Chinese electric vehicle start-up Nio provides an insightful case study that despite investing heavily in research and development, it is still far from profitable, highlighting the complexity of the electric vehicle business and the important challenges that EV manufacturers must address before they can start turning a profit.
Still, Nio's blueprint offers some important strategic insights that could help emerge as a winner in this fiercely competitive market, especially for Japanese companies preparing to accelerate their advance in the global electric vehicle race.
Founded in 2014, NIO launched its first electric vehicle in 2018 and listed on the New York Stock Exchange in the same year.
The company has both charging and swapping technology and has begun ramping up production of the latter. The company is also developing its own semiconductor devices and systems.
Nio stands out for its aggressive investment strategy. From 2016 to June 2023, the company's total investment in R&D reached 36.8 billion yuan (approximately US$5.15 billion), which is equivalent to the R&D expenditures of Mitsubishi Motors, whose annual sales are seven times its annual sales.
This year, NIO's R&D spending may even exceed Suzuki Motor's 230 billion yen ($1.55 billion). In 2022, NIO's R&D to sales ratio will be 22%, far exceeding Tesla's 3.8% and BYD's 4.3%.
Personnel costs account for 60% of Weilai's R&D expenditures. The company's average annual salary is 670,000 yuan, which is relatively high in China.
Although sales in 2022 have surged more than six times from three years ago to 49.2 billion yuan, operating losses during the same period have expanded from 11 billion yuan to 15.6 billion yuan. Weilai still has a long way to go to turn losses into profits.
In addition to the huge development costs, investment in battery replacement infrastructure has also severely affected the company. NIO has built more than 1,300 battery swap stations across China and plans to build another 1,000 this year. According to estimates by securities companies, the cost of a battery swap station is about 3.5 million yuan.
In the first half of 2023, NIO’s operating loss reached 11.1 billion yuan.
The company's unit sales from April to June fell to a two-year low, denting the company's ability to raise capital. As a result, the company's decision in September to issue convertible bonds worth a total of $1 billion heightened concerns about its financial health. The company's shares have fallen about 10% since the end of last year, in sharp contrast to Tesla's 110% surge.
After nine years of development, NIO's development trajectory is not inferior to Tesla, which only achieved profitability in its 18th year. However, Tesla dominated the market at the time and enjoyed first-mover advantage. But now the EV industry is more crowded, with the United States and Europe competing fiercely with Chinese manufacturers.
Relatively speaking, Japanese automakers are latecomers to the electric vehicle market, and they face the same dilemma as Nio.
Most Japanese automakers plan to invest hundreds of billions to trillions of yen in mid- to long-term investments to expand their electric vehicle businesses. Despite the huge investment, to achieve profitability they need to secure larger sales volumes. Some analysts say electric car startups need to sell 200,000 vehicles a year to reach break-even point.
Nissan, which leads domestic rivals in the electric car race, will sell 130,000 vehicles in 2022, according to research firm MarkLines. Although Japanese companies have abundant human, infrastructure and technological resources, the future of their electric vehicle business remains unclear.
With heavy investment required, competition for volume, and an inevitable wave of price cuts, today's EV market dominance has many similarities to past competition in the LCD market, so what separates the winners from the losers?
NIO’s event on September 21st shed light on this critical issue. At a press conference in Shanghai, NIO surprised analysts and market watchers by launching its first self-developed smartphone.
The Android phone comes with multiple features including climate control, seat adjustment, key operation and automatic parking configuration, providing drivers with greater convenience and connectivity. NIO expressed its hope to use mobile phones as a carrier to provide the best experience for car users.
NIO focuses on making cars a smarter and more pleasant space, and has gained advantages in software development and content creation. Zhou Jincheng, chief China analyst at Nagoya-based automotive industry research firm Fourin, said Japanese companies are lagging behind in this regard. NIO also allows customers to use batteries at a fixed price as part of its business strategy to create a "NIO ecosystem" by improving customer convenience.
Japanese companies have begun to gradually unveil details of their plans for electric vehicles over the next few years, outlining new models as well as investment and volume production strategies. While economies of scale are crucial in this area, Japanese manufacturers need to establish a unique competitive advantage.