Chinese EV maker NIO has recently announced that it expects to be profitable by the end of 2023. This means that it is only targeting for 4Q23 to be profitable and not the entire financial year.
This profit expectation is part of the company’s expectations for its sales in 2023 to double from 2022.
If NIO achieves profitability, NIO could very well be the first Chinese EV startup to stem the red ink, as all other Chinese EV startups are still in the red despite their robust sales.
In 4Q22, NIO recorded revenues of US$2.3 billion and gross profits of US$90 million, representing a gross margin of 4%. For FY22, NIO recorded revenues of US$7.1 billion and gross profits of US$750 million, representing a gross margin of 10%. This compares with 17% in 4Q21 and 13% in 3Q22.
The vehicle margin in 4Q22 was negatively impacted by 6.7% due to inventory provisions, accelerated depreciation on production facilities which were no longer needed, and losses on purchase commitments for the existing generation of ES8, ES6 and EC6 cars.
The losses on purchase commitments arose because NIO outsources its manufacturing. The company entered into contracts with manufacturers to produce the cars at a certain price. With the recent discounts, NIO may have incurred losses on these cars.
Net loss for 4Q22 and FY22 was US$840 million and US$2.1 billion respectively. This indicates an acceleration of losses in 4Q22, as recent price reductions have directly impacted the company’s gross margins.
Price wars
Almost every Electric Vehicle company is reducing prices to grab market share despite higher production costs from increased commodity prices and labour costs.
NIO has recently begun reducing its prices, starting with the ES6, ES8, and ES7 models. In some of the promotion packages, the price decrease of the NIO ES6 and ES8 will exceed 100,000 yuan or US$14,000.
One of its closest competitor, Xpeng, also reduced its prices by more than 12% in January for its P7 Sedan.
Tesla has also carried out multiple price cuts, with the latest announced in March 2023, of about 5% for its Model S luxury sedan and 9% for its Model X sport utility vehicle. BYD has also cut prices by 5% to compete with Tesla.
The bigger and better capitalized players such as Tesla and BYD will be able to last in a war of attrition. Smaller players with weaker balance sheet are being pressured to turn a profit but if they do not reduce price, it is likely that they will lose market share. Eventually they not be able to sell a sufficient number of cars to cover overheads and will have to downsize their entire operations.
Cost inflation continues
Price of raw materials have increased significantly due to inflation.
In China, the Feb23’s producer price index declined 1.4% YoY while the Feb23’s consumer price index rose a mere 1%. In Comparison, the US’s Feb23 CPI is 6.4% and the US’s Jan23 PPI was 6%.
Unlike the US, China has a large rural population, which means that the labor situation in China is less tight relatively.
This means that NIO could face less cost inflation, with commodity price risk being the main risk. Meanwhile, foreign car manufacturers with lesser production in China may be in a worse situation.
Does NIO have an edge?
NIO aims to build 1,000 battery-swapping stations this year, bringing the total figure to 2,300. NIO also plans to build these stations in countries such as UK, Germany, Holland and Sweden. As NIO’s battery swapping station reaches a critical mass, its investment will start to pay off, and NIO can charge higher prices even as more NIO car owners sign up for its BaaS platform.
The BaaS platform saves time for car owners, as it takes a matter of moments for a battery to be replaced, as opposed to traditional super charging with Tesla being able to provide 200 miles of charge in 15 mins.
What if NIO does not become profitable in 2023?
Looking at NIO’s balance sheet, the company has US$5.7 billion in cash and investments and US$2.2 billion in borrowings.
In addition, NIO has US$1.5 billion in convertible bonds due in 2026 and 2027, which are convertible at a strike price of US$93.06. Should NIO continue to trade below this price in time to come, the company will have to redeem these convertible bonds.
Including these convertible bonds, NIO has a total debt of US$3.7 billion, representing a debt to equity ratio of approximately 0.9 times and a debt to asset ratio of 0.3 times.
In 4Q22, NIO recorded a cash burn of approximately US$800 million. This means that, if NIO continues on its current cash burn trajectory, it will run out of cash in less than two years.
Equity fund raising will be difficult in these uncertain economic conditions and debt would be costly given its current level of borrowings.
Closing statements
Even as NIO is stuck in a price war to maintain its market share, the company has no choice but to attempt to become profitable.
Looking at other companies such as Sea Ltd who was able to turn a profit in just a quarter, we can say that these companies can achieve wonders when faced with no other alternatives. However, such taxing cost cutting measures stifles growth and NIO may very well end up having a different problem.
The odds are stacked against NIO as inflation continues to rear its ugly head. While NIO does have an edge with its battery swap stations, there is an upfront cost to build these stations before NIO is able to reap its benefits.
NIO has to quickly reduce its cash burn trajectory otherwise it will run out of cash in under two years. Given these times, both equity and debt fundings will be difficult and costly.
For 1Q23, NIO expects to deliver between 31,000 and 33,000 vehicles, representing an increase of approximately 20% to 28% from 1Q22. Total revenues to be between US$1.6 billion and US$1.7 billion, representing an increase of approximately 10% to 17% from the same quarter of 2022. As NIO did not guide on its gross margins or net profit, this would likely be the key metric to watch out for and it is unlikely the market will be patient or accommodating.
