How NIO Might Overtake Tesla in China's Booming EV Market

Tesla announced its fourth-quarter and fiscal 2020 results on Jan. 27. While Tesla had record deliveries and revenues, its earnings missed analysts’ estimates. However, despite the miss, there were many positives in the results. Despite all of the other catalysts, China, the world’s largest EV market, is the biggest catalyst and growth driver for the company. 

Another favorite Chinese EV-maker, NIO is also ramping up its deliveries and market share in China. Both companies have been eyeing one of the lucrative EV markets. Will NIO spoil Tesla's dominance in China's EV market? 

Tesla’s Model 3 became the best-selling EV in China with 139,935 Model 3s delivered. For the first time, a non-Chinese EV-maker was the market leader. In January 2021, Tesla also started delivering China-made Model Ys in China. During the fourth-quarter earnings call, Elon Musk said, “We are currently the leader in the Chinese EV market. So I think we're mostly doing something right if we're the best-selling electric car in China. That said, very few of our customers in China, I think maybe as low as 1% or 2%, actually have selected the FSD option. This is much lower than rest of world.” The company is also working to make FSD work in China as well.

China is a very important market for Tesla. The country is expected to act as a growth engine for the company. When Tesla started delivering vehicles from its Gigafactory in Shanghai to Europe, the waiting times for Chinese customers increased. Currently, the constraint for Tesla’s deliveries in China is demand and not supply. The company expects to produce about 550,000 EVs in 2021, including 300,000 Model 3s and 250,000 Model Ys. 

NIO unveiled its much-awaited sedan, NIO ET7, at its NIO Day event on Jan. 9. The sedan's features include autonomous driving sensors, a crystal-like heartbeat tail light, and a 12.8-inch OLED display. The car will be able to go about 310 miles on a full battery and has a 150 kWh battery pack. NIO will offer three battery options, one of which will have a range of over 600 miles. While the base edition will be priced at around $69,000, the premier edition will come with a price tag of roughly $81,000. 

If NIO delivers on all of the ET7 features that it has announced, Tesla could face some serious competition. Tesla’s Model S is seen as the main rival for NIO’s ET7. At 200.7 inches, ET7 will be about five inches longer than a Tesla Model S. Also, ET7 will be available with a swappable battery. NIO’s ET7 boasts over 600 miles of range on a single charge, which still higher than Tesla’s redesigned Model S. The Model S can go up to 520 miles on a single charge. With ET7, NIO has a serious shot at overtaking Tesla’s Model S.

While Tesla has a cult-like following in the U.S. and elsewhere, NIO is popular in China. NIO’s consistently strong deliveries in 2020 underscore this fact. NIO enjoys a very loyal customer base. According to Technode, as of March 2020, 70 percent of NIO’s new orders came from existing owner referrals. NIO’s loyal fan base is also due to the company’s efforts to create a community. NIO has created a very strong ecosystem, its fashion line, NIO House, where users can come together as a group. NIO has become a lifestyle brand in China. NIO’s cult-like following in China is also evident during its NIO Day event. 

Another thing that puts NIO over Tesla in Chinese customers’ minds is its quality. Until now, Tesla has been following a quantity-over-quality strategy, which can be risky. Tesla ranked last among 32 major brands in the J.D. Power 2020 Initial Quality Study. NIO ranked the highest in the J.D. Power Inaugural China New Energy Vehicle Experience Index Study in August 2019. Some analysts have also voiced their concerns about Tesla’s issues, including its interiors and after-sales service.

NIO is scaling up its deliveries in China. In 2020, the deliveries more than doubled to 43,728 vehicles. While the progress is huge, it's still a fraction of Tesla’s volume. Tesla delivered nearly 140,000 Model 3s. Tesla is also ramping up deliveries in China after completing the Shanghai factory in early 2020. Therefore, there’s an upside to Tesla’s China deliveries. 

Tesla has a much larger scale than NIO with a factory of its own in China. Its Shanghai facility has the ability to sustain a Model 3 run rate of 250,000 per year. Tesla has talked about increasing its volumes by 50 percent YoY worldwide. While NIO is ramping up, Tesla’s volumes are also going to explode. It will take several years for NIO to overtake Tesla in market share and volumes. Many analysts also think that NIO is set to capture a significant chunk of the Chinese market.  

NIO could launch more mass-market appealing vehicles. According to NIO CEO William Li, “As EV technologies advance and battery cost lowers, it is possible that we may enter the massive market, but definitely not with Nio brand.” A more budget car from NIO would likely help it capture an even larger market share in the world’s largest EV market.

NIO and Tesla are both gaining market share and ramping up deliveries in China. They are trusted and desirable brands in the Chinese EV market. However, as China pushes for the largest EV share in the overall auto market, it will likely favor domestic brands over foreign brands. NIO’s increasing loyal fan base could also help it overtake Tesla in China.