|
A.
|
Selected Financial Data
|
Selected Consolidated Financial Data
The following selected
consolidated statements of comprehensive loss data for the years ended December 31, 2016, 2017 and 2018, selected consolidated
balance sheet data as of December 31, 2017 and 2018 and selected consolidated cash flow data for the years ended December 31, 2016,
2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The
selected consolidated balance sheet data as of December 31, 2016 have been derived from our audited consolidated financial statements
that are not included in this annual report. Our historical results do not necessarily indicate results expected for any future
periods. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference
to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects”
below. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted
in the United States of America, or U.S. GAAP.
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except for share and per share data)
|
|
Selected Consolidated Statements of Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle sales
|
|
|
—
|
|
|
|
—
|
|
|
|
4,852,470
|
|
|
|
705,762
|
|
Other sales
|
|
|
—
|
|
|
|
—
|
|
|
|
98,701
|
|
|
|
14,355
|
|
Total revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
4,951,171
|
|
|
|
720,117
|
|
Cost of sales
:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle sales
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,930,135
|
)
|
|
|
(717,058
|
)
|
Other sales
|
|
|
—
|
|
|
|
—
|
|
|
|
(276,912
|
)
|
|
|
(40,275
|
)
|
Total cost of sales
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,207,047
|
)
|
|
|
(757,333
|
)
|
Gross loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(255,876
|
)
|
|
|
(37,216
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
(2)
|
|
|
(1,465,353
|
)
|
|
|
(2,602,889
|
)
|
|
|
(3,997,942
|
)
|
|
|
(581,477
|
)
|
Selling, general and administrative
(2)
|
|
|
(1,137,187
|
)
|
|
|
(2,350,707
|
)
|
|
|
(5,341,790
|
)
|
|
|
(776,931
|
)
|
Total operating expenses
|
|
|
(2,602,540
|
)
|
|
|
(4,953,596
|
)
|
|
|
(9,339,732
|
)
|
|
|
(1,358,408
|
)
|
Loss from operations
|
|
|
(2,602,540
|
)
|
|
|
(4,953,596
|
)
|
|
|
(9,595,608
|
)
|
|
|
(1,395,624
|
)
|
Interest income
|
|
|
27,556
|
|
|
|
18,970
|
|
|
|
133,384
|
|
|
|
19,400
|
|
Interest expenses
|
|
|
(55
|
)
|
|
|
(18,084
|
)
|
|
|
(123,643
|
)
|
|
|
(17,983
|
)
|
Shares of losses of equity investee
|
|
|
—
|
|
|
|
(5,375
|
)
|
|
|
(9,722
|
)
|
|
|
(1,414
|
)
|
Investment income
|
|
|
2,670
|
|
|
|
3,498
|
|
|
|
—
|
|
|
|
—
|
|
Other income/(loss), net
|
|
|
3,429
|
|
|
|
(58,681
|
)
|
|
|
(21,346
|
)
|
|
|
(3,105
|
)
|
Loss before income tax expenses
|
|
|
(2,568,940
|
)
|
|
|
(5,013,268
|
)
|
|
|
(9,616,935
|
)
|
|
|
(1,398,726
|
)
|
Income tax expenses
|
|
|
(4,314
|
)
|
|
|
(7,906
|
)
|
|
|
(22,044
|
)
|
|
|
(3,206
|
)
|
Net loss
|
|
|
(2,573,254
|
)
|
|
|
(5,021,174
|
)
|
|
|
(9,638,979
|
)
|
|
|
(1,401,932
|
)
|
Accretion on convertible redeemable preferred value
|
|
|
(981,233
|
)
|
|
|
(2,576,935
|
)
|
|
|
(13,667,291
|
)
|
|
|
(1,987,825
|
)
|
Accretion on redeemable non-controlling interests to redemption value
|
|
|
—
|
|
|
|
—
|
|
|
|
(63,297
|
)
|
|
|
(9,206
|
)
|
Net loss attributable to non-controlling interests
|
|
|
36,938
|
|
|
|
36,440
|
|
|
|
41,705
|
|
|
|
6,066
|
|
Net loss attributable to ordinary shareholders of NIO Inc.
|
|
|
(3,517,549
|
)
|
|
|
(7,561,669
|
)
|
|
|
(23,327,862
|
)
|
|
|
(3,392,897
|
)
|
Net loss
|
|
|
(2,573,254
|
)
|
|
|
(5,021,174
|
)
|
|
|
(9,638,979
|
)
|
|
|
(1,401,932
|
)
|
Other comprehensive Income/ (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of nil tax
|
|
|
55,493
|
|
|
|
(124,374
|
)
|
|
|
(20,786
|
)
|
|
|
(3,023
|
)
|
Total other comprehensive income/ (loss)
|
|
|
55,493
|
|
|
|
(124,374
|
)
|
|
|
(20,786
|
)
|
|
|
(3,023
|
)
|
Total comprehensive loss
|
|
|
(2,517,761
|
)
|
|
|
(5,145,548
|
)
|
|
|
(9,659,765
|
)
|
|
|
(1,404,955
|
)
|
Accretion on convertible redeemable preferred shares to redemption value
|
|
|
(981,233
|
)
|
|
|
(2,576,935
|
)
|
|
|
(13,667,291
|
)
|
|
|
(1,987,825
|
)
|
Accretion on redeemable non-controlling interests to redemption value
|
|
|
—
|
|
|
|
—
|
|
|
|
(63,297
|
)
|
|
|
(9,206
|
)
|
Net loss attributable to non-controlling interests
|
|
|
36,938
|
|
|
|
36,440
|
|
|
|
41,705
|
|
|
|
6,066
|
|
Comprehensive loss attributable to ordinary shareholders of NIO Inc.
|
|
|
(3,462,056
|
)
|
|
|
(7,686,043
|
)
|
|
|
(23,348,648
|
)
|
|
|
(3,395,920
|
)
|
Weighted average number of ordinary shares used in computing net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
16,697,527
|
|
|
|
21,801,525
|
|
|
|
332,153,211
|
|
|
|
332,153,211
|
|
Net loss per share attributable to ordinary shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(210.66
|
)
|
|
|
(346.84
|
)
|
|
|
(70.23
|
)
|
|
|
(10.21
|
)
|
Notes:
|
(1)
|
We began generating revenues in June 2018, when we began making deliveries and sales of the ES8.
We currently generate revenues from vehicle sales and other sales.
|
|
(2)
|
Share-based compensation expenses were allocated in cost of sales and operating expenses as follows:
|
|
|
For the Year Ended December 31
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Cost of Sales
|
|
|
—
|
|
|
|
—
|
|
|
|
9,289
|
|
|
|
1,351
|
|
Research and development expenses
|
|
|
14,484
|
|
|
|
23,210
|
|
|
|
109,124
|
|
|
|
15,871
|
|
Selling, general and administrative expenses
|
|
|
62,200
|
|
|
|
67,086
|
|
|
|
561,055
|
|
|
|
81,603
|
|
Total
|
|
|
76,684
|
|
|
|
90,296
|
|
|
|
679,468
|
|
|
|
98,825
|
|
The
following
table
presents our selected consolidated balance sheet data as of the dates
indicated.
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except for share data)
|
|
Selected Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
581,296
|
|
|
|
7,505,954
|
|
|
|
3,133,847
|
|
|
|
455,799
|
|
Restricted cash
|
|
|
—
|
|
|
|
10,606
|
|
|
|
57,012
|
|
|
|
8,292
|
|
Long-term restricted cash
|
|
|
15,335
|
|
|
|
14,293
|
|
|
|
33,528
|
|
|
|
4,876
|
|
Property, plant and equipment, net
|
|
|
833,004
|
|
|
|
1,911,013
|
|
|
|
4,853,157
|
|
|
|
705,862
|
|
Total assets
|
|
|
1,770,478
|
|
|
|
10,468,034
|
|
|
|
18,842,552
|
|
|
|
2,740,536
|
|
Total liabilities
|
|
|
825,264
|
|
|
|
2,402,028
|
|
|
|
10,692,210
|
|
|
|
1,555,118
|
|
Total mezzanine equity
|
|
|
4,861,574
|
|
|
|
19,657,786
|
|
|
|
1,329,197
|
|
|
|
193,324
|
|
Ordinary shares
|
|
|
52
|
|
|
|
60
|
|
|
|
1,809
|
|
|
|
263
|
|
Total shareholders’ (deficit)/equity
|
|
|
(3,916,360
|
)
|
|
|
(11,591,780
|
)
|
|
|
6,821,145
|
|
|
|
992,094
|
|
Total shares outstanding
|
|
|
17,773,459
|
|
|
|
23,850,343
|
|
|
|
1,050,799,032
|
|
|
|
1,050,799,032
|
|
The following table
presents our selected consolidated cash flow data for the
years
indicated.
|
|
For the Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Selected Consolidated Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,201,564
|
)
|
|
|
(4,574,719
|
)
|
|
|
(7,911,768
|
)
|
|
|
(1,150,719
|
)
|
Net cash provided by/(used in) investing activities
|
|
|
117,843
|
|
|
|
(1,190,273
|
)
|
|
|
(7,940,843
|
)
|
|
|
(1,154,949
|
)
|
Net cash provided by financing activities
|
|
|
2,292,704
|
|
|
|
12,867,334
|
|
|
|
11,603,092
|
|
|
|
1,687,601
|
|
Effects of exchange rate changes on cash, cash equivalents and restricted cash
|
|
|
40,539
|
|
|
|
(168,120
|
)
|
|
|
(56,947
|
)
|
|
|
(8,283
|
)
|
Net increase/(decrease) in cash, cash equivalents and restricted cash
|
|
|
249,522
|
|
|
|
6,934,222
|
|
|
|
(4,306,466
|
)
|
|
|
(626,350
|
)
|
Cash, cash equivalents and restricted cash at beginning of the year
|
|
|
347,109
|
|
|
|
596,631
|
|
|
|
7,530,853
|
|
|
|
1,095,317
|
|
Cash, cash equivalents and restricted cash at end of the year
|
|
|
596,631
|
|
|
|
7,530,853
|
|
|
|
3,224,387
|
|
|
|
468,967
|
|
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
Risks Related to Our Business and Industry
Our
ability to develop and manufacture a car of sufficient quality and appeal to customers on schedule and on a large scale is still
evolving.
Our future business
depends in large part on our ability to execute on our plans to develop, manufacture, market and sell our electric vehicles. We
plan to manufacture our vehicles in higher volumes than our present production capabilities in strategic collaboration with a Chinese
manufacturer.
Our continued development
and manufacturing of our manufactured vehicles, the ES8 and the ES6, and our future vehicles are and will be
subject to risks, including with respect to:
|
·
|
our ability to secure necessary funding;
|
|
|
|
|
·
|
the equipment we use being able to accurately manufacture the vehicle within specified design tolerances;
|
|
|
|
|
·
|
compliance with environmental, workplace safety and similar regulations;
|
|
|
|
|
·
|
securing necessary components on acceptable terms and in a timely manner;
|
|
|
|
|
·
|
delays in delivery of final component designs to our suppliers;
|
|
|
|
|
·
|
our ability to attract, recruit, hire and train skilled employees;
|
|
|
|
|
·
|
quality controls;
|
|
|
|
|
·
|
delays or disruptions in our supply chain;
|
|
|
|
|
·
|
our ability to maintain solid partnership with our manufacturing partners and suppliers; and
|
|
·
|
other delays, backlog in manufacturing and research and development of new
models, and cost overruns.
|
We began making deliveries
of the seven-seater ES8 in June 2018. We launched our second volume manufactured electric vehicle, the ES6, in December 2018, but
we do not expect to deliver the ES6 until June 2019. Our vehicles may not meet customer expectations and our future models may
not be commercially viable.
Historically, automobile
customers have expected car manufacturers to periodically introduce new and improved vehicle models. In order to meet these expectations,
we may be required to introduce new vehicle models and enhanced versions of existing vehicle models. To date we have limited experience
designing, testing, manufacturing, marketing and selling our electric vehicles and therefore cannot assure you that we will be
able to meet customer expectations.
Any of the foregoing
could have a material adverse effect on our results of operations and growth prospects.
We
have negative cash flows from operation, have only recently started to generate revenues and have not been profitable, all of which
may continue in the future.
We have only recently
started to generate revenues and have not been profitable since our inception. We incurred net losses of RMB2,573.3 million, RMB5,021.2
million and RMB9,639.0 million (US$1,401.9 million) in 2016, 2017 and 2018, respectively. In addition, we had negative cash flows
from operating activities of RMB2,201.6 million, RMB4,574.7 million and RMB7,911.8 million (US$1,150.7 million) in 2016, 2017 and
2018, respectively. We have made significant up-front investments in research and development, service network, and sales and marketing
to rapidly develop and expand our business. We expect to continue to invest significantly in research and development and sales
and marketing, to establish and expand our business, and these investments may not result in an increase in revenue or positive
cash flow on a timely basis, or at all.
We may not generate
sufficient revenues or we may incur substantial losses for a number of reasons, including lack of demand for our vehicles and services,
increasing competition, as well as other risks discussed herein, and we may incur unforeseen expenses, or encounter difficulties,
complications and delays in generating revenue or achieving profitability. If we are unable to achieve profitability, we may have
to reduce the scale of our operations, which may impact our business growth and adversely affect our financial condition and results
of operations.
We
have a limited operating history and face significant challenges as a new entrant into our industry.
We were formed in 2014
and began making deliveries to the public of our first volume manufactured vehicle, the seven-seater ES8, in June 2018. In December
2018, we launched our second volume manufactured electric vehicle, the ES6, to the public at our NIO Day event and we plan to start
initial deliveries in June 2019.
You should consider
our business and prospects in light of the risks and challenges we face as a new entrant into our industry, including, among other
things, with respect to our ability to:
|
·
|
design and produce safe, reliable and quality vehicles on an ongoing basis;
|
|
|
|
|
·
|
build a well-recognized and respected brand;
|
|
|
|
|
·
|
establish and expand our customer base;
|
|
|
|
|
·
|
successfully market not just our vehicles but also our other services, including our service package, energy package and other services we provide;
|
|
|
|
|
·
|
properly price our services, including our charging solutions and service package and successfully anticipate the take-rate and usage of such services by users;
|
|
|
|
|
·
|
improve and maintain our operational efficiency;
|
|
·
|
maintain a reliable, secure, high-performance and scalable technology infrastructure;
|
|
|
|
|
·
|
attract, retain and motivate talented employees;
|
|
|
|
|
·
|
anticipate and adapt to changing market conditions, including technological developments and changes in competitive landscape; and
|
|
|
|
|
·
|
navigate an evolving and complex regulatory environment.
|
If we fail to address
any or all of these risks and challenges, our business may be materially and adversely affected.
We have limited experience
to date in high volume manufacturing of our electric vehicles. We cannot assure you that we will be able to develop efficient,
automated, cost-efficient manufacturing capability and processes, and reliable sources of component supply that will enable us
to meet the quality, price, engineering, design and production standards, as well as the production volumes required to successfully
mass market the ES8, the ES6 and future vehicles.
Furthermore, our vehicles
are highly technical products that will require maintenance and support. If we were to cease or cut back operations, even years
from now, buyers of our vehicles from years earlier might encounter difficulties in maintaining their vehicles and obtaining satisfactory
support. We also believe that our service offerings, including user confidence in our ability to provide our charging solutions
and honor our obligations under our service package will be key factors in marketing our vehicles. As a result, consumers will
be less likely to purchase our vehicles now if they are not convinced that our business will succeed or that our operations will
continue for many years. Similarly, suppliers and other third parties will be less likely to invest time and resources in developing
business relationships with us if they are not convinced that our business will succeed.
Manufacturing
in collaboration with partners is subject to risks.
We have entered into
an arrangement with Jianghuai Automobile Group Co., Ltd., or JAC, for manufacturing the ES8 for five years. The ES8 is manufactured
in partnership with JAC at its Hefei manufacturing plant. JAC is a major state-owned automobile manufacturer in China and it constructed
such Hefei manufacturing plant for the production of the ES8 (with a modified production line for the ES6) and potentially other
future vehicles with us. Pursuant to our arrangement with JAC with respect to the ES8, we pay JAC for each vehicle produced on
a per-vehicle basis monthly for the first three years. We are in the process of negotiating with JAC the arrangement for manufacturing
the ES6. We aim to enter into similar arrangements for the ES6 soon and may enter into similar arrangements for our other vehicles
in the future. Collaboration with third parties for the manufacturing of vehicles is subject to risks with respect to operations
that are outside our control. We could experience delays to the extent our partners do not meet agreed upon timelines or experience
capacity constraints. There is risk of potential disputes with partners, and we could be affected by adverse publicity related
to our partners whether or not such publicity is related to their collaboration with us. Our ability to successfully build a premium
brand could also be adversely affected by perceptions about the quality of our partners’ vehicles. In addition, although
we are involved in each step of the supply chain and manufacturing process, given that we also rely on our partners to meet our
quality standards, there can be no assurance that we will successfully maintain quality standards.
In addition, for the
first 36 months after the start of production, which commenced on April 10, 2018, to the extent the Hefei manufacturing plant incurs
any operating losses, we have agreed to compensate JAC for such operating losses. As of December 31, 2018, we have paid JAC a total
of RMB222,9 million, including RMB126.4 million as compensation for losses incurred in 2018 and RMB96.5 million for manufacturing
and processing fees. If we are obligated to compensate JAC for any losses, our results of operations and financial condition may
be materially and adversely affected, particularly if such losses are incurred as a result of lower than anticipated sales volume.
We may be unable to
enter into new agreements or extend existing agreements with third-party manufacturing partners on terms and conditions acceptable
to us and therefore may need to contract with other third parties or significantly add to our own production capacity. There can
be no assurance that in such event we would be able to partner with other third parties or establish or expand our own production
capacity to meet our needs on acceptable terms or at all. The expense and time required to complete any transition, and to assure
that vehicles manufactured at facilities of new third-party partners comply with our quality standards and regulatory requirements,
may be greater than anticipated. Any of the foregoing could adversely affect our business, results of operations, financial condition
and prospects.
The
unavailability, reduction or elimination of government and economic incentives or government policies which are favorable for electric
vehicles and domestically produced vehicles could have a material adverse effect on our business, financial condition, operating
results and prospects.
Our growth depends
significantly on the availability and amounts of government subsidies, economic incentives and government policies that support
the growth of new energy vehicles generally and electric vehicles specifically. For example, each qualified purchaser of the ES8
is entitled to receive subsidies from China’s central government. In addition, in certain cities, quotas that limit the number
of internal combustion engine, or ICE, vehicles do not apply to electric vehicles, making it easier for customers to purchase electric
vehicles.
On April 10, 2018,
President Xi Jinping vowed to open China’s economy further and lower import tariffs on products, including cars, in a speech
during the Boao Forum. Beginning July 1, 2018, the tariff on imported passenger vehicles (other than those originating in the United
States of America) was reduced to 15%. As a result, our pricing advantage could be diminished. On June 28, 2018, the National Development
and Reform Commission, or NDRC, and the Ministry of Commerce, or the MOFCOM, promulgated the
Special Administrative Measures
for Market Access of Foreign Investment
, or the Negative List, which came into effect on July 28, 2018. Pursuant to the Negative
List, the limits on foreign ownership of auto manufacturers were lifted in 2018 for NEVs and will be lifted by 2022 for ICE vehicles.
As a result, foreign EV competitors could build wholly-owned facilities in China without the need for a domestic joint venture
partner. For example, Tesla has started constructing a factory in Shanghai without a joint venture partner. These changes could
increase our competition and reduce our pricing advantage.
China's central
government provides subsidies for purchasers of certain NEVs until 2020 and reviews and adjusts the subsidy standard on an
annual basis. The current subsidy standard is provided for in the Circular on Further Improving the Subsidy Policies for the
Promotion and Application of New Energy Vehicles, which was jointly promulgated by the MOF, the MOST, the MIIT and the NDRC
on March 26, 2019. The current subsidy standard reduces the amount of national subsidies and cancels local subsidies,
resulting in a significant reduction in the total subsidy amount applicable to the ES8 as compared to
2018. Furthermore, China’s central government provides certain local governments with funds and subsidies to support
the roll-out of a charging infrastructure. See “Item 4. Information on the Company—B. Business
Overview—Regulation—Favorable Government Policies Relating to New Energy Vehicles in the PRC.” These
policies are subject to change and beyond our control. We cannot assure you that any changes would be favorable to our
business. Furthermore, any reduction, elimination or discriminatory application of government subsidies and
economic incentives because of policy changes, the reduced need for such subsidies and incentives due to the perceived
success of electric vehicles, fiscal tightening or other factors may result in the diminished competitiveness of the
alternative fuel vehicle industry generally or our electric vehicles in particular. Any of the foregoing could materially and
adversely affect our business, results of operations, financial condition and prospects.
Our
vehicles may not perform in line with customer expectations.
Our vehicles, including
the ES8 and the ES6, may not perform in line with customers’ expectations. For example, our vehicles may not have the durability
or longevity of other vehicles in the market, and may not be as easy and convenient to repair as other vehicles on the market.
Any product defects or any other failure of our vehicles to perform as expected could harm our reputation and result in adverse
publicity, lost revenue, delivery delays, product recalls, product liability claims, harm to our brand and reputation, and significant
warranty and other expenses, and could have a material adverse impact on our business, financial condition, operating results and
prospects.
In addition, the range
of our vehicles on a single charge declines principally as a function of usage, time and charging patterns as well as other factors.
For example, a customer’s use of his or her electric vehicle as well as the frequency with which he or she charges the battery
can result in additional deterioration of the battery’s ability to hold a charge.
Furthermore, our vehicles
may contain defects in design and manufacture that may cause them not to perform as expected or that may require repair. We have
delivered our vehicles with certain features of our NIO Pilot ADAS system initially disabled, and subsequently turned on some of
these features. We plan to activate most features of our NIO Pilot system by the second quarter of 2019. We cannot assure you that
our NIO Pilot system will ultimately perform in line with expectations. Our vehicles use a substantial amount of software code
to operate and software products are inherently complex and often contain defects and errors when first introduced. While we have
performed extensive internal testing on our vehicles’ software and hardware systems, we have a limited frame of reference
by which to evaluate the long-term performance of our systems and vehicles. There can be no assurance that we will be able to detect
and fix any defects in the vehicles prior to their sale to consumers. If any of our vehicles fail to perform as expected, we may
need to delay deliveries, initiate product recalls and provide servicing or updates under warranty at our expense, which could
adversely affect our brand in our target markets and could adversely affect our business, prospects and results of operations.
Any
delays in the manufacturing and launch of the commercial production vehicles in our pipeline could have a material adverse effect
on our business.
We launched our
second volume manufactured electric vehicle, the ES6, to the public at our NIO Day event on December 15, 2018. The ES6 is a
five-seater high-performance long-range premium electric SUV. The ES6 is smaller but more affordable than the ES8, allowing
us to target a broader market in the premium SUV segment. The ES6 currently offers the Standard, Performance and Premier
versions with pre-subsidy starting prices of RMB358,000, RMB398,000 and RMB498,000, respectively. Users can pre-order the ES6
through the NIO App and we expect to begin making deliveries of the ES6 in June 2019. Before making deliveries of the ES6, we
will need to enter into an arrangement with JAC for manufacturing the ES6. Also, the ES6 must enter into an Announcement of
Vehicle Manufacturers and Products and obtain the China Compulsory Certification, or the CCC certification, prior to mass
production. If we encounter delays in any of these matters, we may consequently delay our deliveries of the ES6. We generally
target to launch a new model every year in the near future as we ramp up our business. Automobile manufacturers often
experience delays in the design, manufacture and commercial release of new vehicle models. We are planning to target a
broader market with our future vehicles, and to the extent we need to delay the launch of our vehicles, our growth prospects
could be adversely affected as we may fail to grow our market share. We also plan to periodically perform facelifts or
refresh existing models, which could also be subject to delays. Furthermore, we rely on third party suppliers for the
provision and development of many of the key components and materials used in our vehicles. To the extent our suppliers
experience any delays in providing us with or developing necessary components, we could experience delays in delivering on
our timelines. Any delay in the manufacture and launch of the ES8, the ES6 or future models (including the ET7 and all other
models in our pipeline), including in the build out of the manufacturing facilities in China for these models or due to any other
factors, or in refreshing or performing facelifts to existing models, could subject us to customer complaints and materially
and adversely affect our reputation, demand for our vehicles, results of operations and growth prospects.
In addition, to the
extent the Hefei manufacturing plant incurs any operating losses, we have agreed to compensate JAC for such operating losses. As
of December 31, 2018, we have paid JAC a total of RMB222.9 million, including RMB126.4 million as compensation for losses incurred
in 2018 and RMB96.5 million for manufacturing and processing fees. If we are obligated to compensate JAC for any losses, our results
of operations and financial condition may be materially and adversely affected, particularly if such losses are incurred as a result
of lower than anticipated sales volume. We expect that our sales volume and the ability of the Hefei manufacturing plant to achieve
profitability will be significantly affected by our ability to timely bring new vehicles to market.
We
may face challenges providing our charging solutions.
We have marketed our
ability to provide our users with comprehensive charging solutions conveniently accessible using our mobile application. We install
home chargers for users where practicable, and provide other solutions including battery swapping, charging through publicly accessible
charging infrastructure and charging using our fast charging trucks. Our users are able to use our NIO Power one-click valet charging
service where their vehicles are picked up, charged and then returned. We have very limited experience in the actual provision
of our charging solutions to users and providing these services is subject to challenges, which include the logistics of rolling
out our network and teams in appropriate areas, inadequate capacity or over capacity in certain areas, security risks or risk of
damage to vehicles during Power Express valet services and the potential for lack of user acceptance of our services. In addition,
although the Chinese government has supported the roll-out of a public charging network, the current number of charging infrastructures
is generally considered to be insufficient. We face significant challenges as we roll out our charging solutions, including access
to sufficient charging infrastructure, obtaining any required permits, land use rights and filings, and, to a certain extent, such
roll-out is subject to the risk that government support may discontinue.
In addition, given
our limited experience in providing charging solutions, there could be unanticipated challenges which may hinder our ability to
provide our solutions or make the provision of our solutions costlier than anticipated. To the extent we are unable to meet user
expectations or experience difficulties in providing our charging solutions, our reputation and business may be materially and
adversely affected.
Our
services may not be generally accepted by our users. If we are unable to provide good customer service, our business and reputation
may be materially and adversely affected.
We aim to provide users
with a good customer service experience, including by providing our users with access to a full suite of services conveniently
through our mobile application and vehicle applications. In addition, we seek to engage with our users on an ongoing basis using
online and offline channels, in ways which are non-traditional for automakers. We cannot assure you that our services, including
our energy package and service package, or our efforts to engage with our users using both our online and offline channels, will
be successful, which could impact our revenues as well as our customer satisfaction and marketing.
Our servicing will
primarily be carried out through third parties certified by us. Although such servicing partners may have experience in servicing
other vehicles, we and such partners have very limited experience in servicing our vehicles. Servicing electric vehicles is different
from servicing ICE vehicles and requires specialized skills, including high voltage training and servicing techniques. There can
be no assurance that our service arrangements will adequately address the service requirements of our users to their satisfaction,
or that we and our partners will have sufficient resources to meet these service requirements in a timely manner as the volume
of vehicles we deliver increases.
In addition, if we
are unable to roll out and establish a widespread service network, user satisfaction could be adversely affected, which in turn
could materially and adversely affect our sales, results of operations and prospects.
We
have received only a limited number of reservations for the ES8 and the ES6, all of which are subject to cancellation.
Intention orders and
reservations for our vehicles are subject to cancellation by the customer until delivery of the vehicle. We have experienced cancellations
in the past. Notwithstanding the non-refundable deposits we charge for the reservations, our users may still cancel their reservations
for many reasons outside of our control, in certain cases even after they have paid deposits with such reservations. The potentially
long wait from the time a reservation is made until the time the vehicle is delivered could also impact user decisions on whether
to ultimately make a purchase, due to potential changes in preferences, competitive developments and other factors. If we encounter
delays in the introduction of the ES8, ES6 or future vehicles, we believe that a significant number of reservations may be cancelled.
As a result, no assurance can be made that reservations will not be cancelled and will ultimately result in the final purchase,
delivery, and sale of the vehicle. Such cancellations could harm our financial condition, business, prospects and operating results.
The
automotive market is highly competitive, and we may not be successful in competing in this industry.
The China automotive
market is highly competitive. We have strategically entered into this market in the premium EV segment and we expect this segment
will become more competitive in the future as additional players enter into this segment. We compete with international competitors,
including Tesla. Our vehicles also compete with ICE vehicles in the premium segment. Many of our current and potential competitors,
particularly international competitors, have significantly greater financial, technical, manufacturing, marketing and other resources
than we do and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale
and support of their products. We expect competition in our industry to intensify in the future in light of increased demand and
regulatory push for alternative fuel vehicles, continuing globalization and consolidation in the worldwide automotive industry.
Factors affecting competition include, among others, product quality and features, innovation and development time, pricing, reliability,
safety, fuel economy, customer service and financing terms. Increased competition may lead to lower vehicle unit sales and increased
inventory, which may result in downward price pressure and adversely affect our business, financial condition, operating results
and prospects. Our ability to successfully compete in our industry will be fundamental to our future success in existing and new
markets and our market share. There can be no assurance that we will be able to compete successfully in our markets. If our competitors
introduce new cars or services that successfully compete with or surpass the quality or performance of our cars or services at
more competitive prices, we may be unable to satisfy existing customers or attract new customers at the prices and levels that
would allow us to generate attractive rates of return on our investment.
Furthermore, as the
company with the first-to-market and only premium EV volume-manufactured domestically in China, we believe we have a multi-year
lead time in terms of product delivery ahead of our domestic and international competitors in China’s premium EV segment.
However, if such competitors begin making deliveries earlier than expected, our competitive advantage could be adversely affected.
We may also be affected
by the growth of the overall China automotive market. While sales of electric vehicles in China increased in 2018, overall automobile
sales in China declined 2.8% during the year. If demand for automobiles in China continues to decrease, our business, results of
operations and financial condition could be materially adversely affected.
Our
industry and its technology are rapidly evolving and may be subject to unforeseen changes. Developments in alternative technologies
or improvements in the internal combustion engine may materially and adversely affect the demand for our electric vehicles.
We operate in China’s
electric vehicle market, which is rapidly evolving and may not develop as we anticipate. The regulatory framework governing the
industry is currently uncertain and may remain uncertain for the foreseeable future. As our industry and our business develop,
we may need to modify our business model or change our services and solutions. These changes may not achieve expected results,
which could have a material adverse effect on our results of operations and prospects.
Furthermore, we may
be unable to keep up with changes in electric vehicle technology and, as a result, our competitiveness may suffer. Our research
and development efforts may not be sufficient to adapt to changes in electric vehicle technology. As technologies change, we plan
to upgrade or adapt our vehicles and introduce new models in order to provide vehicles with the latest technology, in particular
battery cell technology, which could involve substantial costs and lower our return on investment for existing vehicles. There
can be no assurance that we will be able to compete effectively with alternative vehicles or source and integrate the latest technology
into our vehicles, against the backdrop of our rapidly evolving industry. Even if we are able to keep pace with changes in technology
and develop new models, our prior models could become obsolete more quickly than expected, potentially reducing our return on investment.
Developments in alternative
technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements in the fuel economy of the
internal combustion engine, may materially and adversely affect our business and prospects in ways we do not currently anticipate.
For example, fuel which is abundant and relatively inexpensive in China, such as compressed natural gas, may emerge as consumers’
preferred alternative to petroleum based propulsion. Any failure by us to successfully react to changes in existing technologies
could materially harm our competitive position and growth prospects.
We
may be unable to adequately control the costs associated with our operations.
We have required significant
capital to develop and grow our business, including developing our first and second volume manufactured vehicles, the ES8 and the
ES6, as well as building our brand. We expect to incur significant costs which will impact our profitability, including research
and development expenses as we roll out new models and improve existing models, raw material procurement costs and selling and
distribution expenses as we build our brand and market our vehicles. In addition, we may incur significant costs in connection
with our services, including providing charging solutions and honoring our commitments under our service package. Our ability to
become profitable in the future will not only depend on our ability to successfully market our vehicles and other products and
services but also to control our costs. If we are unable to cost efficiently design, manufacture, market, sell and distribute and
service our vehicles and services, our margins, profitability and prospects will be materially and adversely affected.
We
could experience cost increases or disruptions in supply of raw materials or other components used in our vehicles.
We incur significant
costs related to procuring raw materials required to manufacture and assemble our vehicles. We use various raw materials in our
vehicles including aluminum, steel, carbon fiber, non-ferrous metals such as copper, lithium, nickel as well as cobalt. The prices
for these raw materials fluctuate depending on factors beyond our control, including market conditions and global demand for these
materials, and could adversely affect our business and operating results. Our business also depends on the continued supply of
battery cells for our vehicles. Battery cell manufacturers may refuse to supply electric vehicle manufacturers to the extent they
determine that the vehicles are not sufficiently safe. We are exposed to multiple risks relating to availability and pricing of
quality lithium-ion battery cells. These risks include:
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the inability or unwillingness of current battery cell manufacturers to build or operate battery cell manufacturing plants to supply the numbers of lithium-ion cells required to support the growth of the electric or plug-in hybrid vehicle industry as demand for such cells increases;
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disruption in the supply of cells due to quality issues or recalls by the battery cell manufacturers; and
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an increase in the cost of raw materials, such as lithium, nickel and cobalt, used in lithium-ion cells.
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Furthermore, currency
fluctuations, tariffs or shortages in petroleum and other economic or political conditions may result in significant increases
in freight charges and raw material costs. Substantial increases in the prices for our raw materials or components would increase
our operating costs, and could reduce our margins. In addition, a growth in popularity of electric vehicles without a significant
expansion in battery cell production capacity could result in shortages which would result in increased costs in raw materials
to us or impact of prospects.
We
are dependent on our suppliers, many of whom are our single source suppliers for the components they supply.
Both the ES8 and ES6
use over 1,700 purchased parts which we source from over 160 suppliers, many of whom are currently our single source suppliers
for these components, and we expect that this will be similar for any future vehicle we may produce. The supply chain exposes us
to multiple potential sources of delivery failure or component shortages. While we obtain components from multiple sources whenever
possible, similar to other automobile manufacturers, many of the components used in our vehicles are purchased by us from a single
source. To date, we have not qualified alternative sources for most of the single sourced components used in our vehicles and we
generally do not maintain long-term agreements with our single source suppliers. For example, while several sources of the battery
cell we have selected for the ES8 are available, we have fully qualified only one supplier for these cells.
Furthermore, qualifying
alternative suppliers or developing our own replacements for certain highly customized components of the ES8 and ES6, such as the
air suspension system and the steering system, may be time-consuming and costly. Any disruption in the supply of components, whether
or not from a single source supplier, could temporarily disrupt production of our vehicles until an alternative supplier is fully
qualified by us or is otherwise able to supply us the required material. There can be no assurance that we would be able to successfully
retain alternative suppliers or supplies on a timely basis, on acceptable terms or at all. Changes in business conditions, force
majeure, governmental changes and other factors beyond our control or which we do not presently anticipate, could also affect our
suppliers’ ability to deliver components to us on a timely basis. Any of the foregoing could materially and adversely affect
our results of operations, financial condition and prospects.
Our
business and prospects depend significantly on our ability to build our NIO brand. We may not succeed in continuing to establish,
maintain and strengthen the NIO brand, and our brand and reputation could be harmed by negative publicity regarding our company
or products.
Our business and prospects
are heavily dependent on our ability to develop, maintain and strengthen the “NIO” brand. If we do not continue to
establish, maintain and strengthen our brand, we may lose the opportunity to build a critical mass of customers. Promoting and
positioning our brand will likely depend significantly on our ability to provide high quality vehicles and services and engage
with our customers as intended and we have limited experience in these areas. In addition, we expect that our ability to develop,
maintain and strengthen the NIO brand will depend heavily on the success of our user development and branding efforts. Such efforts
mainly include building a community of online and offline users engaged with us through our mobile application and NIO Houses as
well as other branding initiatives such as our annual NIO Day, NIO Formula E Team, or Formula E team, and other automotive shows
and events. Such efforts may be non-traditional and may not achieve the desired results. To promote our brand, we may be required
to change our user development and branding practices, which could result in substantially increased expenses, including the need
to use traditional media such as television, radio and print. If we do not develop and maintain a strong brand, our business, prospects,
financial condition and operating results will be materially and adversely impacted.
In addition, if incidents
occur or are perceived to have occurred, whether or not such incidents are our fault, we could be subject to adverse publicity.
In particular, given the popularity of social media, including WeChat/Weixin in China, any negative publicity, whether true or
not, could quickly proliferate and harm consumer perceptions and confidence in our brand. Furthermore, there is the risk of potential
adverse publicity related to our manufacturing or other partners, whether or not such publicity related to their collaboration with
us. Our ability to successfully position our brand could also be adversely affected by perceptions about the quality of our partners’
vehicles.
In addition, from time
to time, our vehicles are evaluated and reviewed by third parties. Any negative reviews or reviews which compare us unfavorably
to competitors could adversely affect consumer perception about our vehicles.
Our
business depends substantially on the continuing efforts of our executive officers, key employees and qualified personnel, and
our operations may be severely disrupted if we lose their services.
Our success depends
substantially on the continued efforts of our executive officers and key employees. If one or more of our executive officers or
key employees were unable or unwilling to continue their services with us, we might not be able to replace them easily, in a timely
manner, or at all. As we build our brand and become more well-known, the risk that competitors or other companies may poach our
talent increases. Our industry is characterized by high demand and intense competition for talent and therefore we cannot assure
you that we will be able to attract or retain qualified staff or other highly skilled employees. In addition, because our electric
vehicles are based on a different technology platform than traditional ICE vehicles, individuals with sufficient training in electric
vehicles may not be available to hire, and we will need to expend significant time and expense training the employees we hire.
We also require sufficient talent in areas such as software development. Furthermore, as our company is relatively young, our ability
to train and integrate new employees into our operations may not meet the growing demands of our business, which may materially
and adversely affect our ability to grow our business and our results of operations.
If any of our executive
officers and key employees terminates his or her services with us, our business may be severely disrupted, our financial condition
and results of operations may be materially and adversely affected and we may incur additional expenses to recruit, train and retain
qualified personnel. We have not obtained any “key person” insurance on our key personnel. If any of our executive
officers or key employees joins a competitor or forms a competing company, we may lose customers, know-how and key professionals
and staff members. Each of our executive officers and key employees has entered into an employment agreement and a non-compete
agreement with us. However, if any dispute arises between our executive officers or key employees and us, the non-competition provisions
contained in their non-compete agreements may not be enforceable, especially in China, where these executive officers reside, on
the ground that we have not provided adequate compensation to them for their non-competition obligations, which is required under
relevant PRC laws.
Our
future growth is dependent on the demand for, and upon consumers’ willingness to adopt, electric vehicles.
Demand for automobile
sales depends to a large extent on general, economic, political and social conditions in a given market and the introduction of
new vehicles and technologies. As our business grows, economic conditions and trends will impact our business, prospects and operating
results as well.
Demand for our electric
vehicles may also be affected by factors directly impacting automobile prices or the cost of purchasing and operating automobiles,
such as sales and financing incentives, prices of raw materials and parts and components, cost of fuel and governmental regulations,
including tariffs, import regulation and other taxes. Volatility in demand may lead to lower vehicle unit sales, which may result
in further downward price pressure and adversely affect our business, prospects, financial condition and operating results.
In addition, the demand
for our vehicles and services will highly depend upon the adoption by consumers of new energy vehicles in general and electric
vehicles in particular. The market for new energy vehicles is still rapidly evolving, characterized by rapidly changing technologies,
competitive pricing and competitive factors, evolving government regulation and industry standards and changing consumer demands
and behaviors.
Other factors that
may influence the adoption of alternative fuel vehicles, and specifically electric vehicles, include:
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perceptions about electric vehicle quality, safety, design, performance and cost, especially if adverse events or accidents occur that are linked to the quality or safety of electric vehicles, whether or not such vehicles are produced by us or other manufacturers;
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perceptions about vehicle safety in general, in particular safety issues that may be attributed to the use of advanced technology, including electric vehicle and regenerative braking systems;
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the limited range over which electric vehicles may be driven on a single battery charge and the speed at which batteries can be recharged;
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the decline of an electric vehicle’s range resulting from deterioration over time in the battery’s ability to hold a charge;
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concerns about electric grid capacity and reliability;
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the availability of new energy vehicles, including plug-in hybrid electric vehicles;
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improvements in the fuel economy of the internal combustion engine;
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the availability of service for electric vehicles;
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the environmental consciousness of consumers;
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access to charging stations, standardization of electric vehicle charging systems and consumers’ perceptions about convenience and cost to charge an electric vehicle;
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the availability of tax and other governmental incentives to purchase and operate electric vehicles or future regulation requiring increased use of nonpolluting vehicles;
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perceptions about and the actual cost of alternative fuel; and
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macroeconomic factors.
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Any of the factors
described above may cause current or potential customers not to purchase our electric vehicles and use our services. If the market
for electric vehicles does not develop as we expect or develops more slowly than we expect, our business, prospects, financial
condition and operating results will be affected.
We
depend on revenue generated from a single model of vehicle and in the foreseeable future will be significantly dependent on a limited
number of models.
Our business
currently depends substantially on the sales and success of a limited number of models that we have launched.
Historically, automobile customers have come to expect a variety of vehicle models offered in a manufacturer’s fleet
and new and improved vehicle models to be introduced frequently. In order to meet these expectations, we plan in the future
to introduce on a regular basis new vehicle models as well as enhance versions of existing vehicle models. To the extent our
product variety and cycles do not meet consumer expectations, or cannot be produced on our projected timelines and cost and
volume targets, our future sales may be adversely affected. Given that for the foreseeable future our business will depend on
a single or limited number of models, to the extent a particular model is not well-received by the market, our sales
volume could be materially and adversely affected. This could have a material adverse effect on our business, prospects,
financial condition and operating results.
We
are subject to risks related to customer credit.
We currently provide
our users with the option of a battery payment arrangement, where users can make battery payments in installments. For the ES8
ordered before January 15, 2019, there is an RMB100,000 reduction in the purchase price and users adopting this arrangement pay
RMB1,280 per month, payable over 78 months. For the ES8 and ES6 ordered after January 16, 2019, there is an RMB100,000 reduction
in the purchase price and users adopting this arrangement pay RMB1,660 per month, payable over 60 months. We are exposed to the
creditworthiness of our users since we expect them to make monthly payments for vehicle batteries under the battery payment arrangement.
To the extent our users fail to make payments on-time, our results of operations may be adversely affected.
We
may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully
defend or insure against such claims.
We may become subject
to product liability claims, which could harm our business, prospects, operating results and financial condition. The automotive
industry experiences significant product liability claims and we face inherent risk of exposure to claims in the event our vehicles
do not perform as expected or malfunction resulting in property damage, personal injury or death. Our risks in this area are particularly
pronounced given we have limited field experience of our vehicles. A successful product liability claim against us could require
us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about
our vehicles and business and inhibit or prevent commercialization of our future vehicle candidates which would have a material
adverse effect on our brand, business, prospects and operating results. Any insurance coverage might not be sufficient to cover
all potential product liability claims. Any lawsuit seeking significant monetary damages may have a material adverse effect on
our reputation, business and financial condition.
Our
vehicles are subject to motor vehicle standards and the failure to satisfy such mandated safety standards would have a material
adverse effect on our business and operating results.
All vehicles sold must
comply with various standards of the market where the vehicles were sold. In China vehicles must meet or exceed all mandated safety
standards. Rigorous testing and the use of approved materials and equipment are among the requirements for achieving such standards.
Vehicles must pass various tests and undergo a certification process and be affixed with the CCC certification, before receiving
delivery from the factory, being sold, or being used in any commercial activity, and such certification is also subject to periodic
renewal. The seven-seater ES8 and the six-seater ES8 received the CCC certification in December 2017 and January 2019, separately.
The ES6 has not yet undergone the CCC certification but must be certified in the future prior to mass production. The process of
obtaining the CCC certification typically requires four to five months. We plan to complete this process and obtain the CCC certification
for the ES6 in April 2019. Furthermore, the government carries out the supervision and scheduled and unscheduled inspection of
certified vehicles on a regular basis. In the event that our certification fails to be renewed upon expiry, a certified vehicle
has a defect resulting in quality or safety accidents, or consistent failure of certified vehicles to comply with certification
requirements is discovered during follow-up inspections, the CCC may be suspended or even revoked. With effect from the date of
revocation or during suspension of the CCC, any vehicle that fails to satisfy the requirements for certification may not continue
to be delivered, sold, imported or used in any commercial activity. Failure by us to have the ES8, the ES6 or any future model
electric vehicle satisfy motor vehicle standards would have a material adverse effect on our business and operating results.
We
may be subject to risks associated with autonomous driving technology.
Through NIO Pilot,
we will provide enhanced Level 2 autonomous driving functionalities, and through our research and development, we plan to update
and improve our autonomous driving technology. Autonomous driving technologies are subject to risks and from time to time there
have been accidents associated with such technologies. For example, in March 2018, Tesla indicated that its autopilot system was
engaged at the time of a fatal accident and an Uber Technologies Inc. self-driving vehicle struck a pedestrian leading to a fatality.
The safety of such technologies depends in part on user interaction and users may not be accustomed to using such technologies.
To the extent accidents associated with our autonomous driving systems occur, we could be subject to liability, government scrutiny
and further regulation. Any of the foregoing could materially and adversely affect our results of operations, financial condition
and growth prospects.
We
may be compelled to undertake product recalls or take other actions, which could adversely affect our brand image and financial
performance.
If our vehicles are
subject to recalls in the future, we may be subject to adverse publicity, damage to our brand and liability for costs. In the future,
we may at various times, voluntarily or involuntarily, initiate a recall if any of our vehicles, including any systems or parts
sourced from our suppliers, prove to be defective or non-compliant with applicable laws and regulations. Such recalls, whether
voluntary or involuntary or caused by systems or components engineered or manufactured by us or our suppliers, could involve significant
expense and could adversely affect our brand image in our target markets, as well as our business, prospects, financial condition
and results of operations.
Our
distribution model is different from the predominant current distribution model for automobile manufacturers, which makes evaluating
our business, operating results and future prospects difficult.
Our distribution model
is not common in the automotive industry today, particularly in China. We plan to conduct vehicle sales directly to users rather
than through dealerships, primarily through our mobile application and NIO Houses. Furthermore, generally all vehicles are made
to order. This model of vehicle distribution is relatively new and unproven, especially in China, and subjects us to substantial
risk as it requires, in the aggregate, significant expenditures and provides for slower expansion of our distribution and sales
systems than may be possible by utilizing the traditional dealer franchise system. For example, we will not be able to utilize
long established sales channels developed through a franchise system to increase our sales volume. Moreover, we will be competing
with companies with well established distribution channels. Our success will depend in large part on our ability to effectively
develop our own sales channels and marketing strategies. Implementing our business model is subject to numerous significant challenges,
including obtaining permits and approvals from government authorities, and we may not be successful in addressing these challenges.
The lead time in fulfilling
our orders could lead to cancelled orders. Our aim is in the future to manufacture vehicles within 21-28 days from the order date.
If we are unable to achieve these targets, our customer satisfaction could be adversely affected, harming our business and reputation.
Our
financial results may vary significantly from period-to-period due to the seasonality of our business and fluctuations in our operating
costs.
Our operating results
may vary significantly from period-to-period due to many factors, including seasonal factors that may have an effect on the demand
for our electric vehicles. Demand for new cars in the automotive industry in general typically decline over the winter season,
while sales are generally higher during the spring and summer months. Our limited operating history makes it difficult for us to
judge the exact nature or extent of the seasonality of our business. Also, any unusually severe weather conditions in some markets
may impact demand for our vehicles. Our operating results could also suffer if we do not achieve revenue consistent with our expectations
for this seasonal demand because many of our expenses are based on anticipated levels of annual revenue.
We also expect our
period-to-period operating results to vary based on our operating costs which we anticipate will increase significantly in future
periods as we, among other things, design, develop and manufacture our electric vehicles and electric powertrain components, build
and equip new manufacturing facilities to produce such components, open new NIO Houses, increase our sales and marketing activities,
and increase our general and administrative functions to support our growing operations.
As a result of these
factors, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and that these comparisons
cannot be relied upon as indicators of future performance. Moreover, our operating results may not meet expectations of equity
research analysts or investors. If this occurs, the trading price of our ADSs could fall substantially either suddenly or over
time.
If
our vehicle owners customize our vehicles or change the charging infrastructure with aftermarket products, the vehicle may not
operate properly, which may create negative publicity and could harm our business.
Automobile enthusiasts
may seek to “hack” our vehicles to modify their performance which could compromise vehicle safety systems. Also, customers
may customize their vehicles with after-market parts that can compromise driver safety. We do not test, nor do we endorse, such
changes or products. In addition, the use of improper external cabling or unsafe charging outlets can expose our customers to injury
from high voltage electricity. Such unauthorized modifications could reduce the safety of our vehicles and any injuries resulting
from such modifications could result in adverse publicity which would negatively affect our brand and harm our business, prospects,
financial condition and operating results.
Our
business plans require a significant amount of capital. In addition, our future capital needs may require us to sell additional
equity or debt securities that may dilute our shareholders or introduce covenants that may restrict our operations or our ability
to pay dividends.
We will need significant
capital to, among other things, conduct research and development and expand our production capacity as well as roll out our charging
and servicing network and our NIO Houses. As we ramp up our production capacity and operations we may also require significant
capital to maintain our property, plant and equipment and such costs may be greater than anticipated. We currently estimate that
our capital expenditures for the next three years, including for research and development and the expansion of our sales and service
networks, will be approximately US$1.7 billion, with approximately US$600 million incurred over the twelve months starting from
January 2019. We expect that our level of capital expenditures will be significantly affected by user demand for our products and
services. The fact that we have a limited operating history means we have limited historical data on the demand for our products
and services. As a result, our future capital requirements may be uncertain and actual capital requirements may be different from
those we currently anticipate. We plan to seek equity or debt financing to finance a portion of our capital expenditures. Such
financing might not be available to us in a timely manner or on terms that are acceptable, or at all.
Our ability to obtain
the necessary financing to carry out our business plan is subject to a number of factors, including general market conditions and
investor acceptance of our business plan. These factors may make the timing, amount, terms and conditions of such financing unattractive
or unavailable to us. If we are unable to raise sufficient funds, we will have to significantly reduce our spending, delay or cancel
our planned activities or substantially change our corporate structure. We might not be able to obtain any funding, and we might
not have sufficient resources to conduct our business as projected, both of which could mean that we would be forced to curtail
or discontinue our operations.
In addition, our future
capital needs and other business reasons could require us to sell additional equity or debt securities or obtain a credit facility.
The sale of additional equity or equity-linked securities could dilute our shareholders. The incurrence of indebtedness would result
in increased debt service obligations and could result in operating and financing covenants that would restrict our operations
or our ability to pay dividends to our shareholders.
We
retain certain information about our users and may be subject to various privacy and consumer protection laws.
We use our vehicles’
electronic systems to log information about each vehicle’s use, such as charge time, battery usage, mileage and driving behavior,
in order to aid us in vehicle diagnostics, repair and maintenance, as well as to help us customize and optimize the driving and
riding experience. Our users may object to the use of this data, which may harm our business. Possession and use of our user’s
driving behavior and data in conducting our business may subject us to legislative and regulatory burdens in China and other jurisdictions
that could require notification of any data breach, restrict our use of such information and hinder our ability to acquire new
customers or market to existing customers. If users allege that we have improperly released or disclosed their personal information,
we could face legal claims and reputational damage. We may incur significant expenses to comply with privacy, consumer protection
and security standards and protocols imposed by laws, regulations, industry standards or contractual obligations. If third parties
improperly obtain and use the personal information of our users, we may be required to expend significant resources to resolve
these problems.
Failure
of information security and privacy concerns could subject us to penalties, damage our reputation and brand, and harm our business
and results of operations.
We face significant
challenges with respect to information security and privacy, including the storage, transmission and sharing of confidential information.
We transmit and store confidential and private information of our car buyers, such as personal information, including names, accounts,
user IDs and passwords, and payment or transaction related information.
We are required by
PRC law to ensure the confidentiality, integrity, availability and authenticity of the information of our users, customers and
distributors, which is also essential to maintaining their confidence in our vehicles and services. We have adopted strict information
security policies and deployed advanced measures to implement the policies, including, among others, advanced encryption technologies.
However, advances in technology, an increased level of sophistication and diversity of our products and services, an increased
level of expertise of hackers, new discoveries in the field of cryptography or others can still result in a compromise or breach
of the measures that we use. If we are unable to protect our systems, and hence the information stored in our systems, from unauthorized
access, use, disclosure, disruption, modification or destruction, such problems or security breaches could cause a loss, give rise
to our liabilities to the owners of confidential information or even subject us to fines and penalties. In addition, complying
with various laws and regulations could cause us to incur substantial costs or require us to change our business practices, including
our data practices, in a manner adverse to our business.
In addition, we may
need to comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the
U.S., Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation, or the GDPR, which
became effective on May 25, 2018. The GDPR imposes additional obligations on companies regarding the handling of personal data
and provides certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently
enacted laws (including implementation of the privacy and process enhancements called for under GDPR) and regulations can be costly;
any failure to comply with these regulatory standards could subject us to legal and reputational risks.
We generally comply
with industry standards and are subject to the terms of our own privacy policies. Compliance with any additional laws could be
expensive, and may place restrictions on the conduct of our business and the manner in which we interact with our customers. Any
failure to comply with applicable regulations could also result in regulatory enforcement actions against us, and misuse of or
failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against
us by governmental entities or others, damage to our reputation and credibility and could have a negative impact on revenues and
profits.
Significant capital
and other resources may be required to protect against information security breaches or to alleviate problems caused by such breaches
or to comply with our privacy policies or privacy-related legal obligations. The resources required may increase over time as the
methods used by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving.
Any failure or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related
legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable
information or other customer data, could cause our customers to lose trust in us and could expose us to legal claims. Any perception
by the public that online transactions or the privacy of user information are becoming increasingly unsafe or vulnerable to attacks
could inhibit the growth of online retail and other online services generally, which may reduce the number of orders we receive.
Our
warranty reserves may be insufficient to cover future warranty claims which could adversely affect our financial performance.
For the initial owner
of the ES8 or ES6, we provide an extended warranty, subject to certain conditions. As required under the relevant PRC law, we also
provide (i) a bumper to bumper three-year or 120,000 kilometer warranty, (ii) for critical EV components (battery pack, electrical
motors, power electrical unit and vehicle control unit) an eight-year or 120,000 kilometer warranty, and (iii) a two-year or 50,000
kilometer warranty covering vehicle repair, replacement and refund. Our warranty program is similar to other vehicle manufacturer’s
warranty programs intended to cover all parts and labor to repair defects in material or workmanship in the body, chassis, suspension,
interior, electric systems, battery, powertrain and brake system. We plan to record and adjust warranty reserves based on changes
in estimated costs and actual warranty costs. However, because we did not start making deliveries of the ES8 until June 2018 and
have not begun making deliveries of the ES6, we have little experience with warranty claims regarding our vehicles or with estimating
warranty reserves. As of February 28, 2019, we had warranty reserves in respect of our vehicles of RMB197.6 million (US$28.7 million).
We cannot assure you that such reserves will be sufficient to cover future claims. We could, in the future, become subject to a
significant and unexpected warranty claims, resulting in significant expenses, which would in turn materially and adversely affect
our results of operations, financial condition and prospects.
We
may need to defend ourselves against patent or trademark infringement claims, which may be time-consuming and would cause us to
incur substantial costs.
Companies, organizations
or individuals, including our competitors, may hold or obtain patents, trademarks or other proprietary rights that would prevent,
limit or interfere with our ability to make, use, develop, sell or market our vehicles or components, which could make it more
difficult for us to operate our business. From time to time, we may receive communications from holders of patents or trademarks
regarding their proprietary rights. Companies holding patents or other intellectual property rights may bring suits alleging infringement
of such rights or otherwise assert their rights and urge us to take licenses. Our applications and uses of trademarks relating
to our design, software or artificial intelligence technologies could be found to infringe upon existing trademark ownership and
rights. In addition, if we are determined to have infringed upon a third party’s intellectual property rights, we may be
required to do one or more of the following:
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cease selling, incorporating certain components into, or using vehicles or offering goods or services
that incorporate or use the challenged intellectual property;
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pay substantial damages;
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seek a license from the holder of the infringed intellectual property right, which license may
not be available on reasonable terms or at all;
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redesign our vehicles or other goods or services; or
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establish and maintain alternative branding for our products and services.
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In the event of a successful
claim of infringement against us and our failure or inability to obtain a license to the infringed technology or other intellectual
property right, our business, prospects, operating results and financial condition could be materially and adversely affected.
In addition, any litigation or claims, whether or not valid, could result in substantial costs, negative publicity and diversion
of resources and management attention.
We
may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive
position.
We regard our trademarks,
service marks, patents, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to
our success. We rely on trademark and patent law, trade secret protection and confidentiality and license agreements with our employees
and others to protect our proprietary rights.
We have invested significant
resources to develop our own intellectual property. Failure to maintain or protect these rights could harm our business. In addition,
any unauthorized use of our intellectual property by third parties may adversely affect our current and future revenues and our
reputation.
Implementation and
enforcement of PRC intellectual property-related laws have historically been deficient and ineffective. Accordingly, protection
of intellectual property rights in China may not be as effective as in the United States or other countries with more developed
intellectual property laws. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive. We rely
on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual
property rights. Despite our efforts to protect our proprietary rights, third parties may attempt to copy or otherwise obtain and
use our intellectual property or seek court declarations that they do not infringe upon our intellectual property rights. Monitoring
unauthorized use of our intellectual property is difficult and costly, and we cannot assure you that the steps we have taken or
will take will prevent misappropriation of our intellectual property. From time to time, we may have to resort to litigation to
enforce our intellectual property rights, which could result in substantial costs and diversion of our resources.
As
our patents may expire and may not be extended, our patent applications may not be granted and our patent rights may be contested,
circumvented, invalidated or limited in scope, our patent rights may not protect us effectively. In particular, we may not be able
to prevent others from developing or exploiting competing technologies, which could have a material and adverse effect on our business
operations, financial condition and results of operations.
As of February 28,
2019, we had 1,535 issued patents and 2,594 patent applications pending. For our pending application, we cannot assure you that
we will be granted patents pursuant to our pending applications. Even if our patent applications succeed and we are issued patents
in accordance with them, it is still uncertain whether these patents will be contested, circumvented or invalidated in the future.
In addition, the rights granted under any issued patents may not provide us with meaningful protection or competitive advantages.
The claims under any patents that issue from our patent applications may not be broad enough to prevent others from developing
technologies that are similar or that achieve results similar to ours. The intellectual property rights of others could also bar
us from licensing and exploiting any patents that issue from our pending applications. Numerous patents and pending patent applications
owned by others exist in the fields in which we have developed and are developing our technology. These patents and patent applications
might have priority over our patent applications and could subject our patent applications to invalidation. Finally, in addition
to those who may claim priority, any of our existing or pending patents may also be challenged by others on the basis that they
are otherwise invalid or unenforceable.
We
have limited insurance coverage, which could expose us to significant costs and business disruption.
We have limited liability
insurance coverage for our products and business operations. A successful liability claim against us due to injuries suffered by
our users could materially and adversely affect our financial condition, results of operations and reputation. In addition, we
do not have any business disruption insurance. Any business disruption event could result in substantial cost to us and diversion
of our resources.
We
have a significant amount of debt, including our convertible senior notes, that are senior in capital structure and cash flow,
respectively, to our shareholders. Satisfying the obligations relating to our debt could adversely affect the amount or timing
of distributions to our shareholders or result in dilution.
As of February 28,
2019, we had approximately US$1,080.9 million in total long-term liabilities outstanding, consisting primarily of US$750.0 million
in principal that remains outstanding under our 4.50% convertible senior notes due 2024, or the 2024 Notes, and RMB1,489.1 million
(US$216.6 million) in bank debt.
The 2024 Notes are
unsecured debt and are not redeemable by us prior to the maturity date except for certain changes in tax law. In accordance with
the indenture governing the 2024 Notes, or the Indenture, holders of the 2024 Notes may require us to purchase all or any portion
of their notes on February 1, 2022 at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased,
plus accrued and unpaid interest. Holders of the 2024 Notes may also require us, upon a fundamental change (as defined in the Indenture),
to repurchase for cash all or part of their 2024 Notes at a fundamental change repurchase price equal to 100% of the principal
amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest. Satisfying the obligations of the 2024 Notes could
adversely affect the amount or timing of any distributions to our shareholders. We may choose to satisfy, repurchase, or refinance
the 2024 Notes through public or private equity or debt financings if we deem such financings available on favorable terms. If
we do not have adequate cash available or cannot obtain additional financing, or our use of cash is restricted by applicable law,
regulations or agreements governing our current or future indebtedness, we may not be able to repurchase the 2024 Notes when required
under the Indenture, which would constitute an event of default under the Indenture. An event of default under the Indenture could
also lead to a default under other agreements governing our current and future indebtedness, and if the repayment of such other
indebtedness were accelerated, we may not have sufficient funds to repay the indebtedness and repurchase the 2024 Notes or make
cash payments upon conversion of the 2024 Notes.
In addition, the holders
of the 2024 Notes may convert their notes to a number of our ADSs at their option at any time prior to the close of business on
the second business day immediately preceding the maturity date pursuant to the Indenture. The 2024 Notes that are converted in
connection with a make-whole fundamental change (as defined in the Indenture) may be entitled to an increase in the conversion
rate for such 2024 Notes. Any conversion will result in immediate dilution to the ownership interests of existing shareholders
and such dilution could be material.
We
may seek to obtain future financing through the issuance of debt or equity, which may have an adverse effect on our shareholders
or may otherwise adversely affect our business.
If we raise funds through
the issuance of additional equity or debt, including convertible debt or debt secured by some or all of our assets, holders of
any debt securities or preferred shares issued will have rights, preferences and privileges senior to those of holders of our ordinary
shares in the event of liquidation. The terms of the 2024 Notes do not restrict our ability to issue additional debt. If additional
debt is issued, there is a possibility that once all senior claims are settled, there may be no assets remaining to pay out to
the holders of ordinary shares. In addition, if we raise funds through the issuance of additional equity, whether through private
placements or public offerings, such an issuance would dilute ownership of our current shareholders that do not participate in
the issuance. If we are unable to obtain any needed additional funding, we may be required to reduce the scope of, delay, or eliminate
some or all of, our planned research, development, manufacturing and marketing activities, any of which could materially harm our
business.
Furthermore, the terms
of any additional debt securities we may issue in the future may impose restrictions on our operations, which may include limiting
our ability to incur additional indebtedness, pay dividends on or repurchase our share capital, or make certain acquisitions or
investments. In addition, we may be subject to covenants requiring us to satisfy certain financial tests and ratios, and our ability
to satisfy such covenants may be affected by events outside of our control.
The
terms of the 2024 Notes could delay or prevent an attempt to take over our company.
The terms of the 2024
Notes require us to repurchase the 2024 Notes in the event of a fundamental change. A takeover of our company would constitute
a fundamental change. This could have the effect of delaying or preventing a takeover of our company that may otherwise be beneficial
to our shareholders.
We
are or may be subject to risks associated with strategic alliances or acquisitions.
We have entered into
and may in the future enter into strategic alliances, including joint ventures or minority equity investments, with various third
parties to further our business purpose from time to time. These alliances could subject us to a number of risks, including risks
associated with sharing proprietary information, non-performance by the third party and increased expenses in establishing new
strategic alliances, any of which may materially and adversely affect our business. We may have limited ability to monitor or control
the actions of these third parties and, to the extent any of these strategic third parties suffers negative publicity or harm to
their reputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue
of our association with any such third party.
In addition, although
we have no current acquisition plans, if appropriate opportunities arise, we may acquire additional assets, products, technologies
or businesses that are complementary to our existing business. In addition to possible shareholder approval, we may have to obtain
approvals and licenses from relevant government authorities for the acquisitions and to comply with any applicable PRC laws and
regulations, which could result in increased delay and costs, and may derail our business strategy if we fail to do so. Furthermore,
past and future acquisitions and the subsequent integration of new assets and businesses into our own require significant attention
from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse
effect on our operations. Acquired assets or businesses may not generate the financial results we expect. Acquisitions could result
in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill
impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired
business. Moreover, the costs of identifying and consummating acquisitions may be significant.
If
we fail to manage our growth effectively, we may not be able to market and sell our vehicles successfully.
We have expanded our
operations, and as we ramp up our production, further significant expansion will be required, especially in connection with potential
increased sales, providing our users with high-quality servicing, providing charging solutions, expansion of our NIO House network
and managing different models of vehicles. Our future operating results depend to a large extent on our ability to manage this
expansion and growth successfully. Risks that we face in undertaking this expansion include, among others:
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managing a larger organization with a greater number of employees in different divisions;
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controlling expenses and investments in anticipation of expanded operations;
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establishing or expanding design, manufacturing, sales and service facilities;
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implementing and enhancing administrative infrastructure, systems and processes; and
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addressing new markets and potentially unforeseen challenges as they arise.
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Any failure to manage
our growth effectively could materially and adversely affect our business, prospects, results of operations and financial condition.
We
have granted, and may continue to grant options and other types of awards under our share incentive plan, which may result in increased
share-based compensation expenses.
We adopted share incentive
plans in 2015, 2016, 2017 and 2018, which we refer to as the 2015 Plan, the 2016 Plan, the 2017 Plan and the 2018 Plan, respectively,
in this annual report, for the purpose of granting share-based compensation awards to employees, directors and consultants to incentivize
their performance and align their interests with ours. The 2018 Plan became effective as of January 1, 2019. We recognize expenses
in our consolidated statement of income in accordance with U.S. GAAP. Under our share incentive plans, we are authorized to grant
options and other types of awards. Under the 2015 Plan, the 2016 Plan and the 2017 Plan, the maximum numbers of Class A ordinary
shares which may be issued pursuant to all awards are 46,264,378, 18,000,000 and 33,000,000, respectively. Under the 2018 Plan,
a maximum number of 23,000,000 Class A ordinary shares may be issued pursuant to all awards. This amount should automatically increase
each year by the number of shares representing 1.5% of the then total issued and outstanding share capital of our company as of
the end of each preceding year. As of December 31, 2018, awards to purchase an aggregate amount of 91,074,140 Class A ordinary
shares under the 2015 Plan, the 2016 Plan and the 2017 Plan had been granted and were outstanding, excluding awards that were forfeited
or cancelled after the relevant grant dates. As of December 31, 2018, our unrecognized share-based compensation expenses amounted
to RMB73.0 million (US$10.6 million).
We believe the granting
of share-based awards is of significant importance to our ability to attract and retain key personnel and employees, and we will
continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation
may increase, which may have an adverse effect on our results of operations.
Furthermore, perspective
candidates and existing employees often consider the value of the equity awards they receive in connection with their employment.
Thus, our ability to attract or retain highly skilled employees may be adversely affected by declines in the perceived value of
our equity or equity awards. Furthermore, there are no assurances that the number of shares reserved for issuance under our share
incentive plans will be sufficient to grant equity awards adequate to recruit new employees and to compensate existing employees.
If
we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our
financial results or prevent fraud, and investor confidence in our company and the market price of our ADSs may be adversely affected.
Prior to the initial
public offering of our ADSs on the New York Stock Exchange in September 2018, we were a private company with limited accounting
personnel and other resources with which to address our internal controls and procedures. Effective internal control over financial
reporting is necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures,
are designed to prevent fraud.
Our internal controls
relating to financial reporting have not kept pace with the expansion of our business. Our financial reporting function and system
of internal controls are less developed in certain respects than those of similar companies that operate in fewer or more developed
markets and may not provide our management with as much or as accurate or timely information. The U.S. Public Company Accounting
Oversight Board, or the PCAOB, has defined a material weakness as “a deficiency, or a combination of deficiencies in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim
statements will not be prevented or detected on a timely basis.”
Our independent registered
public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with
the preparation and external audit of our consolidated financial statements as of and for the year ended December 31, 2018, we
and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting.
The material weakness identified was that we do not have sufficient competent financial reporting and accounting personnel with
an appropriate understanding of U.S. GAAP to (i) design and implement formal period-end financial reporting policies and procedures
to address complex U.S. GAAP technical accounting issues and (ii) prepare and review our consolidated financial statements and
related disclosures in accordance with U.S. GAAP and the financial reporting requirements set forth by the Securities and Exchange
Commission, or the SEC. The material weakness resulted in a significant number of adjustments and amendments to our consolidated
financial statements and related disclosures under U.S. GAAP.
As a result of the
identification of this material weakness, we have been taking measures to remedy this control deficiency. However, we can give
no assurance that the implementation of these measures will be sufficient to eliminate such material weakness or that material
weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. Our
failure to implement and maintain effective internal controls over financial reporting could result in errors in our financial
statements that could result in a restatement of our financial statements, cause us to fail to meet our reporting obligations and
cause investors to lose confidence in our reported financial information, which may result in volatility in and a decline in the
market price of the ADSs.
As a public company,
we are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, will require that we include
a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F
beginning with our annual report for the fiscal year ending December 31, 2019. In addition, once we cease to be an “emerging
growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to
and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal
control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial
reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue
a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented,
designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, as we have become
a public company, our reporting obligations may place a significant strain on our management, operational and financial resources
and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.
During the course of
documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other
weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy
of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we
may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance
with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements
in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in
our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and
lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose
us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which
we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements
from prior periods.
If
our suppliers fail to use ethical business practices and comply with applicable laws and regulations, our brand image could be
harmed due to negative publicity.
Our core values, which
include developing high quality electric vehicles while operating with integrity, are an important component of our brand image,
which makes our reputation sensitive to allegations of unethical business practices. We do not control our independent suppliers
or their business practices. Accordingly, we cannot guarantee their compliance with ethical business practices, such as environmental
responsibilities, fair wage practices, and compliance with child labor laws, among others. A lack of demonstrated compliance could
lead us to seek alternative suppliers, which could increase our costs and result in delayed delivery of our products, product shortages
or other disruptions of our operations.
Violation of labor
or other laws by our suppliers or the divergence of an independent supplier’s labor or other practices from those generally
accepted as ethical in the markets in which we do business could also attract negative publicity for us and our brand. This could
diminish the value of our brand image and reduce demand for our electric vehicles if, as a result of such violation, we were to
attract negative publicity. If we, or other manufacturers in our industry, encounter similar problems in the future, it could harm
our brand image, business, prospects, results of operations and financial condition.
If
we update our manufacturing equipment more quickly than expected, we may have to shorten the useful lives of any equipment to be
retired as a result of any such update, and the resulting acceleration in our depreciation could negatively affect our financial
results.
We and JAC have invested
and expect to continue to invest significantly in what we believe is state of the art tooling, machinery and other manufacturing
equipment for the product lines where the ES8 is manufactured, and we depreciate the cost of such equipment over their expected
useful lives. However, manufacturing technology may evolve rapidly, and we or JAC may decide to update our manufacturing process
with cutting-edge equipment more quickly than expected. Moreover, as our engineering and manufacturing expertise and efficiency
increase, we or JAC may be able to manufacture our products using less of our installed equipment. The useful life of any equipment
that would be retired early as a result would be shortened, causing the depreciation on such equipment to be accelerated, and to
the extent we own such equipment, our results of operations could be negatively impacted.
The
construction and operation of our manufacturing facilities are subject to regulatory approvals or filings and may be subject to
changes, delays, cost overruns or may not produce expected benefits.
In 2017, we
signed a framework agreement with the Shanghai Jiading government and its authorized investment entity to build and develop
our own manufacturing facility in Jiading, Shanghai. Recently, we have agreed with the related contractual parties to cease
construction of this planned manufacturing facility and terminate this development project, due to newly issued government
policies that allow collaborative manufacturing between traditional automotive manufacturers and companies with a focus on
research, development and design of new energy vehicles.
In addition, we are
building phase two of our manufacturing facilities in Nanjing. Construction projects of this scale are subject to risks and will
require significant capital. Any failure to complete these projects on schedule and within budget could adversely impact our financial
condition, production capacity and results of operations. Under PRC law, construction projects are subject to broad and strict
government supervision and approval procedures, including but not limited to project approvals and filings, construction land and
project planning approvals, environment protection approvals, pollution discharge permits, work safety approvals, fire protection
approvals, and the completion of inspection and acceptance by relevant authorities. Some of the construction projects being carried
out by us are undergoing necessary approval procedures as required by law. As a result, the relevant entities operating such construction
projects may be subject to administrative uncertainty, and construction projects in question may be subject to fines or the suspension
of use of such projects. Any of the foregoing could have a material adverse impact on our operations, and we may not be able to
find commercially reasonable alternatives.
Our
vehicles make use of lithium-ion battery cells, which have been observed to catch fire or vent smoke and flame.
The battery packs that
we produce make use of lithium-ion cells. On rare occasions, lithium-ion cells can rapidly release the energy they contain by venting
smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. While we have designed the battery
pack to passively contain any single cell’s release of energy without spreading to neighboring cells, a field or testing
failure of our vehicles or other battery packs that we produce could occur, which could subject us to lawsuits, product recalls,
or redesign efforts, all of which would be time-consuming and expensive. Also, negative public perceptions regarding the suitability
of lithium-ion cells for automotive applications or any future incident involving lithium-ion cells such as a vehicle or other
fire, even if such incident does not involve our vehicles, could seriously harm our business.
In addition, we store
a significant number of lithium-ion cells at our facilities. Any mishandling of battery cells may cause disruption to the operation
of our facilities. While we have implemented safety procedures related to the handling of the cells, a safety issue or fire related
to the cells could disrupt our operations. Such damage or injury could lead to adverse publicity and potentially a safety recall.
Moreover, any failure of a competitor’s electric vehicle or energy storage product may cause indirect adverse publicity for
us and our products. Such adverse publicity could negatively affect our brand and harm our business, prospects, financial condition
and operating results.
Interruption
or failure of our information technology and communications systems could impact our ability to effectively provide our services.
We aim to provide our
users with an innovative suite of services through our mobile application. In addition, our in-car services depend, to a certain
extent, on connectivity. The availability and effectiveness of our services depend on the continued operation of our information
technology and communications systems. Our systems are vulnerable to damage or interruption from, among other adverse effects,
fire, terrorist attacks, natural disasters, power loss, telecommunications failures, computer viruses, computer denial of service
attacks or other attempts to harm our systems. Our data centers are also subject to break-ins, sabotage, and intentional acts of
vandalism, and to potential disruptions. Some of our systems are not fully redundant, and our disaster recovery planning cannot
account for all eventualities. Any problems at our data centers could result in lengthy interruptions in our service. In addition,
our products and services are highly technical and complex and may contain errors or vulnerabilities, which could result in interruptions
in our services or the failure of our systems.
We
are subject to anti-corruption, anti-bribery, anti-money laundering, financial and economic sanctions and similar laws, and non-compliance
with such laws can subject us to administrative, civil and criminal fines and penalties, collateral consequences, remedial measures
and legal expenses, all of which could adversely affect our business, results of operations, financial condition and reputation.
We are subject to anti-corruption,
anti-bribery, anti-money laundering, financial and economic sanctions and similar laws and regulations in various jurisdictions
in which we conduct activities, including the U.S. Foreign Corrupt Practices Act, or FCPA, the U.K. Bribery Act 2010, and other
anti-corruption laws and regulations. The FCPA and the U.K. Bribery Act 2010 prohibit us and our officers, directors, employees
and business partners acting on our behalf, including agents, from corruptly offering, promising, authorizing or providing anything
of value to a “foreign official” for the purposes of influencing official decisions or obtaining or retaining business
or otherwise obtaining favorable treatment. The FCPA also requires companies to make and keep books, records and accounts that
accurately reflect transactions and dispositions of assets and to maintain a system of adequate internal accounting controls. The
U.K. Bribery Act also prohibits non-governmental “commercial” bribery and soliciting or accepting bribes. A violation
of these laws or regulations could adversely affect our business, results of operations, financial condition and reputation.
We have direct or indirect
interactions with officials and employees of government agencies and state-owned affiliated entities in the ordinary course of
business. We have also entered into joint ventures and/or other business partnerships with government agencies and state-owned
or affiliated entities. These interactions subject us to an increased level of compliance-related concerns. We are in the process
of implementing policies and procedures designed to ensure compliance by us and our directors, officers, employees, representatives,
consultants, agents and business partners with applicable anti-corruption, anti-bribery, anti-money laundering, financial and economic
sanctions and similar laws and regulations. However, our policies and procedures may not be sufficient and our directors, officers,
employees, representatives, consultants, agents, and business partners could engage in improper conduct for which we may be held
responsible.
Non-compliance with
anti-corruption, anti-bribery, anti-money laundering or financial and economic sanctions laws could subject us to whistleblower
complaints, adverse media coverage, investigations, and severe administrative, civil and criminal sanctions, collateral consequences,
remedial measures and legal expenses, all of which could materially and adversely affect our business, results of operations, financial
condition and reputation. In addition, changes in economic sanctions laws in the future could adversely impact our business and
investments in our shares.
Any
unauthorized control or manipulation of our vehicles’ systems could result in loss of confidence in us and our vehicles and
harm our business.
Our vehicles contain
complex information technology systems. For example, our vehicles are designed with built-in data connectivity to accept and install
periodic remote updates from us to improve or update the functionality of our vehicles. We have designed, implemented and tested
security measures intended to prevent unauthorized access to our information technology networks, our vehicles and their systems.
However, hackers may attempt in the future, to gain unauthorized access to modify, alter and use such networks, vehicles and systems
to gain control of, or to change, our vehicles’ functionality, user interface and performance characteristics, or to gain
access to data stored in or generated by the vehicle. Vulnerabilities could be identified in the future and our remediation efforts
may not be successful. Any unauthorized access to or control of our vehicles or their systems or any loss of data could result
in legal claims or proceedings. In addition, regardless of their veracity, reports of unauthorized access to our vehicles, their
systems or data, as well as other factors that may result in the perception that our vehicles, their systems or data are capable
of being “hacked”, could negatively affect our brand and harm our business, prospects, financial condition and operating
results.
Any
financial or economic crisis, or perceived threat of such a crisis, including a significant decrease in consumer confidence, may
materially and adversely affect our business, financial condition and results of operations.
The global financial
markets experienced significant disruptions in 2008 and the United States, European and other economies went into recession. The
recovery from the lows of 2008 and 2009 was uneven and the global financial markets are facing new challenges, including the escalation
of the European sovereign debt crisis since 2011, the hostilities in the Ukraine, the end of quantitative easing by the U.S. Federal
Reserve and the economic slowdown in the Eurozone in 2014. It is unclear whether these challenges will be contained and what effects
they each may have. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies
that have been adopted by the central banks and financial authorities of some of the world’s leading economies, including
China’s. Economic conditions in China are sensitive to global economic conditions. Recently there have been signs that the
rate of China’s economic growth is declining. Any prolonged slowdown in China’s economic development might lead to
tighter credit markets, increased market volatility, sudden drops in business and consumer confidence and dramatic changes in business
and consumer behaviors.
In addition, the global
macroeconomic environment is facing challenges. There is considerable uncertainty over the long-term effects of the expansionary
monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies,
including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and
Africa and over the conflicts involving Ukraine, Syria and North Korea. There have also been concerns on the relationship among
China and other Asian countries, which may result in or intensify potential conflicts in relation to territorial disputes, and
the possibility of a trade war between the United States and China. In addition, the U.K. held a referendum on June 23, 2016 on
its membership in the European Union., in which a majority of voters in the U.K. voted to exit the European Union (commonly referred
to as “Brexit”). The U.K.’s departure from the European Union is currently scheduled to take place on Friday,
March 29, 2019. Brexit could adversely affect European and worldwide economic and market conditions and could contribute to instability
in global financial and foreign exchange markets. It is unclear whether these challenges and uncertainties will be contained or
resolved, and what effects they may have on the global political and economic conditions in the long term.
Sales of high-end and
luxury consumer products, such as our performance electric vehicles, depend in part on discretionary consumer spending and are
even more exposed to adverse changes in general economic conditions. In response to their perceived uncertainty in economic conditions,
consumers might delay, reduce or cancel purchases of our electric vehicles and our results of operations may be materially and
adversely affected.
Shutdowns
of the U.S. federal government could materially impair our business and financial condition.
Development of our
product candidates and/or regulatory approval may be delayed for reasons beyond our control. For example, over the last several
years the U.S. government has shut down several times and certain regulatory agencies, such as the SEC, have had to furlough critical
SEC and other government employees and stop critical activities. In our operations as a public company, future government shutdowns
could impact our ability to access the public markets, such as through delaying the declaration of effectiveness of registration
statements, and obtain necessary capital in order to properly capitalize and continue our operations.
Changes
in U.S. and international trade policies, particularly with regard to China, may adversely impact our business and operating results.
The U.S. government
has recently made statements and taken certain actions that may lead to potential changes to U.S. and international trade policies,
including imposing several rounds of tariffs affecting certain products manufactured in China. It is unknown whether and to what
extent new tariffs (or other new laws or regulations) will be adopted, or the effect that any such actions would have on us or
our industry and customers. Although we do not currently export any products to the United States, it is not yet clear what impact
these tariffs may have or what actions other governments, including the Chinese government, may take in retaliation. While we intend
to sell our vehicles only in China in the near future, tariffs could potentially impact our raw material prices. If any new tariffs,
legislation and/or regulations are implemented, or if existing trade agreements are renegotiated or, in particular, if the U.S.
government takes retaliatory trade actions due to the recent U.S.-China trade tension, such changes could have an adverse effect
on our business, financial condition and results of operations.
Recent
disruptions in the financial markets and economic conditions could affect our ability to raise capital.
In recent years, the
United States and global economies suffered dramatic downturns as the result of a deterioration in the credit markets and related
financial crisis as well as a variety of other factors including, among other things, extreme volatility in security prices, severely
diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others. The
United States and certain foreign governments have taken unprecedented actions in an attempt to address and rectify these extreme
market and economic conditions by providing liquidity and stability to the financial markets. If the actions taken by these governments
are not successful, the return of adverse economic conditions may cause a significant impact on our ability to raise capital, if
needed, on a timely basis and on acceptable terms or at all.
There
are uncertainties relating to our users trust arrangement involving a portion of our chairman’s shareholding in our company.
Mr. Bin Li, our chairman
and chief executive officer, has transferred 189,253 Class A ordinary shares and 49,810,747 Class C ordinary shares to a trust
after the completion of the initial public offering of our ADSs on the New York Stock Exchange in September 2018. After such share
transfer, he continues to retain the voting rights of these shares, but plans to let NIO users discuss and propose how to use the
economic interests of these shares at certain points in the future, through certain mechanisms still to be implemented. Mr. Li
hopes this trust arrangement will help deepen our relationship with users. However, the mechanisms for letting NIO users discuss
the use of the economic interests of the shares have yet to be determined or implemented. There is no assurance that such mechanisms
will be adopted to our users’ satisfaction, or at all. Furthermore, depending on the proposed use of the economic interests
of the shares in the future, there could be accounting implications to us, which implications we cannot presently ascertain.
We
and certain of our directors and officers have been named as defendants in several shareholder class action lawsuits, which could
have a material adverse impact on our business, financial condition, results of operation, cash flows and reputation.
Several putative shareholder
class action lawsuits have been filed against us and certain of our directors and officers. See “Item 8. Financial Information—A.
Consolidated Statements and Other Financial Information—Legal Proceedings” for more details. Additional complaints
related to these claims may be filed in the coming months. We are currently unable to estimate the potential loss, if any, associated
with the resolution of such lawsuits, if they proceed. We anticipate that we will continue to be a target for lawsuits in the future,
including putative class action lawsuits brought by shareholders. There can be no assurance that we will be able to prevail in
our defense or reverse any unfavorable judgment on appeal, and we may decide to settle lawsuits on unfavorable terms. Any adverse
outcome of these cases, including any plaintiffs’ appeal of the judgment in these cases, could result in payments of substantial
monetary damages or fines, or changes to our business practices, and thus have a material adverse effect on our business, financial
condition, results of operation, cash flows and reputation. In addition, there can be no assurance that our insurance carriers
will cover all or part of the defense costs, or any liabilities that may arise from these matters. The litigation process may utilize
a significant portion of our cash resources and divert management’s attention from the day-to-day operations of our company,
all of which could harm our business. We also may be subject to claims for indemnification related to these matters, and we cannot
predict the impact that indemnification claims may have on our business or financial results.
We
face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
Our business could
be adversely affected by the effects of epidemics. In recent years, there have been outbreaks of epidemics in China and globally.
Our business operations could be disrupted if any of our employees are suspected of having H1N1 flu, avian flu or another epidemic,
since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations
could be adversely affected to the extent that the outbreak harms the Chinese economy in general.
We are also vulnerable
to natural disasters and other calamities. Although we have servers that are hosted in an offsite location, our backup system does
not capture data on a real-time basis and we may be unable to recover certain data in the event of a server failure. We cannot
assure you that any backup systems will be adequate to protect us from the effects of fire, floods, typhoons, earthquakes, power
loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events. Any of the foregoing events may
give rise to interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the
loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide services
on our platform.
Risks Related to Our Corporate Structure
If
the PRC government deems that our contractual arrangements with our variable interest entities do not comply with PRC regulatory
restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations
change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
According to the
Guidance
Catalogue of Industries for Foreign Investment
promulgated in 2017, or the Catalogue, promulgated by the MOFCOM and the NDRC,
foreign ownership of certain areas of businesses is subject to restrictions under current PRC laws and regulations. For example,
under the Catalogue, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication
service provider (except e-commerce) or in a vehicle manufacturer which manufactures the whole vehicle. The Catalogue was amended
by
the Negative List
, which came into effect on July 28, 2018,
and lifts restrictions on foreign investment in NEVs manufacturers.
We are a Cayman Islands
company and our PRC subsidiaries are considered foreign-invested enterprises. To comply with the Catalogue before it is amended
by the Negative List, we had planned to conduct certain operations that were then subject to restrictions on foreign investment
under the Catalogue in China through Shanghai NIO Energy Automobile Co., Ltd., or NIO New Energy. NIO Co., Ltd. owns 50% equity
interests in NIO New Energy. Our founders Bin Li and Lihong Qin, through holding equity interests in Shanghai Anbin Technology
Co., Ltd. indirectly own 40% and 10%, respectively, of the equity interests in NIO New Energy. With respect to the 50% equity interests
of NIO New Energy indirectly held by the founders, we have entered into a series of contractual arrangements with Shanghai Anbin
Technology Co., Ltd., or Shanghai Anbin, and its shareholders, which enable us to (i) ultimately exercise effective control over
such 50% equity interests of NIO New Energy, (ii) receive 50% of substantially all of the economic benefits and bear the obligation
to absorb 50% of substantially all of the losses of NIO New Energy, and (iii) have an exclusive option to purchase all or part
of the equity interests in Shanghai Anbin when and to the extent permitted by PRC laws, as a result of which we will indirectly
own all or part of such 50% equity interests in NIO New Energy. Because of the ownership of 50% equity interests of NIO New Energy
and these contractual arrangements, we are the primary beneficiary of NIO New Energy and hence consolidate its financial results
as our variable interest entity under U.S. GAAP. In addition, to comply with the Catalogue (as amended by the Negative List), we
have also entered into a series of contractual arrangements with Beijing NIO Network Technology Co., Ltd., or Beijing NIO, and
its shareholders that enable us to hold all the required Internet content provision service, or the ICP, and related licenses in
China. For a detailed description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational
Structure—Contractual Agreements with the VIEs and their respective shareholders.”
In the opinion of Han
Kun Law Offices, our PRC legal counsel, (i) the ownership structures of NIO Co., Ltd. and our variable interest entities in China
do not result in any violation of PRC laws and regulations currently in effect; and (ii) the contractual arrangements between our
wholly-owned subsidiary NIO Co., Ltd., our variable interest entities and their respective shareholders governed by PRC laws will
not result in any violation of PRC laws or regulations currently in effect. However, we have been advised by our PRC legal counsel
that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations
and rules, and there can be no assurance that the PRC regulatory authorities will take a view that is consistent with the opinion
of our PRC legal counsel. See “Item 4. Information on the Company—B. Business Overview—Regulation—PRC Regulations—Foreign
Investment Law” and “—Regulation—Regulations on Foreign Investment in China” and “Item 3. Key
Information—D. Risk Factors—Risks Related to Doing Business in China—Our business may be significantly affected
by the Foreign Investment Law.” It is uncertain whether any new PRC laws or regulations relating to variable interest entity
structures will be adopted or if adopted, what they would provide.
If the ownership structure,
contractual arrangements and businesses of our PRC subsidiaries or our variable interest entities are found to be in violation
of any existing or future PRC laws or regulations, or our PRC subsidiaries or our variable interest entities fail to obtain or
maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take
action in dealing with such violations or failures, including:
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revoking the business licenses and/or operating licenses of such entities;
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shutting down our servers or blocking our website, or discontinuing or placing restrictions or
onerous conditions on our operation through any transactions between our PRC subsidiaries and variable interest entities;
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imposing fines, confiscating the income from our PRC subsidiaries or our variable interest entities,
or imposing other requirements with which we or our variable interest entities may not be able to comply;
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requiring us to restructure our ownership structure or operations, including terminating the contractual
arrangements with our variable interest entities and deregistering the equity pledge of our variable interest entities, which in
turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our variable interest
entities; or
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restricting or prohibiting our use of the proceeds of any financing outside China to finance our
business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business.
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Any of these actions
could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially
and adversely affect our business, financial condition and results of operations. If any of these occurrences results in our inability
to direct the activities of our variable interest entities that most significantly impact their economic performance, and/or our
failure to receive the economic benefits from our variable interest entities, we may not be able to consolidate the entities in
our consolidated financial statements in accordance with U.S. GAAP.
We
rely on contractual arrangements with our variable interest entities and their shareholders to exercise control over our business,
which may not be as effective as direct ownership in providing operational control.
We have relied and
expect to continue to rely on contractual arrangements with Shanghai Anbin and Beijing NIO and their respective shareholders to
conduct a portion of our operations in China. For a description of these contractual arrangements, see “Item 4. Information
on the Company—C. Organizational Structure—Contractual Agreements with the VIEs and their respective shareholders.”
The respective shareholders of Shanghai Anbin and Beijing NIO may not act in the best interests of our company or may not perform
their obligations under these contracts. If we had direct ownership of our variable interest entities, or VIEs, we would be able
to exercise our rights as a shareholder to control our VIEs to exercise rights of shareholders to effect changes in the board of
directors of our VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management
and operational level. However, under the contractual arrangements, we would rely on legal remedies under PRC law for breach of
contract in the event that Shanghai Anbin and Beijing NIO and their respective shareholders did not perform their obligations under
the contracts. These legal remedies may not be as effective as direct ownership in providing us with control over Shanghai Anbin
and Beijing NIO.
If Shanghai Anbin or
Beijing NIO or their respective shareholders fail to perform their obligations under the contractual arrangements, we may have
to incur substantial costs and expend additional resources to enforce such arrangements, and rely on legal remedies under PRC laws,
including contractual remedies, which may not be sufficient or effective. All of the agreements under our contractual arrangements
are governed by and interpreted in accordance with PRC laws, and disputes arising from these contractual arrangements will be resolved
through arbitration in China. However, the legal framework and system in China, in particularly those relating to arbitration proceedings,
are not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system
could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance
as to how contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC law.
There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary.
In addition, under PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if
the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce
the arbitration awards in the PRC courts through arbitration award recognition proceedings, which would require additional expenses
and delay. If we are unable to enforce these contractual arrangements, or if we suffer significant delay or face other obstacles
in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our variable interest
entities, and our ability to conduct our business may be negatively affected. See “Item 3. Key Information——D.
Risk Factors—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of PRC laws
and regulations could limit the legal protections available to you and us.”
Our
ability to enforce the equity pledge agreements between us and our PRC variable interest entities’ shareholders may be subject
to limitations based on PRC laws and regulations.
Pursuant to the equity
interest pledge agreements between Shanghai Anbin and Beijing NIO, our variable interest entities, and NIO Co., Ltd., our wholly-owned
PRC subsidiary, and the respective shareholders of Shanghai Anbin and Beijing NIO, each shareholder of Shanghai Anbin and Beijing
NIO agrees to pledge its equity interests in Shanghai Anbin and Beijing NIO to our subsidiary to secure Shanghai Anbin and Beijing
NIO’s performance of its obligations under the relevant contractual arrangements. The equity interest pledges of shareholders
of each of Beijing NIO and Shanghai Anbin under its equity interests pledge agreement have been registered with the relevant local
branch of State Administration for Market Regulation, or the SAMR. In addition, in the registration forms of the local branch of
the SAMR for the pledges over the equity interests under the equity interest pledge agreements, the aggregate amount of registered
equity interests pledged to NIO Co., Ltd. represents 100% of the registered capital of Shanghai Anbin and Beijing NIO. The equity
interest pledge agreements with our variable interest entities’ shareholders provide that the pledged equity interests shall
constitute continuing security for any and all of the indebtedness, obligations and liabilities under all of the principal service
agreements and the scope of pledge shall not be limited by the amount of the registered capital of that variable interest entity.
However, a PRC court may take the position that the amount listed on the equity pledge registration forms represents the full amount
of the collateral that has been registered and perfected. If this is the case, the obligations that are supposed to be secured
in the equity interest pledge agreements in excess of the amount listed on the equity pledge registration forms could be determined
by the PRC court as unsecured debt, which typically takes last priority among creditors.
The
shareholders of our variable interest entities may have potential conflicts of interest with us, which may materially and adversely
affect our business and financial condition.
Our founders, Bin Li
and Lihong Qin, own 80% and 20%, respectively, of the equity interests in our variable interest entities, Shanghai Anbin and Beijing
NIO. As shareholders of Shanghai Anbin and Beijing NIO, they may have potential conflicts of interest with us. These shareholders
may breach, or cause our variable interest entities to breach, or refuse to renew, the existing contractual arrangements we have
with them and our variable interest entities, which would have a material and adverse effect on our ability to effectively control
our variable interest entities and receive economic benefits from them. For example, the shareholders may be able to cause our
agreements with Shanghai Anbin and Beijing NIO to be performed in a manner adverse to us by, among other things, failing to remit
payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise,
any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.
Currently, we do not
have any arrangements to address potential conflicts of interest between these shareholders and our company. Each of Bin Li and
Lihong Qin is also a director and executive officer of our company. We rely on Bin Li and Lihong Qin to abide by the laws of the
Cayman Islands and China, which provide that directors owe a fiduciary duty to the company that requires them to act in good faith
and in what they believe to be the best interests of the company and not to use their position for personal gain. There is currently
no specific and clear guidance under PRC laws that addresses any conflict between PRC laws and the laws of Cayman Islands in respect
of any conflict relating to corporate governance. If we cannot resolve any conflict of interest or dispute between us and the shareholders
of Shanghai Anbin and Beijing NIO, we would have to rely on legal proceedings, which could result in disruption of our business
and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
Our
contractual arrangements with our variable interest entities may be subject to scrutiny by the PRC tax authorities and they may
determine that we or our variable interest entities owe additional taxes, which could negatively affect our financial condition.
Under applicable PRC
laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities
within ten years after the taxable year when the transactions are conducted. The PRC Enterprise Income Tax Law requires every enterprise
in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the
relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related
party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences
if the PRC tax authorities determine that the contractual arrangements between NIO Co., Ltd., our wholly-owned subsidiary in China,
Shanghai Anbin and Beijing NIO, our variable interest entities in China, and Shanghai Anbin and Beijing NIO’s shareholders
were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable
PRC laws, rules and regulations, and adjust Shanghai Anbin and Beijing NIO’s income in the form of a transfer pricing adjustment.
A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by Shanghai Anbin
and Beijing NIO for PRC tax purposes, which could in turn increase their tax liabilities without reducing NIO Co., Ltd.’s
tax expenses. In addition, if NIO Co., Ltd. requests the shareholders of Shanghai Anbin and Beijing NIO to transfer their equity
interests in NIO Co., Ltd. at nominal or no value pursuant to the contractual agreements, such transfer could be viewed as a gift
and subject NIO Co., Ltd. to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties
on Shanghai Anbin and Beijing NIO for the adjusted but unpaid taxes according to the applicable regulations. Our financial position
could be materially and adversely affected if either of our variable interest entities’ tax liabilities increase or if either
is required to pay late payment fees and other penalties.
We
may lose the ability to use and benefit from assets held by our variable interest entities that are material to the operation of
our business if either of our variable interest entities goes bankrupt or becomes subject to dissolution or liquidation proceedings.
As part of our contractual
arrangements with our variable interest entities, these entities may in the future hold certain assets that are material to the
operation of our business. If either of our variable interest entities goes bankrupt and all or part of their assets become subject
to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially
and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, our variable
interest entities may not, in any manner, sell, transfer, mortgage or dispose of their assets or legal or beneficial interests
in the business without our prior consent. If either of our variable interest entities undergoes voluntary or involuntary liquidation
proceedings, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to
operate our business, which could materially and adversely affect our business, financial condition and results of operations.
Risks Related to Doing Business in
China
Changes
in China’s political or social conditions or government policies could have a material and adverse effect on our business
and results of operations.
Substantially all of
our revenues are expected to be derived in China in the near future and most of our operations, including all of our manufacturing,
is conducted in China. Accordingly, our results of operations, financial condition and prospects are influenced by economic, political
and legal developments in China. China’s economy differs from the economies of most developed countries in many respects,
including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange
and allocation of resources. The PRC government exercises significant control over China’s economic growth through strategically
allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. While the PRC economy has experienced significant growth over the
past decades, that growth has been uneven across different regions and between economic sectors and may not continue, as evidenced
by the slowing of the growth of the Chinese economy since 2012. Any adverse changes in economic conditions in China, in the policies
of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic
growth of China. Such developments could adversely affect our business and operating results, leading to reduction in demand for
our services and solutions and adversely affect our competitive position.
Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.
The PRC legal system
is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference
but have limited precedential value.
Our PRC subsidiaries
are foreign-invested enterprises and are subject to laws and regulations applicable to foreign-invested enterprises as well as
various Chinese laws and regulations generally applicable to companies incorporated in China. However, since these laws and regulations
are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules
are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
From time to time,
we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and
court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more
difficult to evaluate the outcome of administrative and court proceedings and the level of protection we enjoy than in more developed
legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are
not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation
of any of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope
and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to
changes in the regulatory environment in China could materially and adversely affect our business and impede our ability to continue
our operations.
Our
business may be significantly affected by the newly enacted Foreign Investment Law.
On March 15, 2019,
the National People’s Congress promulgated the Foreign Investment Law, which will take effect on January 1, 2020 and replace
the trio of existing laws regulating foreign investment in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative
Joint Venture Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations.
Since the Foreign Investment Law is newly enacted, uncertainties still exist in relation to its interpretation and implementation.
The Foreign Investment Law does not explicitly classify whether variable interest entities that are controlled via contractual
arrangements would be deemed as foreign invested enterprises if they are ultimately “controlled” by foreign investors.
However, it has a catch-all provision under definition of “foreign investment” to include investments made by foreign
investors in China through means stipulated by laws or administrative regulations or other methods prescribed by the State Council.
Therefore, it still leaves leeway for future laws, administrative regulations or provisions to provide for contractual arrangements
as a form of foreign investment. There can be no assurance that our contractual arrangements will not be deemed to be in violation
of the market access requirements for foreign investment under the PRC laws and regulations.
The Foreign Investment
Law grants national treatment to foreign invested entities, except for those foreign invested entities that operate in industries
deemed to be either “restricted” or “prohibited” in the “negative list” to be published. Because
the “negative list” has yet to be published, it is unclear as to whether it will differ from the Negative List currently
in effect. The Foreign Investment Law provides that only foreign invested entities operating in foreign restricted or prohibited
industries will require entry clearance and other approvals that are not required by PRC domestic entities or foreign invested
entities operating in other industries. In the event that our variable interest entities through which we operate our business
are not treated as domestic investment and our operations carried out through such variable interest entities are classified in
the “restricted” or “prohibited” industry in the “negative list” under the Foreign Investment
Law, such contractual arrangements may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements
and/or dispose of such business.
Furthermore, if future
laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. In
addition, the Foreign Investment Law provides that existing foreign invested enterprises established according to the existing
laws regulating foreign investment may maintain their structure and corporate governance within five years after the implementation
of the Foreign Investment Law, which means that we may be required to adjust the structure and corporate governance of certain
of our PRC entities then. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance
challenges could materially and adversely affect our current corporate structure, corporate governance and business operations.
We
may be adversely affected by the complexity, uncertainties and changes in PRC regulations on internet-related business, automotive
businesses and other business carried out by our PRC subsidiaries.
We operate in THE automotive
and internet industry, both of which are extensively regulated by the PRC government. For example, the PRC government imposes foreign
ownership restrictions and licensing and permit requirements for companies in the internet industry. See “Item 4. Information
on the Company—B. Business Overview—Regulation—Regulations on Foreign Investment in China” and “Item
4. Information on the Company—B. Business Overview—Regulation—Regulations on Value-added Telecommunications Services.”
Recently, the MOFCOM and the NDRC promulgated the Negative List, which lifts restrictions on foreign investment on the production
of new energy vehicles, effective on July 28, 2018; and the NDRC promulgated the
Provisions on Administration of Investment
in Automobile Industry
, which became effective on January 10, 2019, to set certain requisite criteria for newly-established
pure electric vehicle automakers. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations
and Approvals Covering the Manufacturing of Pure Electric Passenger Vehicles.” These laws and regulations are relatively
new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances
it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations
and furthermore, we cannot assure you that we have complied or will be able to comply with all applicable laws at all times. Consequently,
we could face the risks of being subject to governmental investigations, orders by the competent authorities for rectification,
administrative penalties or other legal proceedings.
Currently we rely on
the contractual arrangements with Beijing NIO, one of our variable interest entities, to hold an ICP license, and separately own
the relevant domain names and trademarks in connection with our internet services and operate our website and mobile application
through NIO Co., Ltd. Our internet services may be treated as a value-added telecommunications business. If so, we may be required
to transfer the domain names, trademark and the operations of the internet services from NIO Co., Ltd. to Beijing NIO, and we may
also be subject to administrative penalties. Further, any challenge to the validity of these arrangements may significantly disrupt
our business, subject us to sanctions, compromise enforceability of our contractual arrangements, or have other harmful effects
on us. It is uncertain if Beijing NIO or NIO Co., Ltd. will be required to obtain a separate operating license for certain services
carried out by us through our mobile application in addition to the valued-added telecommunications business operating licenses
for internet content provision services, and if Beijing NIO will be required to supplement our current ICP license in the future.
In addition, our mobile
applications are also regulated by the
Administrative Provisions on Mobile Internet Applications Information Services
, or
the APP Provisions, promulgated by the Cyberspace Administration of China, or the CAC, on June 28, 2016 and effective on August
1, 2016. According to the APP Provisions, the providers of mobile applications shall not create, copy, publish or distribute information
and content that is prohibited by laws and regulations. However, we cannot assure that all the information or content displayed
on, retrieved from or linked to our mobile applications complies with the requirements of the APP Provisions at all times. If our
mobile applications were found to be violating the APP Provisions, we may be subject to administrative penalties, including warning,
service suspension or removal of our mobile applications from the relevant mobile application store, which may materially and adversely
affect our business and operating results.
The interpretation
and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet
industry, particularly the policies relating to value-added telecommunications services, have created substantial uncertainties
regarding the legality of existing and future foreign investments in the businesses and activities of internet businesses in China,
including our business.
Several PRC regulatory
authorities, such as the SAMR, the NDRC, the Ministry of Industry and Information Technology, or the MIIT, and the MOFCOM, oversee
different aspects of our operations, and we are required to obtain a wide range of government approvals, licenses, permits and
registrations in connection with our operations. For example, certain filings must be made by automobile dealers through the information
system for the national automobile circulation operated by the relevant commerce department within 90 days after the receipt of
a business license. Furthermore, the NEV industry is relatively new in China, and the PRC government has not adopted a clear regulatory
framework to regulate the industry. As some of the laws, rules and regulations that we may be subject to were primarily enacted
with a view toward application to ICE vehicles, or are relatively new, there is significant uncertainty regarding their interpretation
and application with respect to our business. For example, it remains unclear under PRC laws whether our charging trucks need to
be registered with related local traffic management authorities or obtain transportation operation licenses for their services,
and whether we would be required to obtain any particular permit or license to be qualified to provide our charging services in
cooperation with third party charging stations. In addition, the PRC government may enact new laws and regulations that require
additional licenses, permits, approvals and/or registrations for the operation of any of our existing or future business. As a
result. we cannot assure you that we have all the permits, licenses, registrations, approvals and/or business license covering
the sufficient scope of business required for our business or that we will be able to obtain, maintain or renew permits, licenses,
registrations, approvals and/or business license covering sufficient scope of business in a timely manner or at all.
We
may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements
we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse
effect on our ability to conduct our business.
We are a holding company,
and we may rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements,
including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur.
Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated after-tax profits upon
satisfaction of relevant statutory conditions and procedures, if any, determined in accordance with Chinese accounting standards
and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each
year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. As of December
31, 2018, our variable interest entities had not made appropriations to statutory reserves as our PRC subsidiaries and our variable
interest entities reported accumulated loss. For a detailed discussion of applicable PRC regulations governing distribution of
dividends, see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Dividend
Distribution.” Additionally, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing
their debt may restrict their ability to pay dividends or make other distributions to us. Furthermore, the PRC tax authorities
may require our subsidiaries to adjust their taxable income under the contractual arrangements they currently have in place with
our variable interest entities in a manner that would materially and adversely affect their ability to pay dividends and other
distributions to us. See “—Risks Related to Our Corporate Structure—Our contractual arrangements with our variable
interest entities may be subject to scrutiny by the PRC tax authorities and they may determine that we or our variable interest
entities owe additional taxes, which could negatively affect our financial condition.” In addition, the incurrence of indebtedness
by our PRC subsidiaries could result in operating and financing covenants and undertakings to creditors that would restrict the
ability of our PRC subsidiaries to pay dividends to us.
Any limitation on the
ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability
to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct
our business. See “—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification
could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”
Increases
in labor costs and enforcement of stricter labor laws and regulations in the PRC may adversely affect our business and our profitability.
China’s overall
economy and the average wage in China have increased in recent years and are expected to grow. The average wage level for our employees
has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will increase. Unless
we are able to pass on these increased labor costs to those who pay for our services, our profitability and results of operations
may be materially and adversely affected.
In addition, we have
been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees, limitation with
respect to utilization of labor dispatching, applying for foreigner work permits, labor protection and labor condition and paying
various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment
insurance and maternity insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor
Contract Law and its implementation rules, employers are subject to stricter requirements in terms of signing labor contracts,
minimum wages, paying remuneration, determining the term of employee’s probation and unilaterally terminating labor contracts.
In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the PRC Labor
Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner,
which could adversely affect our business and results of operations.
In October 2010, the
Standing Committee of the National People’s Congress promulgated the PRC Social Insurance Law, which came into effect on
July 1, 2011. On April 3, 1999, the State Council promulgated the Regulations on the Administration of Housing Funds, which was
amended on March 24, 2002. Companies registered and operating in China are required under the Social Insurance Law and the Regulations
on the Administration of Housing Funds to, apply for social insurance registration and housing fund deposit registration within
30 days of their establishment, and to pay for their employees different social insurance including pension insurance, medical
insurance, work-related injury insurance, unemployment insurance and maternity insurance to the extent required by law. However,
certain of our PRC subsidiaries and VIEs that do not hire any employees and are not a party to any employment agreement, have not
applied for and obtained such registration, and instead of paying the social insurance payment on their own for their employees,
certain of our PRC subsidiaries and VIEs use third-party agencies to pay in the name of such agency. We could be subject to orders
by the competent labor authorities for rectification and failure to comply with the orders may further subject us to administrative
fines.
As the interpretation
and implementation of labor-related laws and regulations are still evolving, our employment practices may violate labor-related
laws and regulations in China, which may subject us to labor disputes or government investigations. We cannot assure you that we
have complied or will be able to comply with all labor-related law and regulations including those relating to obligations to make
social insurance payments and contribute to the housing provident funds. If we are deemed to have violated relevant labor laws
and regulations, we could be required to provide additional compensation to our employees and our business, financial condition
and results of operations will be adversely affected.
Fluctuations
in exchange rates could have a material and adverse effect on our results of operations.
The value of Renminbi
against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s
foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value
of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three
years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar
remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and
unpredictably. While appreciating approximately by 7% against the U.S. dollar in 2017, the Renminbi in 2018 depreciated approximately
by 5% against the U.S. dollar. Since October 1, 2016, the Renminbi has joined the International Monetary Fund (IMF)’s basket
of currencies that make up the Special Drawing Right (SDR), along with the U.S. dollar, the Euro, the Japanese yen and the British
pound. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization,
the PRC government may in the future announce further changes to the exchange rate system and there is no guarantee that the Renminbi
will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how
market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
There remains significant
international pressure on the PRC government to adopt a more flexible currency policy. Any significant appreciation or depreciation
of Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends
payable on, our ADSs in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from any financing
outside China into Renminbi to pay our operating expenses, appreciation of Renminbi against the U.S. dollar would have an adverse
effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of Renminbi against the U.S.
dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our
ADSs.
Very limited hedging
options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions
in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our
exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict
our ability to convert Renminbi into a foreign currency. As a result, fluctuations in exchange rates may have a material adverse
effect on our results of operations.
PRC
regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency
conversion may delay or prevent us from using the proceeds of our offshore equity offerings to make loans to or make additional
capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund
and expand our business.
Under PRC laws and
regulations, we are permitted to utilize the proceeds of any financing outside China to fund our PRC subsidiaries by making loans
to or additional capital contributions to our PRC subsidiaries, subject to applicable government registration, statutory limitations
on amount and approval requirements. For more details, see “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations
on Foreign Exchange.” These PRC laws and regulations may significantly limit our ability to use Renminbi converted from the
net proceeds of any financing outside China to fund the establishment of new entities in China by our PRC subsidiaries, to invest
in or acquire any other PRC companies through our PRC subsidiaries, or to establish new variable interest entities in China. Moreover,
we cannot assure you that we will be able to complete the necessary registrations or obtain the necessary government approvals
on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or future capital contributions by us to our
PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we received
or expect to receive from our offshore offerings and to capitalize or otherwise fund our PRC operations may be negatively affected,
which could materially and adversely affect our liquidity and our ability to fund and expand our business.
On December 26, 2017,
the NDRC issued the
Management Rules for Overseas Investment by Enterprises
, or Order 11. On February 11, 2018, the
Catalog
on Overseas Investment in Sensitive Industries (2018 Edition)
, or the Sensitive Industries List was promulgated. Overseas investment
governed by Order 11 refers to the investment activities conducted by an enterprise located in the territory of China either directly
or via an overseas enterprise under its control through making investment with assets and equities or providing financing or guarantees
in order to obtain overseas ownership, control, management rights and other related interests, and overseas investment by a PRC
individual through overseas enterprises under his/her control is also subject to Order 11. According to Order 11, before being
conducted, any overseas investment in a sensitive industry or any direct investment by a Chinese enterprise in a non-sensitive
industry but with an investment amount over US$300 million requires approval from, or filing with, the NDRC, and for those non-sensitive
investments indirectly by Chinese investors (including PRC individuals) with investment amounts over US$300 million need to be
reported. However uncertainties remain with respect to the interpretation and application of Order 11, we are not sure whether
our using of proceeds will be subject to Order 11. If we fail to obtain the approval, complete the filing or report our overseas
investment with our proceeds (as the case may be) in a timely manner provided that Order 11 is applicable, we may be forced to
suspend or cease our investment, or be subject to penalties or other liabilities, which could materially and adversely affect our
business, financial condition and prospects.
Governmental
control of currency conversion may limit our ability to utilize our revenues effectively.
The PRC government
imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out
of China. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and
trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State
Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval from or registration
with appropriate governmental authorities is required where Renminbi is to be converted into a foreign currency and remitted out
of China to pay capital expenses, such as the repayment of loans denominated in foreign currencies. See “Item 4. Information
on the Company—B. Business Overview—Regulation—Regulations on Foreign Exchange.”
Since 2016, the PRC
government has tightened its foreign exchange policies again and stepped up scrutiny of major outbound capital movement. More restrictions
and a substantial vetting process have been put in place by SAFE to regulate cross-border transactions falling under the capital
account. The PRC government may also restrict access in the future to foreign currencies for current account transactions, at its
discretion. We receive substantially all of our revenues in RMB. If the foreign exchange control system prevents us from obtaining
sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies
to our shareholders, including holders of our ADSs.
PRC
regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase
their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability
and penalties under PRC law.
SAFE requires PRC residents
or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established
for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations
when the offshore special purpose vehicle undergoes certain material events. See “Item 4. Information on the Company—B.
Business Overview—Regulation—Regulations on Foreign Exchange—Offshore Investment.”
If our shareholders
who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiaries may be
prohibited from distributing their profits and any proceeds from any reduction in capital, share transfer or liquidation to us,
and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with
SAFE registration requirements could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
However, we may not
be informed of the identities of all the PRC residents or entities holding direct or indirect interests in our company, nor can
we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our
shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any
applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply
with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to
fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability
to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
China’s
M&A Rules and certain other PRC regulations establish complex procedures for certain acquisitions of PRC companies by foreign
investors, which could make it more difficult for us to pursue growth through acquisitions in China.
A number of PRC laws
and regulations have established procedures and requirements that could make merger and acquisition activities in China by foreign
investors more time-consuming and complex. In addition to the Anti-Monopoly Law itself, these include the Rules on Acquisition
of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC governmental and regulatory agencies in
2006, and the Rules of the Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, or the Security Review Rules, promulgated in 2011. These laws and regulations impose requirements
in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes
control of a PRC domestic enterprise. In addition, the Anti-Monopoly Law requires that the MOFCOM be notified in advance of any
concentration of undertaking if certain thresholds are triggered. Moreover, the Security Review Rules specify that mergers and
acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions
through which foreign investors may acquire de facto control over domestic enterprises that raise “national security”
concerns are subject to strict review by the MOFCOM, and prohibit any attempt to bypass a security review, including by structuring
the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary
businesses. Complying with the requirements of the relevant regulations to complete such transactions could be time-consuming,
and any required approval processes, including approval from the MOFCOM, may delay or inhibit our ability to complete such transactions,
which could affect our ability to expand our business or maintain our market share.
Any
failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the
PRC plan participants or us to fines and other legal or administrative sanctions.
Under SAFE regulations,
PRC residents who participate in a stock incentive plan in an overseas publicly listed company are required to register with SAFE
or its local branches and complete certain other procedures. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations
on Employment and Social Welfare—Employee Stock Incentive Plan.” We and our PRC resident employees who participate
in our share incentive plans are subject to these regulations since we became a public company listed in the United States. If
we or any of these PRC resident employees fail to comply with these regulations, we or such employees may be subject to fines and
other legal or administrative sanctions. We also face regulatory uncertainties that could restrict our ability to adopt additional
incentive plans for our directors, executive officers and employees under PRC law.
Discontinuation
of any of the preferential tax treatments and government subsidies or imposition of any additional taxes and surcharges could adversely
affect our financial condition and results of operations.
Our PRC subsidiaries
currently benefit from a number of preferential tax treatments. For example, our subsidiary, NIO Co., Ltd., is entitled to enjoy,
after completing certain application formalities, a 15% preferential enterprise income tax from 2018 as it has been qualified as
a “High New Technology Enterprise” under the PRC Enterprise Income Tax Law and related regulations. The discontinuation
of any of the preferential income tax treatment that we currently enjoy could have a material and adverse effect on our result
of operations and financial condition. We cannot assure you that we will be able to maintain or lower our current effective tax
rate in the future.
In addition, our PRC
subsidiaries have received various financial subsidies from PRC local government authorities. The financial subsidies result from
discretionary incentives and policies adopted by PRC local government authorities. For example, our subsidiary, XPT (Nanjing) E-Powertrain
Technology Co., Ltd., has received subsidies of an aggregate of RMB33.1 million for the phase I construction of the Nanjing Advanced
Manufacturing Engineering Center. Local governments may decide to change or discontinue such financial subsidies at any time. The
discontinuation of such financial subsidies or imposition of any additional taxes could adversely affect our financial condition
and results of operations.
If
we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax
consequences to us and our non-PRC shareholders or ADS holders.
Under the PRC Enterprise
Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body”
within the PRC is considered a PRC resident enterprise. The implementation rules define the term “de facto management body”
as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts
and properties of an enterprise. In 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides
certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that
is incorporated offshore is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises
or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular
may reflect the State Administration of Taxation’s general position on how the “de facto management body” test
should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated
enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having
its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only
if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii)
decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations
or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and
shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives
habitually reside in the PRC.
We believe that none
of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise
is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term
“de facto management body.” If the PRC tax authorities determine that we are a PRC resident enterprise for enterprise
income tax purposes, we will be subject to the enterprise income tax on our global income at the rate of 25% and we will be required
to comply with PRC enterprise income tax reporting obligations. In addition, we may be required to withhold a 10% withholding tax
from interest or dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In
addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax at a rate of 10% on gains
realized on the sale or other disposition of our ADSs or ordinary shares, if such income is treated as sourced from within the
PRC. Furthermore, if PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, interest
or dividends paid to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of the
ADSs or ordinary shares by such holders may be subject to PRC tax at a rate of 20% (which, in the case of interest or dividends,
may be withheld at source by us), if such gains are deemed to be from PRC sources. These rates may be reduced by an applicable
tax treaty, but it is unclear whether our non-PRC shareholders would be able to claim the benefits of any tax treaties between
their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise.
We
may not be able to obtain certain benefits under relevant tax treaty on dividends paid by our PRC subsidiaries to us through our
Hong Kong subsidiary.
We are a holding company
incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC
subsidiaries to satisfy part of our liquidity requirements. Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate
of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless
any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax
treatment. Pursuant to the
Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance
of Double Taxation and Tax Evasion on Income
, such withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise
owns no less than 25% of a PRC enterprise. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments
under Tax Treaties, which became effective in August 2015, require non-resident enterprises to determine whether they are qualified
to enjoy the preferential tax treatment under the tax treaties and file relevant report and materials with the tax authorities.
There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations.
See “Item 10. Additional Information—E. Taxation—People’s Republic of China Taxation.” As of December
31, 2018, our subsidiaries and variable interest entities located in the PRC reported accumulated loss and therefore they had no
retained earnings for offshore distribution. In the future, we intend to re-invest all earnings, if any, generated from our PRC
subsidiaries for the operation and expansion of our business in China. Should our tax policy change to allow for offshore distribution
of our earnings, we would be subject to a significant withholding tax. Our determination regarding our qualification to enjoy the
preferential tax treatment could be challenged by the relevant tax authority and we may not be able to complete the necessary filings
with the relevant tax authority and enjoy the preferential withholding tax rate of 5% under the arrangement with respect to dividends
to be paid by our PRC subsidiaries to our Hong Kong subsidiary.
We
face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
In February 2015, the
State Administration of Taxation, or the SAT, issued the
Circular on
Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises
, or Circular 7
. Circular
7 extends its tax jurisdiction to not only indirect transfers but also transactions involving transfer of other taxable assets,
through the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides certain criteria on how
to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and
sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee
(or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect
transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company,
the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets
may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax
authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established
for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject
to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold
the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. On October
17, 2017,
the SAT
issued
Circular
on Issues of Tax Withholding regarding Non-PRC Resident Enterprise Income Tax
, or Circular 37
, which came into
effect on December 1, 2017. Circular 37 further clarifies the practice and procedure of the withholding of nonresident enterprise
income tax.
We face uncertainties
on the reporting and consequences of future private equity financing transactions, share exchanges or other transactions involving
the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such
non-resident enterprises with respect to a filing or the transferees with respect to withholding obligations, and request our PRC
subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being
subject to filing obligations or being taxed under Circular 7 and Circular 37, and may be required to expend valuable resources
to comply with them or to establish that we and our non-resident enterprises should not be taxed under these regulations, which
may have a material adverse effect on our financial condition and results of operations.
If
the custodians or authorized users of controlling non-tangible assets of our company, including our corporate chops and seals,
fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially
and adversely affected.
Under PRC law, legal
documents for corporate transactions are executed using the chops or seal of the signing entity or with the signature of a legal
representative whose designation is registered and filed with the relevant branch of the SAMR.
Although we usually
utilize chops to enter into contracts, the designated legal representatives of each of our PRC subsidiaries, variable interest
entities and their subsidiaries have the apparent authority to enter into contracts on behalf of such entities without chops and
bind such entities. All designated legal representatives of our PRC subsidiaries, variable interest entities and their subsidiaries
are members of our senior management team who have signed employment agreements with us or our PRC subsidiaries, variable interest
entities and their subsidiaries under which they agree to abide by various duties they owe to us. In order to maintain the physical
security of our chops and chops of our PRC entities, we generally store these items in secured locations accessible only by the
authorized personnel in the legal or finance department of each of our subsidiaries, variable interest entities and their subsidiaries.
Although we monitor such authorized personnel, there is no assurance such procedures will prevent all instances of abuse or negligence.
Accordingly, if any of our authorized personnel misuse or misappropriate our corporate chops or seals, we could encounter difficulties
in maintaining control over the relevant entities and experience significant disruption to our operations. If a designated legal
representative obtains control of the chops in an effort to obtain control over any of our PRC subsidiaries, variable interest
entities or their subsidiaries, we or our PRC subsidiaries, variable interest entities and their subsidiaries would need to pass
a new shareholders or board resolution to designate a new legal representative and we would need to take legal action to seek the
return of the chops, apply for new chops with the relevant authorities, or otherwise seek legal redress for the violation of the
representative’s fiduciary duties to us, which could involve significant time and resources and divert management attention
away from our regular business. In addition, the affected entity may not be able to recover corporate assets that are sold or transferred
out of our control in the event of such a misappropriation if a transferee relies on the apparent authority of the representative
and acts in good faith.
Our
leased property interest or entitlement to other facilities or assets may be defective or subject to lien and our right to lease,
own or use the properties affected by such defects or lien challenged, which could cause significant disruption to our business.
Under PRC laws, all
lease agreements are required to be registered with the local housing authorities. We presently lease several premises in China,
some of which have not completed the registration of the ownership rights or the registration of our leases with the relevant authorities.
Failure to complete these required registrations may expose our landlords, lessors and us to potential monetary fines. If these
registrations are not obtained in a timely manner or at all, we may be subject to monetary fines or may have to relocate our offices
and incur the associated losses.
Some of the ownership
certificates or other similar proof of certain leased properties have not been provided to us by the relevant lessors. Therefore,
we cannot assure you that such lessors are entitled to lease the relevant real properties to us. If the lessors are not entitled
to lease the real properties to us and the owners of such real properties decline to ratify the lease agreements between us and
the respective lessors, we may not be able to enforce our rights to lease such properties under the respective lease agreements
against the owners. If our lease agreements are claimed as null and void by third parties who are the real owners of such leased
real properties, we could be required to vacate the properties, in the event of which we could only initiate the claim against
the lessors under relevant lease agreements for indemnities for their breach of the relevant leasing agreements. We cannot assure
you that suitable alternative locations are readily available on commercially reasonable terms, or at all, and if we are unable
to relocate our operations in a timely manner, our operations may be adversely affected.
Some of our PRC subsidiaries
have incurred or will incur indebtedness and may, in connection therewith, create mortgage, pledge or other lien over substantive
operating assets, facilities or equity interests of certain PRC subsidiaries as guarantee to their repayment of indebtedness or
as counter guarantee to third-party guarantors which provide guarantee to our PRC subsidiaries’ repayment of indebtedness.
In the event that the relevant PRC subsidiaries fail to perform their repayment obligations or such guarantors perform their guarantee
obligations, claims may be raised to our substantive operating assets, facilities or equity interests of the PRC subsidiaries in
question. If we cannot continue to own or use such assets, facilities or equity interests, our operation may be adversely affected.
The
audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight
Board and, as such, our investors are deprived of the benefits of such inspection.
Our independent registered
public accounting firm that issues the audit report included in this annual report, as auditors of companies that are traded publicly
in the United States and a firm registered with the PCAOB, is subject to laws in the United States to pursuant to which the PCAOB
conducts regular inspections to assess its compliance with professional standards. Because our auditors are located in China, a
jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditors
are not currently inspected by the PCAOB.
Inspections of other
firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality
control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB
inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures.
As a result, investors may be deprived of the benefits of PCAOB inspections. On December 7, 2018, the SEC and the PCAOB issued
a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits
of U.S.-listed companies with significant operations in China. However, it remains unclear what further actions the SEC and the
PCAOB will take to address the problem.
The inability of the
PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s
audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections.
Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
Proceedings
instituted by the SEC against the “big four” PRC-based accounting firms, including our independent registered public
accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange
Act.
In late 2012, the SEC
commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act against the
Chinese affiliates of the “big four” accounting firms (including our auditors). The Rule 102(e) proceedings initiated
by the SEC relate to these firms’ inability to produce documents, including audit work papers, in response to the request
of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act, as the auditors located in the PRC are not in a position lawfully
to produce documents directly to the SEC because of restrictions under PRC law and specific directives issued by the China Securities
Regulatory Commission, or the CSRC. The issues raised by the proceedings are not specific to our auditors or to us, but affect
equally all audit firms based in China and all China-based businesses with securities listed in the United States.
In January 2014, the
administrative judge reached an initial decision, or the Initial Decision, that the Chinese affiliates of “big four”
accounting firms should be barred from practicing before the SEC for six months. Thereafter, the accounting firms filed a petition
for review of the Initial Decision, prompting the SEC commissioners to review the Initial Decision, determine whether there had
been any violation and, if so, determine the appropriate remedy to be placed on these audit firms.
In February 2015, the
Chinese affiliates of the “big four” accounting firms (including our auditors) each agreed to censure and pay a fine
to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S. listed companies.
The settlement requires the firms to follow detailed procedures and to seek to provide the SEC with access to the Chinese firms’
audit documents via the CSRC. If they failed to meet the specified criteria during a period of four years starting from the settlement
date, the SEC retained authority to impose a variety of additional remedial measures on the firms depending on the nature of the
failure. Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed
dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. While we cannot
predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S. law in connection with
U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties
such as suspensions. If additional remedial measures are imposed on the Chinese affiliates of the “big four” accounting
firms, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.
In the event the Chinese
affiliates of the “big four” become subject to additional legal challenges by the SEC or PCAOB, depending upon the
final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors
in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance
with the requirements of the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act, and could result in delisting.
Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based,
United States-listed companies and the market price of our shares may be adversely affected. If our independent registered public
accounting firm was denied, temporarily, the ability to practice before the SEC and we were unable to timely find another registered
public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined
to not be in compliance with the requirements of the Exchange Act.
Risks
Related to Our ADSs and Trading Market
The
trading prices of our ADSs have fluctuated and may be volatile, which could result in substantial losses to investors.
The trading price
of our ADSs has been volatile and has ranged from a low of US$4.90 to a high of US$13.80 since our ADSs started to trade on
the New York Stock Exchange on September 12, 2018. The market price for our ADSs may continue to be volatile and subject to
wide fluctuations in response to factors including, but not limited to, the following:
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actual or anticipated fluctuations in our quarterly results of operations;
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changes in financial estimates by securities research analysts;
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conditions in automotive markets;
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changes in the operating performance or market valuations of other automotive companies;
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announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint
ventures or capital commitments;
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addition or departure of key personnel;
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fluctuations of exchange rates between RMB and the U.S. dollar;
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litigation, government investigation or other legal or regulatory proceeding;
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release of lock-up and other transfer restrictions on our ADSs or any ordinary shares or sales
of additional ADSs;
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any actual or alleged illegal acts of our shareholders or management;
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any share repurchase program; and
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general economic or political conditions in China or elsewhere in the world.
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Any of these factors
may result in large and sudden changes in the volume and price at which our ADSs will trade.
In addition, the stock
market in general, and the market prices for companies with operations in China in particular, have experienced volatility that
often has been unrelated to the operating performance of such companies. The securities of some China-based companies that have
listed their securities in the United States have experienced significant volatility since their initial public offerings in recent
years, including, in some cases, substantial declines in the trading prices of their securities. The trading performances of these
companies’ securities after their offerings may affect the attitudes of investors towards Chinese companies listed in the
United States in general, which consequently may impact the trading performance of our ADSs, regardless of our actual operating
performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting,
corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese
companies in general, including us, regardless of whether we have engaged in any inappropriate activities. In particular, the global
financial crisis and the ensuing economic recessions in many countries have contributed and may continue to contribute to extreme
volatility in the global stock markets. These broad market and industry fluctuations may adversely affect the market price of our
ADSs. Volatility or a lack of positive performance in our ADS price may also adversely affect our ability to retain key employees,
most of whom have been granted options or other equity incentives.
If
securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations
regarding our ADSs, the market price for our ADSs and trading volume could decline.
The
trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business.
If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of
these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets,
which in turn could cause the market price or trading volume for our ADSs to decline.
Our
triple-class voting structure will limit the holders of our Class A ordinary shares and ADSs to influence corporate matters, provide
certain shareholders of ours with substantial influence and could discourage others from pursuing any change of control transactions
that holders of our Class A ordinary shares and ADSs may view as beneficial.
We have adopted a triple-class
voting structure such that our ordinary shares consist of Class A ordinary shares, Class B ordinary shares and Class C ordinary
shares. Holders of Class A ordinary shares, Class B ordinary shares and Class C ordinary shares have the same rights other than
voting and conversion rights. Each holder of our Class A ordinary shares is entitled to one vote per share, each holder of our
Class B ordinary shares is entitled to four votes per share and each holder of our Class C ordinary shares is entitled to eight
votes per share on all matters submitted to them for a vote. Our Class A ordinary shares, Class B ordinary shares and Class C ordinary
shares vote together as a single class on all matters submitted to a vote of our shareholders, except as may otherwise be required
by law. Each Class B ordinary share or Class C ordinary share is convertible into one Class A ordinary share, whereas Class A ordinary
shares are not convertible into Class B ordinary shares or Class C ordinary shares under any circumstances. Upon any transfer of
Class B ordinary shares or Class C ordinary shares by a holder thereof to any person or entity which is not an affiliate of such
holder, such Class B ordinary shares or Class C ordinary shares are automatically and immediately converted into the equal number
of Class A ordinary shares.
As of the date of this
annual report, Mr. Bin Li, our chairman and chief executive officer, together with his affiliates, beneficially own all of our
issued Class C ordinary shares. The Tencent entities beneficially owned all of our issued Class B ordinary shares. Due to the disparate
voting powers associated with our triple classes of ordinary shares, Mr. Li has considerable influence over important corporate
matters. As of February 28, 2019, Mr. Li beneficially owns 48.0% of the aggregate voting power of our company through mobike Global
Ltd. and Originalwish Limited, companies wholly owned by Mr. Li, and through NIO Users Limited, a holding company ultimately controlled
by Mr. Li, whereas Tencent entities beneficially own 21.6% of the aggregate voting power of our company through Mount Putuo Investment
Limited, Image Frame Investment (HK) Limited and TPP Follow-on I Holding D Limited. Mr. Li has considerable
influence over matters requiring shareholder approval, including electing directors and approving material mergers, acquisitions
or other business combination transactions. This concentrated control will limit the ability of the holders of our Class A ordinary
shares and ADSs to influence corporate matters and could also discourage others from pursuing any potential merger, takeover or
other change of control transaction, which could have the effect of depriving the holders of our Class A ordinary shares and our
ADSs of the opportunity to sell their shares at a premium over the prevailing market price. Moreover, Mr. Li may increase the concentration
of his voting power and/or share ownership in the future, which may, among other consequences, decrease the liquidity in our ADSs.
The
sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
Sales of substantial
amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price
of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. We cannot predict
what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability
of these securities for future sale will have on the market price of our ADSs. In addition, certain holders of our existing shareholders
are entitled to certain registration rights, including demand registration rights, piggyback registration rights, and Form F-3
or Form S-3 registration rights. Registration of these shares under the Securities Act of 1933, or the Securities Act, would result
in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the
registration. Sales of these registered shares in the public market, or the perception that such sales could occur, could cause
the price of our ADSs to decline.
Because
we do not expect to pay dividends in the foreseeable future, the holders of our ADSs must rely on price appreciation of our ADSs
for return on their investment.
We currently intend
to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business.
As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment
in our ADSs as a source for any future dividend income.
Our board of directors
has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends,
the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital
requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual
restrictions and other factors deemed relevant by our board of directors. Accordingly, the return to ADS holders will likely depend
entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain
the price at which ADS holders purchased the ADSs. Our ADS holders may not realize a return on their investment in our ADSs and
they may even lose their entire investment in our ADSs.
There
can be no assurance that we will not be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax
purposes for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or
Class A ordinary shares.
A non-U.S. corporation
will be classified as a passive foreign investment company, or PFIC, for any taxable year if either (1) at least 75% of its gross
income for such year consists of certain types of “passive” income; or (2) at least 50% of the value of its assets
(based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income
or are held for the production of passive income (the “asset test”). Based on our current and expected income and assets
(taking into account our current market capitalization), we do not believe that we were a PFIC for our taxable year ended December
31, 2018 and we do not expect to be a PFIC for the current taxable year or the foreseeable future. However, no assurance can be
given in this regard because the determination of whether we are or will become a PFIC is a fact-intensive inquiry made on an annual
basis that depends, in part, upon the nature and composition of our income and assets. Fluctuations in the market price of our
ADSs may cause us to become a PFIC for the current or subsequent taxable years because the value of our assets for the purpose
of the asset test may be determined by reference to the market price of our ADSs, which may be volatile. The nature and composition
of our income and assets may also be affected by how, and how quickly, we use our liquid assets.
Although the law in
this regard is not entirely clear, we treat our consolidated VIEs as being owned by us for U.S. federal income tax purposes because
we control their management decisions and are entitled to substantially all of the economic benefits associated with these entities.
As a result, we consolidated their results of operations in our consolidated U.S. GAAP financial statements. If it were determined,
however, that we are not the owner of the consolidated VIEs for U.S. federal income tax purposes, we may be treated as a PFIC for
the current taxable year and any subsequent taxable year.
If we were to be or
become a PFIC for any taxable year during which a U.S. Holder (as defined in “Item 10—Additional Information—E.
Taxation––United States Federal Income Taxation”) holds our ADSs or Class A ordinary shares, certain adverse
U.S. federal income tax consequences could apply to such U.S. Holder. See “Item 10—Additional Information––E.
Taxation––United States Federal Income Taxation.”
Our
memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights
of holders of our Class A ordinary shares and ADSs.
Our eleventh amended
and restated memorandum and articles of association contain provisions that have the potential to limit the ability of others to
acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect
of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging
third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our board of directors has
the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations,
powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or
restrictions, including dividend rights, conversion rights, voting rights, rights and terms of redemption and liquidation preferences,
any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred
shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of
management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the
voting and other rights of the holders of our Class A ordinary shares and ADSs may be materially and adversely affected.
The
capped call and zero-strike call transactions may affect the value of our ADSs.
On
January 30, 2019, in connection with the pricing of the 2024 Notes, we entered into capped call transactions with one or more of
the initial purchasers and/or their respective affiliates and/or other financial institutions, or the Capped Call Option Counterparties.
We entered into additional capped call transactions with the Capped Call Option Counterparties on February 15, 2019 and February
26, 2019, respectively. We used a portion of the net proceeds of the 2024 Notes to pay the cost of such transactions. The cap price
of these capped call transactions is initially US$14.92 per ADS, representing a premium of approximately 100% to the closing price
on the New York Stock Exchange, or NYSE, of the Company’s ADSs on January 30, 2019, which was US$7.46 per ADS, and is subject
to adjustment under the terms of the capped call transactions. As part of establishing their initial hedges of the capped call
transactions, the Capped Call Option Counterparties or their respective affiliates expect to trade the ADSs and/or enter into various
derivative transactions with respect to our ADSs concurrently with, or shortly after, the pricing of the 2024 Notes. This activity
could increase (or reduce the size of any decrease in) the market price of the ADSs or the 2024 Notes at that time. However, if
any such capped call transactions fail to become effective, the Capped Call Option Counterparties may unwind their hedge positions
with respect to the ADSs, which could adversely affect the market price of the ADSs. In addition, the Capped Call Option Counterparties
or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with
respect to the ADSs, the 2024 Notes or our other securities and/or by purchasing or selling the ADSs, the 2024 Notes or our other
securities in secondary market transactions following the pricing of the 2024 Notes and prior to the maturity of the 2024 Notes
(and are likely to do so following any conversion of the 2024 Notes, if we exercise the relevant election under the capped call
transactions, or repurchase of the 2024 Notes by us). This activity could also cause or avoid an increase or a decrease in the
market price of our ADSs.
On
January 30, 2019, in connection with the pricing of the 2024 Notes, NIO also entered into privately negotiated zero-strike call
option transactions with one or more of the initial purchasers or their respective affiliates, or the Zero-Strike Call Option Counterparties,
and used a portion of the net proceeds of the 2024 Notes to pay the aggregate premium under such transactions. Pursuant to the
zero-strike call option transactions, we purchased, in the aggregate, approximately 26.8 million ADSs, with delivery thereof (subject
to adjustment) by the respective Zero-Strike Call Option Counterparties at settlement shortly after the scheduled maturity date
of the 2024 Notes, subject to the ability of each Zero-Strike Call Option Counterparty to elect to settle all or a portion of the
respective zero-strike option transaction early. Facilitating investors’ hedge positions by entering into the zero-strike
call option transactions, particularly if investors purchase the ADSs on or around the day of the pricing of the 2024 Notes, could
increase (or reduce the size of any decrease in) the market price of the ADSs. However, if any zero-strike call option transactions
fail to become effective, the respective Zero-Strike Call Option Counterparties may unwind their hedge positions with respect to
the ADSs, which could adversely affect the market price of the ADSs. In addition, the Zero-Strike Call Option Counterparties or
their respective affiliates may modify their respective hedge positions by entering into or unwinding one or more derivative transactions
with respect to the ADSs, the 2024 Notes or our other securities and/or by purchasing or selling the ADSs, the 2024 Notes or our
other securities in secondary market transactions at any time, including following the pricing of the 2024 Notes and prior to the
maturity of the 2024 Notes. This activity could also cause or avoid an increase or a decrease in the market price of the ADSs.
Our
shareholders may face difficulties in protecting their interests, and ability to protect their rights through U.S. courts may be
limited, because we are incorporated under Cayman Islands law.
We are an exempted
company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our eleventh amended and restated
memorandum and articles of association, the Companies Law (2018 Revision) of the Cayman Islands and the common law of the Cayman
Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities
of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common
law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from
the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman
Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as
clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular,
the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have
more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies
may not have standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman
Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies
of lists of shareholders of these companies. Our directors have discretion under our articles of association to determine whether
or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them
available to our shareholders. This may make it more difficult for our shareholders to obtain the information needed to establish
any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
As a Cayman
Islands company listed on the New York Stock Exchange, we are subject to the NYSE corporate governance listing standards.
However, the NYSE corporate governance listing standards permit a foreign private issuer like us to follow the corporate
governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home
country, may differ significantly from the NYSE corporate governance listing standards. Currently, we do not plan to rely on
home country exemption for corporate governance matters. However, if we choose to follow home country practice in the future,
our shareholders may be afforded less protection than they otherwise would under the NYSE corporate governance listing
standards applicable to U.S. domestic issuers.
As a result of all
of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management,
members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated
in the United States.
ADS
holders may not be entitled to a jury trial with respect to claims arising under the deposit agreements, which could result in
less favorable outcomes to the plaintiff(s) in any such action.
The deposit agreement
and the deposit agreement for restricted securities governing the ADSs representing our Class A ordinary shares provide that, subject
to the depositary’s right to require a claim to be submitted to arbitration, the federal or state courts in the City of New
York have exclusive jurisdiction to hear and determine claims arising under the deposit agreements and in that regard, to the fullest
extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary arising
out of or relating to our Class A ordinary shares, the ADSs or the deposit agreements, including any claim under the U.S. federal
securities laws.
If we or the depositary
opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts
and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of
a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally
adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision
is generally enforceable, including under the laws of the State of New York, which govern the deposit agreements. In determining
whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly,
intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreements
and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.
If any of the holders
or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreements
or the ADSs, including claims under federal securities laws, such holder or beneficial owner may not be entitled to a jury trial
with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary.
If a lawsuit is brought against us and/or the depositary under the deposit agreements, it may be heard only by a judge or justice
of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes
than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.
Nevertheless, if this
jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit
agreements with a jury trial. No condition, stipulation or provision of the deposit agreements or ADSs serves as a waiver by any
holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal
securities laws and the rules and regulations promulgated thereunder.
Certain
judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands
company and the majority of our assets are located outside of the United States. The most significant portion of our operations
are conducted in China. In addition, a majority of our current directors and officers are nationals and residents of countries
other than the United States. Substantially all of the assets of these persons may be located outside the United States. As a result,
it may be difficult or impossible for our shareholders to bring an action against us or against these individuals in the United
States in the event that such shareholders believe that their rights have been infringed under the U.S. federal securities laws
or otherwise. Even if such shareholders are successful in bringing an action of this kind, the laws of the Cayman Islands and of
China may render them unable to enforce a judgment against our assets or the assets of our directors and officers.
We
are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.
We are an “emerging
growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable
to other public companies that are not emerging growth companies including, most significantly, not being required to comply with
the auditor attestation requirements of Section 404 for so long as we are an emerging growth company until the fifth anniversary
from the date of the initial public offering of our ADSs.
The JOBS Act also provides
that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date
that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected
to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required
when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
We
are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions
applicable to United States domestic public companies.
Because we are a foreign
private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United
States that are applicable to U.S. domestic issuers, including:
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the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current
reports on Form 8-K with the SEC;
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the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations
in respect of a security registered under the Exchange Act;
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the sections of the Exchange Act requiring insiders to file public reports of their stock ownership
and trading activities and liability for insiders who profit from trades made in a short period of time; and
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the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
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We are required to
file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results
on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the New York Stock Exchange.
Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information
we are required to file with or furnish to the SEC will be less extensive and less timely than that required to be filed with the
SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available
to you were you investing in a U.S. domestic issuer.
The
voting rights of holders of ADSs are limited by the terms of the deposit agreement, and they may not be able to exercise their
right to vote their Class A ordinary shares.
Holders
of our ADSs will only be able to exercise the voting rights with respect to the underlying Class A ordinary shares in accordance
with the provisions of the deposit agreements. Under the deposit agreement, ADS holders must vote by giving voting instructions
to the depositary. If we ask for instructions of ADS holders, then upon receipt of such voting instructions, the depositary will
try to vote the underlying Class A ordinary shares in accordance with these instructions. If we do not instruct the depositary
to ask for instructions of ADS holders, the depositary may still vote in accordance with instructions given by holders of ADSs,
but it is not required to do so. ADS holders will not be able to directly exercise their right to vote with respect to the underlying
shares unless they withdraw the shares. When a general meeting is convened, an ADS holder may not receive sufficient advance notice
to withdraw the shares underlying his or her ADSs to allow such holder to vote with respect to any specific matter. If we ask for
instructions of holders of ADSs, the depositary will notify ADS holders of the upcoming vote and will arrange to deliver our voting
materials to ADS holders. We have agreed to give the depositary at least 30 days’ prior notice of shareholders’ meetings.
Nevertheless, we cannot assure you that ADS holders will receive the voting materials in time to ensure that ADS holders can instruct
the depositary to vote their shares. In addition, the depositary and its agents are not responsible for failing to carry out voting
instructions or for their manner of carrying out ADS holders’ voting instructions. This means that an ADS holder may not
be able to exercise the right to vote and may have no legal remedy if the shares underlying his or her ADSs are not voted as such
holder requested.
The
depositary for our ADSs will give us a discretionary proxy to vote our Class A ordinary shares underlying the ADSs if the holders
of such ADSs do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect the interests
of our ADS holders.
Under the deposit agreements
for the ADSs, if any holder of the ADSs does not vote, the depositary will give us a discretionary proxy to vote our Class A ordinary
shares underlying such ADSs at shareholders’ meetings unless:
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we have failed to timely provide the depositary with notice of meeting and related voting materials;
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we have instructed the depositary that we do not wish a discretionary proxy to be given;
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we have informed the depositary that there is substantial opposition as to a matter to be voted
on at the meeting;
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a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
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the voting at the meeting is to be made on a show of hands.
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The effect of this
discretionary proxy is that if any such holder of the ADSs does not vote at shareholders’ meetings, such holder cannot prevent
our Class A ordinary shares underlying such ADSs from being voted, except under the circumstances described above. This may make
it more difficult for shareholders to influence the management of our company. Holders of our Class A ordinary shares are not subject
to this discretionary proxy.
An
ADS holder’s right to pursue claims against the depositary are limited by the terms of the deposit agreements.
Under the deposit agreements,
any action or proceeding against or involving the depositary, arising out of or based upon the deposit agreements or the transactions
contemplated thereby or by virtue of owning the ADSs may only be instituted in a state or federal court in New York, New York,
and a holder of our ADSs, will have irrevocably waived any objection which such holder may have to the laying of venue of any such
proceeding, and irrevocably submitted to the exclusive jurisdiction of such courts in any such action or proceeding.
The depositary may,
in its sole discretion, require that any dispute or difference arising from the relationship created by the deposit agreements
be referred to and finally settled by an arbitration conducted under the terms described in the deposit agreements, although the
arbitration provisions do not preclude a ADS holder from pursuing claims under federal securities laws in federal courts. Furthermore,
if a ADS holder is unsuccessful in such arbitration, such holder may be responsible for the fees of the arbitrator and other costs
incurred by the parties in connection with such arbitration pursuant to the deposit agreements. Also, we may amend or terminate
the deposit agreements without the consent of any ADS holder. If a ADS holder continues to hold its ADSs after an amendment to
the deposit agreements, such holder agrees to be bound by the deposit agreements as amended.
Our
ADS holders may not receive dividends or other distributions on our Class A ordinary shares and the ADS holders may not receive
any value for them, if it is illegal or impractical to make them available to the ADS holders.
The depositary of our
ADSs has agreed to pay the ADS holders the cash dividends or other distributions it or the custodian receives on Class A ordinary
shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. Our ADS holders will receive these
distributions in proportion to the number of Class A ordinary shares the underlying ADSs represent. However, the depositary is
not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example,
it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the
Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary
may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain
distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property.
We have no obligation to register under U.S. securities laws any ADSs, Class A ordinary shares, rights or other securities received
through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, Class A ordinary
shares, rights or anything else to holders of ADSs. This means that our ADS holders may not receive distributions we make on our
Class A ordinary shares or any value for them if it is illegal or impractical for us to make them available to the ADS holders.
These restrictions may cause a material decline in the value of our ADSs.
Our
ADS holders may experience dilution of their holdings due to inability to participate in rights offerings.
We may, from time to
time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreements, the depositary
will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights
relate are either exempt from registration under the Securities Act with respect to all holders of ADSs or are registered under
the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to
third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities
Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to
endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our
rights offerings and may experience dilution of their holdings as a result.
We
may need additional capital, and the sale of additional ADSs or other equity securities could result in additional dilution to
our shareholders, and the incurrence of additional indebtedness could increase our debt service obligations.
We
may require additional cash resources due to changed business conditions, strategic acquisitions or other future developments.
If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities
or obtain additional credit facilities. The sale of additional equity and equity-linked securities could result in additional dilution
to our shareholders. The sale of substantial amounts of our ADSs (including upon conversion of the notes) could dilute the interests
of our shareholders and ADS holders and adversely impact the market price of our ADSs. The incurrence of indebtedness would result
in increased debt service obligations and could result in operating and financing covenants that would restrict our operations.
We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Future
sales or issuances, or perceived future sales or issuances, of substantial amounts of our ordinary shares or ADSs could adversely
affect the price of our ADS.
If
our existing shareholders sell, or are perceived as intending to sell, substantial amounts of our ordinary shares or ADSs, including
those issued upon the exercise of our outstanding stock options, the market price of our ADSs could fall. Such sales, or perceived
potential sales, by our existing shareholders might make it more difficult for us to issue new equity or equity-related securities
in the future at a time and place we deem appropriate. Shares held by our existing shareholders may be sold in the public market
in the future subject to the restrictions contained in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up
agreements. If any existing shareholder or shareholders sell a substantial amount of ordinary shares after the expiration of the
applicable lock-up periods, the prevailing market price for our ADSs could be adversely affected.
In
addition, certain of our shareholders or their transferees and assignees will have the right to cause us to register the sale of
their shares under the Securities Act upon the occurrence of certain circumstances. Registration of these shares under the Securities
Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness
of the registration.
Our
ADS holders may be subject to limitations on transfer of their ADSs.
Our ADSs are transferable
on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient
in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons,
including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an
exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on
weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our
share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so
because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreements,
or for any other reason.
We
will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging
growth company.”
As a public company,
we incur significant legal, accounting and other expenses that we did not incur as a private company, including additional costs
associated with our public company reporting obligations. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented
by the SEC and New York Stock Exchange, impose various requirements on the corporate governance practices of public companies.
As a company with less than US$1.07 billion in net revenues for our last fiscal year, we qualify as an “emerging growth company”
pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that
are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement
under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over
financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply
to private companies. However, we have elected to “opt out” of the provision that allow us to delay adopting new or
revised accounting standards and, as a result, we will comply with new or revised accounting standards as required when they are
adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
We expect these rules
and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming
and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote
substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002
and the other rules and regulations of the SEC. We are currently evaluating and monitoring developments with respect to these rules
and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or
the timing of such costs.
In the past, shareholders
of a public company often brought securities class action suits against the company following periods of instability in the market
price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our
management’s attention and other resources from our business, which could harm our results of operations and require us to
incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation
and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required
to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
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ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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History and Development of the Company
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We were founded in
November 2014, as Nextev Inc., which was changed to our current name NIO Inc. in July 2017. Significant milestones in our development
include the following:
2015
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In February 2015, we established NIO Nextev Limited (formerly known as Nextev Limited), our wholly-owned
subsidiary in Hong Kong. We participated in the inaugural season of the FIA Formula E Championship as the Nextev TCR Formula E
Team, and in June 2015, we secured the inaugural FIA Formula E Driver’s Championship with Nelson Piquet Jr. In November 2015,
we held the inaugural NIO Formula Students Electric China NIO cup in Shanghai.
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In May 2015, NIO Nextev Limited incorporated NIO Co., Ltd. in China to, among other things, be
our global headquarters and engage in research and development related activities. In the same month, NIO Nextev Limited established
NIO GmbH in Germany as our vehicle design headquarters.
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In November 2015, NIO Nextev Limited established NIO USA, Inc. as our headquarters in the United
States to design and develop our software and hardware for autonomous driving systems and other advanced technology modules for
our vehicles.
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In December 2015, we established XPT Limited, or XPT, our wholly-owned subsidiary in Hong Kong,
to engage in the development of systems and components used in electric vehicles.
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2016
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In February 2016, NIO Nextev Limited established NIO Nextev (UK) Limited in the United Kingdom
as our Formula E and EP9 electric supercar headquarters. NIO Nextev (UK) Limited also provides engineering support for vehicle
development in Shanghai.
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In April 2016, NIO Nextev Limited incorporated NIO SPORT Limited in Hong Kong to handle Formula
E related business. In April 2016, NIO SPORT Limited purchased the Nextev TCR Formula E Team (now the NIO Formula E Team), which
NIO Nextev (UK) Limited operates on behalf of NIO SPORT Limited.
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In April 2016, XPT established XPT Technology Limited in Hong Kong in charge of intellectual property
management of XPT. In the same month, XPT established XPT Inc. in the State of Delaware as an operational base in the United States
to engage in technology development and cooperation. In May 2016, XPT established XPT (Jiangsu) Investment Co., Ltd. as its investment
platform in China.
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In May 2016, we entered into a manufacturing cooperation agreement with JAC, pursuant to which
the JAC-NIO Cooperation Project (New Energy Vehicle) officially launched since the signing of the framework agreement.
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In September 2016, XPT (Jiangsu) Investment Co., Ltd., or XPT Investment, and a state-owned company,
Nanjing Xingzhi Science & Technology Industrial Development Co., Ltd., or Xingzhi, entered into a joint venture agreement to
establish a joint venture, XPT (Nanjing) Energy Storage System Co., Ltd., or XPT ESS, to engage in the battery pack business. Each
of XPT Investment and Xingzhi holds a 50% equity interest in XPT ESS.
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In October 2016, we obtained an autonomous vehicle testing permit in the State of California.
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In November 2016, we unveiled our NIO brand and the EP9 at the Saatchi Gallery in London.
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2017
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In January 2017, we established NIO Power Express Limited, our wholly-owned subsidiary, which later
incorporated NIO Energy Investment (Hubei) Co., Ltd. in April 2017 to handle our power management related businesses.
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In February 2017, we established NIO User Enterprise Limited, our wholly-owned subsidiary, which
incorporated Shanghai NIO Sales and Services Co., Ltd. in March 2017, to handle sales and services of our electric vehicles. In
March 2017, we unveiled our vision car, the NIO EVE, at South by Southwest 2017 in Austin, Texas. In April 2017, we further unveiled
our first volume manufactured passenger car, the ES8, and showcased EP9 and the NIO EVE at the 2017 Shanghai International Automobile
Industry Exhibition.
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In May 2017, our EP9 electric supercar broke the record for fastest lap for a production car at
the
Nürburgring Nordschleife “Green Hell” track
in Germany after having already
broken the records for fastest autonomous lap and fastest lap for a production car at the Circuit of the Americas Race Track in
Austin, Texas in the United States in February 2017.
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In May 2017, NIO Energy Investment (Hubei) Co., Ltd. and a PRC provincial government investment
vehicle, Hubei Technology Investment Group Limited, entered into a joint venture agreement to establish a joint venture to conduct
research and development and design of infrastructure for new energy automobiles.
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In November 2017, we opened our first NIO House in Beijing. In December 2017, we held our first
NIO Day and introduced the ES8 to a widespread audience and began taking orders for the ES8.
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2018
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In March 2018, we were in the first batch of companies to obtain a Shanghai Intelligent Connected
Vehicle Test License to test seventeen items including, among others,
obstacles identification and response
and automatic emergency braking on the testing roads,
traffic sign recognition and lane keeping systems in the testing roads.
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In April 2018, we were in the first batch of companies to obtain a Beijing Autonomous Driving Test
License to test various items including, among others, perception and compliance with traffic regulations, emergency reaction and
manual intervention and integrated driving ability on testing roads.
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In April 2018, we entered into a series of contractual arrangements with Shanghai Anbin and Beijing
NIO, our VIEs, and their respective shareholders to conduct certain of our operations in China in the future.
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In April 2018 and July 2018, XPT Limited, XPT Investment, and certain investors entered into a
share purchase agreement and a supplementary agreement, respectively, pursuant to which such investors, subject to certain closing
conditions, agreed to invest an aggregate RMB1,269.9 million in XPT (Jiangsu) Automotive Technology Co., Ltd., or XPT Automotive,
a company established in May 2018. Upon the consummation of the transaction, XPT Investment holds a 78.91% equity interest in XPT
Automotive and the other investors hold an aggregate 21.09% equity interest.
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In April 2018, NIO Co., Ltd., Hubei Yangtze River NIO New Energy Industrial Planning Fund and two
state-owned companies, Guangzhou Automobile Group Co., Ltd. and GAC New Energy Automobile Co., Ltd. entered into a joint venture
agreement to establish a joint venture, GAC NIO New Energy Automobile Technology Co., Ltd., to conduct sales of charger modules
and design of automobile parts.
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In May 2018, XPT Investment set up XPT Automotive as a wholly-owned subsidiary of XPT Investment.
XPT Automotive, XPT and XPT Investment entered into a set of agreements, pursuant to which, XPT and XPT Investment transferred
the shareholdings in their respective subsidiaries to XPT Automotive. Following the transaction, XPT Technology Limited, XPT Automotive
and Shanghai XPT Technology Limited entered into a share transfer agreement, pursuant to which XPT Technology Limited agreed to
transfer a 100% equity interest in Shanghai XPT Technology Limited to XPT Automotive, as a result of which Shanghai XPT Technology
Limited became a wholly-owned subsidiary of XPT Automotive.
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In May 2018, XPT (Nanjing) E-Powertrain Technology Co., Ltd. and Nanjing Punch Powertrain Automatic
Transmission Co., Ltd. entered into a joint venture agreement to establish a joint venture to develop, produce and sell gear boxes
for new energy vehicles and other components of new energy vehicles, and provide after-sales service.
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In May 2018, XPT Investment purchased the 50% equity interest in XPT ESS held by Xingzhi and, together
with the 50% equity interest it holds in XPT ESS, transferred 100% of the equity interest in XPT ESS to XPT Automotive during the
restructuring of XPT Investment and its group companies.
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In July 2018, NIO Co., Ltd. and a state-owned company, Chongqing Changan Automobile Co., Ltd.,
entered into a joint venture agreement to establish a joint venture to design and develop new energy automobiles as well as their
parts and components.
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In December 2018, XPT Automotive, Xtronics Innovation Ltd. and Wistron (Kunshan) Co., Ltd., or
Wistron Kunshan, entered into a joint venture agreement, pursuant to which Wistron Kunshan purchased and subscribed for certain
equity interests in XTRONICS (Nanjing) Automotive Intelligent Technologies Co., Ltd., or XTRONICS Nanjing. Upon the consummation
of the first phase of the transaction, XPT Automotive holds a 50% equity interest in XTRONICS Nanjing.
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2019
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In February 2019, we issued
$750 million aggregate principal amount of 4.50% convertible senior notes due 2024, or the 2024 Notes. The 2024 Notes are unsecured
debt and are not redeemable by us prior to the maturity date except for certain changes in tax law. In accordance with the indenture
governing the 2024 Notes, or the Indenture, holders of the 2024 Notes may require us to purchase all or any portion of their notes
on February 1, 2022 at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued
and unpaid interest, and may require us, upon a fundamental change (as defined in the Indenture), to repurchase for cash all or
part of their 2024 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2024 Notes to be
repurchased, plus accrued and unpaid interest. In addition, the holders of the 2024 Notes may convert their notes to a number
of our ADSs at their option at any time prior to the close of business on the second business day immediately preceding the maturity
date pursuant to the Indenture. The 2024 Notes that are converted in connection with a make-whole fundamental change (as defined
in the Indenture) may be entitled to an increase in the conversion rate for such 2024 Notes.
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In connection
with the issuance of the 2024 Notes, we entered into capped call transactions and zero-strike call option transactions. The cap
price of these capped call transactions is initially US$14.92 per ADS, representing a premium of approximately 100% to the NYSE
closing price of our ADSs on January 30, 2019, which was US$7.46 per ADS, and is subject to adjustment under the terms of these
capped call transactions. Pursuant to the zero-strike call option transactions, we purchased, in the aggregate, approximately 26.8
million ADSs, with delivery thereof (subject to adjustment) by the respective zero-strike call option counterparties at settlement
shortly after the scheduled maturity date of the 2024 Notes, subject to the ability of each zero-strike call option counterparty
to elect to settle all or a portion of the respective zero-strike option transaction early.
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In March 2019, we have agreed with the related contractual parties to cease construction of our planned manufacturing facility in Jiading, Shanghai and terminate this development project.
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Our principal executive
offices are located at Building 20, No. 56 Antuo Road, Jiading District, Shanghai 201804, PRC. Our telephone number at this address
is +86-21-6908-3306. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited,
PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Puglisi
& Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
We are a pioneer in
China’s premium electric vehicle market. We design, jointly manufacture, and sell smart and connected premium electric vehicles,
driving innovations in next generation technologies in connectivity, autonomous driving and artificial intelligence. Redefining
user experience, we aim to provide users with comprehensive, convenient and innovative charging solutions and other user-centric
service offerings. Our Chinese name, Weilai
(
)
, which means Blue Sky
Coming, reflects our commitment to a more environmentally friendly future.
The first model we
developed was the EP9 supercar, introduced in 2016. The EP9 set a world record as the then fastest all-electric car on the track
at the Nürburgring Nordschleife “Green Hell” track in Germany in May 2017, finishing a lap in 6 minutes and 45.90
seconds. Combined with an attractive design and strong driving performance, the EP9 delivers extraordinary acceleration and best-in-class
electric powertrain technology, helping position us as a premium brand.
We launched
our first volume manufactured electric vehicle, the seven-seater ES8, to the public at our NIO Day event on December 16, 2017
and began making deliveries to users on June 28, 2018. In December 2018, we launched its variant, the six-seater ES8,
with delivery beginning in March 2019. The ES8 is an all-aluminum alloy body, premium electric SUV that offers
exceptional performance, functionality and mobility lifestyle. It is equipped with our proprietary e-propulsion system, which
is capable of accelerating from zero to 100 kilometers (km) per hour (kph) in 4.4 seconds and delivering a New European
Driving Cycle, or NEDC, driving range of up to 355 km and a maximum range of up to 500 kilometers when constantly running at
60 kph and equipped with a 70-kilowatt-hour battery pack. As of December 31, 2018, we had delivered 11,348 seven-seater ES8s to
customers in more than 200 cities.
We launched our second
volume manufactured electric vehicle, the ES6, to the public at our NIO Day event on December 15, 2018. The ES6 is a five-seater
high-performance long-range premium electric SUV. The ES6 is smaller but more affordable than the ES8, allowing us to target a
broader market in the premium SUV segment. The ES6 currently offers the Standard, Performance and Premier versions with pre-subsidy
starting prices of RMB358,000, RMB398,000 and RMB498,000, respectively. Users can pre-order the ES6 through the NIO App and we
expect to begin making deliveries of the ES6 in June 2019.
We aim to create the
most worry-free experience for our users, online or offline, at home or on-the-go. In response to common concerns over the accessibility
and convenience of EV charging, we offer a comprehensive, convenient and innovative suite of charging solutions. These solutions,
which we call our NIO Power solutions, include Power Home, our home charging solution; Power Swap, our innovative battery swapping
service; Power Mobile, our mobile charging service through charging trucks; and Power Express, our 24-hour on-demand pick-up and
drop-off charging service. In addition, our vehicles are compatible with China’s national charging standards and have access
to a nationwide publicly accessible charging network of approximately 300,000 charging piles. Beyond charging solutions, we offer
comprehensive value-added services to our users, such as statutory and third-party liability insurance and vehicle damage insurance
through third-party insurers, repair and routine maintenance services, courtesy car during lengthy repairs and maintenance, nationwide
roadside assistance, as well as an enhanced data package. We believe these solutions and services, together, will create a holistic
user experience throughout the vehicle lifecycle.
The electric powertrain
technologies we developed for the EP9 set the technological foundation for the development of our vehicles, from the ES8, to the
ES6 and to other future models. Our e-propulsion system consists of three key sub-systems:
an electric drive system, or EDS, an energy storage system, or ESS, and a vehicle intelligence control system, or VIS. Our electric
powertrain reflects our cutting-edge proprietary technologies and visionary engineering in our EV design.
We are a pioneer in
automotive smart connectivity and enhanced Level 2 autonomous driving. NOMI, which we believe is one of the most advanced in-car
AI assistants developed by a Chinese company, is a voice activated AI digital companion that personalizes the user’s driving
experience. NIO Pilot, our proprietary enhanced Level 2 advanced driver assistance system, or ADAS, is enabled by 23 sensors and
equipped with the Mobileye EyeQ
®
4 ADAS processor, which is eight times more powerful than its predecessor.
We have significant
in-house capabilities in the design and engineering of electric vehicles, electric vehicle components and software systems. We
have strategically located our teams in locations where we believe we have access to the best talent. Our strong design, engineering
and research and development capabilities enable us to launch smart and connected premium electric vehicles that are customized
for, and thus appealing to, Chinese consumers. In addition, our research and development efforts also have resulted in an extensive
intellectual property portfolio that we believe differentiates us from our competitors.
We adopt an innovative
sales model compared to incumbent automobile manufacturers. We sell our vehicles through our own sales network, including NIO Houses
and our mobile application. NIO Houses are not only the showrooms for our vehicles, but also clubhouses for our users with multiple
social functions. Prospective users can place orders using our mobile application and more importantly, our mobile application
fosters a dynamic and interactive online platform. We believe our online and offline integrated community which is developing from
our NIO Houses and mobile application will retain user engagement and cultivate loyalty to our brand, along with other successful
branding activities, such as our annual NIO Day and our Drivers’ Championship winning Formula E team.
Reservations, Production and Delivery
We began making deliveries
of our first volume manufactured vehicle, the seven-seater ES8, to users on June 28, 2018. The table below sets forth certain operating
data relating to the seven-seater ES8 up to December 31, 2018.
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May
2018
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June
2018
(1)
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July
2018
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August
2018
|
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September
2018
|
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October
2018
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November
2018
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December
2018
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ES8s produced for the period
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228
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272
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831
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1,296
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|
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2,079
|
|
|
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2,060
|
|
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3,348
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|
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2,661
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ES8s delivered for the period
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—
|
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100
|
|
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381
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1,121
|
|
|
|
1,766
|
|
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1,573
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3,089
|
|
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3,318
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Cumulative ES8s delivered
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—
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|
100
|
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481
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1,602
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|
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3,368
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|
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4,941
|
|
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8,030
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11,348
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(1) Deliveries for June
represent deliveries for the period from June 28, 2018 (being the date we began making deliveries of the seven-seater ES8 to the
public) through June 30, 2018.
In December 2018, we
launched (i) the six-seater ES8, with delivery beginning in March 2019, and (ii) our second volume manufactured electric vehicle,
the ES6, with delivery expected to begin in June 2019.
Our Vehicles
We design,
jointly manufacture and sell our vehicles in China’s premium electric vehicle segment. We began making deliveries to
the public of our first volume manufactured car, the seven-seater ES8 on June 28, 2018. In December 2018, we launched its
variant, the six-seater ES8, with delivery beginning in March 2019. In addition, we launched our second volume manufactured
electric vehicle, the ES6, to the public at our NIO Day event on December 15, 2018. The ES6 is a five-seater high-performance
long-range premium electric SUV. The ES6 is smaller but more affordable than the ES8, allowing us to target a broader market
in the premium SUV segment. The ES6 currently offers the Standard, Performance and Premier versions with pre-subsidy starting
prices of RMB358,000, RMB398,000 and RMB498,000, respectively. Users can pre-order the ES6 through the NIO App and we expect
to begin making deliveries of the ES6 in June 2019. We plan to leverage the platform technologies from the ES8 and the ES6 to
build our future models, including the ET7.
Our goal is to launch
a new vehicle model each year for the near future as we plan to offer our users more choices to suit their preferences and target
different segments within the premium electric vehicle market in China. We also plan to upgrade our existing models on an ongoing
basis with facelifts for each model around every one or two years and do a major model redesign or upgrade every three years.
We plan to exclusively
sell our vehicles in China for the near future.
ES8
The ES8, our first
volume manufactured vehicle, is a spacious six or seven-seater high-performance premium electric SUV. The ES8 was officially launched
at our NIO Day event on December 16, 2017, following which we began taking reservations. We started making deliveries to the public
of the seven-seater ES8 on June 28, 2018 and have ramped up deliveries since launch. In December 2018, we launched its variant,
the six-seater ES8, with delivery beginning in March 2019.
With both front
and rear motors (240 kilowatt (kW) each), the ES8 delivers 480 kW of power and 840 units or Newton meters (Nm) of torque to
all four wheels. The ES8’s e-propulsion system enables the ES8 to accelerate from zero to 100 kph in just 4.4 seconds.
The ES8 is equipped with a 70-kilowatt-hour liquid-cooled battery pack comprised of cutting-edge square cell batteries. The
battery pack features an energy density of 135watt hours per kilogram (wh/kg) and provides an approximately
1,200-charge-discharge lifecycle with an 87% capacity retention. The ES8 achieves 500 kilometers of range when constantly
running at 60 kph, and the car achieves a NEDC driving range of 355 kilometers. An 84-kilowatt-hour battery pack is expected
to be made available in the second half of 2019. With
the new 84-kilowatt-hour battery system, the ES8 can achieve a NEDC driving range of 430 km.
With 21 active safety
features, the ES8 is designed to meet five-star Chinese New Car Assessment Program safety standards developed by the China Automotive
Technology Research Center. In addition to standard safety features for a vehicle in its class, ES8 also features or will feature,
driver drowsiness detection, lane departure warning, lane change assistance, automatic emergency braking, side door opening warning,
and 360-degree high definition surround vision, among other advanced safety measures. The ES8 is also designed to include safety
features, such as electric stability program, electric traction control, cornering brake control, hill descent control, hill start
assist, rear view camera, front and rear parking sensors, side distance indication system, direct-tire pressure monitoring system,
blind spot detection, dynamic wheel torque by brake and roll stability control. In addition, the braking distance of the ES8 from
100 kph to a complete stop is 33.8 meters.
The ES8 is the first
car in China to have an all-aluminum alloy body and chassis featuring aerospace grade 7003 series aluminum alloy, enabling torsional
stiffness of 44,140 Nm/Deg, and also features the highest amount of aluminum for any mass production car yet. The active air suspension
on the ES8 creates, we believe, a comfortable riding experience. The ES8 has a 3,010 millimeter long wheelbase, to create a truly
mobile living space. The three-row, seven-seat layout makes full use of the interior space. The innovative “lounge seat”
and “child-care mode”, together with the nappa leather wrap, create, we believe, a comfortable atmosphere, redefining
the riding experience. The smart air quality system includes an activated carbon and high-efficiency particulate air, or HEPA,
filter and negative ion generator.
Together with the launch
of the ES8 in 2017, we launched our NIO Pilot system. We have activated certain functions of our NIO Pilot system and expect
to activate most of the features on it by the second quarter of 2019. Our NIO Pilot ADAS, with comprehensive enhanced Level 2 autonomous
driving features, is enabled by 23 sensors, including a trifocal front-facing camera, four surround exterior cameras, five millimeter-wave
radars, 12 ultrasonic sensors and a driver monitor camera. The ES8 comes equipped with the Mobileye EyeQ
®
4 ADAS
chip which has a computation capacity eight-times more powerful than its predecessor, the Mobileye EyeQ
®
3.
In addition, the ES8’s
sophisticated 4G support and software and hardware suite enables subscribers to enjoy upgraded services through FOTA updates. Each
vehicle comes standard with eight gigabytes per month of data. Our remote updates are driven by our centralized connected vehicle
gateway which controls all electric control units, or ECUs. The ES8 provides high-speed parallel over-the-air updates, allowing
the ES8 to acquire new features from time to time while minimizing downtime.
Together with the launch
of the ES8, we launched our NOMI system, an optional feature, which we believe is one of the most advanced in-car AI assistants
developed by a Chinese company. Our goal is to provide users with a more natural interaction with the in-car AI system and enhanced
safety by further removing the need for users to keep looking at the screen while driving. NOMI combines the ES8’s intelligence
and car connectivity functionalities to turn the ES8 into an intuitive companion that can listen to, talk with, and help drivers
and passengers along the way. Through NOMI, users are able to use shortcuts and voice control to make phone calls, play music and
control systems, including navigation, air-conditioning, opening and closing windows, climate control, controlling the seat massage
function, operating in-car media and controlling the in-car camera (including taking pictures), among others. We intend to improve
the system and add additional functions through FOTA upgrades.
The seven-seater
ES8 and the six-seater ES8 have pre-subsidy starting prices of RMB448,000 and RMB456,000, respectively. Purchasers can
purchase additional options that come with the ES8, including different wheel styles, certain exterior colors, NIO Pilot and
NOMI, among others. We are also producing approximately 10,000 “Founder’s Edition” vehicles, available for
RMB548,000 before subsidies, which comes standard with additional features such as the nappa luxury interior package
(consisting of nappa leather perforated seats, a nappa leather interior wrap and front massage seats), all-season comfort
package (heated steering wheel, second row heated seats, and front row ventilated seat), a premium audio system, an enhanced
head unit display and additional NIO Pilot functions. Such features can also be added based on user preferences to our
standard ES8. The ES8 also comes equipped with a wireless charging board. We currently provide our users with the option of a
battery payment arrangement, where users can make battery payments in installments. For the ES8 ordered before January 15,
2019, there is an RMB100,000 reduction in the purchase price and users adopting this arrangement pay RMB1,280 per month,
payable over 78 months. For the ES8 and ES6 ordered after January 16, 2019, there is an RMB100,000 reduction in the purchase
price and users adopting this arrangement pay RMB1,660 per month, payable over 60 months. To purchase an ES8, a customer is
first required to pay a refundable deposit reserving the car, which for the ES8 is RMB5,000, and prior to the user’s
ES8 entering into production, a non-refundable deposit of RMB45,000 must be made (which can include the initial RMB5,000
reservation deposit) and is applied towards the purchase price of the vehicle.
ES6
The ES6 is a five-seater
high-performance electric premium SUV launched in December 2018. We expect to begin making deliveries of the ES6 in June 2019.
The ES6 is smaller but more affordable than the ES8, allowing us to target a broader market in the premium SUV segment. The ES6
currently offers the Standard, Performance and Premier versions with pre-subsidy starting prices of RMB358,000, RMB398,000, and
RMB498,000, respectively. Users can pre-order the ES6 through the NIO App.
The ES6 is
the world’s first SUV equipped with a combination of the permanent magnet motor (160 kW) and the induction motor (240
kW). The ES6 delivers 400 kW of power and 725 Newton meters of torque to all four wheels with an energy conversion rate of
97%. The ES6 can accelerate from zero to 100 kph in 4.7 seconds. The braking distance of the ES6 from 100 kph to a complete
stop is 33.9 meters. When we start making deliveries of the ES6, we plan to offer users of the ES6 with a 70-kilowatt-hour
battery pack. An 84-kilowatt-hour battery pack is expected to be made available in the second half of 2019. The ES6 is the
first car in China with a hybrid structure of aluminum alloy (91%) and carbon fiber (9%), featuring aircraft grade 7
series aluminum alloy, enabling torsional stiffness of 44,930 Nm/Deg, the highest among any mass production SUV globally. The
use of high-strength carbon fiber makes the ES6 lighter but more solid. It features the independent suspension,
Continuous Damping Control (CDC) and the intelligent electric all-wheel-drive system. Users have the option of installing the
active air suspension and switching between driving modes, creating a more comfortable riding experience.
The ES6 is equipped
with Lion, a high-performance intelligent gateway enabling data exchange and remote upgrading via FOTA. Additionally, the ES6’s
Dragon security architecture offers a matrix-like firewall to enhance data security and protect user privacy. In addition, the
speech-based interactive NOMI system with a voice-based interactive feature is built into the ES6. The ES6 also has an upgraded
head-up display, a digital instrument cluster and an 11.3 inch second-generation multi-touch screen. Moreover, the ES6 has a pre-installed
NIO Pilot system with a Mobileye EyeQ
®
4 and 23 sensors.
Our Power Solutions
Through our NIO Power
solutions, we offer a comprehensive and innovative suite of power solutions to address the battery charging needs of our users.
We aim to provide power services in most major cities in China, with our solutions being easily accessible through our mobile application.
We also offer our users our valet service where we pick up, charge and then return the vehicle. Our goal is to provide the most
convenient power solutions to our users. Using our mobile application, our users will be able to monitor battery levels and charging
status. The charging status of batteries and the charging solutions available to users are all connected through our cloud, enabling
us to assist users in finding the most convenient charging solution available in a given area.
Home
Charging (NIO Power Home)
Through NIO Power Home,
we install chargers at our customers’ homes after the purchase of a new vehicle based on customer request where installation
at the customer’s home is feasible. Given the convenience of having a home charger installed, we aim to install a home charger
for our users whenever practicable. Our home charger is expected to be the first to have an auto-identification function which
enables a vehicle to automatically pair with its exclusively compatible home charger. Charging takes place by simply inserting
the charging gun into the vehicle’s charging port. The first NIO Power Home device and basic installation are initially included
in the price of the vehicle though there may be charges in certain circumstances. Any user has the option of postponing such installation
if installation is not feasible at his or her residence at the time of purchase. Any subsequent installation is subject to charge
on a case-by-case basis. Installation is performed by professional third-party contractors engaged by us. Our charging pile design
won the “best of best” reddot award in 2018. Under normal temperatures and battery conditions, the battery of the ES8
would be charged from approximately 20% to 90% power level in seven to eight hours using our home charger.
Power Express and Other
Power Solutions
We have tailored our
charging solutions to serve the needs of Chinese users. We anticipate that many of our users are likely to live in condominiums
or apartment buildings where they are unable to install a home charger. We aim to provide such users with a level of convenience
and service with our other power solutions so that they can enjoy a similar level of convenience as our users with home chargers
installed. We are also committed to ensuring the high standard of quality and performance of our charging solutions.
To that end, we offer
our users our Power Express valet service and other charging solutions, including access to public charging, access to our Power
Mobile charging trucks, and battery swapping.
Using our mobile application,
a user is able to arrange to have our team pick up his or her vehicle at the user’s designated parking location. The vehicle
is driven to a nearby battery charging station or battery swap station or a charging truck is driven to the parking location. The
vehicle is returned to the user once battery charging or swapping is completed. Users are able to select “immediate service”
which provides the fastest charging option to meet a more urgent charging demand or “reservation service” for scheduled
charging services. We also plan to provide “idle charging” which allows users to set an anticipated start time and
end time when their vehicle is expected to remain idle, such as overnight, and the threshold of the vehicle’s cruising range
when the service will be triggered, as well as a specific location where the vehicle is parked during specific periods. Our one-click
charging service will be automatically triggered when the vehicle is idle and parked at the specified location during the specified
period. Users are able to monitor their vehicle charging status in real time using our mobile application. We aim to provide users
with the fastest charging experience, optimizing convenience to users by identifying the most appropriate charging solution based
on the user’s travel habits through cloud-based smart scheduling.
We offer our users
our energy package, which provides them with access to our Power Express services and charging solutions, including public charging,
access to our Power Mobile charging trucks, and battery swapping for a fixed monthly fee, which is initially set at RMB980 per
month if paid monthly, or RMB10,800 annually, for up to 15 charges per month. We currently anticipate that our energy package and
Power Express services will primarily be utilized by users without home chargers installed. However, users who do not purchase
our energy package are able to access our Power Express services and charging solutions on a pay-per-use basis, and the initial
price for such services is set at RMB180 per charge.
Access to Public Charging
Our users have access
to a network of public chargers, which as of December 31, 2018 consisted of approximately 300,000 publicly accessible charging
piles. These chargers have been installed by both public and private sectors, including state-owned electricity companies and automotive
original equipment manufacturers, or OEMs. Data from over 156,000 public chargers as of December 31, 2018, installed by the third
parties, including the China Southern Grid, are synchronized to our cloud so that users can access real-time information on the
availability and location of these chargers. We plan to increase the number of chargers with data synchronized to our cloud. The
Chinese government has also set a target of more than 4.8 million charging piles in 2020. Access to these chargers is included
in our energy package or can be provided on a pay-per-use basis. Under normal temperatures and battery conditions, the battery
of the ES8 would be charged from approximately 20% to 90% power (or battery) level in seven to eight hours using a normal charger
or in approximately 75 minutes using a supercharger.
In addition, we have
entered into a framework agreement with the State Grid Corporation of China with the aim of expanding the network of publicly accessible
charging piles through technology and business model innovations in a collaborative way. Pursuant to the framework agreement, the
parties have agreed to cooperate in the following areas: (i) building systematic solutions for electric cars, charging piles and
grid network by leveraging each party’s own resources and standardizing electric vehicle charging and battery swap technology;
(ii) application of smart vehicle connectivity technology to practice; (iii) innovation in electric vehicle charging and battery
swap technology; (iv) the construction and operation of electric vehicle charging and battery swap infrastructure, and (v) the
sales, leasing and insurance of or for electric vehicles. While this framework agreement sets forth certain long-term strategic
cooperation principles for cooperation between the State Grid Corporation of China and us, the actual implementation of such principles
would likely require the parties to enter into supplemental agreements covering specific areas of cooperation.
Fast Charging Trucks (Power Mobile)
Through NIO Power Mobile,
we provide charging through charging trucks. We plan to use these charging trucks to supplement our charging network. Users are
able to book NIO Power Mobile services in advance conveniently through our mobile application. We own fast charging trucks, which
are equipped with our proprietary fast-charging technology.
As of December 31,
2018, we had approximately 485 NIO Power Mobile trucks in operation. We plan to initially deploy these trucks in major cities,
including Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu, Hangzhou, Nanjing and Suzhou, among others. We may also redeploy these
trucks based on user demand.
Battery Swapping (Power Swap)
Through Power Swap,
we offer our users the ability to arrange for a battery swap for the ES8 and ES6. Our swap stations are compact stations located
in parking lots and other locations. The typical size of a swap station is approximately three parking spaces, or 45 square meters.
Swap stations are designed to be fully automated, but for the first and second years of operation we plan to have one staff member
at each location to ensure reliability for the initial roll-out. Once a vehicle is parked in the swap station and the driver activates
the swap function, battery swapping will take place automatically. Charging of the batteries at swap stations takes place while
the batteries are stored at the swap station and their charging status information is sent to our cloud. Our battery swap stations
were developed in-house and use chassis replacement technology and apply more than 300 patented technologies to provide precise
positioning, rapid disassembly, compact integration, and flexible deployment, allowing battery replacement within minutes.
As of December 31,
2018, we had battery swap stations in 22 cities, including Beijing, Shanghai, Guangzhou, Shenzhen, Hefei, Chengdu, Nanjing, Suzhou
and Hangzhou. We had 28 battery swap stations in total along the two major highways in China: G2 highway that connects Beijing
and Shenzhen, and G4 highway that connects Beijing and Shanghai.
Our Other Value-Added Service Offerings
Through one click using
our mobile application, our users can access a full suite of innovative services, as part of our strategy of redefining the user
experience. In addition to our NIO Power solutions described above, we offer our users our NIO Service, comprised of other value-added
services provided primarily through our service package, which can be ordered conveniently through our mobile application.
Service
Package
We offer our users
a service package, which, at a price initially set at RMB14,800 per year, provides statutory and third-party liability and vehicle
damage insurance through third-party insurers, repair and routine maintenance services, courtesy car during repair and maintenance
lasting more than 24 hours, roadside assistance and an enhanced data package, among other services. As of December 31, 2018, approximately
90% of our users had a subscription for our service package.
Through our service
package, we aim to provide users with a “worry free” vehicle ownership experience. Using our mobile application, users
are able to arrange for vehicle service with a few clicks. At a user’s request, we pick up the car, arrange for maintenance
and repair services, and then return the car to users once the services are done. As long as the maintenance and repair is covered
under our service package, no additional fee will be invoiced to the service package subscriber. If the user has a car accident,
we will also assist the user in engaging with the insurance company and providing necessary repairs.
We provide users who
subscribe to this service package with an enhanced Internet data package with an additional 7GB of data per month. We also have
agreements with China Taiping Insurance, pursuant to which we will procure basic mandatory automobile insurance and vehicle damage
insurance for our users as part of the service package. Users are also able to supplement this basic insurance coverage with China
Taiping Insurance at an additional cost, which will be paid to the insurance provider. We are currently seeking to enter into arrangements
with additional insurance providers.
Battery
Payment Arrangement
We currently provide
our users with the option of a battery payment arrangement, where users can make battery payments in installments. For the ES8
ordered before January 15, 2019, there is an RMB100,000 reduction in the purchase price and users adopting this arrangement pay
RMB1,280 per month, payable over 78 months. For the ES8 and ES6 ordered after January 16, 2019, there is an RMB100,000 reduction
in the purchase price and users adopting this arrangement pay RMB1,660 per month, payable over 60 months.
Vehicle
Financing and License Plate Registration
We currently have
agreements with Bank of China, China Industrial Bank, Great China Finance Leasing Co., Ltd. and China Merchants Bank,
pursuant to which we assist users in procuring financing when they purchase our vehicles We assist our users in their
application for financing, making the buying process easier. Through our arrangements with our partner banks, we believe we
are able to assist our users in procuring financing on attractive terms. We also apply for license plate registration on
behalf of our users at the time of purchase.
Vehicle Engineering and Design
We have significant
in-house vehicle engineering capabilities, which cover all major areas of vehicle engineering starting from concept to completion.
Our vehicle engineering group consists of: (i) four design groups, namely, body and exterior; chassis; interior, heating and cooling;
and electrical and electronics; (ii) two integration groups, namely, mechanical and electrical, which are together responsible
for integrating components and systems into a complete vehicle and work with the design groups; and (iii) two advanced engineering
groups, namely, vehicle concepts and system concepts, which focus on future products and longer term innovation. We aim to implement
industry best practices throughout the engineering and design process.
We have strategically
located our vehicle engineering teams based on where we believe the right talent is located. As of December 31, 2018, our vehicle
engineering group had 808 employees worldwide, with 692 located in Shanghai, 62 in San Jose, our North American headquarters in
the United States, 40 in Oxford, United Kingdom and 14 in Munich, Germany. We have significant engineering capabilities at our
Shanghai headquarters, which was selected due to its status as a global automotive hub, providing us with a significant talent
pool. Our international offices provide us with deeper capabilities in certain areas. Our San Jose and Oxford teams focus on advanced
development work with our Oxford team also working on complex computer-aided engineering, and our Munich team focuses on light-weight
material development and vehicle design. In addition, our engineering teams in Munich focus on lightweight and e-powertrain engineering
and work on the challenges of energy and resource efficiency and design our vehicles, including the interior and exterior.
Our Technology
We believe one of our
core technology competencies is our proprietary e-propulsion system. It also has a modular design, allowing future models to incorporate
a significant portion of this technology. Our technologies, including battery management system, electric driving system, vehicle
control system, and autonomous driving, among others, are cutting-edge and differentiates us from our competitors. The ES8 and
ES6 integrate many of these industry-leading technology modules, including our proprietary e-propulsion system, digital cockpit,
enhanced level 2 ADAS system, smart data router, security architecture and cloud data platform, to create a comprehensive interactive
system for the optimal user experience.
Electric
Powertrain (E-propulsion System)
We have developed our
own e-propulsion system. The e-propulsion system consists primarily of an electric drive system, or EDS, an energy storage system,
or ESS, and a vehicle intelligence control system, or VIS.
Our integrated EDS
has a copper rotor induction motor, a motor controller with a unique topology design, and a high-torque gearbox. The combination
of high-power and high-torque is expected to provide users with powerful driving force. We possess dual technologies for induction
motors and permanent magnet motors. Our first volume manufactured vehicle, the ES8, is equipped with integrated EDS, delivering
480 kW of power. Our second volume manufactured vehicle, the ES6, is the world’s first SUV equipped with a combination of
the permanent magnet motor (160 kW) and the induction motor (240 kW), delivering 400 kW of power.
Our lightweight
ESS uses high-energy density battery cells and high-strength housing. Currently, the ES8 is equipped with our proprietary
70-kilowatt-hour liquid-cooled battery pack developed and packaged in-house, bringing a high energy density of 135wh/kg.
Starting the second half of 2019, an
84-kilowatt-hour battery pack is expected to be made available, giving our users more flexibility in choosing the battery
packs they desire based on their specific needs. Our ESS is high-capacity and has industry-leading thermal management
technology and a safety structure design. In addition, our ESS is equipped with a state-of-the-art battery management system,
a high-efficiency liquid-cooled design and swapping technology to achieve long-lasting, stable and new energy solutions. In
particular, our battery management system provides real-time monitoring of the vehicle insulation status, a comprehensive
fault diagnosis mechanism to ensure the safety and reliability of battery pack use. We are able to upgrade the software of
our battery management units and cell supervising circuits and switch-boxes through FOTA updates. We conduct extensive
testing to ensure safety, performance, durability and reliability. We also possess the module capability of prismatic, pouch
and cylindrical cells, with a planned annual production capacity of over seven gigawatts per hour.
Our advanced VIS includes
a vehicle control unit, or VCU, electric vehicle controller and ADAS system. A VCU is an intelligent controller, which can control
the torque output according to different driver behavior and control region torque according to best energy recovery. The vehicle
control system’s network architecture also takes into account functional safety and network security. The intelligent high-
and low-voltage energy management system can monitor and adjust the optimized pure electric cruising range in real time and the
adaptive cruise control system, or ACC, automatic parking and other functions can meet the requirements of automatic assisted driving.
Our VCUs and ADAS have passed software testing and vehicle calibration and verification, thus bringing a new experience of smart
and safe driving.
Immersive
Experiences Powered by Artificial Intelligence
Our digital cockpit
is an AI driven, scalable and flexible architecture that presents the user with an intelligent and immersive interface which provides,
we believe, an industry leading integrated user experience. Each of the ES8 and the ES6 uses NVIDIA DRIVETM for its in-car digital
cockpit. It adopts a single highly advanced proprietary controller, supporting a flexible multiple-operating system environment
running Android, QNX, and Linux. This in-cabin technology enables a unified user experience across all four interior displays and
advanced user interaction through our AI connected assistant, NOMI.
NOMI is designed to
be one of the most advanced AI systems in a production vehicle and through NOMI we aim to revolutionize the relationship between
users and their vehicles. NOMI learns users’ habits and interests through deep learning algorithms in order to meet their
individual needs under different circumstances. We have built flexibility into our system which will allow for new functions and
applications to be added through future software updates.
Vehicle
Control and Connectivity
Our vehicles are equipped
with our proprietary software and hardware, enabling us to control the vehicles’ ECU and BCU modules, including core electric
powertrain control software, which allows for an integrated and optimized control over vehicle performance.
We are one of the first
automobile manufacturers in China that have both the FOTA and the software over-the-air capabilities. Our FOTA firmware management
technology will allow the operating firmware of ECUs in vehicles to be wirelessly updated and upgraded. The vehicle will be connected
to our information cloud at all times, and when there is a firmware or software update available, our cloud will push an update
message to the vehicle which triggers an update. Upgrades will be wirelessly downloaded to the vehicle, installed, and launched,
including updates for firmware, software, operating systems and applications. FOTA updates will enable us to upgrade the operating
firmware down to the individual programmable ECU level across the vehicle’s core systems, such as powertrain and ADAS. Since
we began to make deliveries of the seven-seater ES8 in June 2018, we have completed over ten FOTA updates, improving more than
200 features.
We expect this technology
will allow us to fix bugs and remotely install new features and services after a vehicle has already been delivered to customers.
As a result, we expect to be able to reduce the cost and time of marketing new feature roll-outs.
Our proprietary software
leverages Linux, QNX and Android systems and control systems such as the central digital cockpit, connected gateway, ADAS and cyber
security systems. We believe our highly-integrated design allows us to reduce the development time and cost of new technologies
and creates an upgradable and flexible system for our next generation of products. The ES8 and the ES6’s smart data router,
or SDR, has, we believe, industry leading connectivity and remote service capabilities with a comprehensive end-to-end security
framework. The SDR enables a superior driver experience by tracking vehicle settings, user preferences and offering instant remote
vehicle diagnostics with respect to faults, alerts and logs to our service and maintenance team. The SDR’s high speed Ethernet
accelerates our autonomous driving development by uploading relevant video and driving metadata. The SDR also offers a completely
integrated vehicle security system enabled by a firewall, an intrusion detection system and machine learning for continuous improvement.
Autonomous
Driving
The ES8 and ES6’s
ADAS system is built for advanced processing and learning capabilities.
Our ES8 and ES6 are
equipped with NIO Pilot, a comprehensive enhanced Level 2 ADAS system that will update with new features over time through high-speed
FOTA updates. The ES8 is the world’s first vehicle to come equipped with the Mobileye’s EyeQ
®
4 ADAS
processor. The NIO Pilot hardware consists of 23 sensors, including a front-facing trifocal camera, four exterior surround cameras,
five millimeter-wave radars, 12 ultrasonic sensors, and an interior driver monitor camera. Our multi-sensor ADAS solution has a
reaction time that is many times faster than the average human reaction time.
NIO Pilot also has
a built-in algorithm that we expect to source driving data across the entire vehicle fleet of ES8s and ES6s. This allows us to
accelerate the enhancement of autonomous driving solutions, without materially impacting driver safety or vehicle operation, before
activating these features for users. Our autonomous and assisted driving algorithm development is accelerated by our smart data
management system which flags and uploads unusual events (false positives and negative events as well as corner cases) for in-house
analysis. We anticipate that as we increase the scale of business and more of our vehicles are on the road, this functionality
will enable us to validate algorithms against millions of miles of empirical data in a short period of time.
We plan to roll
out our ADAS features through FOTA updates after undergoing a rigorous and thorough testing of the features. We have
successfully realized various features for NIO Pilot, including front collision warning and automatic emergency braking, park
assist, automatic high-beam control, lane changing assistance, lane departure warning, blind spot detection, rear
cross-traffic alert, door opening warning. We are currently further testing these features to ensure safety and smoothness,
and will roll out these features in the future. NIO Pilot features under development include: (i) active ADAS features, such
as adaptive cruise control, traffic jam pilot, and highway autopilot for lateral and longitudinal support in certain
conditions; (ii) driving support, including automatic lane keeping assistance, automatic lane change, automatic park
assistance, and traffic sign recognition; and (iii) alerts and warnings, including front cross-traffic alerts and side
distance indication. We plan to roll out the primary functions of the adaptive cruise control system through FOTA updates
first in the second quarter of 2019 and the remaining ADAS features described above by the end of 2019.
We have established
autonomous driving research and development centers in Shanghai and San Jose. As of December 31, 2018, we had 233 full-time specialized
engineers carrying out smart driving system technology projects, such as custom production hardware and sensors, environment awareness,
data fusion, route planning, vehicle control, deep learning and car networking, with the aim of developing an intelligent driving
system for electric vehicles.
In July 2016, our self-driving
car completed a start-function test at the National Autonomous Vehicle Testing Center in Shanghai. The test was intended to improve
reliability, detection accuracy, and application scenarios through the deployment of a sensor configuration scheme suitable for
mass production, multi-sensor data fusion and target detection tracking technology.
In October 2016, we
obtained an autonomous vehicle testing permit issued by the State of California and became among the first group of businesses
to obtain such a permit. In March 2018, we were in the first batch of companies to obtain a Shanghai Intelligent Connected Vehicle
Test Permit to test seventeen items including, among others, obstacles identification and response and automatic emergency braking
on the testing roads, traffic sign recognition and lane keeping systems in the testing roads. In April 2018, we were in the first
batch of companies to obtain a Beijing Autonomous Driving Test License, to test various items including, among others, perception
and compliance with traffic regulations, emergency reaction and manual intervention and integrated driving ability on testing roads.
In December 2016, we
established a cross-functional team for ADAS system management with core members from project management, autonomous driving development,
supply chain, product quality, product planning, manufacturing, logistics and finance. Our ADAS system management team is committed
to deploying technology to products tailored for the Chinese market. It collaborates closely with vehicle integration, electric
architecture and other engineering teams to ensure successful product rollout.
In February 2017, we
set a world record by completing the fastest autonomous lap at the Circuit of the Americas Race Track in Austin, Texas. The NIO
EP9 drove autonomously without any interventions, recording a time of two minutes 40.33 seconds at a top speed of 160 mph.
Cloud
Data Platform and Integrated Vehicle Security Solution
Our cloud data platform
stores vehicle, sensor and user data in a single data lake to minimize data duplication and cost. We can easily access fleet level
data and analytics for diagnostic purposes and autonomous driving development. The NIO cloud data platform is designed to enable
rapid development and deployment of new applications across fleet and users.
While other OEMs must
use multiple vendors to build their security solutions, we have one comprehensive end-to-end security framework. Our integrated
security framework protects vehicle data from end-of-assembly to end-of-life. All external and critical internal communications
are protected by on-the-fly encryption. Our cloud-based developer suite for maintenance and analytics enables us to continue improving
our security and stay ahead of future threats.
Worldwide
Research and Development Footprint
We have strategically
located our teams in locations where we believe we will have access to the best talent. Our global engineering office is located
at our Shanghai, China headquarters. Our vehicle design headquarters is in Munich, Germany and our software and autonomous driving
technology is designed and developed at our North American headquarters in San Jose in the United States. Our Formula E headquarters
and advanced vehicle concepts team are stationed across two United Kingdom offices in London and Oxford.
Shanghai
Our engineering research
and development headquarters is in Shanghai, where we had a team of 2,667 research and development personnel as of December 31,
2018. Our team in Shanghai coordinates between each of our other research and development teams globally while also focusing on
vehicle integration, electrical engineering and integration, body and interior engineering, chassis engineering and engineering
quality and support. In Shanghai we have an advanced research and development center, which provides comprehensive testing and
research and development services related to electric and smart vehicles, including vehicle integration, electric engineering and
integration, battery, motor, and electrical control, power management and charging devices, customer service and spare parts management.
More than half of the patents obtained globally by us originated from our team in Shanghai.
Silicon Valley
Our San Jose office,
located in the heart of Silicon Valley, is our North American headquarters and global advanced technology center. As of December
31, 2018, the San Jose team consisted of 640 employees, 62 of which are focused on vehicle engineering. We also have a smaller
studio in San Francisco with 16 employees focused on user experience and interface. Our teams in San Jose and San Francisco focus
on innovation in the areas of: autonomous systems, artificial intelligence, electric powertrain technology, digital systems, cloud
architecture, digital cockpit security, user experience, user interface and vehicle engineering.
Munich
Our Munich office is
primarily responsible for our product and brand design. As of December 31, 2018, in Munich we had a team with approximately 198
employees, 166 of which are focused on vehicle engineering, vehicle interior and exterior design, user experience and user interface
design, and brand design
.
United Kingdom
In the U.K. we have
a London office which is our performance product research and development center and our Formula E team headquarters. The office
is responsible for our cooperation with the FIA Formula E program and U.K. market operations. Our Centre for Innovation and Enterprise
is located at the Begbroke Science Park near Oxford and houses our performance program, advanced engineering group and Formula
E team technical offices. The Formula E team’s operational base is at Donington Park. We had 40 employees focused on vehicle
engineering in the U.K. as of December 31, 2018.
Vehicle Servicing and Warranty Terms
Service,
Service Centers and Service Vans
We currently provide
servicing both through authorized third party service centers and NIO service centers. both of which provide repair, maintenance
and bodywork services. For our NIO service centers, we hire qualified employees to provide customer services of high quality. We
conduct professional training and tests to our employees. We typically lease the premises used for our NIO service centers. As
of December 31, 2018, we had 13 NIO service centers across 11 cities, including Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing, Suzhou, Chengdu, Xi’an, Shijiazhuang, Tianjin and Wuhan.
For authorized third
party service centers, we have a network management team to carefully select and bring authorized service centers into our network.
Our team selects service centers based on the following criteria: (i) capability of repairing the aluminum alloy body of our vehicles;
(ii) experience with servicing high-end branded vehicles, as these typically have more complex features requiring more technical
training which would also be useful in servicing our vehicles; and (iii) service-related operational capabilities as determined
by our field team during on-site inspections. We enter into agreements with the service centers, pursuant to which a service center
first becomes a candidate. Following the purchase of certain required equipment by the candidate service center, including diagnostic
equipment and tools and training by our staff, we conduct a review and provided that the review is successful, we certify the service
center as an authorized center which will be available to our users through our mobile application. As of December 31, 2018, we
had 78 authorized service centers across 60 cities, including Beijing, Shanghai, Shenzhen, Chengdu, Hefei, Hangzhou, Wuhan, Nanjing,
Suzhou and Guangzhou.
By December 31, 2018,
we have deployed 110 service vans in 78 cities which we selected based on user demand. We also plan to increase coverage thereafter
based on user demand.
New
Vehicle Limited Warranty Policy
For the initial owner
of the ES8 and ES6, we are providing an extended warranty subject to certain conditions, including, among others, that the extended
warranty only applies for the original owner of the vehicle and not for any subsequent buyers of the vehicle; the user must service
the vehicle only with us or one of our authorized service centers; and the vehicle must not have experienced any major accident.
As required under relevant PRC law, we also provide (i) a bumper to bumper three-year or 120,000-km warranty, (ii) for critical
EV components (battery pack, electrical motors, power electrical unit and vehicle control unit), an eight-year or 120,000-km warranty,
and (iii) a two-year or 50,000-km warranty covering vehicle repair, replacement and refund. See “Item 3. Key Information—D.
Risk Factors—Risks Related to Our Business and Industry—Our warranty reserves may be insufficient to cover future warranty
claims which could adversely affect our financial performance.”
User Development and Branding
User
Development
We aim to engage with
users and create an environment conducive for user interaction both online and offline. Our mobile application had over 760,000
registered users as of December 31, 2018 and over 190,000 daily active users on peak days in 2018.
Mobile Application
Our mobile application,
the NIO App, is designed to be a portal not only for selling cars where users can make reservations for the ES8 and ES6 and, in
the future, our other vehicles, but also for accessing our other services, including those under our energy package and service
package.
The layout of products
offered on our mobile application is designed to be intuitive and easy to use. Our mobile application allows customers to order
an ES8 and ES6 and easily check the latest status of an order. Users can also use our mobile application to find charging stations
or arrange for charging or battery swap services through NIO Power. Users are also able to monitor battery and charging status
using our mobile application.
In order to foster
community building, our mobile application allows our users to engage with other users through moment sharing and users can shop
for our merchandise and earn NIO Credits (as described below). We also notify users of our events through our mobile application.
Our mobile application
also has our product information and information on locations of NIO Houses. Customers can also shop in our online shop for items,
such as NIO apparel, accessories, games and children’s items. Using the friend function, our customers can connect with other
NIO customers. Our mobile application also keeps our users updated on our latest announcements and activities.
NIO House
We aim to provide our
users with experiences that go beyond the car with our NIO Houses. NIO Houses are intended to function not just as showrooms for
our vehicles and services, but also as a living space for our customers and their friends. Potential users can browse our cars
and products and go for test drives and interact with our team of user development specialists. If a new user decides to purchase
a car, our team walks them through the process and assists the user in completing his or her order through our mobile application.
In November 2017 we
opened our first NIO House in Beijing, and as of December 31, 2018 had 13 NIO Houses in total, two in Shanghai, two in Beijing,
and one in each of Nanjing, Guangzhou, Shenzhen, Hangzhou, Suzhou, Chengdu, Xi’an, Hefei and Dongguan.
The first NIO House,
which occupies over 32,000 square feet, has two floors and seven main areas and is Beijing’s largest brand experience center.
The features and design of each NIO House may vary based on what we believe to be user preferences in the relevant city or area
and we may include larger flagship NIO Houses as well as other types, such as NIO House “light” in smaller cities and
pop-up NIO Houses. Each NIO House features a gallery showcasing our brand and products, and may also feature a lounge for our users
to relax and socialize, forums which consist of a theater and which we intend to be a place for gatherings, meetings or presentations,
“labs” which are bookable meeting rooms and workspaces, a library, an open kitchen and a kids joy camp. Although we
charge (through cash or NIO Credits) small amounts for the use of certain services at NIO Houses or for certain items, we mainly
intend to use NIO Houses to support our vehicle sales and user development activities.
Branding
We focus on promoting
awareness of our brand generally and in particular as a premium brand with high-quality vehicles and services in China. We aim
to engage in cost-effective branding activities taking advantage of social media and to build an online and offline ecosystem of
users that will promote awareness of our brand. To a lesser extent, we engage in limited mass-marketing, such as through billboard
advertising in airports. Our branding efforts include the following:
NIO Day
We held our first “NIO
Day” in December 2017 at the Beijing Wukesong Arena, where we introduced the seven-seater ES8. We launched our second volume
manufactured electric vehicle, the ES6, to the public on our second “NIO Day” in December 2018. We plan to hold NIO
Day each year on which we introduce our new vehicles and products to users. Our first two NIO Days consisted of presentations by
our Chief Executive Officer, Bin Li, who introduced our ES8 and ES6, respectively. The second NIO Day had 150 million views and
produced a significant increase in our social media followers, as well as over 5,500 Chinese media reports. We believe that NIO
Day gives us an opportunity to interact with our current and prospective users while providing us with more publicity and brand
awareness.
Formula E
We have a Formula E
team, which is a racing team that competes in the Fédération Internationale de l’Automobile, or FIA, Formula
E championship electric racing series, which helps increase brand awareness. We were the title sponsor for the Drivers’ Championship
winning team in the inaugural FIA Formula E season in 2015.
EP9
Our development of
the EP9 was part of our brand-building efforts. Through its achievements it brings attention to our capabilities and to our brand.
The EP9 is an electric two-seat sports car developed by us. The EP9 has four high-performance inboard motors and four individual
gearboxes, the EP9 delivers 1 megawatt of power, equivalent to 1,360PS. The EP9 accelerates from zero to 200 kph in 7.1 seconds
and has a top speed of 313 kph. With an interchangeable battery system, the EP9 is designed to be charged in 45 minutes. The EP9
achieved a new lap record at the Nürburgring Nordschliefe where on October 12, 2016, the EP9 lapped the 20.8 km ‘Green
Hell’ track in 7 minutes and 5.12 seconds, beating the previous electric vehicle lap record held, marking it out as one of
the fastest electric cars in the world. On May 12, 2017, the EP9 lapped the 20.8 km ‘Green Hell’ track in 6 minutes
and 45.90 seconds, breaking its own record. Previously, in November 2016, it had set a new electric vehicle record at Circuit Paul
Ricard in France, recording a time of 1 minute 52.78 seconds, surpassing the previous record of 2 minutes and 40 seconds. We believe
these achievements, along with the media attention we have received, have boosted our reputation and awareness of our brand.
Other Branding Activities
We also
participate in events, including displaying our cars and technology at automotive shows, such as Shanghai’s 17th
International Automobile Industry Exhibition, where we unveiled the ES8 and showcased the EP9 as well as our vision concept
car, the NIO EVE. We also showcased the NIO EVE at the South by Southwest festival in Austin, Texas. We also conduct many
other smaller events at our NIO Houses. We also have NIO Life, which includes an online store where users, accessing
our mobile application, can purchase NIO merchandise, including NIO sweaters, miniature cars, phone cases, tote bags
and calendars, among others. Since we launched our online store in December, 2016, over 1,000,000 pieces of merchandise have
been sold or awarded to our users online and offline. We also provide users with NIO Credits to encourage user engagement and
for certain positive behavior, including a clean safety record for the year. NIO Credits are earned, among other things,
through frequent sign-ins to our mobile application, sharing articles from our mobile application on users’ own social
media, through a welcome package upon the purchase of a vehicle, and referrals of new vehicle purchasers. NIO Credits can be
used both at our online store and at our NIO Houses to purchase merchandise. As of December 31, 2018, approximately 119
million NIO Credits had been used in total.
Manufacturing, Supply Chain and Quality
Control
We view the manufacturers
and suppliers we work with as key partners in our vehicle development process. We aim to leverage our partners’ industry
expertise to ensure that each vehicle we produce meets our strict quality standards.
Manufacturing
Nanjing Advanced Manufacturing
Engineering Center
Our Nanjing Advanced
Manufacturing Technology and Engineering Center, or Nanjing AMTEC, houses our trial production, or pilot line, which is mainly
used to test engineering prototypes and is also used by our research and development department to develop and verify new processes,
materials and products. We believe that our use of this line advances production time by six months to eight months. All of our
new models are first tested at the Nanjing AMTEC. Nanjing AMTEC pilot line covers the three processes of bodywork, painting and
general assembly.
We also use Nanjing
AMTEC to train employees for the JAC-NIO manufacturing base.
Partnership
with JAC
We entered into an
arrangement with Jianghuai Automobile Group Co., Ltd., or JAC, for manufacturing the ES8 for five years starting from May 2016,
which may be renewed as agreed by JAC and us. JAC is a major state-owned automobile manufacturer in China, with a 50-year history
of automotive manufacturing and annual sales of nearly 700,000 vehicles, including passenger and commercial vehicles. JAC has
in-house development, manufacturing, and testing systems for new energy vehicles, and is an established player in China’s
new energy vehicle market. In addition, JAC has a joint venture partnership with Volkswagen for the manufacturing of electric
cars. We also expect our partnership with JAC will allow us to bring our vehicles to the market at an accelerated pace by taking
advantage of JAC’s capacity and through its capital investment and support. JAC has invested more than RMB2.2 billion to
the construction of a brand-new world-class factory for the production of the ES8 and potentially other future vehicles with us.
This factory has the capability of conducting stamping, welding, painting and assembly, and is equipped with testing tracks, a
quality inspection center and a utility power and sewage treatment center. Given its advances in new energy vehicle manufacturing,
JAC has contributed to our ability to bring the ES8 to the market more quickly and helps us to meet our production requirements.
We exercise significant
control in the manufacturing partnership with JAC to ensure high quality standards. We conduct product development, provide supply
chain systems, set production technique standards, and put in place quality management systems. We take a number of steps throughout
the entire manufacturing process to ensure that our vehicles are manufactured in accordance with our standards. These steps include:
(x) at the procurement stage, our being responsible for procuring all third-party components for our vehicles and applying our
quality assurance procedures with respect to suppliers; and (y) at the manufacturing stage, our taking additional measures, including:
(i) processing and owning the key tooling equipment, including stamping equipment, body connection equipment and inspection tools
at the factory; and (ii) our training certain key supervisory personnel at Nanjing AMTEC. We have implemented operational policies
and guidelines as well as quality inspection measures, conducting inspections of both parts and completed vehicles.
Pursuant to our agreement
with JAC, we pay JAC on a per-vehicle basis monthly for the first three years, which allows us greater cost flexibility as we ramp
up our operations. The factory covers an area of 138 acres. The factory has pressing facilities which include a high-speed, fully
automated, five-sequence pressing line. It uses fully automated operation, real-time monitoring and alarm connection parameters
to ensure reliable connection quality, while a total body laser detector is also equipped on the line to monitor the dimensional
accuracy of the vehicle body. The factory has state-of-the-art production facilities and techniques, and also applies environmentally
friendly techniques and uses renewable energy. Photovoltaic panels on top of the factory are expected to be installed to make use
of solar energy and ground-source heat pumps have been used in the assembly area to provide a temperate working environment. In
addition, we and JAC have put together a high-quality workforce, consisting of experienced management and supervisors from us and
JAC and thousands of front-line employees selected from JAC. Our employees at the factory take on key management and supervisory
roles in production, quality control and training. We believe that the manpower is sufficient for an annual production capacity
of 120,000 vehicles based on running three shifts per day.
Powertrain
and Battery Pack
We manufacture our
powertrain, or e-propulsion system, our battery pack and engine driving system. We established AMTEC, in Nanjing for pilot production,
motors and EDSs, Kunshan for inverters and Changshu for energy storage systems.
Nanjing AMTEC is located
in the Nanjing Economic and Technological Development Zone. Its first phase was completed in August 2016. Its plant and ancillary
facilities have a building area of 64,000 square meters and mainly produce motor and electric driving products with a planned capacity
to make up to 300,000 motors annually. It is equipped with an intelligent information management system which is able to trace
real-time performance of labor, equipment and materials, and technique parameters, quality and final products. Nanjing AMTEC has
advanced equipment sourced from reputable international suppliers, including ABB, DMG, and TRUMF.
A second phase of Nanjing
AMTEC is under construction, with planned production bases and power centers for PM motors, ESS, EDS and inverters, and additional
highly automated lines which are expected to be put into operation by the end of 2019. Meanwhile, Nanjing AMTEC has passed the
ISO 16949 audit, which audit is used to certify as to technical specification aimed at the development of a quality management
system prepared by the International Automotive Task Force and the “Technical Committee” of the International Organization
for Standardization.
In Changshu, we have
a joint venture with Zhengli Investment Co., Ltd. for the production of pure electric automobile energy storage systems for the
ES8. In Kunshan, we have our manufacturing base for inverters.
Our
Suppliers
We have a “global
brand, locally build” strategy where, to the extent practicable, we seek to partner with reputable international brands which
have operations in China. The ES8 and ES6 each uses over 1,700 purchased parts which we source from over 160 suppliers. The majority
of our supply base is located in China (including a significant portion of our suppliers which are global suppliers with a Chinese
footprint), which we believe is beneficial as it enables us to acquire supplies more quickly and reduces risk of delays related
to shipping and importing. We expect that as our scale increases we will be able to better take advantage of economies of scale
with respect to pricing.
We have developed close
relationships with several key suppliers. These include: Mobileye B.V., which provides its Mobileye EyeQ
®
4 ADAS
processor used in the ES8 and ES6; CATL, which provides battery cells used in the battery pack of the ES8; Continental, which provides
its air suspension system; Bosch, which provides its iBooster (vacuum-independent electromechanical brake booster, a key component
for electromobility and driver assistance systems) and ADAS hardware (sensors and radars) used in the ES8 and the ES6; Brembo,
which provides four-piston all-aluminum brake calipers used in the ES8 and the ES6; ThyssenKrupp, which provides steering systems;
and Novelis, which provides aluminum coils used in the aluminum body panel of the ES8 and the ES6. Our electric driving systems
and energy storage systems are developed in-house. We believe we have strong relationships with our suppliers. Despite our limited
operating history, many of our suppliers have been willing to support our business. For example, we believe we are one of the first
brands using the Bosch iBooster braking system in China.
We obtain systems,
components, raw materials, parts, manufacturing equipment and other supplies and services from suppliers which we believe to be
reputable and reliable. Similar to other global major automobile manufacturers, we follow our internal process to source suppliers
taking into account quality, cost and timing. We have a parts quality management team which is responsible for managing and ensuring
that supplies meet quality standards. Our quality standards are guided by industry standards, including AIAG (Automotive Industry
Action Group) APQP (Advanced Product Quality Planning) and PPAP (Production Part Approval Process) procedures, which were developed
by the U.S. automotive industry.
Our method for sourcing
suppliers depends on the nature of the supplies needed. For general parts which are widely available, we seek proposals from multiple
suppliers and choose based on quality and price competitiveness, among other factors. For parts requiring special designs, we solicit
design proposals and choose largely based on design-related factors. However, in certain cases we have limited choices given our
scale, such as for aluminum and battery cell packages, so in such circumstances we typically partner with suppliers that we believe
to be well-positioned to meet our needs.
We enter into strategic
framework agreements with key suppliers. These agreements typically cover the life cycle of a particular model of vehicle. We use
various raw materials in our business, including aluminum, steel, carbon fiber, other non-ferrous metals such as copper, as well
as cobalt. The prices for these raw materials fluctuate depending on market conditions and global demand for these materials. For
certain raw materials, such as aluminum, our pricing is set within pricing bands which shift with respect to market prices.
While we obtain components
from multiple sources whenever possible, similar to other automobile manufacturers, many of the components used in our vehicles
are purchased by us from a single source. Eventually we plan to implement a multi-source volume purchasing strategy in order to
reduce our reliance on sole source suppliers. We believe that will also help us to increase our ability to obtain quality components
with better cost competitiveness.
Quality
Assurance
We aim to deliver high-quality
products and services to our users in line with our core values and commitments. We believe that our quality assurance systems
are the key to ensuring the delivery of high-quality products and services, and to minimize waste and to maximize efficiency. We
strongly emphasize quality management across all business functions, including product development, manufacturing, supplier quality
management, procurement, charging solutions, user experience, servicing and logistics. Our quality management groups are responsible
for our overall quality strategy, quality systems and processes, quality culture, and general quality management implementation.
During product development,
many phases of testing vehicles are built to verify our design and production processes. For example, we built more than 250 ES8
testing vehicles in order to conduct a wide range of function and durability tests. The durability test runs for more than an aggregate
of three million km.
The ES8 is manufactured
at a new plant which is operated jointly by JAC and us with quality standards implemented by our team. All lines including stamping,
body-in-white, painting, and general assembly are developed in accordance with industry standards with a high degree of automation.
The manufacturing process performance failure mode effect analysis, control plans, and standard operation procedures are developed
and audited carefully by us. We apply advanced product quality planning (APQP), which is a framework of procedures and techniques
utilized in the global automotive industry, across all phases of product development and supplier quality management. Through our
factory automated system, we monitor manufacturing process parameters and parts information for process control and traceability.
Other
Partnerships
We have partnered with
other strategic partners including Baidu for its iQIYI online video streaming, search engine, and map data and technology; Tencent
for its Tencent Cloud; QQ music; and Keen Lab for NOMI text to speech function.
Certain Other Cooperation Arrangements
We have entered into
arrangements with Guangzhou Automobile Group Co., Ltd, or GAC, and Chongqing Changan Automobile Co Ltd, or Changan in order to
take advantage of market opportunities in the entry and mid-range segments of the Chinese EV market, reduce supply chain costs
through potential joint procurement and jointly conduct research and development activities. Any vehicles developed and sold under
these arrangements will be marketed and sold using GAC’s, Changan’s, or other jointly developed brands.
GAC
In April 2018,
(i) we, (ii) an entity associated with our founder Bin Li, Hubei Changjiang Weilai New Energy Industry Development Fund
Partnership (Limited Partnership), or NIO Capital, (iii) Guangqi New Energy Automobile Co., Ltd., and (iv) GAC, jointly
established a joint venture company, GAC-NIO New Energy Vehicle Technology Co., Ltd., or GAC JV, to mainly engage in electric
vehicle and parts development, sales and services. GAC is a Chinese state-owned automaker headquartered in Guangzhou,
Guangdong and listed on the Hong Kong Stock Exchange and the Shanghai Stock Exchange. Pursuant to the joint venture agreement
entered into on December 28, 2017, we have agreed to invest 22.5% of the registered capital of the joint venture and unless
otherwise unanimously approved by the board of directors of GAC JV, no dividend distribution will be made among shareholders
prior to a qualified initial public offering of GAC JV. The joint venture agreement is valid for 20 years and can be renewed
as agreed by the joint venture parties. The total registered capital of the joint venture is RMB500 million. With respect to
governance rights, the parties have agreed that the board of directors will have five directors, with one appointed by each
party and the remaining director appointed by all the parties together.
Changan
In January 2018, we
and Changan entered into a joint venture agreement and a supplemental agreement agreeing to set up a joint venture, Changan NIO
Renewable Automobile Co., Ltd., with a total registered capital of RMB98 million of which RMB49 million will be contributed by
us. Pursuant to the joint venture agreement, it is valid for 20 years and can be renewed as agreed by Changan and us. In July 2018,
Changan NIO Renewable Automobile Co., Ltd. was established. We expect to receive distribution of profits, if any, after deducting
required reserves, in proportion to the respective actual capital contributions to be made by Changan and us. Pursuant to the joint
venture agreement, “required reserves” include statutory reserve funds and surplus reserve funds. Under the Company
Law of the PRC, before a company distributes its after-tax profit for the current year, 10% of the profit must be allocated to
its statutory reserve funds, and the company is not required to do so once the cumulative amount of the statutory reserve funds
reach 50% or more of the company’s registered capital. If the statutory reserve funds of the company are not sufficient to
cover its losses in previous years, the company shall use the profit of the current year to cover the losses before accruing the
statutory reserve funds. After the company has accrued the statutory reserve funds from its after-tax profit, it may, subject to
its shareholders’ or the board’s decision, accrue certain discretionary reserve funds, including surplus reserve funds,
from the after-tax profit. Changan is a state-owned Chinese automaker headquartered in Chongqing, China and listed on the Shenzhen
Stock Exchange. The joint venture may provide services, such as design or development of vehicle or components, sales and after-sale
service, sales of automotive parts and EV-related technology services. Pursuant to the joint venture agreement, any vehicles produced
by the joint venture may use a Changan trademark and the joint venture will enter into a separate trademark license agreement with
Changan. With respect to governance rights, we and Changan have agreed that the board of directors will have five directors, with
two appointed by each party and the remaining director appointed by us and Changan together.
Sales and Delivery of Vehicles
We directly sell our
vehicles to users, which we believe allows us to provide a more consistent, differentiated and compelling user experience, compared
to the traditional franchised distribution model used by our competitors in China. Vehicle purchases are placed through our mobile
application, which provides an easy to follow and interactive vehicle shopping experience to our users. This also provides us with
real-time information on demand for our vehicles, allowing us to plan our production more efficiently and reducing inventory needs.
At our NIO Houses, users are able to purchase vehicles using our mobile application, assisted by our sales representatives at the
NIO Houses. Users purchasing outside of our NIO Houses typically purchase through our mobile application and use our hotline for
assistance with the purchase. We believe that our online and offline direct sales model is more cost-efficient by cutting out franchised
distribution costs as well as lowering the number of physical locations required and also allows us to expand our sales network
effectively and efficiently in China.
We have set up a vehicle
delivery center in cities including Shanghai, Beijing, Guangzhou, Shenzhen, Chengdu, Nanjing, Suzhou, Wuhan, Xi’an, Shijiazhuang
and Tianjin. Vehicles will be delivered to users at such centers.
Competition
Competition in the
automotive industry is intense and evolving. We believe the impact of new regulatory requirements for occupant safety and vehicle
emissions, technological advances in powertrain and consumer electronic components, and shifting customer needs and expectations
are causing the industry to evolve in the direction of electric-based vehicles. We believe the primary competitive factors in our
markets are:
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pricing;
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technological innovation;
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vehicle performance, quality and safety;
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service and charging options;
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user experience;
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design and styling; and
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manufacturing efficiency.
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The China automotive
market is generally competitive. We have strategically entered into this market in the premium EV segment in which there is limited
competition relative to other segments. However, we expect this segment will become more competitive in the future. We also expect
that we will compete with international competitors, including Tesla. Our vehicles also compete with ICE vehicles in the premium
segment. Given the quality and performance of the ES8 and the ES6, and their attractive pricing, we believe that we are strategically
positioned in China’s premium electric vehicle market.
Intellectual Property
We have significant
capabilities in the areas of vehicle engineering, development and design. As a result, we have developed a number of proprietary
systems and technologies. As a result, our success depends, at least in part, on our ability to protect our core technology and
intellectual property. To accomplish this, we rely on a combination of patents, patent applications and trade secrets, including
employee and third-party nondisclosure agreements, copyright laws, trademarks, intellectual property licenses and other contractual
rights to establish and protect our proprietary rights in our technology. As of February 28, 2019, we had 1,535 issued patents
and 2,594 pending patent applications, 1,829 registered trademarks and 2,084 pending trademark applications in the United States,
China, Europe and other jurisdictions. As of February 28, 2019, we also held or otherwise had the legal right to use 57 registered
copyrights for software or works of art and 441 registered domain names, including www.nio.io. We intend to continue to file additional
patent applications with respect to our technology.
Regulation
This section sets forth
a summary of the most significant rules and regulations that affect our business activities in China.
Regulations and Approvals Covering
the Manufacturing of Pure Electric Passenger Vehicles
The NDRC promulgated
the
Provisions on Administration of Investment in Automobile Industry, or the Investment Provisions,
which became effective
on January 10, 2019. According to the Investment Provisions, enterprises are encouraged to, through equity investment and cooperation
in production capacity, enter into strategic cooperation relationship, carry out joint research and development of products, organize
manufacturing activities jointly and increase industrial concentration. The advantageous resources in production, high learning,
research, application and other areas shall be integrated and core enterprises in automobile industry shall be propelled to form
industrial alliance and industrial consortium.
According to the
Regulations
on the Administration of Newly Established Pure Electric Passenger Vehicle Enterprises
, or the New Electric Passenger Vehicle
Enterprise Regulations, which became effective on July 10, 2015, before our vehicles (including our current vehicles manufactured
in cooperation with JAC) can be added to the
Announcement of Vehicle Manufacturers and Products,
or the Manufacturers and
Products Announcement, issued by the MIIT, a procedure that is required in order for our vehicles to be approved for manufacture
and sale in China, our vehicles must meet the applicable requirements set forth in relevant laws and regulations. Such relevant
laws and regulations include, among others, the
Administrative Rules on the Admission of New Energy Vehicle Manufacturers and
Products
, or the MIIT Admission Rules, which became effective on July 1, 2017, and the
Administrative Rules on the Admission
of Passenger Vehicles Manufacturer and Products
, which became effective on January 1, 2012, and pass the review by the MIIT.
Pure electric passenger vehicles that have entered into the Manufacturers and Products Announcement are required to undergo regular
inspection every three years by the MIIT so that the MIIT may determine whether the vehicles remain qualified to stay in the Manufacturers
and Products Announcement.
According to the MIIT
Admission Rules, in order for our vehicles to enter into the Manufacturers and Products Announcement, our vehicles must satisfy
certain conditions, including, among others, meeting certain standards set out therein, meeting other safety and technical requirements
specified by the MIIT, and passing inspections conducted by a state-recognized testing institution. Once such conditions for vehicles
are met and the application has been approved by the MIIT, the qualified vehicles are published in the Manufacturers and Products
Announcement by the MIIT. Where any new energy vehicle manufacturer manufactures or sells any model of a new energy vehicle without
the prior approval of the competent authorities, including being published in the Manufacturers and Products Announcement by the
MIIT, it may be subject to penalties, including fines, forfeiture of any illegally manufactured and sold vehicles and spare parts
and revocation of its business licenses.