TOKYO -- Chinese electric vehicle startup Nio offers an insightful case study on the typical challenges early-stage EV manufacturers must tackle before starting to make money.
The Shanghai-based carmaker is under the spotlight in the ever-evolving Chinese EV landscape. Despite its massive investment into research and development, the company is still far from generating profit, underscoring the complexities of the EV business.
Nevertheless, Nio's vision for its future offers some key strategic ideas for emerging as a winner in this highly competitive market, especially for Japanese players that are poised to accelerate in the global EV race.
Founded in 2014, Nio is notable for its fabless management model, which means that it does not have its own manufacturing facilities. The company rolled out its debut EV in 2018 and, in the same year, listed its shares on the New York Stock Exchange.
The company has both rechargeable and swappable battery technologies, and has started ramping up production of the latter. It is also developing its own semiconductor devices and systems.
The company stands out for its aggressive investment strategy. From 2016 to June 2023, it shelled out a total of 36.8 billion yuan ($5.15 billion) in research and development -- comparable to R&D spending at Mitsubishi Motors, whose annual unit sales are seven times larger.
This year, Nio's R&D outlay could even surpass Suzuki Motor's 230 billion yen ($1.55 billion). In the 2022 calendar year, Nio's R&D-to-sales ratio stood at 22%, far exceeding Tesla's 3.8% and Chinese rival BYD's 4.3%.
Personnel costs account for 60% of Nio's R&D spending, with the average annual salary at the company coming in at 670,000 yuan, which is relatively high for China.
The EV maker has a long way to go before operating in the black. While its sales in 2022 soared more than sixfold from three years before to 49.2 billion yuan, its operating losses expanded from 11 billion yuan to 15.6 billion yuan over the period.
In addition to huge development costs, investment in battery-swapping infrastructure has been weighing heavily on the company's bottom line. Nio has built over 1,300 battery swap stations around China and plans to construct another 1,000 this year. Estimates by securities companies suggest a single station costs around 3.5 million yuan.
In the first half of 2023, Nio reported an operating loss of 11.1 billion yuan. Since the start of the year, state subsidies for EVs and plug-in hybrids in China have been terminated.
This depressed the firm's unit sales in the April to June quarter to the lowest in two years, undermining the company's fundraising ability. Consequently, it decided in September to issue dollar-denominated convertible bonds worth $1 billion in total, fueling concerns about its financial health. The company's stock price has dropped around 10% since the end of last year, in sharp contrast with Tesla's 110% surge.
Nine years into its journey, Nio's trajectory is not inferior to Tesla, which only achieved profitability in its 18th year. However, Tesla at that time dominated the market, enjoying first-mover advantage. But the EV sector is far more crowded and competitive now, with U.S. and European players fiercely vying for supremacy along with Chinese manufacturers.
Nio's hardships are shared by Japanese automakers, which are relative newcomers to the market.
Most Japanese carmakers plan to splash hundreds of billions to several trillions of yen as medium-to-long-term investments to expand their EV operations. To achieve profitability despite such a hefty investment, they need to secure big sales volumes. Some analysts say an EV startup needs to sell 200,000 units a year to hit break-even point.
Nissan Motor, which leads domestic rivals in the EV race, sold 130,000 units in 2022, according to research firm MarkLines. Even though Japanese companies have rich pools of human, infrastructure and technological resources, the prospects for their EV businesses remain uncertain.
With the need for heavy investment, competition for sales volume and an inevitable wave of price cuts, the drive for dominance in today's EV market has many parallels with the competitive dynamics of the liquid crystal display market in the past. What will separate the winners from the losers?
A Nio event on Sept. 21 offers some insight into that crucial question. At a news conference in Shanghai, Nio surprised analysts and market watchers by unveiling its first self-developed smartphone.
The Android device is packed with features for greater driver convenience and connectivity, including air conditioner control, seat adjustment, key operations and automatic parking configurations. "We would like to use the phone as a carrier to provide the best experience for our vehicle users," said Nio CEO William Li.
"Nio focuses on making its vehicles smarter and more joyful spaces, gaining an edge in software development and content creation. Japanese players are lagging in this area," said Zhou Jincheng, lead China analyst at Nagoya-based auto industry research firm Fourin. Nio also offers services allowing fixed-price battery usage for its customers as part of its business strategy for creating a "Nio ecosystem" by boosting customer convenience.
Tesla, whose estimated sales of 1.8 million units in 2023 dwarfed competitors, is also aiming to be more than a simple EV seller. By capitalizing on reams of data collected from its vehicle software, software update services and battery rechargers, Tesla is pushing to become a platform business powerhouse akin to U.S. tech giants such as Google, Apple and Amazon.
Japanese companies have started gradually unveiling details of their EV plans for the coming years, outlining new models along with investment and mass-production strategies. While economies of scale are crucial in this field, Japanese makers need to build unique competitive edges similar to the advantages they had in the gasoline car market.
