Monday, 2024 April 22

Self-rescue plans and cyclical crises: Will Nio succeed?

In May this year, it began spreading among long-serving Nio employees that the company had held a capital planning meeting. Employees who went through the company’s challenging phase in 2019 knew well what this might signify. In the second half of 2019, Nio faced operational challenges and needed to organize such meetings to clarify the capital needs of its business lines and reallocate resources as needed.

Nio denied the occurrence of such a meeting. However, during the first-quarter earnings call which took place shortly after, William Li, CEO of Nio, announced that the company would temporarily halt some major capital-intensive projects. Could another crisis be near?

According to 36Kr, some veteran employees were surprised at how quickly another potential crisis had arrived, just four years after what happened in 2019. But with sales declining, the writing had been on the wall since the beginning of the year. Nio’s ET5 sedans were losing their spark while its ES6 model was awaiting a redesign. With a lack of new models, Nio’s monthly sales plummeted by around 60% compared to the end of the previous year.

Nio officially rolled off the production line for the ES6 on May 28, 2019, at the JAC Nio Advanced Manufacturer Center, a facility jointly established with JAC Motors. Photo source: Nio.

Despite the dip in sales, Nio kept its scope of business vast. It operates three car brands and has invested significantly in autonomous driving, batteries and battery swapping technology, chips, smartphones, and an array of miscellaneous services. R&D and sales expenses related to these components collectively cost the company tens of billions in RMB.

The balance between income and expenditure has shifted significantly for Nio in recent times. It incurred a net loss of RMB 14.44 billion (USD 1.98 billion) last year, representing a 260% increase over the previous year. Cash reserves have also depleted rapidly. Starting from the second half of 2022, Nio’s cash, restricted cash, and short-term investments have decreased by around RMB 6 billion (USD 822.9 million) each quarter. To strengthen its balance sheet and stave off the risk of a debt crisis, it raised around RMB 5.3 billion (USD 1 billion) in investment via convertible senior notes from an Abu Dhabi-based institution.

With projects on the edge of being cut, various rumors began circulating within the company, leading to fears of impending layoffs reminiscent of the life-or-death moment of 2019.

In a meeting with employees, Li sought to keep staff in a buoyant mood, encouraging them to focus on current projects and performing well. But doubts proved hard to quell as anxious employees raised their concerns. In particular, a highly upvoted question posed during the meeting was about Nio’s low sales and significant dip in stock prices. Nio had been so hard hit in the stock market that employees could no longer cover the difference with their wages.

Li reassured the employee who posed the question, saying that sales would improve and everything would eventually turn around. What he didn’t verbalize was that, during that time, he had been actively seeking financing.

In June, Nio’s engineering department received a sudden, mysterious task to ensure the company has cars ready to operate in the Middle East. Nobody knew the purpose of this task, though it is rumored that the instruction had come directly from Li.

Dispatching these vehicles to the Middle East offered Nio some breathing room by helping to secure the RMB 5.3 billion investment from the institution based in Abu Dhabi. While the process was thought to be swift, individuals with knowledge of the matter claimed that the deal wasn’t as easy to close as expected. The investor wanted a larger stake, but Nio did not want to dilute its shares too much. Tencent had to intervene and resolve the deadlock by giving up some of its shares to expedite the deal.

Simultaneously, Nio announced an unprecedented price reduction of RMB 30,000 across its entire lineup of vehicle models. Sales surged as a result, with deliveries in July reaching 20,000 vehicles in a single sweep. Nio appeared to have averted a crisis once again.

However, the automobile market is entering a long and grueling phase, with investors getting more cautious with their capital commitments. The cost of making mistakes in this cyclical industry is hard to estimate, and Nio would fare well not to tread too close to the brink.

Why did Nio’s ET5 not succeed?

ET5 had a promising start when it was launched, but its ending was far from satisfactory.

It was one of Nio’s sedan models, presenting an eye-catching design yet costing a starting price of just over RMB 300,000 (USD 41,100). When it was released on Nio Day at the end of 2021, ET5 garnered a massive volume of orders that, according to Li, made it the model with the highest order volume after any Nio launch event in history. ET5’s popularity wasn’t fleeting. Nearly a year later, in September 2022, when ET5 vehicles were brought to four Nio stores in Shanghai for display, people flocked in waves to see the cars.

Nio unveiled the ET5, a smart electric sedan model, during Nio Day 2021 on December 18, 2021. Image source: Nio.

“It was as good as the iPhone launch back in the day,” said Qin Lang (pseudonym), a Nio salesperson. He described what seemed like the arrival of Nio’s golden age, when the company’s salespeople kept ringing to notify them of customers that had paid deposits for their purchases. At its peak, Qin said that the number of pre-orders for ET5 reached a staggering 128,000, which became a new record for Nio models. This would have equated to monthly sales of over 10,000 units, though a setback soon occurred: the vehicles were unable to be delivered on time.

At the end of September 2022, Nio began delivering ET5 vehicles to customers. However, it managed to deliver only 1,030 units in October, and 2,861 units the following month. Things took a turn for the worse over time as Nio’s delivery cycle became longer, with orders from October expected to be fulfilled only by April of the following year, equivalent to six months of waiting time.

In ET5’s price segment, competition was also getting intense with models like Tesla’s Model 3 and the Xpeng P7. Nio’s weak delivery capability led users to turn to competitors, and by the time it had finally ramped up its production capacity, the company had missed the peak sales opportunity. This burdened Nio with batches of unsold vehicles, which it sought to clear its inventory of by offering a series of subsidies and price reductions.

There were many discussions within Nio regarding the missed opportunity, though they could not arrive at a definitive reason to summarize ET5’s ordeal. Pan Lin (pseudonym), an employee of Nio’s manufacturing division, told 36Kr that ET5’s production process was very bumpy. It wasn’t produced in the F1 factory run by Nio, but in the newer F2 factory which was plagued by various problems.

“Our new factory has always had problems, the entire team was overworked, and there were issues with the production line. Sometimes a problem might take two or three months to solve,” Pan said. When asked about the specifics of the factory issues, Pan refused to reveal further, and his colleagues from the same factory were also tight-lipped.

However, a supplier who was familiar with the production process of ET5 offered a glimpse into these issues. According to him, ET5 adopted a brand-new aluminum body design which was produced in the new factory. Its new-generation battery was similarly produced in the same facility. This results in a complex production process with difficulties in debugging and integration.

The supplier also disclosed that the production of ET5 vehicles had indeed fallen behind schedule. Nio took measures to resolve the problem, but the process was slow. He believes that the delivery delays were not just because of the factory issues but also related to the complexity of the new model’s technology.

A challenging ride ahead

Nio’s journey ahead is fraught with challenges. The electric vehicle industry is highly competitive and established players like Tesla hold a significant advantage in terms of production capacity, technology, and global reach. Traditional automakers are also rapidly ramping up their EV offerings, further intensifying competition.

To succeed, Nio needs to address the following areas:

  • Production and delivery efficiency: Nio must improve its production and delivery capabilities to ensure timely and smooth delivery of vehicles to customers. Addressing issues in production lines and reducing delivery times are crucial steps.
  • Cost management: Nio needs to manage its costs across various business lines to achieve sustainable profitability. The company should streamline operations and optimize resource allocation to reduce losses and improve financial health.
  • Model success and innovation: Developing and launching successful vehicle models is vital for Nio’s growth. The company should focus on innovation, product differentiation, and understanding customer preferences to create vehicles that can capture market demand.
  • Global expansion: Expanding beyond the Chinese market is essential for Nio’s long-term success. The company should develop strategies for entering international markets, considering factors like regulatory requirements, infrastructure development, and consumer preferences.
  • Battery swapping network: Nio’s battery swapping technology is a unique advantage. The company should continue investing in and expanding its battery swapping network to provide a competitive edge and convenience to its customers.
  • Funding and financing: Nio needs to secure adequate funding to support its operations, R&D efforts, and expansion plans. Strategic partnerships, investments, and financial discipline will play a critical role in ensuring the company’s financial stability.
Battery swapping has been a relatively successful model in China, with Nio being recognized as one of the trailblazers. Nio operated around 700 battery swapping stations in mainland China as of December 10, 2021, with the number steadily increasing since. Image source: Nio.

At the end of last year, Li was believed to have received a market plan for the following year from Europe, with one of the goals being to sell tens of thousands of vehicles. This was denied by Nio when 36Kr reached out for verification. Nonetheless, during the same period, Nio also sent a sales forecast for 2023 to the supply chain, which included a target of over 400,000 units.

2023 is only the second year since Nio made a foray into the European market, which made the annual sales target look overly ambitious. Employees who are privy of Nio’s operations in Europe said that, until recently,  the company’s monthly sales in the continent, including rentals and sales, were only in the hundreds.

It is unclear where the goal originated from, but shortly after, Nio apparently shelved this ambitious plan. Earlier this year, the sales forecast sent to the supply chain was revised with a new target that was almost halved to about 240,000 units.

Such fluctuating forecasts can challenge the confidence of the supply chain but can also offer quick damage control. However, once a target has been set, it can start to erode resources and become difficult to retract.

Infinite ambitions, limited resources

In 2019, Nio’s vice president of battery R&D proposed a battery upgrade plan that entailed the development of a battery pack with a storage capacity of 125-kilowatt-hour (kWh) rating. Nio currently uses a battery pack with two versions: 75 kWh and 100 kWh. Its battery team wanted to increase the capacity by 25% for the next-generation battery.

However, senior figures at Nio did not approve the plan. An employee from Nio’s battery team told 36Kr that Qin Lihong, president of Nio, and other executives did not believe that a 125 kWh battery pack would represent a significant breakthrough. If Nio was to develop a new battery, it would be one with a 150 kWh rating.

To put this into perspective, industry leader Contemporary Amperex Technology introduced its high-nickel Qilin battery pack this year, which officially went into production in the first quarter. The Qilin battery pack is rated at about 140 kWh, and can be used as a reference for the difficulty of developing a 150 kWh battery.

At the beginning of 2021, during Nio Day, Nio unveiled its 150 kWh semi-solid battery that it planned to start producing at the end of 2022. However, production of the battery has been repeatedly delayed, with Li promising to start delivering from July this year, but that promise wasn’t realized.

The challenges faced in developing the 150 kWh semi-solid battery are massive. An industry source told 36Kr that the battery is being supplied by Weilan Battery, which uses the in-situ curing method to develop batteries. The supplier’s yield of good-quality cells was only a little over 50% last year.

Undeterred, Nio pushed for the mass production of the semi-solid battery with greater determination. Zhang Ran (pseudonym), an engineer who dealt with the 150 kWh semi-solid battery, said that he was told to prioritize its development as soon as he joined the company.

Nio also dispatched hundreds of employees to its production line in Huzhou at the beginning of this year, to assist Weilan Battery in the 150 kWh battery’s development. The company went to the extent of recruiting technical executives from Apple and Panasonic in the US to support the production line. Engineers often worked overtime until late at night, clocking out as late as 1:00 a.m. and returning to work hours shortly after dawn. This enabled Weilan Battery to deliver the cells to Nio by the end of June, although this was just the first step in the overall production process. Nio still needed to assemble the cells into packs, and that entails overcoming several technical and engineering challenges.

Assembling battery packs involves processes like welding and potting, and large soft cell cores are easily scratchable. It was hard to ensure consistency in these processes, resulting in samples that either lack insulation, have incorrect voltage, or were too heavy. Each time a step went wrong, production had to be halted for at least a week or more for the battery team to rectify issues by modifying the design. This made engineers like Zhang feel hopeless as redesigning just before mass production is a taboo in the automotive industry—most processes would have to start over from scratch.

Yet, the feeling at the frontlines was that Nio would overcome all odds and complete the projects using all resources it can muster. The company went to the extent of pausing other projects if that was necessary to help deliver the 150 kWh battery.

However, how much benefit would the 150 kWh semi-solid battery provide to Nio? The company’s employees are skeptical. Qin once revealed that the cost of one semi-solid battery pack might be equivalent to an ET5 vehicle, which has a starting price of RMB 250,000 (USD 34,900). With this price tag, widespread adoption is unlikely. The 1,000-kilometer range touted by Nio two years ago was also already common in the industry.

This project, requiring a lot of resources to realize while not being well-understood by the employees, is in some ways akin to making smartphones.

From batteries to smartphones

Nio released a new smartphone recently, positioning it as a flagship product with a high price. Its main feature? Car connectivity, which will enable the smartphone to replace car keys, while providing drivers with access to various vehicle control functions.

Nio is integrating its smartphones with vehicles using ultra-wideband (UWB) technology, which is known for its high-precision positioning capabilities. This integration is expected to add a new dimension to the company’s smartphones, turning them into digital car keys that can be used to access more advanced vehicle control functions. Photo source: Nio.

In early 2022, Nio began a massive recruitment drive for its smartphone business. Li explained the reason for making smartphones very simply: Nio wants to provide its users with the best car-phone integration experience. He said that the majority of Nio’s customers are iPhone users, but Apple, with ambitions of its own in the automobile industry, has kept its technology ecosystem closed.

For example, while Nio’s second-generation platform and Apple’s smartphones are both equipped with ultra-wideband (UWB) positioning technology, Apple is hesitant to open its development interfaces to all car manufacturers. This has impacted Nio’s plans to implement features that rely on interconnectivity.

Although the Android smartphone ecosystem is open, it’s well-established in the industry that cache-clearing and other software of smartphone manufacturers will “kill” the car key function in the background. Vehicle manufacturers have to pay smartphone manufacturers to keep the car key function active.

Highly ambitious, Nio did not want to be restrained by such conditions. To cite an example, Nio used to procure seats from international manufacturers like Faurecia, before eventually replacing them with self-developed versions.

But making smartphones is a different story. It’s a fiercely competitive industry where small players have long been washed out. Li’s judgment appears unclear either. An industry executive who consulted Li told 36Kr that Li had hesitated between the level of commitment to devote to smartphones. He advised Li to not go too big, which was seemingly heeded as Li subsequently limited Nio’s annual outlay on smartphones to a maximum of RMB 1 billion (USD 139.7 million).

Regardless of investment size, there are extraneous factors that adversely affect the differential value that Nio’s smartphones can provide. In the case of Apple, it has selectively opened its UWB technology interface to BMW and BYD. Numerous other car manufacturers have also applied for the rights, pending Apple’s approval.

An industry insider who works at a car company and was deeply involved in the design of digital car keys told 36Kr that he was skeptical about vehicle manufacturers developing smartphones of their own, since smartphone manufacturers are increasingly improving the interconnectivity of their devices with cars. But Nio has already started this project, with mass production and shipment expected to commence next year.

Exhausted engineers, persistent leaders

Li is remaining steadfast despite the challenges put in Nio’s way. With a successful track record and bold ambitions, his confidence is understandable.

However, engineers and employees at Nio often find themselves working long hours, sometimes to the point of exhaustion. Their motivation to keep going is driven by a shared belief in the company’s vision and the potential of its technology to revolutionize the automotive industry.

As Nio expands globally and ventures into new territories, the challenges will only continue to mount. The automotive industry is notoriously complex and highly competitive, and Nio needs to navigate this landscape while maintaining its innovative edge and meeting ambitious sales targets.

Will the commitment of Nio’s employees and the leadership of individuals like Li be sufficient to secure the company’s success in this demanding environment? The company’s journey is far from over, and only time will tell whether it can truly disrupt the industry and achieve its lofty goals.

KrASIA Connection features translated and adapted content that was originally published at 36Kr.com. This article was originally written in Chinese by Peng Suping.

KrASIA Connection
KrASIA Connection
KrASIA Connection features translated and adapted high-quality insights published on 36Kr.com, the largest and most influential technology portal in Chinese language with over 150 million readers across the globe.
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