Nio, Xpeng, Li Auto: your cheat sheet to China’s listed Tesla rivals

With China’s electric vehicle (EV) sector still reeling from a withdrawal of government support, three companies have emerged as viable challengers to Tesla in the world’s largest car market: Nio, Xpeng Motors, and Li Auto.

The three Tesla wannabes vary in their approaches and development.

Nio is the showiest, led by its charismatic founder, William Li Bin, and boasts the deepest pockets and boldest business plan. The company is known for its grand, customer-centric strategies ranging from a network of luxurious showrooms to a free battery swap service. It was the first of the three to deliver cars to its customers, in June 2018.

Alibaba-backed Xpeng has its targets set on self-driving technology, and began delivering cars just six months after Nio. Led by a former Alibaba executive, its vehicles have been criticized for bearing a close resemblance to Tesla’s—this is no coincidence.

The staid Li Auto is more practical, solving the most urgent issues of early EV adopters, and was the last of the three to begin deliveries, in late 2019.

Comeback story

While EVs may be exciting, investors have doubted the viability of the market as a whole and question Chinese EV makers’ prospects. Even in their home market, these companies are dwarfed by Tesla, whose locally built Model 3 is the country’s top-selling EV. Critics had viewed Nio’s prospects as gloomy, last year speculating that the company was insolvent and wondering if other companies might follow in its footsteps.

But the Chinese government is bolstering a surge in EV adoption and clean energy vehicles are expected to grab a quarter of total car sales by 2025. The state’s efforts to achieve this goal has benefited EV makers, including Nio. The company landed a $1 billion bailout from the government of Hefei, capital of China’s eastern Anhui province. As a result, its shares have rocketed a whopping 470% this year.

Nio, Xpeng, and Li Auto have reported surging deliveries that outperform legacy automakers. As investors reverse their attitudes towards Tesla’s Chinese challengers, we wonder whether they are well-positioned to sustain high growth rates into the future, and even more interestingly: which one has a stronger shot at becoming the “Tesla of China”?

Infection points

Chinese EV makers seemed to be teetering on the edge of collapse earlier this year after Beijing slashed purchase subsidies by half last year to cool the overheated industry. As a result, EV makers saw sales figures sink while cash burn rates stayed high.

Nio—then the poster child for China’s EV industry—saw its cash reserves disappear after years of aggressive spending on its retail strategy, which included building impressive showrooms across China. The market went from around 500 EV companies in early 2019, to fewer than 10 that have managed to deliver cars in 2020.

Then, the EV market quietly began to turn around. Growing consumer demand and extended government support have led to robust sales growth and narrowed losses. As the world’s biggest auto market recovers from the Covid-19 pandemic, analysts expect strong long-term growth for Chinese EV makers, with Nio and Li Auto potentially expanding their lead among the homegrown players.

Deliveries

Nio, Xpeng, and Li Auto recorded surging sales over the past two quarters, illustrating their improving performance. Analysts expect further top-line revenue growth in the second half of this year, as Tesla’s success in China draws more funding to help local EV makers grab a share of the market.

• Nio delivered a record 4,708 vehicles to customers in September, up 133% year on year. The company sold 12,206 vehicles over the summer, a new high in quarterly deliveries. Li Auto came in behind Nio, selling 8,660 of its own EVs over the same period.
• Growth may prove more difficult for Xpeng, which has just recently launched its first sedan, the P7. Some analysts have expressed concern over Xpeng’s near-term prospects considering that the P7 competes head-to-head with Tesla’s Model 3.
• Meanwhile, Tesla is seen as a growth driver for China’s EV market by increasing consumers’ awareness of these cars. The US carmaker this month launched a Model 3 with Chinese-made batteries, bringing the post-subsidy price down by almost 10%, Bloomberg reported. China’s biggest brokerage, Citic Securities, remains bullish, in a note (in Chinese) on Oct. 9 saying Tesla is stimulating the overall market.

Tackling money problems

As China’s EV makers produce and sell more cars, they have also been able to absorb costs more effectively. In the first half of the year, Nio and Xpeng narrowed their net losses by more than 50% compared with the same period a year ago.

• Li Auto improved its gross margin to 13.3% in the second quarter from 8% in Q1, impressing observers. Still, Bernstein analysts warned that future losses are inevitable as the company ramps up development of new vehicles and self-driving technology.

Meanwhile, Tesla’s success in China is good for the company—but also for its competitors. The US carmaker’s growth has local governments scrambling to bail out homegrown competitors.

• Nio’s $1 billion lifeline spurred some analysts to rethink their evaluations of the EV maker, though the company will continue to face pressure to raise more capital. UBS analyst Paul Gong in late August jacked up his target share price for Nio to $16.3 from $1 while upgrading the company to neutral from sell, according to a CNBC report, since the company’s liquidity concerns were “assuaged” by the successful fundraising.
• Xpeng followed soon after. In September, the company secured $586 million from the government of Guangzhou, capital of China’s southern Guangdong province. Analysts said that Beijing-based Li Auto could strike a similar deal with local authorities.

Strategies

Tesla’s Chinese rivals have taken vastly different approaches to gaining a foothold in the market. Nio, the most high-profile and best-financed of the three, had a market cap of $29 billion as of Oct. 14, almost equivalent to that of Xpeng and Li Auto combined (Update: These figures are slightly out of date—Nio’s stock jumped 22.57% in trading Wednesday following publication of a favorable report from J. P. Morgan, coming after this article was published in a newsletter). However, analysts are sharply divided over the company’s ability to improve margins because of its big budget, customer-centric business model, which includes offering battery swap facilities around China.

But Nio’s investment in its costly retail and community strategy appears to be paying off. Deutsche Bank said last month that a growing number of consumers recognize Nio as “a high-quality premium brand with best-in-class technology and customer service.” Meanwhile, Credit Suisse reportedly raised Nio’s price target to a new high of $25 when the company guided a record number of orders last month and expanded its monthly production capacity to 5,000 vehicles.

• Still, analysts warn that Nio sales are likely to fall off following the end of an offer of unlimited free battery swaps in October. Sales may have been artificially high if consumers sought to lock in purchases before the deadline.
• China International Capital Corporation (CICC) expects Nio’s net loss to narrow another 6.8% to RMB 4.4 billion in 2021. In a note (in Chinese) published in August, analysts said the company’s battery-leasing service could significantly lower the cost of EV ownership, while enhancing user experience with upgradable battery technologies.
• Still, bearish researchers including Bernstein think otherwise, warning that the launch of Tesla’s locally built Model Y next year could deal a blow to Nio’s sales.

Analysts are generally more positive about Xpeng and Li Auto, which have more conventional business models. These companies are more circumspect about spending, have strong growth potential, and have successfully tightened manufacturing costs.

J.P Morgan said Xpeng could be the potential winner in China with its in-house self-driving technologies and mid-to-high-end positioning. The company expects Xpeng to break even in 2023 and sell 345,000 cars a year by 2025.

• Targeting more frugal consumers than Nio and Li Auto means Xpeng could find itself locked in a price war against companies including Tesla and BYD, among others, Bernstein noted, adding that autonomous driving technology in general is still in its infancy.

While Nio is seen as the higher-tier brand and Xpeng the cutting-edge competitor, Li Auto’s pragmatic approach is viewed favorably. The company has distinguished itself from competitors by offering extended-range electric vehicles (EREVs), a bridge technology that addresses the pain points of owning a standard EV, including range anxiety and charging point bottlenecks.

Bernstein expects Li Auto to reach a gross margin of 13.5% this year and break even between 2022 and 2023. Goldman Sachs in August classed Li Auto as a “conviction buy,” predicting that the company’s stocks would outperform expectations, and estimated an annual sales volume of 445,000 vehicles in 2025.

• There has been some controversy over EREVs as a transitional technology, as well as doubt about how long it will remain relevant as EV technology improves. Nevertheless, Bernstein and CICC analysts said Li Auto could jump from EREVs to all-electric, since the latter is simpler from an engineering standpoint.
• Li Auto may break even earlier than its peers, while Nio remains a bigger threat to Tesla with a solid reputation in the high-end segment, something no Chinese manufacturer has accomplished before.

Market shifts

China’s EV sales have slumped since last year. Beijing’s subsidy cuts followed by the economic shock of the Covid-19 outbreak have left companies reeling.

More analysts have reversed their initially positive outlook for 2020, predicting a 20% drop in sales compared to last year’s 1.2 million deliveries. In August, the country’s top auto industry body, the China Association of Automobile Manufacturers (CAAM), lowered its 2020 EV sales forecasts to 1.1 million vehicles.

The situation could get even worse for EV companies, as legacy automakers including VW plan to release more EV models from 2022 onwards. This, coupled with Nio, Xpeng, and Li Auto’s relative inexperience in manufacturing, could make for a difficult next couple of years.

However, the transition from internal combustion vehicles to EVs is gaining speed. And Chinese firms are riding the wave of Beijing’s push to maintain its leadership as the world’s biggest EV market. Sales of all-electric and plug-in hybrids vehicles have to make up around one-quarter of total auto sales in 2025 in order to reach China’s mandated EV quotas, according to IHS Markit (in Chinese).

Consumer demand for EVs is expected to grow rapidly over the next few years due to increased affordability, with the high-end market seeing a rapid surge in sales. Around 1 million luxury EVs will be sold in China by 2025, according to Bernstein analysts. Half of this total will be made up of sales from smaller EV players like Nio, Xpeng, and Li Auto.

“China’s smart and electric vehicle market will enter the fast lane over the next 10 years, and the hand-to-hand fight between homegrown carmakers and overseas giants has started,” Citic Securities wrote in a note in July (our translation).

While many Wall Street analysts have taken bearish views of the field, Asia-based analysts are embracing the notion that young EV makers could co-exist with Tesla and even benefit from its China success. Nio and its peers collectively accounted for 14% of China’s EV sales in June, a significant rise from 7% a year ago, figures from the China Passenger Car Association (CPCA) show.

The road ahead

Speed is the key to success for homegrown Tesla challengers to carve out a position in the market and avoid getting squeezed out by established automakers.

Bernstein expects that the pace of sales network expansion will be a “critical determinant” for Li Auto’s performance in the coming year. As of Sept. 30, the company currently has 35 retail stores in 30 cities, only a quarter of those of Nio and Xpeng.

Time is also short for Nio and Xpeng to scale charging service networks, which IHS Markit sees as one of Tesla’s early competitive advantages in encouraging consumers to go electric. Nio last month announced a RMB 100 million ($14.9 million) initiative to build 30,000 fast chargers over the next three years. Xpeng is also ramping up with its lifelong free charging for first-time owners program, which launched on Sept. 26.

As costly projects come to life, Chinese EV makers need to continually raise capital to keep funding their ambitions. Any gaps in financing could mean being left behind.

“The combined market cap of Nio, Xpeng, and Li Auto is $50 billion, far below Tesla’s $450 billion. There is still great room for (valuation) growth,” Chinese media in August reported citing Wang Sheng, deputy head of global investment banking at CICC. (our translation).

Updates: An earlier version of this article incorrectly compared the price of Tesla’s Chinese-made Model 3 to competing autos. Additionally, Li Auto has 35 retail stores as of Sept. 30 according to an announcement released earlier this month, not 30. This article was also updated to reflect a jump in Nio’s stock price shortly after publication.