Electric car start-ups face uphill battle
China’s Nio provides cautionary tale for those seeking to enter increasingly tough market
Nio’s banner, draped over the New York Stock Exchange last September to mark its US listing, proclaimed: “Blue Sky Coming.”
But since then investors in the Chinese carmaker have witnessed storm clouds growing darker each quarter as losses spiral.
Once the shining hope for Chinese electric car start-ups, Nio is flirting with collapse with losses piling up, cash flowing out of the door and the share price plunging.
Last month the group was forced to raise $200m from its own chief executive William Li and one of its biggest shareholders, Tencent, to keep afloat. The company still needs more funds, with analysts giving the group weeks to recapitalise in order to survive.
Nio’s disastrous year is a cautionary tale for dozens of small would-be car pioneers looking to gain a toehold in the industry as they try to compete with established giants such as Volkswagen and Toyota.
“You have to be really brave to try and come into [the] automotive [sector],” said Volkswagen chief executive Herbert Diess.
Scores of electric car start-ups have been launched over the past few years, attracted to the market because battery-powered vehicles are comparatively cheap to develop and manufacture.
Electric vehicles are in effect a battery and chassis on wheels in contrast to the thousands of complex moving parts in the internal combustion engine.
China has seen the biggest influx of new groups, helped by subsidies and cheap financing. But there have also been several launches in the US, Europe and Japan.
“Before Tesla, there was I would say an unwritten rule, but I think it was probably a written rule, that you couldn’t start a new car company and succeed,” said Peter Rawlinson, the founder and chief executive of Californian electric start-up Lucid Motors who is a former senior executive at Tesla. “It was impossible.”
But although Tesla, the Californian pioneer, has given other groups the confidence to take the plunge, the electric car market is now more competitive and the environment is tougher for delivering profits.
Many manufacturers failed to recognise the costs involved in creating supply and retail chains, which can run into the billions.
“Probably the biggest challenge is . . . the investment is so big,” said Mr Diess.
Nio’s problems have been exacerbated by overspending.
Last December at a company-branded jamboree called “Nio day”, the group splashed out with the booking of chart-topping singer Bruno Mars to entertain customers.
“Nio have been spending beyond their means for years and their losses have been largely due to unnecessary expenses,” said a senior executive at another Chinese electric car start-up.
As well as high costs, start-ups have struggled with the rigours of scale manufacturing.
At one point Tesla was manufacturing cars without computer units or even seats, requiring its dealers to install them before delivering finished cars to customers. This was in part because of difficulties with its supply chain.
Many new groups also underestimated the challenge of building a brand in a sector where established rivals have spent years developing a loyal customer base.
“A key challenge for the likes of Nio and Byton [another start-up] will be convincing consumers that these new brands are legit,” said Michael Dunne, a former General Motors executive who runs Chinese automotive consultancy ZoZo Go.
“Nio’s disappointing sales reflect not a failure of product but an inability to persuade consumers that a Nio should be considered alongside an Audi or a Tesla.”
Robin Zhu, analyst at Bernstein, added: “Ultimately, our biggest problem with Nio is the lack of traction its vehicles have generated among Chinese consumers to date. Nio’s volumes have not been enough to support anything close to profitability for the company, even at the gross profit line.”
Existing carmakers also have the advantage of a deep well of combustion engine vehicles that allow them to offset the losses from battery cars.
BMW, which is rolling out hybrid options on most of its models, has launched an X7 model to rival Range Rover as well as the 8-series super-saloon specifically to top up the thin profits likely to trickle in from its cheaper battery models.
“We need to compensate with those cars for the smaller electric vehicles,” Harald Krüger, replaced as BMW chief executive over the summer, said earlier in the year.
Still, despite the challenges and risks, scores of start-ups continue to pile into the market, willing to risk failure.
“We know the enormity of this task,” admitted Mr Rawlinson at Lucid. “I’ve been there and done it, and a lot of my team have. But we are under no illusion that this is a marathon.”