIO have found ways of getting more range from their vehilces,
by using 150 kWh batteries, that's right, if they use batteries twice as big as Tesla,
then they can actually achieve a competitive range to Tesla too.
Of course the added cost is another factor, and the fact it likely handles like a dog
as a result, but it might look good on paper.
As they can say they get 1,000 km range with their cars.
Of course that is NEDC, which is only 700 km range EPA, or 430 miles, which sure is
a about 70 miles further than the Model 3 Long Range, but still only gets the same 0
to 60 time, despite twice the battery size.
20% more range, with twice, I repeat twice the size of the battery.
Yet they have bragging rights that they have longer range than Tesla.
And part of this is just purely marketing.
Marketing to investors, not to customers.
As it may indeed be a way of supporting the stock price long enough, until the market
changes, and consumers actually see more value in EVs rather than just Teslas.
Or there is a revolutionary new battery technology to come and save they day.
Well there is, but it's Tesla's 4680.
But for a more fair comparison their NIO ET7 100 kWh hour battery is getting just 305 miles
of range, compared to 400 miles in a Model S. And just 240 miles for a 75 kWh battery,
compared to about 360 in a Model 3 with similar size battery.
Yea, that's not great, oh and the worse part of that, is this with nickel cells, not LFP.
MODELS Now NIO actually offers about 3 times more
models than Tesla, if we exclude the S and X.
They are particularly focusing on the SUV market, offering various shapes and sizes.
Of course whenever you offer more models it means less economies of scale.
But if you cant hit volume production, it makes more sense to start another production
line for a different vehicle in a different market, that may be able to get more demand.
Yea, there is a demand problem somewhat for some SUVs.
Especially when you factor in how they are all getting subsidies, without those subsidies,
they would have a serious demand problem.
Oh and if they didn't sell them at a loss either and tried to make a profit, then there
likely would be a demand problem.
PRODUCTION Let's take a look at production, well in July
it looks like NIO sold 10,000 vehicles, and that's across the board for all their models.
They haven't even hit half way to volume production, even if you added up all their models combined,
let alone volume production for just one or let alone 3 times volume production like the
Model Y in Shanghai.
FINANCIALS Anyway, that's an overview of the company,
I could go on, but you get the idea.
But it's all moot, if they are actually going to end up making a profit and be one of the
few EV companies that survive, so let's take a look at the financials.
Well Q2 doesn't seem to be out yet, but I can't imagine they would have made any major
break-throughs since Q1, and should be able to get a close enough idea of how well they
are doing.
By which I really mean, how much longer they have, until they need to really turn a profit.
Anyway, they are currently at a vehicle gross margin of 21%.
Which is actually pretty good, considering how very few vehicles they produce.
But like I said they produce very few vehicles, and it's all about getting your gross margin
higher than your OPEX, or you go under.
Anyway, that's $1.56 billion in revenue with a cost of $1.34 billion.
Leaving $228 million gross profit.
Alright so on to the all important OPEX, which is a massive $573 million.
Leaving a $345 million loss in operations, and a total net loss of $281 million.
If we annualize that, it's just over $1 billion.
Looking under their balance sheet, they actually have a working capital currently of what appears
to be $5 billion.
Which is actually a reasonable amount.
In fact at their current burn rate they should be able to last at least another 5 years.
5 years is a long time to be able to increase production, reduce costs, hope for new battery
technology, and other potential software upgrades like FSD to increase income, along with the
overall market changing and people willing to spend more on electric vehicles.
SOLUTION NIO just need to increase their production.
Of course they are still being aided with subsidies too, which may not last forever.
They also need to work on reducing their OPEX.
But increasing production is their best shot, which will also add to margins, and with higher
margins and quantity, they may be able to cover OPEX.
I think they should drop their battery exchange business, likely redesign their cars without
the removable pack, the battery exchange side of the business appears to even have a negative
gross profit, unlike vehicle sales.
SUMMARY Look I am not going to lie, and I do try and
be objective and step outside of the Tesla Fanboy mold.
I think NIO actually have a chance of survival.
I am not sure how big they may get, they are still doing small numbers, and I am not sure
what they have secured in the way of cells, remember it's nickel cells they need not LFP,
which is a lot more scarce, and they have very littler vertical integration.
I don't expect them to be particularly big, obviously nothing like Tesla, but they could
hit profitability, and perhaps be sustainable.
Although they would still need a lot of profit to justify the current price tag of the stock,
even if they got to 10 times the production level.