Chinese EV startup Nio announced its first-quarter results last week and, by most accounts, the Tencent-backed company appears to have weathered the impact of COVID-19. That argument was further bolstered on Thursday when Nio released strong May delivery figures. But Nio also recently finalized a crucially-timed $1 billion bailout from a local government in China, and the price the company had to pay to survive is becoming increasingly apparent.
Now Nio — which is billed as an independent startup with ambitions to sell cars in Europe and the US, and even has offices in London, Munich, and Silicon Valley — is more anchored to the whims of the Chinese government than before. And owners of Nio shares that trade on the New York Stock Exchange have had an extra layer of abstraction placed between them and the company’s most valuable assets.
The cost of the bailout
The major deal Nio inked was with the city of Hefei, the capital of Anhui province. Announced in February and finalized in April, it involves a group of state-owned or state-adjacent construction, economic development, and investment companies pumping about $1 billion into a subsidiary in China created by Nio called, simply, “Nio China.”
In return, Nio had to commit its “core businesses and assets in China, including vehicle research and development, supply chain, sales and services and Nio Power” (that last part being its home charging and battery swap business) into this new subsidiary. Nio also has to invest around $600 million of its own money into Nio China, and has committed to building a new headquarters specifically for the new subsidiary in Hefei.
On top of all of that, the Hefei investor group now owns 24 percent of Nio China. The other 76 percent belongs to Nio Inc., the holding company at the very top of the EV startup’s corporate structure. Nio Inc. is what trades on the NYSE, and so the company made sure to tell its shareholders on the recent earnings call that they will own the controlling stake of Nio China “for the long term.”
That reassurance is important because companies like Nio are ostensibly independent from the government in China, at least when compared to outright state-owned enterprises. Yes, they benefit from government subsidies and aggressive electric vehicle policies, but it’s not like Beijing is calling the day-to-day shots.
But that case will be slightly harder to make following this deal, because the Hefei investor group was granted “voting rights with respect to various significant corporate matters” like changes to Nio China’s corporate structure, and its “core business and … articles of association,” which, according to Nio, “may significantly limit our ability to make certain major corporate decisions with regard to” the new subsidiary. And if Nio doesn’t hit certain sales benchmarks or take the Nio China subsidiary public on its own within five years, the Hefei investors can cash in their shares at an 8.5 percent premium.
What’s more, if that happens and Nio is unable to pay them back, the Hefei investors can force Nio to sell its own stake in Nio China. “[w]e may lose control,” the company warned investors in a recent filing.
Nio didn’t have much of a choice but to make this bargain, says Michael Dunne, head of ZoZo Go, an automotive consulting group focused on the Chinese market.
“At a certain point there comes a day of reckoning where [Chinese companies] are just hungry for cash, and they look around and say, ‘what are our alternatives here?’ And the final backstop is the government,” Dunne says. “China wants to lead the world in electric vehicles, and they have the wherewithal to provide Nio with the cash lifeline to allow it to proceed with its dream.”
Still, it has some skeptics worried. One investor who is short Nio’s stock (meaning he’s essentially betting the share price will go down) has called it an “asset strip,” and that those concessions the company made in return for Hefei’s investment put shareholders at risk.
Dunne disagrees, though he admits Nio was “caught in a place where they were vulnerable and they had to lose control of some elements.”
“Do I think it’s some kind of a play? I don’t. I think it’s a short term improvisation to stay alive, with the hope they can improve performance and reassert control of the venture both inside and outside of China,” he says.
But, he adds, “anything is possible in China. When the company you’re investing in is also owned by Chinese shareholders, including the state enterprise or the government, all bets are off.”
Nio’s brush with death
The money came at a particularly crucial time for Nio, as the startup was barreling toward financial catastrophe.
Not only has Nio burned through more than $6 billion since its founding in 2014, but it stumbled repeatedly in 2019. Despite it being Nio’s first full year of sales, and the company launching a second, more affordable electric SUV, it ultimately delivered half the total number of cars it promised last year.
The company’s progress was tripped up by a number of things: a battery recall, the Chinese government’s reduction of subsidies on expensive electric vehicles, a pre-pandemic slowdown in China’s economy, and — by Nio’s own admission — five straight years of unchecked growth.
Nio went through multiple rounds of layoffs, delayed a new vehicle, and canceled plans to build its own factory as a result. The company also sold its Formula E electric racing team for $15 million, a figure that has not been previously reported, according to a recent filing.
To staunch the bleeding, Nio spent the better part of the last year trying to scare up new funding. That search did not go so well. A proposed $1.45 billion deal with the economic development agency in Beijing never materialized. Instead, Nio wound up taking a $200 million loan from its founder and Tencent in September 2019, and then took on another $435 million worth of debt in early 2020 to fund its operations, before ultimately lining up the deal with Hefei.
Then, of course, the COVID-19 pandemic hit. Nio’s sales briefly flatlined, as did pretty much every other automaker’s. The company went from delivering 8,224 vehicles in the fourth quarter of 2019 to 3,838 cars in the first quarter of 2020 — putting Nio roughly in line with where it was at in the first quarter of 2019 (3,989 cars delivered) when it had just one model for sale.
Nio’s first quarter numbers emphasize how existential things got. The startup generated just $177.3 million of revenue on the 3,838 cars it sold in the first quarter, and $193.8 million in total revenue for the quarter. The company ultimately posted a $238.9 million loss, and finished the quarter with just $338.6 million of cash in the bank, which the company said once again “is not adequate to provide the required working capital and liquidity for continuous operation in the foreseeable future” — marking the second consecutive quarter that Nio had to issue such a warning.
But amidst a recovering new car market in China, Nio delivered 3,436 vehicles in May — nearly as many as it shipped across the entire first quarter. Braced by the optimism around the Hefei investment, analysts at JP Morgan and Goldman Sachs have upgraded their ratings of the company’s stock. CEO William Li has said he feels confident Nio has enough funding to move forward, and it looks like things are trending back up.
If Nio builds on this momentum, the company can still follow through on its ambitions to become a global brand, Dunne says. He’s also not concerned those plans would be inhibited by the fact that the local government is now directly involved.
“The Hefei government would be absolutely 100 percent in support of that direction, to go global, and compete globally, in part because the brand value goes up if it’s not a China-only play,” he says. The central government in Beijing is also calling for more exports of Chinese vehicles, according to Dunne, which would bode well for Nio long term.
Success at that scale could be a boon to Hefei, a place that was already humming with automaker activity, and one that has only seen its status improve since the ink dried on the deal with Nio. Just last week, Volkswagen announced it’s pouring more than $2 billion into state-owned automaker JAC Motors and battery maker Guoxuan High-Tech, two companies located in the capital city of the Anhui province.
JAC Motors just so happens to be the company that makes Nio’s cars, though Dunne thinks the move will only further bolster each company’s prospects. “Anhui province, enjoying apparent powerful godfathers in Beijing, looks hell-bent on establishing itself as a core production hub in China’s EV industry,” he says.