China’s once-ballooning electric vehicle industry is showing signs of bursting after the country’s largest manufacturer reported the biggest quarterly loss since its inception, triggering massive job cuts and asset sales.
New York-listed Nio, dubbed the 'Tesla of China' by both advocates and journalists seeking a handy reference point, said it lost Rmb3.3 billion ($462 million) in the three months to June-end. That was 83% higher than in the same period last year and 25% higher than in the first quarter.
The five-year-old company said it will lay off another 1,100 employees to bring down its total headcount to 7,800 by the end of September. Nio, which had 9,900 staff at the beginning of the year, has already slashed 1,000 jobs.
The planned restructuring includes the divestment of some non-core businesses before year-end as the company strives to cut loss-making operations and improve cash flow.
"In response to the overall tempered market conditions, we are also working hard to maximize returns on our resources and have implemented comprehensive efficiency and cost-control measures across the organization,” Nio chairman William Li said in a statement. “These measures aim to further improve efficiency and streamline operations within our sales and service network and R&D activities.”
Nio's share price plunged by as much as 28% immediately after the quarterly results were announced on Tuesday. It ended down 20.2% at $2.17, about 65% lower than its listing price of $6.26 barely a year ago.
Some equity analysts are sceptical about how long the company can sustain its operations. Unless business improves, it could just about hang on for another three months without additional funding, given its cash holdings at the end of June of $503 million.
In its quarterly results announcement, Nio said it will receive a $200 million capital injection from its largest shareholder Tencent, as well as Nio’s chairman William Li. This could be a sliver lining for the company and its existing shareholders.
OWN-GOALS
Nio’s heavy quarterly loss could be partly attributed to R&D failures. The company has recently recalled 4,803 of its ES8 sport utility vehicles after a series of battery fires were reported.
That's more than a fifth of the 21,670 total vehicles delivered by Nio since its inception. It is also higher than the 3,140 ES8s delivered throughout the second quarter.
The company has said it will compensate all users for property losses incurred as a result of incidents caused by battery quality and safety issues.
MARKET PRESSURES
Nio’s problems are also partly caused by oversupply in China’s electric vehicle (EV) sector. The promising prospects of the industry, which is tipped to continue growing despite already being the world’s largest, has attracted hundreds of young startups in recent years and caused intense competition.
Nio has so far been barely affected since most of these startups are far from actually delivering cars to the market. Nio is among a handful of Chinese EV manufacturers to have started commercial deliveries.
But the overheating market has caught the attention of the government, which started to scale back subsidies on EV purchases earlier this year in an attempt to cool the market. Launched in 2010 at an average of about $10,000 per vehicle, the subsidies are expected to be reduced by 30% this year and completely scrapped by the end of 2020.
Subsidies for Nio’s ES8 model were cut by about Rmb56,000 this year, implying that buyers are now paying $7,900 more for the car than a year ago.
The subsidy cut hit other EV makers too and became a major concern for investors looking at the industry, with China’s EV sales falling 16% year-on-year in August, according to the Chinese Association of Automobile Manufacturers. It is the 14th consecutive decline recorded since July last year.
And there's the broader economic backdrop. With China's trade spat with the US potentially accelerating the country's economic slowdown, sales of consumer discretionary products like cars could be among the sectors most adversely affected.
But it's still far from being the end of the world for homegrown Chinese EV manufacturers.
Cars made by Tesla, which aims to start production from its Shanghai factory this year, will cost 25% more after December 15 as Chinese retaliatory tariffs come into force on $75 billion-worth of American products, including autos and auto parts, soybeans, beef and pork.
That will provide some breathing space for domestic rivals, particularly Nio, which competes directly with Tesla on luxury EVs.
China’s EV subsidy cut is also expected to streamline competition as the smaller, weaker EV makers are knocked out of the market, leaving more room for companies better able to survive through this tough period.
