China and the United States have, in recent years, engaged in what the Brookings Institution calls “responsible competition” not only through their notorious trade war, but also by means of expanding into foreign markets. Whilst “responsible” as a word holds the connotation of said contest being implicit, Chinese companies like HUAWEI - that attempt to go head-on against their American counterpart that is Apple - have widely and rather candidly been competing for global market leadership in the technology sector. As of late, tensions between the two countries have further burgeoned as China attempts to infiltrate the vehicle manufacturing market.
Founded in 2014, the Chinese automobile company NIO continues to accumulate substantial amounts of finance through subsidies and bailouts provided by the government in attempt to rival Elon Musk’s Tesla. This new permeation propels the already existing and continuous strife, that is of importance precisely because the end result will speak volumes about the stance China has in the global scale of operations: That is, how does China play and the United States threaten? With the provided duality between NIO and Tesla, research suggests the former ought to fail.
To get an insightful opinion on this matter, we need to look at the recent happenings; NIO stated on February 25th that it made an agreement with the government of Hefei for funding support. The company wanted to move its headquarters from China to Shanghai as well as planning to raise $1.43 billion as a result of the partnership. The stock skyrocketed by 34%.
Those are some pretty ambitious goals considering that NIO withholds $1.5 billion of debt, as well as the fact that it is expected to generate a negative cash flow of $1.4 billion for the whole of 2020. Nevertheless, earlier in this month, NIO stated that it successfully raised $100 million in one-year convertible notes, raising the total to $200 million of private placements this year. Stating that “working on several financing projects, the outcome of which is uncertain at this stage.” Unfortunately however, as the coronavirus is creating chaos around China, NIO cannot currently afford to pay its workers within time.
Furthermore, it should also be noted that the company has followed this strategy of partnership many times within the past years. As a matter of fact, last year NIO entered a $1 billion agreement to finance R&D as well as a new production facility with the government fund E-Town Capital in exchange for a minority stake.
NIO counts on the likes of big companies that have invested in them such as Baillie Gifford & Co., Temasek Holdings Pte and Tencent Holdings Ltd. to back them as they continuously burn through cash since 2018. For instance, NIO went through around $300 million only in its 3rd quarter of last year . They also forecast another cash outflow of $4 billion before the company can even get to break even in the far 2023.
It is easily argued that a governmental helping hand won’t and quite possibly can’t turn around NIO’s operations at this current rate of burn. The integral problem is that the company does not produce its own cars. They’re actually outsourced to Anhui Jianghuai Automobile Group Corporation, at a production plant within Hefei under a 5 year contract that was first signed back in 2016. The efficiency of this agreement is rather questionable, as the first 3 years, NIO agreed to pay on a per-car system as well as to cover the costs for the plant’s operating losses. However, it is not really clear as to what the agreement is supposed to shift to now.
Even though car sales have considerably risen, the company has yet continued to spend well beyond its boundaries. The cost of selling the vehicles but also other products shockingly ended up rising faster than NIO’s revenues in the 3rd quarter of 2019. Furthermore, their cost of sales increased to $300 million, up 2.3% from their previous quarter, this being 30% more than from a year earlier. R&D expenses came down in comparison to the second quarter, but still they were around $150 million, taking almost 60% of revenues.
Finally, in its most recent earnings call, NIO addressed its problems and started taking cost-reduction measures. They reduced the workforce by making redundant around 2,000 jobs within a 3-month window. Consequently, whatever money NIO can bring in the company better be spent on producing the cars, instead of feeding hype around them. Even more than hard cash, NIO desperately needs a new strategy if it wants to survive.
George-Aris Lavas
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Founded in 2014, the Chinese automobile company NIO continues to accumulate substantial amounts of finance through subsidies and bailouts provided by the government in attempt to rival Elon Musk’s Tesla. This new permeation propels the already existing and continuous strife, that is of importance precisely because the end result will speak volumes about the stance China has in the global scale of operations: That is, how does China play and the United States threaten? With the provided duality between NIO and Tesla, research suggests the former ought to fail.
To get an insightful opinion on this matter, we need to look at the recent happenings; NIO stated on February 25th that it made an agreement with the government of Hefei for funding support. The company wanted to move its headquarters from China to Shanghai as well as planning to raise $1.43 billion as a result of the partnership. The stock skyrocketed by 34%.
Those are some pretty ambitious goals considering that NIO withholds $1.5 billion of debt, as well as the fact that it is expected to generate a negative cash flow of $1.4 billion for the whole of 2020. Nevertheless, earlier in this month, NIO stated that it successfully raised $100 million in one-year convertible notes, raising the total to $200 million of private placements this year. Stating that “working on several financing projects, the outcome of which is uncertain at this stage.” Unfortunately however, as the coronavirus is creating chaos around China, NIO cannot currently afford to pay its workers within time.
Furthermore, it should also be noted that the company has followed this strategy of partnership many times within the past years. As a matter of fact, last year NIO entered a $1 billion agreement to finance R&D as well as a new production facility with the government fund E-Town Capital in exchange for a minority stake.
NIO counts on the likes of big companies that have invested in them such as Baillie Gifford & Co., Temasek Holdings Pte and Tencent Holdings Ltd. to back them as they continuously burn through cash since 2018. For instance, NIO went through around $300 million only in its 3rd quarter of last year . They also forecast another cash outflow of $4 billion before the company can even get to break even in the far 2023.
It is easily argued that a governmental helping hand won’t and quite possibly can’t turn around NIO’s operations at this current rate of burn. The integral problem is that the company does not produce its own cars. They’re actually outsourced to Anhui Jianghuai Automobile Group Corporation, at a production plant within Hefei under a 5 year contract that was first signed back in 2016. The efficiency of this agreement is rather questionable, as the first 3 years, NIO agreed to pay on a per-car system as well as to cover the costs for the plant’s operating losses. However, it is not really clear as to what the agreement is supposed to shift to now.
Even though car sales have considerably risen, the company has yet continued to spend well beyond its boundaries. The cost of selling the vehicles but also other products shockingly ended up rising faster than NIO’s revenues in the 3rd quarter of 2019. Furthermore, their cost of sales increased to $300 million, up 2.3% from their previous quarter, this being 30% more than from a year earlier. R&D expenses came down in comparison to the second quarter, but still they were around $150 million, taking almost 60% of revenues.
Finally, in its most recent earnings call, NIO addressed its problems and started taking cost-reduction measures. They reduced the workforce by making redundant around 2,000 jobs within a 3-month window. Consequently, whatever money NIO can bring in the company better be spent on producing the cars, instead of feeding hype around them. Even more than hard cash, NIO desperately needs a new strategy if it wants to survive.
George-Aris Lavas
Want to keep up with our most recent articles? Subscribe to our weekly newsletter here.