China’s most high-profile challenger to Tesla has had a tough year, and 2020 isn’t looking any easier.
Electric-car maker NIO has accumulated a deficit of almost $6 billion (Dh22bn) since its founding in 2014, spending extensively on marketing and product development for a foothold in the burgeoning market. Third-quarter earnings, which are due to be released as soon as on Monday, are expected to show there’s still a long way to profitability.
While NIO has slashed jobs and started to scale back marketing expenditures, its finances remain critically strained. China’s electric-car market is slowing as the government reduces subsidies, and competition is getting tougher with Tesla preparing to start sales of its China-built Model 3 sedans.
“NIO’s balance sheet implies serious liquidity risk,” said Robin Zhu, an analyst at Sanford C Bernstein in Hong Kong, with an underperform rating on the stock. “The key will be whether they are able to announce major new financing.”
Shares of NIO have plunged 60 per cent since the company had its initial public offering in New York last year. That’s left it with a market value of $2.6bn, compared with Tesla’s market capitalisation of $78bn.
At the root of NIO’s high cost level is a marketing strategy that includes everything from advertising campaigns to so-called NIO Houses - showrooms where customers can gather to spend time, work and eat. That’s left the company burning cash faster than much bigger Tesla.
The first NIO House, which opened in Beijing in 2017, is located in city’s most expensive districts. NIO has since set up about 20 more, each featuring a showroom and some equipped with a users’ lounge, theatre, meeting rooms, work spaces, library, open kitchen and camp activities for customers’ children.
“There are many activities for kids every week,” said Yuan Ye, an owner of a NIO vehicle and mother of a four-year-old, and a frequent visitor to a NIO House in Beijing. “It has saved me a lot from pre-school tuition.”
NIO had $207 million in selling, general and administrative costs, including marketing and promotional events and rent, in the second quarter. NIO Houses and related promotions probably accounted for $72m of that, estimates Robert Cowell, an analyst at 86Research, a Shanghai-based equity research firm.
The carmaker also spent $189m in research and development.
Yet revenue in the second quarter was just $221m. Though demand has been picking up - NIO delivered 4,799 cars in the third quarter through September, a 47 per cent increase from a year earlier - the company is far from break-even.
It probably lost $381m in the third quarter, according to the average of four analysts’ estimates compiled by Bloomberg. For 2020, the average loss estimate is $1.2bn on sales of $1.7bn.
To rein in costs, NIO has shifted from adding NIO Houses to setting up much smaller stores called NIO Spaces. NIO Houses remain important and contribute to building a premium brand, NIO said in an emailed response to questions.