The reduction of carbon-emissions has become one of the priorities of green policies implemented by governments. For example, the Trump administration mainly supported oil and gas industries, however, the Biden administration is expected to pay more attention to green policies and in particular, to the energetic transition. Over the last decade, electric vehicles (EV) sales rose significantly, mainly due to advances in technology and government incentive policies. In fact, that trend can be clearly seen as “e-cars”, accounting for 2.6% of global car sales in 2019, recording a 40% increase year on year.
Global electric car stock, 2010-2019
In recent years, original equipment manufacturers (OEMs) have invested billions in electrification, from R&D to factory renewal. Moreover, customer attitudes have shifted towards a more sustainable mindset: according to the International Energy Agency (IEA), 1.1 billion new urban residents are expected to have created greater demand for e-mobility solutions by 2030.
Electrification is a trend that is going to grow, and one of the most important factors affecting it is the cost of batteries, which makes up to 57% of the total cost of a light-duty electric vehicle. Prices are decreasing due to several improvements in chemistry, R&D government investments and larger production capacities. Consequently, the forecasts suggest that battery costs could fall until being only 22% of total costs. Even the segment of high-duty vehicles has been positively impacted by the trend. According to BloombergNEF, electric buses – a growing category of high-duty – will reach almost 70% of the global fleet in groups of vehicles owned or leased by a business, government agency or other organization rather than by an individual or family. This will be mainly allowed by a lower total cost of ownership and government projects involving the electrification of public transportation.
In general, Goldman Sachs’ automotive expert team expects EV penetration to grow from 2% in 2019 to near 15% by 2030. Battery prices are declining and the cost of ownership of an EV has become very close to one of the traditional gasoline engines. Moreover, the cost of a traditional ICE engine has increased due to new restrictions on CO2 emissions, making EV even more economically attractive. Factors like incentives, a lower cost of ownership and the evolving trend of sustainability, generated an outflow of capital coming from small investors that caused a significant increase on stocks linked to electric cars, and a high growth of sales.
In this article there will be the description of the two most famous and iconic EV manufacturers: NIO and Tesla. These are two names that recently raised a lot of dust worldwide, both in the real economy and in the stock market.
Nio is a Shanghai-based premium EV carmaker, founded in 2014 by William Li. The company is specialized in manufacturing well-made and large battery-powered SUVs starting from $51k, reflecting vehicle preferences of their Chinese clients.
In 2019 Nio revenues were about $1.1 billion, delivering around 20,5k cars. The company’s main premium SUV vehicles are the ES8, ES6, and EC6 models, whose prices start at $50k and can reach a maximum range of 500 km with the ES8 model. Also, results from last quarter of 2020 were positive as the gross margin was 12.9%, compared with -12.1% in the third quarter of 2019 and 8.4% in the second quarter of 2020. Total revenues amounted to $666.6 million, stating an increase of 146.4% year-on-year and a 21.7% increase sequentially.
Nio reported deliveries for 43,728 cars last year, with a record-high of 7,225 vehicles just in January, corresponding to year-over-year growth of 352.1%. It was no big surprise though as the company put many efforts in boosting production in December. The car manufacturer not only had to periodically raise capital to survive, but also to maintain its strict links to the Chinese government, as it had invested about $1 billion in the company in April, with the objective to become a global green superpower. The demand of electric vehicles in China is likely to increase as it is favoured by the fact that the government has pledged that 25% of cars sold by 2025 must be new energy vehicles and not powered by fuel, petrol or diesel.
The main areas of innovation for Nio are battery technology and self-driving software, which are important factors that drive the stock. Nio has pulled on modular batteries for its vehicles and has adopted a subscription purchasing model. In other words, car-owners do not own the battery, but they lease it so that it can be easily changed when needed. Indeed, when the battery is low during a drive, it can be swapped out in a matter of minutes at one of NIO’s swap stations. The whole process of swapping a battery only lasts three minutes, and it is called Battery as a Service (BaaS).
This subscription model helps to solve the most common concerns people have for EVs: battery duration, time to charge batteries, and range anxiety. At the moment, Nio built around 150 swap stations, making this alternative more attractive for customers who are worried about the re-charging time of EV during long journeys. Also, the battery can be alternatively charged with electric energy at the charging stations. Still, in some locations – like Shanghai – where charging stations are still scarce, battery swaps are preferred.
This model is not likely to be a sustainable competitive advantage for NIO since China’s EV policy emboldens building in battery swapping. Actually, for certain electric vehicles with a price range of around $46,000, the State grants subsidies only if the company offers battery swapping. As recently unveiled, NIO will make a denser battery pack available by 2022 with a capacity of 150 kW, consisting of ultra-high energy density solid-state cells. However, it is also likely that other players will reach such a threshold by collaborating with suppliers such as CATL, which is the largest global producer of rechargeable cells for the plug-in vehicles.
Another major innovation of NIO has been discussed during its Nio Day event: the self-driving tech on its new sedan due in 2022 and its related monthly subscription program. The main characteristics are a bigger focus on hardware, such as high-resolution cameras, lidar sensors, and Nvidia processors. NIO’s main advantage that sets it apart from the competition in the self-driving sector are the quality of software and the availability of large amounts of data to better develop algorithms.
Despite the huge success of NIO and the relatively high-quality standards for which the company is well-known, the Chinese market is the biggest market worldwide for electric vehicles and it is characterized by strict competition. The other two main players are XPeng and Li Auto. Xpeng had registered strong delivery numbers for January 2021, while Li Auto still has to announce them. NIO has to deal with these two major competitors, as well as over 500 other electric vehicle manufacturers in China. Still, the company maintains its premium position in the market, showing record delivery.
To give an outlook of the future, rumour has it that NIO will be coming to Europe in 2021 and assume an opening of job positions, which will pose just another challenge, having to compete with German SUVs supremacy. Another aspect is that NIO has all necessary credentials to enlarge its lineup and its plan to announce a new model of cars by progressing each year, contributing to the rise of the demand for EV and, consequently, boosting sales. Overall, NIO has been growing really quickly, it has created brand affirmation in the luxury Chinese market of electric vehicles, and its valuation had an exponential growth. Going forward, the main challenges of the company will be to keep maintaining these high-quality standards while expanding the production to satisfy the massive demand.
Tesla was founded in 2003, with the aim of developing electric vehicles’ technology that would lead them to an even competition with their petrol-fuelled counterparts. The company started to become the one we admire today when one of the founders of PayPal, Elon Musk, joined as an investor and later became the CEO of the firm. The earliest production of the then-named “Tesla Motors” amounted to 2,500 Roadsters. In 2020, the company’s deliveries came just shy of the 500,000 units mark.
How could Tesla grow – along with its stock price – so quickly in a market that is crowded with long-established automakers?
The answer is that they changed the game, both through their cars and their software, with a business model that brought the company in direct contact with their customers. Tesla entered the automobile market with a sports car, followed by a luxurious sedan and a luxurious SUV. This strategy allowed them to slowly grow their capacity to meet the demand of a mass-scale vehicle. At the same time, this helped to create an aura of “luxurious elite technology” that still pervades the mind of everyone who thinks, sees, or purchases a car made by Musk’s company.
In order to scale up, Tesla decided to establish production sites, the “Gigafactories”, in strategic locations around the States and the world, with one factory in China, and one under construction in Germany – not by chance two of their biggest markets in the respective continents. All plants are fully automated, as human interaction would slow down the process. Tesla follows the idea that the production only gets as fast as its slowest step, which would be the one performed by human hands. Instead, the human presence in the plants is responsible for programming, controlling and the maintenance of the machines.
Another aspect is that the firm introduced the concept of software updates in the automotive industry. Just like most of us are ready to download the latest version of IOS on our Apple devices, Tesla’s engineers release new versions of the software that control the car, enhance the experience, improve battery performance, and introduce new features like an autopilot capability. As a consequence, a Tesla ages much slower than traditional cars, as it receives constant “improving pit stops” over the internet.
In summary, Tesla is involved in both the construction of the hardware and software for its vehicles. This dualism allows them to bring innovative solutions at a faster pace and at a lower cost than traditional automakers, who can only improve their existing vehicles by releasing new ones, resulting in new costs through raw materials, and manufactured pieces. However, one of the real peculiarities of Tesla’s business model is the interaction with the public that helped its brand become powerful and loved, particularly by the younger generations. Indeed, the company only sells through its own website or branded stores, all of which have the same boutique-flair that gives the customer a familiar and intimate feel.
Elon Musk understood that people would be doubtful about EVs until quick battery recharge could be at their disposal. Therefore, Tesla developed its signature “Supercharger” network, through which it offers a fast-charging service and puts itself ahead of the competition. Lastly, green-automaker Tesla has another income stream: it sells its carbon credits to other carmakers that need them to meet environmental regulations. They are based on the average CO2 emissions of a producer’s fleet. Since Tesla’s fleet does not pollute, they are able to sell their credits to other automakers. Tesla’s success in shares that investors experienced has roots in the recent turning positive of net income, the value of its brand, the development of cheaper cars than the original model S and X and its investments for new Gigafactories and the great skills of its CEO.
Additionally, to that, there are three more aspects that further ensure Tesla’s success: batteries, storage and the automaker itself.
The batteries Tesla uses at the moment in its cars are called NCA (Nickel, Cobalt, Aluminium) and are produced in partnership with Panasonic. They are assembled into “packs” in their Gigafactories, allowing Tesla to reduce the risks, while enhancing batteries’ performances through their software. Musk explained during the 2020 Tesla Battery Day that they are on their way to mass production for a new type of battery, cobalt-free, that will significantly improve range and power available for their cars, while at the same time, reduce production costs.
Tesla has entered the energy storage market, with the “Powerwall”, for houses, and the “Powerpack”, for plants, that allow controlling the energy production and consumption of buildings. The Powerwall is integrated with Tesla’s solar energy-producing roofs, however, in order to satisfy the energy demand even when the solar panels are not producing, it becomes crucial as a means of storage that transforms energy and channels it to the demanding outlets or appliances. Its bigger brother, the Powerpack, has the same purpose of efficient storage and smart channelling, but it is made for greater needs of energy storage. For instance, the American supermarket chain Target has partnered with Tesla for the development of such Powerpacks for their stores and buildings. Tesla is now able to provide its clients with both the tools to produce and to store energy, paving the way for green, smart, and electricity independence.
Tesla is impacting the lives of its clients in many ways, not just by manufacturing automobiles. Perhaps, that is the least important aspect of the company if we were to analyse what they brought to the market that investors value so heavily. Tesla’s added value does not come from the mechanics of the brakes, the suspensions, or the interior design of its cars. It disrupted the market because it was able to develop a battery pack and software that placed itself ahead of the competition in terms of range and performance. Then, it offered its clients the possibility to charge their vehicles fast enough that EVs could be considered valid alternatives to combustion engine cars. Afterwards, it offered solar roofs and storage solutions B2C and B2B. Musk’s company is constantly renovating itself to reach better results. That includes expanding its business further than that of EVs, becoming a 360°company, maybe looking north on the West Coast for inspiration, to Washington State, where Amazon became the everything store, after it was conceived as an online bookshop.
Tesla’s market cap surpassed 800 billion dollars. Its share price already discounts its potential for growth and its current strong position of leader of the EV market. The share price ratios reached levels that were never seen in the automotive industry. Its price premium over the traditional carmakers is very high. However, it could be hard to maintain this level, once the big groups like VW, Mercedes and GM catch up with the development of electric cars, because their know-how related to the manufacturing of parts, other than the engine, will give them an advantage. However, Tesla has always been capable of innovating, as well as consistently surprising everyone’s expectations, so it could be dangerous to bet against Elon Musk.
NIO VS TESLA CORE BUSINESS & INNOVATION
Nio is known for the relatively high quality of its vehicles, which makes it a key point in differentiating from competitors and an advantage compared to Tesla. Both companies excel in exterior design, human-machine interaction and technology innovation. Moreover, Nio is also investing a lot in self-driving technology, collaborating with Mobileye to create and progress with new driver-assistance technologies. Another difference between the two companies is that Nio is developing its network of swap stations, giving the customers the possibility to swap low batteries in a few minutes rather than recharging to the power station.
In terms of market opportunity, both companies had chosen China, where Tesla enjoyed the first-mover advantage, and recently Ford Motors stated that they are making their Mustang Mach-E in China. Nowadays, Tesla is still massively growing, has a well-established brand worldwide, a strong position in different markets and an industry-leading technology advantage. It still must be considered that Nio has not been reporting profit, considering the net margin over 2019 at -146%, while the recent increasing profits of Tesla driven by improved deliveries, potentially higher software sales and higher regulatory credit sales have instilled trust in investors.
Despite the fact that Tesla was the third EV company for market share in China, in November it only sold 21,600 vehicles, which is much less than the target number necessary to reach 880,000 e-cars, produced in China by the end of 2020. Even if in 2020 Nio’s sales amounted to 36,700 vehicles, this actually corresponds to more than 110% in one year. Moreover, Nio signed an agreement with State Grid Electric Vehicles Service Co, a state-owned utility company with which they plan to develop the charging EV infrastructure and starting to build 100 stations in 2021. Going forward, with the cost of batteries progressively declining, improvements in self-driving technology and in vehicles’ software, Tesla margins are set to rise.
The two companies, which are growing rapidly in terms of sales and share price, offer an interesting picture of the “passion” investors have for innovative firms. However, it will be even more thrilling to see how Nio and Tesla will perform when the traditional huge automakers will catch up on EV technology… 2022? 2023? 2024?
Authors: Cecilia Tognini, Tommaso Aldo Enrico Capra