March 6, 2019 / 3:50 AM / 20 days ago

Breakingviews - Nio’s right place, right time may be short-lived

Chinese electric vehicle start-up Nio Inc. vehicles are on display in front of the New York Stock Exchange (NYSE) to celebrate the company’s initial public offering (IPO) in New York, U.S., September 12, 2018. REUTERS/Brendan McDermid

HONG KONG (Reuters Breakingviews) - Automaker Nio is on a roll, delivering more than 11,000 units in its first year of sales. Tesla’s Chinese rival benefits from government subsidies, and from drivers’ enthusiasm for premium electric cars. But other up-and-coming brands are hurrying new models to market this year, putting Nio to the test.

The world’s largest auto market contracted for the first time in three decades in 2018, yet Nio’s slick branding managed to entice China’s affluent upper middle class. The newly listed company reported revenue of nearly 5 billion yuan ($746 million) last year, according to results released Tuesday.

Nio wisely targeted China’s comfortable luxury niche, where brands like Mercedes and Cadillac are still managing to grow sales, and won headlines for coddling customers with online services and clubhouses. In the beginning it was largely left alone at the high end of the electric luxury market, alongside Elon Musk’s marque. Nio leveraged its unique position as a pure-play bet on electric vehicles in China, raising $1 billion in a New York listing in September, and shares have soared by around 50 percent since.

But its scarcity value will be diluted this year. Byton, a local startup founded by former BMW and Infiniti executives, opened its first China showroom in January. Alibaba-backed Xiaopeng has already received more than 10,000 orders for its sleek G3 sports utility vehicle. Volvo is preparing to hive off its China-based premium brand, Polestar, into a stand-alone electric-car unit. Meanwhile, Tesla is slashing prices and starting work on a Shanghai factory.

More competition could squeeze sales and make it harder to raise money. Nio is still burning cash, having lost 9.6 billion yuan in 2018, and it issued a $650 million convertible bond in January, just months after listing. As rivals rev up, its share price is looking toppy. Citron Research, a research shop ordinarily focused on shortselling, published an uncharacteristic endorsement of the stock last year, but its founder told MarketWatch last week it has since exited the trade.

Starting at the right time in the right place helped Nio get a head start. As the competition shifts up a gear, it might need to drive uphill.

Breakingviews

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