From November 21st and 29th respectively, cooperating with the national brand Changan Automobile and private giant Geely Holding to layout battery swapping, to December 5th delivering a satisfactory third quarter performance to the market, NIO (NYSE: NIO; HKEX: 9866) has not stopped its pace. There are reports that NIO has also obtained the qualification for independent car manufacturing.
On the day of the financial report release, NIO's US stock market experienced a sharp rise before trading, with a rise of over 8% at one point. On the 6th, NIO Hong Kong stocks continued their upward trend at the opening, rising more than 5% during the day and closing up 4.87%.
In less than half a month, NIO has launched a sharp "combination punch" that has caught the attention of the market. After all, more than a month ago, NIO was still in a state of questioning. The fast pace of transition is truly overwhelming.
Why can NIO make consecutive moves in a short period of time? What is the underlying logic behind this?
Exciting third quarter report
Here, let's first take a look at how NIO's latest quarterly report satisfies the market. This intelligent electric vehicle brand achieved a revenue of 19.07 billion yuan in the third quarter, a significant increase compared to the previous quarter, with a month on month increase of 117.4% and a year-on-year increase of 46.6%, both reaching historic highs.
More importantly, as a group of new energy vehicle companies engaged in a "price war" that harmed their own profitability, NIO maintained a basic stability in its pricing system, with a significant increase in gross profit margin in the third quarter. Its comprehensive gross profit margin increased from 1% in the second quarter to 8%, while the automotive gross profit margin rose to 11.0%, an increase of 4.8 percentage points compared to the previous quarter.
In the industry, this profit level has actually returned to the upstream level.
The increase in gross profit margin has narrowed losses. The net loss for the third quarter was 4.557 billion yuan, a decrease of 24.8% compared to the second quarter. In terms of R&D investment, NIO's R&D investment in the third quarter was 3.04 billion yuan, although slightly lower than the second quarter, the magnitude is not significant, and it has exceeded 3 billion yuan for four consecutive quarters. It is not easy to narrow losses while R&D investment has not weakened.
In the industry's view, the improvement of profitability actually has two "assists". Firstly, due to the record high delivery volume in Q3, a total of 55432 new cars were delivered, a year-on-year increase of 75.4%, setting a record for the highest delivery in a single season. Secondly, it is closely related to NIO's insistence on not engaging in a price war, which has also been emphasized by Chairman Li Bin.
After all, the impact of price wars on the profitability of car companies is visible to the naked eye. Taking Tesla as an example, its consecutive price reductions in 2023 have resulted in its car gross profit margin dropping from 23.75% in the fourth quarter of last year to 15.75% in the third quarter of this year.
In addition, it must be mentioned that the overall price range of NIO models is actually the high-end market range with the lowest penetration of new energy, which is a blue ocean battlefield for domestic car companies.
According to a research report by Shenwan Hongyuan, the penetration rate of new energy in the price range of 300000 to 400000 yuan in 2022 was 26.6%. In the first seven months of 2023, due to the launch of a series of new cars priced above 300000 yuan, the penetration rate of new energy in this price range quickly climbed to 42.5%. In the price range of over 400000 yuan, the penetration rate of new energy in the first seven months of 2022/2023 was 24.1%/25.0%, which is currently the lowest penetration rate of new energy in the price range.
During a conference call, Li Bin, founder, chairman, and CEO of NIO, also mentioned a set of data: NIO had a market share of over 45% in the domestic electric vehicle market with a transaction price of over 300000 yuan in the third quarter, ranking first. In 2024, the conversion of fuel to electricity in the high-end market will accelerate, and NIO will therefore face greater market opportunities, after all, brand recognition has long been an important barrier for luxury cars.
On the balance sheet side, NIO can be said to have broken through previous rumors and maintained a high margin of safety. Data shows that at the end of the third quarter, its cash and cash equivalents, restricted cash, short-term investments, and long-term fixed deposits reached 45.2 billion yuan, a significant increase of 13.7 billion yuan compared to the previous quarter.
Of course, this is partly due to the optimism of external funds. In July of this year, Abu Dhabi investment firm CYVN completed a strategic investment of approximately $1.1 billion through targeted issuance of new shares and transfer of old shares. In addition, from September to October, NIO successfully issued a total of $1.15 billion in convertible senior bonds. The receipt of these two funds has greatly strengthened NIO's cash reserves and enabled NIO's "blood tank" to recover significantly.
NIO has been expanding its sales capabilities since the second half of this year, placing greater emphasis on building sales capabilities and expanding user touchpoints. It has also extended its capabilities to lower tier markets, including second - and third tier cities, effectively promoting sales growth. It is also understood that NIO is promoting "cost reduction and efficiency improvement" this year, with the aim of improving organizational and resource efficiency. This proactive "weight loss and muscle gain" approach has effectively strengthened NIO's overall operational health.
"Farewell to OEM" benefits long-term business efficiency
From the perspective of performance in the third quarter, the biggest highlight is the rebound in profitability, but this is clearly not enough. On the same day as the performance announcement, NIO is also expected to bid farewell to the "OEM model". How do you view this event?
The cooperation between NIO and JAC Motors began in 2016. But on October 19th this year, Jianghuai Automobile publicly listed and transferred some assets for 4.49 billion yuan, including two factories that were outsourced to NIO - Jianghuai NIO Advanced Manufacturing Base (NIO F1 Factory) and NIO Second Advanced Manufacturing Base (NIO F2 Factory). At that time, the industry generally believed that NIO would be the "successor" to these two factories.
Just as the third quarter report was released, news from the outside world was confirmed. NIO will take over Jianghuai's F1 and F2 factories for contract manufacturing at a total transaction price of 3.158 billion yuan, with a one-time payment. The importance of these two factories for NIO is self-evident.
For the F2 factory, NIO's description is that its most distinctive feature lies in breaking through the contradiction between traditional large-scale production and personalized customization. It has introduced multiple world leading fully automated intelligent equipment and high flexibility production manufacturing processes into the production workshop. With nearly 3.6 million personalized configuration combinations, it only takes 14 days from user orders to vehicle production, and is known as the "model factory of the new generation of intelligent automobile manufacturing".
In fact, NIO was originally a staunch supporter of contract manufacturing. Why choose to invest heavily in buying the factory at this time? After all, 3.158 billion is not a small amount and requires a one-time payment.
Indeed, in the industry, NIO's early commitment to contract manufacturing was seen as a win-win situation. As an innovative company, NIO has limited funds and resources, so it is very important to make reasonable choices. Secondly, Jianghuai has mature production and manufacturing experience, and is willing to follow NIO's processes and process standards.
In fact, this is also a necessary path for many start-up car companies.
But as the sales scale expands, the drawbacks of OEM will gradually become apparent, firstly, the quality is difficult to control; The second is being constrained by factors such as capacity expansion; Especially with the high cost of outsourcing.
According to NIO's previous annual report data, in addition to the production and processing fees for each vehicle, NIO also needs to pay Jianghuai for depreciation and amortization of related assets, purchased production materials, and related taxes. In addition, NIO will also pay some compensation for the investment in the F1 factory. The data shows that in 2020, 2021, and 2022, NIO paid 530 million yuan, 720 million yuan, and 1.13 billion yuan to Jianghuai, respectively.
"From a manufacturing perspective, if we completely manufacture independently, the manufacturing cost will decrease by 10%." During the conference call, although Li Bin did not directly respond to the issue of car manufacturing qualifications, he gave an expectation for cost reduction in independent car manufacturing. It is obvious that bidding farewell to "contract manufacturing" by NIO will be more conducive to cost control, help NIO achieve net profit correction as soon as possible, and benefit the long-term operation and efficiency improvement of the company.
Battery swapping open, a big game of chess
"From NIO's perspective, the battery swapping business is very similar to cloud services, with a strong network effect that requires long-term investment and construction. It needs to be fully verified and proven by oneself before it can be opened up to the outside world. After more than five years of operation, we believe it is time to open up," Li Bin said in a conference call about the recently highly anticipated "battery swapping open sharing" in the market.
As is well known, the battery swapping mode is one of NIO's core competitiveness. As of December 5th, NIO has accumulated 2226 battery swapping stations globally, including 694 domestic highway battery swapping stations, providing users with over 33.2 million battery swapping services. At least in the field of battery swapping, NIO has absolute say.
The battery swapping mode is also expected to be widely promoted. At the 2023 World Power Battery Conference, Vice Minister of Industry and Information Technology, Xin Guobin, stated that he is studying and formulating a battery swapping technology standard system to promote the standardization of battery swapping size, interface, communication protocol, and other standards. Recently, there have been reports that relevant departments have entered the inspection process for the national standards for battery swapping stations and have begun organizing the final review of industry standards for passenger car battery swapping.
And Chang'an and Geely's entry at this time is also quite subtle. On November 21st and 29th, NIO announced cooperation with the national team Changan Automobile and private enterprise giant Geely Holding in the field of battery swapping. In the industry's view, it reflects the country's push for a unified standard for battery swapping, with the aim of maximizing resource efficiency.
However, upon closer inspection of the cooperation models between Changan, Geely, and NIO, subtle differences can also be seen.
For the cooperation with Geely, according to the agreement, both parties will work together to create two major battery swapping standard systems, "private cars" and "commercial cars", through a "joint investment, joint construction, sharing, and joint operation" model, accelerate the connectivity and collaboration of the vehicle end, station end, battery end, and operation end, and expand the scale of the battery swapping network.
In other words, NIO's battery swapping model will shift from home C-end to operating both C-end and B-end simultaneously, officially transitioning from private domain exclusivity to the public service sector, which is precisely the key to achieving profitability and development.
For cooperation with Chang'an, more emphasis is placed on unifying battery packs, battery swapping systems, standards for swapping electric vehicle models, and battery assets. That is to say, both vehicle models will integrate battery swapping services, which means sharing battery swapping stations. "Starting next year, a shared battery swapping network will be built, which can be used by NIO and cooperative brand users. This will form two dedicated and shared battery swapping grids for NIO," Li Bin explained in a conference call.
In the industry's view, the cooperation between NIO and Changan in battery swapping will share the cost of battery swapping. If according to NIO's statement, there are still multiple car companies in talks, NIO Power will undoubtedly accelerate its opening up in the future, and its operating costs will also be effectively amortized.
More importantly, in Li Bin's view, the battery swapping model can be profitable in the long run, and we have already seen profit opportunities in certain regions. According to him, there are also investors interested in NIO Power's independent financing, and it is not ruled out that NIO Power will have independent financing.
Conclusion
At this point, looking back at NIO's recent major actions, it is not difficult to see that whether it is "independent car manufacturing" or "open battery swapping", it will have an undeniable impact on NIO - cost reduction. So in the long run, the future performance of NIO's income statement is worth looking forward to. Of course, this requires time to verify.
However, Li Bin did give important instructions on cost reduction: "NIO will make adjustments to projects that have not been profitable for three years or have not contributed to gross profit growth, such as battery production."
Of course, NIO still adheres to the principle of long-term investment in core technologies. This year, NIO has released the "NIO Technology Full Stack" that covers the panoramic view of its intelligent electric vehicle business. At the same time, NIO has also released leading technological achievements, including the first domestic vehicle wide operating system, SkyOS, the industry's first self-developed and mass-produced LiDAR main control chip, Yangzha, and the vehicle centered panoramic interconnection technology, NIO Link. This is also an important capital for NIO to adhere to high-end quality.
Next, NIO still has many cards to play in his hands. At the upcoming NIO Day 2023 on December 23, NIO will release a brand new flagship model. In Li Bin's words, this car is the culmination of NIO's technological innovation and will become a global benchmark for intelligent electric vehicles.
In addition, the second brand Alps has also made new progress, and it has recently completed the trial production of VB vehicles (Verification Build development and verification prototype). It is reported that Alps will separate sales but share some service networks. And Alps mainly targets the mid-range market, with direct competitors being products from brands such as Tesla, Toyota, and Volkswagen.
After these "combination punches" continue to be launched, NIO should further improve its overall performance. According to Li Bin's plan, NIO's gross profit margin for the fourth quarter of this year will also increase. "In 2024, there will be no product switching disrupting the sales rhythm, and NIO will be even better."
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