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Nio Stock: A Chinese Company Comes Home

Dana Blankenhorn

Editor’s Note: This article was corrected on June 5, 2019, to correctly specify which office will be closing.

Nio (NYSE:NIO), billed as a Chinese version of Tesla (NASDAQ:TSLA), is doing something Tesla can’t do — going under the protection of its government.

Nio Stock: A Chinese Company Comes Home

Source: Shutterstock

A new joint venture called Nio China amounts to a government bailout, with $1.45 billion being funneled into a manufacturing relationship between Nio and state automaker GAC.

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The joint venture was announced as Nio delivered a supremely disappointing first quarter. Unaudited figures showed sales cut in half from the previous quarter, and even those had a negative margin. The company lost $395 million, 38 cents per share, on sales of $243 million.  It delivered 3,989 of its ES8 vehicles.

The shares have now lost half their value during the year and opened for trade today at $3.07, a market cap of around $3 billion.

A Chinese Model

Some U.S. investors found the company’s conference call hard to follow. What Americans may have focused on was CFO Louis Hsieh’s speculation about ES8 sales being cannibalized by a new model, the ES6, announced during the most recent quarter. This is a sporty and less-expensive sport utility vehicle in contrast to the ES8 sedan.

The real news is that China’s government isn’t going to let Nio fail. China remains dedicated to an electric car future, despite Nio’s failure to achieve its ambitions so far. To that end, Nio is closing its San Francisco office. The company is downsizing its efforts even in its home market, opening “pop-up” Nio Houses instead of the elaborate clubhouses it had been offering in major cities.

Nio is far from China’s only bet on electric vehicles, although it was the only one to list in the U.S. market and focus on the luxury segment. The government still sees value in Nio’s patents, like one to charge vehicles more quickly at a high voltage and one to make batteries last longer.

Government-controlled electric car firms have several joint ventures, including with Volkswagen (OTCMKTS:VLKAY). Warren Buffett, through Berkshire Hathaway (NYSE:BRK.A) bought one-quarter of BYD (OTCMKTS:BYDDF), now the largest Chinese electric car maker, a decade ago when BYD was still just a battery business. BYD (it stands for Build Your Dreams) is now the largest Chinese electric car maker with a full line of products and reported a strong first quarter.

Chinese industrial policy is often described by outsiders as “communist,” but according to Joe Studwell in How Asia Works, it has much in common with South Korea. China subsidizes many companies in cutting-edge technology and maintains support for those that win export markets. U.S. policy, by contrast, is to pass state-funded science to the market and then leave things alone.

China is now in the process of winnowing out losers, steadily reducing subsidies for electric cars. Nio’s fourth quarter was a rush to beat a subsidy cut, and another cut is scheduled to take place in June.

The Bottom Line

American investors made a mistake in assuming that because Nio was playing in the U.S. stock market and had dreams like those of Tesla, that it was a Chinese Tesla. It was always more Chinese than Tesla.

In conventional terms, analysts are correct to downgrade Nio and consider it dead money. In Chinese terms, Nio has made good progress on both the technical and marketing fronts, progress from which the Chinese auto sector can benefit. The fate of Americans’ stock investments matters less than proving China can develop and sell a high-end electric.

China remains committed to electric cars. Anyone who has tried to breath in Shanghai or Beijing understands why.

Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

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