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Cloning Tesla: electric-vehicle wars in China

by Ace Damon
Cloning Tesla: electric-vehicle wars in China

WILLIAM BIN LI is as close as China to cloning Elon Musk. The founder of NIO, an electric vehicle (EV) company, is 40 years old, is a tech nerd and, while not as memorable as the Tesla founder, is treated like a rock star by his beloved customers. The $ 4 billion NIO is a fraction of the size of Musk's Tesla, valued at $ 75 billion, but of all 30 electric vehicle startups in China, it is the best known. It also raises and fires investor hopes with similar frequency to Tesla. On December 30, NIO shares rose 54 percent when Li said production likely reached 8,000 vehicles in the fourth quarter, compared with nearly 4,800 in the third. But over 2019 they lost almost 40% (see chart).

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In fact, Musk is in a league of his own. But Mr. Li always had an advantage in one respect. As our Technology Quarterly reports in this issue, NIO is emblematic of China's ambition to be a global hub for electric vehicle production, dominating electric vehicles in the 21st century, as directly as the United States made the internal combustion engine in the 20th century. . As such, China would be a natural place to produce a "Tesla killer," as the NIO was voiced during a CBS interview with Li aired in 2019.

However, if the NIO is trying to topple Tesla, it will be done in a strange way. He is copying some of the aspects of Tesla's business model that have made the company's survival a matter of constant concern, such as overspending on sophisticated technology, resulting in correspondingly large holes in its cash flow statements. If anything can kill Tesla, it is more likely to be its eternal difficulty in generating money than competition from a Chinese beginner with the same problem. Ironically, it could be China that would finally secure a bright future for Tesla. If only NIO could be so lucky.

Not long ago, the NIO was considered the most promising of the two. In the world's largest car market, where luxury vehicle sales are booming, it began in 2014, when state and local governments were launching subsidies for electric vehicle buyers and manufacturers. Support for venture capital was abundant. NIO delivered its first commercial car, the ES8 SUV, priced above $ 70,000, in 2018. Soon after, it issued shares on the New York Stock Exchange, both to raise money and improve its international profile to sell cars. all around the world. Its shareholders include Baillie Gifford, an Edinburgh-based fund manager, which is Tesla's largest institutional investor.

Tu Le of Sino Auto Insights, a consulting firm, says NIO's Tesla killer aspirations have made the most of it. It was imprudent to think that it could quickly take on an 11-year-old company with huge global brand recognition and various models. NIO revenues, estimated at about $ 1.2 billion in 2019, are reduced by Tesla's projected $ 24 billion. However, since early 2017, its accumulated losses have surpassed Tesla's (see chart). NIO has appeared in spacious stores with libraries, coffee shops and day care centers, sometimes across the street from Tesla showrooms. But unlike Tesla, it didn't invest much in factories, contracting manufacturing for state-owned JAC Motors.

In addition, a cut in state subsidies for electric vehicle purchases since June has hurt investor sentiment, raising fears of a funding crisis. NIO raised $ 100 million with Tencent, the technology giant that is also a major shareholder, in the third quarter, and Li is expected to focus on it. But NIO lost more than that in the third quarter and has a net debt of $ 1.3 billion, according to investment firm Bernstein. While NIO sales increased 22.5% in the third quarter compared to the previous three months and launched a third SUV on December 28, it admits it needs funding to survive for another year.

Given the precarious circumstances, the Chinese government can be expected to throw a lifeguard at OI. Instead, it is Tesla that is receiving the breaks. On December 30, the day of the NIO relief rally, the first 3 models were launched at Tesla's Gigafactory in Shanghai, costing a mere $ 50,000 each. Although work began at the factory less than a year ago, production is already running on about 1,000 cars a week. Days earlier, the US company received $ 1.3 billion in financing from Chinese lenders to complete the Shanghai-based plant. Production in China saves Tesla from finished vehicle import duties and its locally manufactured cars also qualify for subsidies. Its shares have risen to record highs in recent days, although there are still lingering doubts about its ability to increase volumes, margins and cash generation. Perversely, Tesla may even have benefited from China's trade war with America. The government hopes to portray investment by Tesla, China's first foreign-owned car factory, as a symbol of its opening.

The NIO, while Chinese, does not offer the same geopolitical advantages and, without its own factories, has less influence in asking state governments to support it. As Michael Dunne, Tesla's boss at ZoZo Go, a car consulting firm, put it, "NIO doesn't have a well-defined godfather in the Chinese government." She is competing with several electric vehicle startups such as Byton, WM and Xpeng for funding. There is no guarantee that they will all survive.

In this market, fortunes could quickly reverse again. The NIO says it may soon announce new financing agreements. A state-backed automaker could have a large stake in it. Some analysts say the government is unlikely to let NIO fail because it is a symbol of China's technological ambitions.

Very gigantic and bigger than America

For now, though, Tesla is in pole position. In fact, says Dunne, China must already feel at home with Musk. Government EV ambitions give Tesla a missing tail wind in the US; On January 1, its customers no longer benefit from a tax credit. Consumers love luxury car brands; Tesla's main competition will be with German, non-Chinese premium automakers. China's manufacturing capacity will help Tesla overcome the "production hell" at home. And China may be faster to encourage autonomous driving than America. For Musk, the main drawback may be that Twitter, his favorite megaphone, is blocked behind the big firewall. But for Tesla this must also be a blessed relief. ■

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