Entry Into the German Market and a New Affordable EV: NIO Is Throwing Down the Gauntlet for Tesla and Charting a Path To Sustainable Profits
NIO (NYSE:NIO), one of the largest manufacturers of electric vehicles in China, is looking increasingly comfortable in boldly challenging Tesla (NASDAQ:TSLA) left, right, and center. While the outcome of this David vs. Goliath battle is as yet unknown, NIO is certainly doing all it can to stack the probability in its favor.
Readers would remember that NIO entered the EU via Norway back in May. Since then, a plethora of reports suggest that the company is working feverishly to expand its footprint in the EU, one of the largest markets for electric cars in the world. To this end, multiple sources continue to suggest that NIO will push into Germany in 2022, thereby establishing its presence in a key geographical constituency that is currently dominated by Tesla.
We had noted on this subject that the move would result in significant upfront costs for NIO, given its proclivity for Battery-as-a-Service (BaaS) and the attendant need to deploy a matrix of Battery Swap 2.0 stations capable of performing a completely automated battery swap in under 3 minutes. Nonetheless, expansion beyond China is critical if NIO is ever to achieve sustainable profitability.
Of course, NIO is not just relying on its existing product portfolio to capture market share. As per a fresh report out of China, NIO is secretly working on an affordable EV that will retail for around RMB 200,000 ($31,300) under a sub-brand. Should this materialize, NIO will be directly challenging the current dominance of the Tesla Model 3 in this price range.
While details remain murky at this stage, including the financial structure of the purported sub-brand, the launch of this new affordable EV can play a crucial role in spurring sustainable profits for NIO. Let’s do some simple calculations. As of Q1 2021, the comapny had reported a vehicle margin of 21.2 percent. However, the margins for affordable EVs are much narrower. Let’s assume that the cheaper model will entail a 50 percent cut on the vehicle margin, corresponding to an interpolated margin of 10.6 percent. Moreover, Tesla was able to sell 439,760 units of its Model 3 in 2020. If NIO’s affordable EV were to capture just 10 percent of this sales volume, it would contribute $145.90 million to the company’s bottom-line profitability. For context, NIO had recorded a net loss of $68.8 million in Q1 2021. If we were to factor in the newer EV model at these stipulated conditions, it would transform NIO’s quarterly loss into a profit of over $77 million!
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Given these developments and their attendant encouraging implications for NIO, it is hardly surprising that the company’s investors are in a bullish mood. Since the 13th of May, the stock has recorded gains of over 46 percent. In the same time period, Tesla has recorded a gain of just over 6 percent.