NIO Challenging Tesla With BaaS (NYSE:NIO)

NIO (NYSE:NIO) is upping the battle with Tesla (TSLA) in China after rolling out its new BaaS services. China cut NEV subsidies back in April, and put a limit of 300,000 yuan on the subsidy, practically eliminating luxury manufacturers while forcing Tesla to become more conscientious of its pricing strategies. NIO, as a domestic manufacturer, has more state-backed support and, although still the smaller of the two, could find more success in the long run with its strategies stemming from Baas, which allow “lower initial purchase prices of our products, flexible battery upgrade options and assurance of battery performance”.

When announcing the NEV subsidies, China also stated that it would “support the sale of cars with swappable batteries, a technology that has been pursued by [Nio]”, giving it a leg up on Tesla in that regard. But the size of the vehicle market in China is huge, with “25 million vehicles, including 1.2 million NEVs” sold in 2019, but Tesla and NIO combined have not hit 100,000 deliveries, leaving huge room for potential growth.

NIO and upcoming IPO rival Xpeng (XPEV) are taking competitive pricing strategies to the max, pricing below Tesla for comparable models.

Tesla’s “China-made Model 3 sedans, meanwhile, are currently priced at [a median] 323,800 yuan before subsidies, meaning the U.S. electric car pioneer will have to reduce the price to qualify for the scheme.” However, the Model 3 can be purchased at a base of 291,800 yuan pre-subsidy (271,550 yuan after subsidy), meeting the 300,000 yuan criteria, while the long-range version costs 344,050 yuan. The Model X is tentatively priced at 772,900 yuan, the Model Y at 488,000 yuan, and the Model S at 756,900 yuan.

Xpeng’s P7 is more of the direct Model 3 rival and has been priced at 279,300 yuan before subsidies, while Tesla’s 271,550 yuan price tag is after subsidies. NIO’s ES6 and EC6, rivaling the Model Y, are priced at 358,000 yuan and 368,000 yuan at base before subsidy, respectively, far below the Model Y. The ES8, rivaling the Model X, is priced at 448,000 yuan.

NIO’s ES6

Even with the competitive pricing relative to Tesla, NIO has the upper-hand with the swappable battery technology that its cars implement, giving the higher end models NIO sells qualification for subsidies regardless of the price.

The new BaaS service that NIO recently announced will further enhance the competitive pricing as well as pass those benefits on to the consumers. With the service, customers “subscribe to use the 70 kWh battery pack under the BaaS model, [and] they can enjoy the vehicle purchase price with a 70K renminbi deduction off the original price and pay a monthly subscription fee of 980 renminbi for the battery pack.” That effectively brings the base price of the ES6 to 288,000 yuan before subsidy, or 273,600 after subsidy, putting what would be a Model Y rival on price with a Model 3.

NIO has already started to show signs of success within the BaaS model – the company has already “deployed 143 battery swap stations across 64 cities in China, and completed over 800,000 battery swaps for our users.” For NIO, which is still only delivering just north of 10,000 vehicles per quarter, having the widespread acceptance of the battery swap, paired now with the BaaS, subsidies at any price, and a partnership with Guotai Junan International show that there is long-term sustainability of this model.

Meanwhile, Tesla, delivering north of 50,000 vehicles in China in the first half 2020, looks reluctant to change its pricing, after a squabble with Pinduoduo (PDD) during a recent promotion. Pinduoduo offered 5 random users a purchase price of 251,800 yuan (13.7% discount) if 10,000 users signed up for Yiauto. However, it seems as if no terms were set between Tesla and Pinduoduo, and that any sales outside of tesla.cn would not be endorsed by Tesla. Yet Tesla’s reaction to this shows that it is unlikely to lower prices of its vehicles, even as domestic Chinese manufacturers are competitively pricing further below.

Even so, there is one large risk – NIO is still smaller than Tesla as a domestic manufacturer from a delivery and manufacturing standpoint. Tesla’s Shanghai facility is expected to have annual production of 200,000 Model 3 which could cause deliveries to scale quicker in China, even with pricing challenges. NIO’s capacity is expected to be raised between 4,500 and 5,000 per month by September, and eventually up to 150,000 annually, but that still puts NIO behind Tesla. Even though NIO provides BaaS, subsidies for vehicles regardless of price, the auto industry is not too fluid, and Tesla could begin to capture a sizable part of the market earlier simply by having higher manufacturing capacity and higher delivery volumes.

The EV industry has much more room to grow. While Tesla has established itself as an outright leader, it doesn’t offer the same capabilities that NIO does or the same overall domestic reach in China. NIO (and Xpeng) are pricing their vehicles competitively towards Tesla’s, with pricing of the domestic manufacturers’ cheaper with subsidies; NIO’s prices are offset even more with the BaaS 70,000 yuan deduction as well as subsidy support at any price level due to swappable batteries. As NIO starts to scale up in deliveries, aggressive pricing as well as other benefits due to battery swapping can potentially give NIO an advantage over Tesla’s vehicles in the long-run, even as Tesla currently has the upper hand in terms of overall deliveries. With shares hovering near 52-week highs, a strong Q3 of deliveries and the BaaS could set the stock to new highs.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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