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Tesla (Nasdaq: TSLA) has become one of the stock market’s most popular stocks, selling premium electric vehicles in the US market. Will a similar approach work in China?

NIO (NYSE: NIO) is betting that it will. The company might not be a household name for most. But it similarly designs, manufactures, and sells high-priced electric vehicles (EVs) to the world’s most populous country.

Beyond selling cars, NIO is also looking to “shape a joyful lifestyle” and to create a community of like-minded, environmentally-conscious EV drivers. And it’s spending lavishly to develop new features, such as 3-minute battery swapping terminals and fully-autonomous driving software.

NIO’s financial results are improving and it is preparing to release a lower-priced, mass-market car by 2024. Yet while NIO is shifting into a higher gear when it comes to production, its home country of China also has an escalating risk profile.

Does that make NIO is a good investment opportunity today? Let’s take a closer look under the hood of one of the market’s most innovative companies.

Background and Product Line

NIO’s Chinese name of “Weilai” means “Blue Sky Coming.” Founded in 2014 by its CEO Li Bin (whose American name is William Li), it reflects a commitment to an environmentally-friendly future.  Today, Li owns around 40% of the company’s overall voting power.

The company’s EV models come in a wide variety of sizes and price points, from coupes and sedans to SUVs. Each vehicle model gives customers the option of choosing from three different battery packs: standard, long-range, ultra-long range. That means its vehicles can be semi-customized, to travel between 280 and 450 miles (450-700 km) before needing to be recharged.

NIO plans to launch a “mass-market vehicle” in the second half of 2024. This is a clear page from the Tesla playbook, and is even intended to compete directly against Tesla’s Model 3 and at a very similar price point (before any subsidies).

The company is in partnership with China’s state-owned automobile manufacturer Jianghuai Automobile Group (JAC) to produce its vehicles. NIO pays JAC a fixed amount for each vehicle manufactured. Its overall gross margin has steadily increased, from (15%) in fiscal 2019 to 11% in fiscal 2020 to 19% in fiscal 2021. We’ll get to see the fiscal 2022 results when they report on March 1st.

While NIO is currently exclusively manufacturing its vehicles in China, it has ambitions of international expansion. Last September, it opened its first international manufacturing facility in Hungary to produce the battery-swapping stations that it will soon place all across Europe. These “Battery as a Service” (BaaS) battery-swapping stations are a competitive differentiator. Once vehicles run low on their charge, drivers can have their battery replaced with a new one in just 3 minutes at company-owned service stations.

This BaaS program reduces the upfront purchase price of the vehicle by around $10,000 USD, and it costs customers just $140 USD per month for a subscription that allows them to swap batteries at more than 1,300 Power Swap stations. It looks to eventually have 4,000 battery swapping stations placed all across the globe.

The Chinese Electric Vehicle Market is Powering Up

China’s electric vehicle market is extremely fast-growing and is also very fragmented. 

China’s Passenger Car Association recently reported there were 6.5 million “new electric vehicles” (NEVs) sold in China during 2022. NEVs include the battery-powered electric vehicles sold by NIO and Tesla, but also include plug-in hybrids that have a combination of a battery + gas-powered engines. This was a 96% increase over 2021 – even as several suppliers fought through zero-COVID regulations that constrained their supply chains.

The actual demand for NEVs in China appears to be far exceeding initial expectations. Deloitte estimated in July 2020 that China’s NEV sales would reach 15.2 million annual sales by the year 2030. It appears that forecast will turn out to be far too conservative.

China’s government has also been stoking the fire, spending some 300 billion CNY ($47 billion USD) in total electric vehicle subsidies since 2009. While the government has constantly amended the subsidies and even suggested they’d be winding them down, it did recently extend its sales tax exemption through 2023.

NIO delivered a total of 122,486 vehicles in 2022, a 34% increase over 2021. This fell shy of the internal guidance of 150,000 it issued in late 2021; though much of this was due to COVID-related supply disruptions.

Country and Competition Risks Loom

China’s zero-COVID policies could still continue for quite some time, keeping workers out of NIO’s manufacturing facilities and constricting its production volumes. If lagging production causes long delivery lead times, it could discourage potential customers from placing new orders.

There’s also no shortage of competition, from domestic players like BYD and SAIC Motors and from foreign players like Tesla and Volkswagen. We’ll watch for NIO’s battery-swapping service stations to differentiate it from several of its competitors.

Recalls are also common in the auto industry, and NIO voluntarily recalled nearly 5,000 of its ES8 SUVs in 2019 due to battery fires. NIO is looking to eventually manufacturing its own proprietary battery packs, which would further expose it to the risk of safety incidents or brand damage.

Why You Should Consider Investing in NIO

Yet even with the production and China-specific risks in mind, NIO is quite worthy of a place on your investing radar. It has an ambitious leader who is successfully introducing new models, is scaling up its production capacity, and is winning favor with China’s affluent consumers. Its innovative battery-swapping technology and autonomous driving software will find their way into its upcoming mass-market vehicles.

All of the above suggest that NIO is accelerating quickly into a market that can support a high speed limit. NIO’s blue sky might appear much sooner than many investors are expecting.

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