Can NIO Recover from Its Slump by Accelerating Deliveries?

NIO (NIO), which is also known as China’s Tesla (TSLA), released its July deliveries data yesterday. The country’s pioneer in EVs (electric vehicle) delivered just 837 vehicles in the month. These deliveries consisted of 673 ES6s (five-seater premium electric SUVs) and 164 ES8s (seven-seater premium SUVs).

Battery recall, subsidy reduction, weak domestic demand, and trade war impacted deliveries

William Li, NIO’s chair and CEO, said, “Our deliveries in July were negatively impacted by multiple factors.” He added, “During the month, we prioritized battery manufacturing capacity for this effort, which significantly affected our production and delivery results. In addition, some deliveries were pushed forward into June in anticipation of further electric vehicle subsidy reductions that took effect at the end of June. Lastly, China’s macroeconomic and auto market conditions remained challenging, exacerbated by the US-China trade conflict.”

China reduced subsidies for new energy vehicles

On June 26, China eliminated subsidies for NEVs (new energy vehicle) with fewer than 250 kilometers of electric range. For higher ranges, it halved the subsidies. This change negatively affected the country’s EV makers. In July, the sales of NEVs declined for the first time in two years. The fall stands in contrast to NEV sales growth of 63% YoY (year-over-year) last year.

NIO’s battery recall

In addition to the reduction in subsidies, NIO’s battery recall of 4,803 ES8s in July affected its July delivery numbers. The company recalled the batteries following a few incidents of short circuits. It then reported that it completed the recall in about half as long as its original timeline. Li said that due to NIO’s swift and transparent actions on recall, “users’ confidence in the safety and quality of our vehicles quickly returning.”

The company now expects to make up for the delivery loss resulting from the recall via accelerated deliveries. It says it will now be possible, as battery capacity allocation is back to normal. NIO expects to deliver between 2,000 and 2,500 vehicles in August.

China’s downturn and the trade war present a challenge for NIO

The macroeconomic backdrop remains challenging for the company. Car sales fell 4.3% YoY in July and were down for the 13th consecutive month. Slowing economic growth, weakening domestic demand, and the ongoing trade war dampened auto demand, affecting not only NIO but also other automakers operating in the country. Due to several rounds of tariffs, companies had to adjust their prices often, impacting their sales.

Other automakers also suffer

Recently, we wrote about how Tesla is thinking of raising prices in China due to “yuan-related uncertainty.” After the recent escalation of the trade war, China devalued the Chinese yuan, which hit automakers that import most of their cars. Tesla is currently building a factory in Shanghai, which it expects to complete before the end of this year. After that, the company might be able to offer its Model 3 to Chinese customers at significantly lower prices.

US automakers such as Ford Motor Company and General Motors are also bearing the brunt of the slowdown not only in China but also in the domestic market.

NIO’s slump

NIO stock is mostly in a downtrend this year due to slumping deliveries, battery recall, subsidy reduction, and rising competition. After the release of its deliveries report, NIO stock fell 2.6% yesterday. With this, its fall in August alone is now at 12%, and it’s down 52% so far this year. This is a huge underperformance given the not-so-great gains in the overall Chinese market this year.

The iShares MSCI China ETF (MCHI) has returned 2.7% YTD, while the iShares China Large-Cap ETF (FXI) has returned -2.1% YTD as of August 12. NIO’s management needs to take care of its execution on accelerated deliveries and concerns regarding refinancing needs before NIO stock can take off in any meaningful way.