Summary
- NIO will face significant challenges as it aims to conquer the European EV market.
- Competition from legacy automakers along with the lack of a manufacturing facility in the region is something that investors should consider.
- The political risk is also one of the main reasons why it’s better not to overexpose your portfolio to Chinese stocks despite their growth potential.
NIO Inc. (NYSE:NIO) has made great progress in developing and getting into the market its flagship electric SUVs such as ES6, ES8, and EC6. As I've mentioned in my latest article on the company, the automaker has a great opportunity to continue to expand within China and become one of the most dominant EV brands in the region. At the same time, I have also mentioned that it's unlikely that NIO will become a truly global brand anytime soon. The problem is that the company doesn't have a solid foothold neither in the United States nor in Europe, which is the second-biggest EV market in the world. Given the increasing competition in Europe, primarily from legacy automakers, which aim at becoming solely electric brands in the future, the possibility for NIO of establishing a decent presence there decreases every day.
It doesn't mean that the company won't grow, though. The reality is that the Chinese EV market is big enough for dozens if not hundreds of EVs to succeed, as it continues to grow at an aggressive rate. However, there are certain challenges outside China which NIO is likely not going to address in time, and it will lose the opportunity to become a dominant brand outside the mainland. That's why in this article I will mostly outline the challenges that NIO faces as it aims to conquer Europe.
Considering this, I still own NIO's shares for the near term due to its broad exposure to the Chinese EV market, but I don't see how it will be able to successfully expand to the outer world anytime soon. At the same time, my position is minimal in comparison to other assets that I own primarily due to the political risks of owning Chinese stocks at this stage.
The Pressure Is Real
Currently, the European EV market is the second biggest EV market in the world after China. In the coming years, it's expected to grow annually at ~40% and worth around $855 billion by 2028. Given such an attractive growth rate, it makes sense for Chinese EV brands such as NIO to try to establish a solid foothold in such a market. The company has already stated that it plans to become a global brand, so Europe seems to be the perfect place to achieve its goals, especially since NIO has already started to slowly expand there. However, despite its attractiveness, the expansion into the European EV market is likely going to become a major challenge for NIO.
Currently, NIO only sells its flagship electric SUV ES8 in Norway in small quantities. While it tries to copy Tesla's (TSLA) strategy in the region, the changing market environment is not going to be favorable to it as was the case with its American counterpart a few years ago. According to NIO's 2025 goal roadmap, the company plans to enter four new European markets this year and reach 25 countries in the following years.
The problem with this is that as NIO slowly expands, its competitors, primarily legacy manufacturers who are quickly developing their own EVs, already captured a large chunk of the market in the last couple of years and will only extend their lead over newcomers in the long run. Tesla, Peugeot, and Renault already sell dozens of thousands of their EVs in the region, while Volkswagen (OTCPK:VWAGY) is already planning to debut a $25,000 EV in 2025.
Considering this, NIO won't be able to quickly expand in Europe due to the increased competition and a lack of solid foothold there. In addition, the company has no real advantages at this stage that could've helped it to gain some edge on the continent. First of all, NIO continues to outsource the production of its vehicles to a third party in China and won't have any manufacturing facility in Europe anytime soon. As a result, the increased shipping costs in comparison to its European competitors are going to be one of the major disadvantages of NIO in Europe.
On top of that, the supply chain disruptions that are caused by the Russian invasion of Ukraine and the resurgence of Covid-19 in China are only making all things worse for NIO. Just recently, the company announced that its deliveries in April were already down ~50% M/M, and if supply chains are not repaired soon, then there's a risk that the company won't be able to expand into four new European countries this year at all.
Tesla had similar issues in the past. It tackled them only byinvesting€4 billion into the development of Gigafactory Berlin, which made it easier for the company to avoid losing its dominant position in Europe due to the global instability. Given the fact that NIO currently has slightly over $8 billion in liquidity, it's unlikely that the company will have its own manufacturing facility in Europe. Therefore, it will make it extremely hard for it to compete with legacy automakers and established competitors in the second-biggest EV market in the world.
The Bottom Line
Despite creating decent EVs, NIO at this stage is able to significantly scale its business only in China. While it has ambitious plans to expand worldwide, so far, it has managed to sell only a small quantity of ES8s in Norway. At the same time, there's a risk that supply chain disruptions could prevent it from expanding to other European countries this year. In addition, the lack of manufacturing facilities in Europe makes it hard to establish a solid foothold in the region and compete with legacy automakers. The latest China-EU summit showed that there's not much enthusiasm between the two parties regarding the signing of the free trade agreement, which has been in the works for years, so Chinese businesses are unlikely to gain favorable trading terms within the European Union in the foreseeable future.