NIO (NYSE: NIO) Can’t Become a Tesla Killer and Tesla (NASDAQ: TSLA) Can’t Vanquish NIO – Any Prediction of an Impending Deathmatch Is a Fallacy
NIO (NYSE:NIO), one of the most prominent Chinese EV manufacturers, continues to attract attention in the financial world on the back of the stock’s 1,000 percent-plus gain in 2020. However, the financial sphere’s relentless fixation in creating a false deathmatch between NIO and Tesla should be taken head-on.
NIO can’t become a Tesla killer. Similarly, Tesla (NASDAQ:TSLA) can’t crush NIO. The two companies operate on a completely different paradigm and, therefore, the proliferation of this analogy is, at best, troubling. Let’s take a deeper look.
One of the most fundamental differences between NIO and Tesla relates to how these two companies approach EV production. Tesla is famous for its CAPEX-intensive in-house approach that aims to localize the maximum possible production nodes via Gigafactories. This gives Tesla granular control over its finished products but comes at a steep cost. NIO, on the other hand, outsources the production of its EVs to the Chinese government-backed contract manufacturer, JAC. In doing so, NIO has adopted the shrewd capital-saving strategy that was popularized by Apple for its iPhones. Crucially, the government-backing of JAC substantially reduces the counterparty risk for NIO. Of course, NIO itself was rescued from bankruptcy just a while back by a group of investors that are collectively known as the Hefei strategic investors. The group includes Jianheng New Energy Fund, Advanced Manufacturing Industry Investment Fund, Anhui Provincial Sanzhong Yichuang Industry Development Fund Co. Ltd., and New Energy Automobile Fund. As a result of this cash injection, these investors retain a residual interest in NIO Holding Co. Ltd. – the legal entity of NIO China. As is evident from NIO’s corporate structure and its choice of production contractor, the company remains heavily reliant on the involvement of the Chinese government, thereby creating a fundamental difference with Tesla, which is largely self-reliant.
The two companies also differ on the scale of their production capacity. While Tesla delivered 500,000 EVs in 2020, NIO could only manage 43,728 deliveries. However, NIO is currently on a steep production ramp-up, whereby its capacity is expected to reach 300,000 units per annum by the end of 2021 or early 2022. This production ramp-up is now evident from the company’s January 2021 numbers, with the company delivering 7,225 EVs during the cyclically weaker month, constituting an all-time high in the process.
Another point of difference between the two companies relates to their products and the market segment that they are targeting. Tesla’s Model 3 targets the entry-level market with very competitive prices, while Models X and Y target the higher end of the EV market. Tesla is also on the cusp of launching its full-fledged electric truck, dubbed the Tesla Semi, as well as a light-duty one, known as the Cybertruck. Crucially, the Cybertruck is expected to start retailing from around $40,000, creating a very compelling case for the product in the process. NIO, on the other hand, targets the high-end EV market with its SUVs – the ES6, ES8, and the EC6 – as well as the newly-announced ET7 sedan that will launch in Q1 2022. Virtually every NIO product retails in excess of $50,000, highlighting the very different product strategy that these two companies are currently pursuing. Moreover, while Teslas are sold in numerous countries, NIO is just taking the initial steps to go beyond China. To wit, the company’s Marco Polo project would see it enter the EU in 2021.
Batteries are another major source of difference between NIO and Tesla. To wit, NIO offers its customers a very attractive Battery-as-a-Service (BaaS) facility, whereby the customers purchase the EV but rent the battery by paying a monthly subscription fee. This slashes over $10,000 – depending upon the size of the battery pack – from every model. In essence, NIO is using this service to make its EVs more affordable. In conjunction, the company continues to expand its battery swap service via dedicated swap stations, where the depleted battery is replaced with a fully-charged one in a completely automated manner in under 3 minutes. This means that NIO customers never have to worry about the depleting energy capacity of the EV’s battery. This operational model is, of course, quite different from that employed by Tesla where the EV is sold with the battery pack. Moreover, Tesla continues to double down on lithium-ion battery packs, with the company recently announcing “tabless” battery cells – dubbed 4680 for their dimension of 46mm by 80mm – with electron conduction pathways etched through lasers in order to reduce production cost and improve recharging duration. In contrast, NIO recently announced a semi-solid-state battery, featuring an in-situ solidification hybrid electrolyte, an inorganic pre-Lithium Si/C composite anode, and a Nickel-ultrarich cathode with nano-coating. This battery, expected to debut in Q4 2022, will reportedly have an energy density of 360 Wh/kg, allowing the range of the new ET7 to extend beyond 1,000 km.
Of course, the ADAS capability offered by both companies forms another major point of difference. Tesla continues to refine its Autopilot system through machine learning and leveraging the data stream collected from millions of connected EVs already on the road. NIO, in comparison, recently announced its autonomous driving feature – NAD. The NAD consists of 33 different sensing units, including a 5mmWave radar, 12 ultrasonic sensors, and 2 high-precision positioning units. Given the very different approach to ADAS adopted by these two companies, any equivalence is faulty. Of course, we can deduce that Tesla’s Autopilot is the current reigning champion in the field, but to say that one would vanquish the other is a complete fallacy.
On a parting note, both Tesla and NIO constitute very promising stock plays. Consequently, exposure to both of these companies has the potential of producing outsized gains. However, I’m personally wary of the narrative that postulates the elimination of one by the other. Given the size of these two companies and their own quirky strengths, this is virtually impossible at this stage.
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