By Trefor Moss
SHANGHAI--A year ago, Chinese electric-vehicle startup NIO Inc.
was near ruin. Today it is worth more than General Motors Co.
NIO's brush with bankruptcy and its subsequent revival to become
the world's fourth most valuable auto maker--only Tesla Inc.,
Toyota Motor Corp. and Volkswagen AG are worth more by market
capitalization--is a measure of investors' seesawing faith in
Chinese EV startups, which for years promised a high-tech
automotive revolution that proved elusive.
From its founding in 2014, NIO led a pack of Chinese EV startups
that became a magnet for investors seeking the next Tesla. But many
investors eventually lost confidence, frustrated by the loss-making
companies' limited progress.
By 2019 China had 635 EV startups on paper, according to the
government-backed NEV State Monitoring Center. Few had produced a
single car and most looked doomed as government subsidies and
private financing evaporated.
NIO's demise looked set to be the most spectacular of all.
Once feted in the local media as "China's Tesla killer," the
company lost $3.67 billion between 2017 and 2019 while selling
fewer than 32,000 cars. NIO shares, worth about $10 when the
company went public, sank to $1.39 late last year as investors
fled.
"We called it an extreme stress test," said William Li, NIO's
founder and chief executive, recalling last year's crisis in an
interview. The company's troubles started, he said, when the
U.S.-China trade war deterred American investors from subscribing
to NIO's 2018 initial public offering on the New York Stock
Exchange. The company raised half the $2 billion Mr. Li had been
hoping for, scrambling his financial plans.
A costly battery recall then strained NIO's finances further, as
did a surprise downturn in the Chinese auto market, during which EV
sales declined 4% in 2019.
An exodus of senior executives followed, as Shanghai-based NIO
slashed its global head count by a quarter to fewer than 7,500
staff members. That included job losses at its American office in
San Jose, Calif.
As it entered a make-or-break phase in late 2019, NIO had one
advantage that most other startups lacked, according Mr. Li--it was
actually selling cars, with the roughly 8,000 vehicles it delivered
in the fourth quarter of last year generating $400 million in
precious cash flow.
"That was very important to us because at that point we had no
other financing channels," said the 46-year-old.
Even so, auto analysts said NIO was weeks away from failure
unless it could find a white knight.
A savior arrived: the government of Hefei, a city about 300
miles west of Shanghai in Mr. Li's home province of Anhui that has
emerged as a center of EV production. NIO agreed to a $683 million
financing package with the city's officials in April.
The capital injection rescued NIO, chiefly by giving suppliers
and customers confidence that the company had a future, Mr. Li
said.
Since then, NIO's shares have rallied, topping $57 on Nov. 25
before falling back slightly. As of Friday, the company had a
market capitalization of about $73.6 billion, still well short of
Tesla's $555 billion valuation.
Aside from its own restructuring efforts, the company's rally is
also thanks to Tesla, which has stoked China's EV market since
starting production in Shanghai late last year. Tesla sold more
than 72,000 locally built Model 3 sedans in the six months to
October, according to the China Passenger Car Association.
Other EV companies have accelerated in Tesla's slipstream. NIO
sold more than 24,000 vehicles in the same six-month period and
topped 5,000 monthly sales for the first time in October.
Like Mr. Musk, Mr. Li is a serial entrepreneur, having founded
or made major investments in more than 40 companies. As a boy, he
herded cattle with his farmer grandparents in Anhui province. He
went on to attend the prestigious Peking University in the nation's
capital.
A sociology major who says he did better in his computer science
classes, Mr. Li co-founded his first company--a kind of data
center--while in college. In 2000, he founded BitAuto, an
automotive services portal that was listed on the New York Stock
Exchange from 2010 until earlier this month, when shareholders took
the company private.
Often seen in polo shirts, jeans and sneakers, Mr. Li is
estimated to be worth more than $8 billion, according to
Forbes.
Mr. Li said NIO aims to produce 7,500 cars a month starting in
January; it contract-manufactures its vehicles in Hefei. It plans
to start selling cars in Europe next year--and eventually in the
U.S.--Mr. Li said.
It is aiming to outflank Tesla and others with a battery-swap
system that enables NIO drivers to switch batteries within a couple
of minutes rather than waiting hours to recharge.
While battery swapping potentially solves the charging issue
that deters many consumers from buying EVs, it requires NIO to
build a costly network of spots where drivers can swap their
batteries. It has built 162 such stations so far.
The company is also giving customers the option of buying a car
minus the battery. That reduces the cost of NIO's ES6 sport-utility
vehicle from about $52,200 to $41,600, though customers would then
pay a $150 monthly fee to rent a battery. A third of NIO buyers are
now choosing this rental option, Mr. Li said.
NIO still has its detractors. Earlier this month short seller
Citron Research said NIO shares had become overvalued and dismissed
investor enthusiasm for Chinese EV startups as "mania." NIO's share
price has kept rising, however.
Mr. Li defended his company's high valuation relative to that of
traditional auto makers. They still produce far more cars than NIO,
he said, but for nuts-and-bolts manufacturers "it would be
difficult to adapt to an era where the car is defined by
software."
Raffaele Huang contributed to this article.
Write to Trefor Moss at Trefor.Moss@wsj.com
(END) Dow Jones Newswires
November 30, 2020 05:44 ET (10:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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