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NIO gets ¥10 billion lifeline, starts production of ES6 but delays ET 7 sedan as losses mount

SHANGHAI – May 28 was a busy day for NIO with a mixed bag of news for the leading Chinese smart EV startup.

The company announced a fresh ¥10 billion investment, the formation of a new entity called NIO China in Beijing, began production of its second model – the ES6, before releasing somewhat better than analyst expected but nevertheless weak vehicle delivery and financial results for Q1 2019. It also confirmed the delay of the introduction of the ET7 sedan, based on the ET Preview that debuted at Auto Shanghai 2019 in April, indefinitely.

E-Town Capital investment to help R&D and service expansion, NIO China pools majority of existing assets

Earlier this month, NIO entered into a framework agreement with Beijing E-Town International Investment and Development Co., Ltd. (E-Town Capital), an investment corporation headquartered in Beijing Economic-Technological Development Area (BDA). A new entity called NIO China will be established inside the BDA where E-Town Capital will initially invest up to ¥10 billion through its affiliated entities or jointly with third parties in exchange for a minority equity stake of NIO China, giving NIO some breathing room for its cash crunch. NIO, on the other hand, will contribute certain businesses and assets into NIO China. E-Town Capital is expected to help NIO China to build or to find third-party partners to build a new manufacturing facility for NIO’s next-generation platform 2.0 (NP2) vehicles, which the ET7 will be based. The parties are continuing to work towards a final binding definitive agreement for this investment.

William Li, founder, chairman and CEO of NIO, told analysts in a conference call that the investment from E-Town Capital will be mainly used for NIO’s R&D, service and network expansion, rather than for manufacturing at a new greenfield production facility. The company does not exclude any opportunities that it may establish its own manufacturing facility but for the near term it will likely look for a third-party manufacturing partner like what it has done with JAC for the production of the ES8 and ES6, which Li says is highly efficient in terms of management and investment.

Most of the business of NIO Inc. will be relocated to NIO China, according to Li, but NIO Inc. will still control NIO China which will be part of NIO’s consolidated statements. He also stressed that NIO China will be an important channel and tool for NIO’s RMB fundraising to complement its USD fundraising channel via its IPO on NYSE.

“With both fundraising channels I think it will help us to sustain our future developments for the second-generation platform,” said Li.

ES6 to begin deliveries in June, more than 12,000 pre-orders received

The ES6 rolled off the production line at the JAC NIO Advanced Manufacturing Center in Hefei on May 28 before deliveries are slated to begin in the second half of June. Several hundred units are expected to be delivered by the end of that month. The ES6, unveiled at NIO Day 2018 last December, is produced with some 350 partners including Bosch, Continental, Novelis, ABB, Magneti Marelli, BASF and Yanfeng Interiors.

In April, NIO entered into a manufacturing cooperation agreement with JAC for the manufacture of the ES6, which is a supplement to the agreement it entered into with JAC in May 2016. NIO pays JAC manufacturing fees on a per-vehicle basis monthly and compensates JAC for its operating losses for the initial three-year period after the start of production of the ES8 from April 10, 2018. It may fund additional investments in equipment in the Hefei manufacturing plant of JAC for the production of the ES6.

The ES6 received broad-based positive feedback from Auto Shanghai 2019, and early reviews from test drive campaign launched in May bode well for continued positive momentum, according to Li. So far more than 12,000 ES6 pre-orders (refundable deposit orders) have been received, including over 5,000 pre-orders since mid-April.

“We are confident that as more and more new potential users start to experience the ES6 first-hand, the vehicle’s competitive features and price will appeal to a growing number of premium automobile buyers,” said Li.

Li stressed that the ES6 will compete not only with similar models from other EV manufacturers but also those of traditional luxury brands like Audi Q5, Mercedes-Benz GLC and BMW X3, to name a few.

“For ES6, it will be tapping into a wider market, the 5-seater SUV. And in this competition, we believe that the ES6 will be outperforming other products even including gasoline cars,” said Li.

“For ES6 and ES8, there are competitors including a lot of premium SUVs from luxury brands. And even with this competition, we still believe that we have strong competitiveness. We have discounts on purchase tax and consumption tax. We also have strong performance. We have good user services. We also have preferential policies for license plate application and usage. As more and more people start appreciating and adopting EVs, we believe in the long run, ES6 and ES8 will be very powerful.”

The ES8 ranked No. 3 in the sales of premium 7-seater SUVs in the first four months of the year with more than 5,000 units sold, beating models like Volvo XC90 and Tesla Model X, according to Li.

ET7 delayed, but third model to launch second half of 2020

NIO confirmed that it recently made the decision to design and develop the ET series with the future NP2 platform, its next generation product platform featuring Level 4 autonomous driving capabilities, which means the introduction of the ET7 high-performance premium electric sedan will be delayed indefinitely.

The company does plan to launch its third model in the second half of 2020, however, leveraging the platform technologies from the ES8 and ES6.

Li told analysts that the decision was made because over the next several years the industry will witness important transformation of ADAS, autonomous driving and electric/electronic architecture of vehicles, and he wants the ET7 to be based on the most advanced architecture.

“I believe this is the best decision for the company, for our investors as well as our users,” he said.

Li also confirmed that the HYCAN brand recently launched by GAC-NIO will offer vehicles below the price range of NIO’s vehicles.

“We want to leverage its cost efficiency on this highly competitive platform, so that we will be tapping into a wider market. This is another approach for NIO to expand our market presence,” said Li, who is also chairman of GAC-NIO formed in April 2018 as a “co-creation” venture with GAC.

Losses mount as deliveries weaken, unlikely to hit full-year guidance of 35,000-40,000 units

NIO delivered 3,989 ES8s in the first quarter of 2019, followed by 1,124 ES8s in April, bringing its total aggregate deliveries to 16,461 vehicles as of April 30, 2019 since deliveries began on June 28, 2018.

Q1 2019 deliveries fell drastically from those of Q4 2018 primarily due to the electric vehicle (EV) subsidy reduction announced in late March, as well as the slowdown of macro-economic conditions in China, exacerbated by the ongoing U.S.-China trade tension, particularly in the automotive sector where wholesale passenger vehicle sales were down approximately 15 percent through to April.

Quarterly revenues reached ¥1.631 billion, down 52.5 percent year-on-year, while net loss widened to more than ¥2.62 billion, down 25.1 percent.

The company expects Q2 deliveries to be between 2,800 and 3,200 units and revenues to be between ¥1.13 billion and ¥1.29 billion. Cash burn is expected to go down significantly in Q3 and Q4 as ES6 deliveries ramp up, while battery pack cost will go down significantly in Q3 and Q4 based on a long-term cost reduction framework with battery cell supplier CATL, according to Li. But the previous guidance of annual deliveries of 35,000-40,000 units for 2019 is most likely in jeopardy.

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