NIO Stock: European Expansion Meets Resistance

Even though it appears that NIO (NYSE:NIO) has managed to mitigate the downside that was caused by Beijing’s zero-Covid policy in recent months by reaching another record of deliveries in November, there are still several political and geopolitical risks that could materialize soon and undermine most of the company’s growth efforts. In the past, I’ve already explained several domestic issues that the company is facing, which make its stock uninvestable. To strengthen my thesis, this article will highlight the geopolitical challenges that the company is unlikely to overcome anytime soon, which could result in the inability of its business to become a truly global brand and make its stock even less attractive as an investment than before.

European Expansion Meets Local Competition

Last month I’ve already covered NIO’s recent earnings results, which were considered mixed at best. Even though the company managed to aggressively improve its top-line performance, the net losses have once again widened. At the same time, despite the fact that NIO recently announced that it delivered a record 14,178 vehicles in November, there are still questions about whether it would be able to achieve its goal of delivering 43,000 to 48,000 vehicles in Q4.

At the same time, as the company tries to mitigate domestic risks such as Beijing’s zero-Covid policy, it also continues to execute its ambition of becoming a global brand by aggressively expanding into other major countries such as Norway in 2021 and Germany in 2022.

From a business perspective, it makes sense for NIO to expand its global footprint by tackling the European market first. After all, Europe is already the second biggest EV market after China, and thanks to various green subsidies it’s expected to grow at a CAGR of 17.78% and be worth ~$340 billion by 2027. The latest data for October shows that the decrease in consumer confidence, the macroeconomic pressures, and the Russo-Ukrainian war, haven’t heavily affected Europe’s EV industry, which experienced a 14% Y/Y growth during the month as close to 211,000 plug-in vehicles were registered during the same period.

To scale its European expansion outside of Norway, NIO has recently announced that it’s about to enter the German, Swedish, Dutch, and Danish markets all at once. The problem is that NIO doesn’t have any major advantages that would differentiate it from others and help it gain an edge in foreign markets.

The biggest issue for NIO is that it doesn’t have any production facility in Europe, which means that it’s going to constantly be exposed to volatile freight rates that make it impossible for it to have any pricing advantages against the local competitors. Tesla (TSLA) has managed to solve this issue in part thanks to building its Gigafactory in Berlin, which helped it to compete with legacy automakers on equal terms. The problem is that NIO doesn’t have the resources, as Tesla’s Gigafactory costs nearly as much as NIO’s total current liquidity, nor the time to achieve Tesla-like results in Europe anytime soon since the majority of European legacy automakers are already electrifying their fleets.

If we take a look at prices, we’ll see that NIO’s lowest offering in Europe is a sedan ET5 that sells at €49,900, while its premiere models ET7 and EL7 are sold at €69,900 and €73,900, respectively. What’s also important to note is that those prices are for vehicles without batteries. For comparison, the leading European EVs Volkswagen’s (OTCPK:VWAGY) ID.4 GTX and Tesla’s Model 3 are sold in Germany at around €54,000 and €53,000, respectively, with batteries. In addition, the average price of EVs in Europe this year is expected to be ~$62,000, which is below the prices of NIO’s two premium flagship models.

Therefore, it’s safe to assume that it’s unlikely that NIO would be able to significantly scale its market share in the region as its vehicles don’t offer anything unique that would’ve made consumers choose them against the local competition. The truth is that unlike China, where the growth opportunities for electric vehicle makers are relatively endless due to the fact that the country didn’t have an automotive industry in the past and was relying on imports to fill its automotive needs, Europe is a completely different market with lots of legacy competitors, who have already electrified their fleets. As a result, I don’t expect the sales that come from the European region to meaningfully impact the company’s financials anytime soon.

The Upcoming Sino-European Confrontation

In addition to the lack of competitive advantages in the European region, NIO could also become a casualty of the Sino-European confrontation. While a decade ago, the EU and China drafted a free trade agreement called the Comprehensive Agreement on Investment, they haven’t signed it to this day. Over the last few years, the relationships between both parties have worsened due to various economic and political disagreements that made the signing of the agreement impossible anytime soon.

In addition to that, some European officials already admit that China has now become a systemic rival of the European Union, while the EU Commission recently requested two WTO panels against Beijing over the restrictions on Lithuanian exports and the inability of private companies to protect their patents in non-Chinese courts. Both of those developments indicate that it’s unlikely that the relations between the two parties improve anytime soon.

What’s worse for NIO is that the European Union has major leverage against China in the automotive industry. While China imposes a 15% to 25% tariff on the imports of European vehicles, the European Union imposes only a 10% tariff on Chinese vehicle imports. In case of a further confrontation, Brussels could effectively diminish NIO’s already relatively weak position on the European EV market even more by raising the tariffs and leaving the company with even fewer options to improve its pricing strategy in the region and diminishing its overall global ambitions.

The Bottom Line

The major problem for NIO is that the strong competition from European legacy automakers coupled with the worsening of Sino-European relations are creating an environment in which it would be hard for the company to compete on equal terms with others going forward. Add to this the fact that NIO’s pricing advantage on the old continent is almost non-existent due to the lack of its own production factory there along with the exposure to volatile freight rates and it becomes obvious that its global ambitions could be under a threat. Even though it makes sense for the company to expand to Europe due to it being the second biggest EV market in the world, it appears that it would be able to achieve decent success in China only.

The problem is that investing in China for non-Chinese nationals has become a risky endeavor due to Beijing’s decision to strengthen its grip over the domestic private sector, which resulted in record capital outflow from the country. Therefore, I continue to believe that China under Xi Jinping has become uninvestable, and buying NIO’s stock at this stage is not on my list given the number of internal and external challenges that its business is facing.