Nio Riders Break Through the Pass

Author | Chai Xuchen

Editor | Wang Xiaojun

"Can Li Bin and Nio win?"

In the increasingly intense competition in the automotive industry, Nio, regarded as an "outsider" in the internal competition, has been facing industry discussions amid the fluctuations in scale. However, Chairman Li Bin once said that he is the kind of person who can pull himself back from the edge of the cliff. Now, the countdown to the finals is ringing in his ears; can he lead Nio to regain its dominance this year?

On the evening of June 3, Nio released its Q1 financial report for this year, showing deliveries of 42,094 units in the first quarter, a year-on-year increase of over 40%. The first-quarter revenue exceeded 12 billion yuan, a year-on-year increase of over 21%.

Although it has not yet turned a profit, after the Q1 results were released, the sentiment in the capital market changed dramatically. The next day, Nio's stock price rose against the trend, with an increase of nearly 10% at one point during trading in the U.S. market. It is evident that investors are eager to place their bets. This seemingly paradoxical scene is a sign that Nio is about to take off after exhausting the negative news in Q1.

"If the crisis of Nio in 2019 was overcome with external help, this time, getting out of the low point of the past three years relies on our own abilities and management to generate cash flow for ourselves. This is a consensus reached by the entire company," Li Bin said to Wall Street Insight during a communication meeting on June 4.

This time, the optimistic Li Bin is not just "painting a pie" for the market.

President Qin Lihong revealed to Wall Street Insight that at the end of March, Nio conducted a lightning placement in Hong Kong, with many investors supporting it. "Our operating cash flow should see significant improvement starting in Q2, and we are very confident about the improvement of the company's operating cash flow for the whole year, which will support the company's stable development."

In Q2, Nio has quietly climbed out of the trough, with sales stabilizing at around 23,000 units for two consecutive months, a net increase of nearly 10,000 units compared to Q1. Based on the sales guidance of 72,000 to 75,000 units for Q2, it implies that June will continue to contribute additional volume, with deliveries of 25,000 to 28,000 new vehicles.

Breaking it down further by the three major brands, Li Bin said that the flagship NIO brand ET9 has created a wave in the market pyramid after its launch, with over 800 units sold in its first complete delivery month, surpassing the sales of traditional luxury models like the BMW 7 Series and Audi A8 during the same period, marking the first time a Chinese brand has surpassed traditional luxury brands in the administrative flagship market.

Sub-brands are also starting to "make progress," preparing to take on the responsibility of supporting the family. Li Bin revealed that since late April, the order volume for the ET5 has steadily increased, and although the number of frontline employees has decreased by 40%, the delivery volume in May grew by over 40% compared to April. As for the Firefly, its sales in May exceeded the combined sales of Mini and Smart in April.

In the short term, the surge of the ET5, the breakthrough of the Firefly, and the stabilization of Nio are indeed encouraging. However, compared to the group's profit target for this year, these changes are just the beginning. At this point, Nio has less than three quarters left to achieve its profit target At the earnings conference, Li Bin presented the profit roadmap: total monthly sales of the three major brands to exceed 50,000 units; gross margin to increase to 17%-18%; sales management expense ratio to be controlled at around 10%; and R&D expense ratio to maintain at 6%-7%.

First, from the sales perspective, Li Bin revealed to Wall Street News that the internal expectation for the fourth quarter is that the Ledo brand can reach 25,000 units, while Firefly is at the level of 3,000-5,000 units.

"There are still heavyweight models yet to be released, and the layout of channels and many aspects is gradually beginning to show. We have no reason not to succeed," Li Bin said.

Currently, the main force of the NIO brand, "5566," has completed its iteration. Li Bin is very confident in this team, stating, "The renewal rate of ES6 and EC6 exceeds 40%, with over 200 functional combinations, equipped with the self-developed 9031 chip and a full-domain operating system. The intelligent chassis has also further evolved. ET5 and ET5T have even more, with a renewal rate as high as 45% and over 500 integrated components."

Li Bin revealed that there is an internal "NIO-BMW Index" (NBI) to look at the market share gap between NIO and BMW. "In many areas of Jiangsu, Zhejiang, and Shanghai, NIO's sales have reached 70-80% of BMW's, and in some cases even exceeded 100%."

However, in the sinking market, NIO's high-end strategy is not as effective. "In Jiangxi, our sales are only 10% of BMW's, and it will be even lower in Northeast China," Li Bin told Wall Street News. "Last year, we began to increase the deployment of battery swap stations in sinking markets, mainly because we saw the role of battery swap stations in these markets. For example, in Hubei and Anhui, we started to try to densify the construction of some battery swap stations last year. Hubei and Anhui were the first and second provinces in terms of growth last year, which gave us very important insights."

On the other hand, the Ledo brand, which is responsible for volume, must become the cornerstone of NIO's sales as planned by Li Bin for NIO's 2025 strategy, where 440,000 units of sales will be borne by Ledo, making it a key pillar for NIO to achieve scale effects.

In April this year, Ledo's former president Ai Tiecheng left, and the restructuring of NIO and Ledo's systems was quickly finalized. Shen Fei, who was parachuted in at the beginning of April, is in charge of Ledo's sales and regional company management, reporting directly to Qin Lihong. Ma Lei, who oversees Ledo's marketing, also reports to Qin Lihong; Li Bin personally manages Ledo's supply chain, R&D, quality, and product experience.

After the new organizational structure was confirmed in May, NIO and Ledo further began to integrate in R&D, service, and marketing areas, further reducing resource waste. Li Bin revealed, "NIO and Ledo will still maintain independence in sales stores and branding, but will integrate in the middle and back office systems, allowing for reuse where possible."

To fully "support Ledo," Li Bin has made a firm decision. After a series of rigorous organizational adjustments, Li Bin has also increased the deployment and completion of battery swap stations.

By the end of May, Ledo's share of NIO's battery swap stations had reached 60%. It should be noted that the current ratio of Ledo users to NIO users is less than 10%, making this configuration quite "generous." Internal research data shows that 60% of users buy Ledo because they can swap batteries, indicating that the expansion of the battery swap station network will significantly help boost Ledo's sales After resource restructuring, Ledo will launch two new cars, L90 and L80, within the year. The "ambitious" layout of battery swap stations this year is prepared for these two new products—Ledo must become the cornerstone of Nio's sales.

In Li Bin's view, the Ledo L90, which will debut in Q3, will be a product that changes the landscape of family three-row SUVs, "I believe it is a very important turning point." At the same time, the industry's balance is also beginning to tilt towards Ledo: in the first four months of this year, the pure electric vehicle market for large and medium-sized SUVs grew by 63%, while range-extended vehicles only grew by 1% year-on-year.

This means that the product structure is entering a turning point, which will soon become a booster for Ledo's rebirth.

The planning of the three major brands has returned to the right track, not only in terms of models but also in new technologies like the "new three major components," chips, intelligent operating systems, intelligent chassis, world models, NOMI technology, and other black technologies, which will be rapidly delivered this year. Internally, there is hope that these can become the growth engine for sales. It can be said that this year is a big year for Nio's products, and the long-awaited "harvest season" is finally about to be realized.

While rolling out products, Li Bin is also vigorously sorting out the system capabilities.

"This year, starting from the first quarter, we are fully implementing cost control and management efficiency improvements, called 'organizational transformation aimed at user value creation.'" Li Bin promised, "60%-70% of the adjustments will be in place in the second quarter; the third quarter will continue to deepen, completing about 80-90%, so that in the fourth quarter, whether in terms of sales, gross profit, expense control, or cost-effectiveness, we can fully achieve operational goals."

After laying out the rebirth plan, Li Bin also expressed, "One quarter after another, time passes quickly, and the fourth quarter will soon arrive; there are only four months left, and we must seize every second."

He took the opportunity to review the three stages of Nio's journey since its establishment with Wall Street Insights.

The first stage, from establishment to 2021, achieved comprehensive technological innovation, system innovation, and a breakthrough in brand high-end positioning; the second stage did not achieve operational goals due to some external factors, but Nio still made resolute counter-cyclical investments in technology, products, and infrastructure for long-term development.

Li Bin insists that this is Nio's way of doing things. "Only in this way, when we enter the third stage this year, can there be hope. This is also where our confidence lies in believing that we can enter the harvest period starting from the second quarter of this year."

"Always good at pulling myself back from the edge of the cliff," is how Li Bin evaluates himself. This time, fortunately, he is still on the windward side, in the hottest and most invested track. As long as Nio's products and technologies are leading, the hope of welcoming dawn remains high.

However, to maintain an upward trend in the uncertain new energy competition landscape and become the ultimate giant, Li Bin and Nio must fulfill the flags they have raised.

Below is the transcript of the dialogue between Wall Street Insights and Nio Chairman Li Bin and President Qin Lihong:

Q: You just mentioned that Nio reached a bottom state in the first quarter of this year. Do you think it is harder now or was it harder in 2019? Li Bin: Overall, it was definitely more difficult in 2019. At that time, we really relied on external help to get through. Now it's different; the company's risk resistance capability is certainly much stronger than in 2019. Moreover, in the past three years, or even longer, our investments have started to yield returns this year.

The challenges we face this year are also different because the competition from 2019 to 2020 was not as intense as it is now. This time, to come out of the trough, the entire company needs to improve comprehensively, to "build strong fortifications, fight a steady battle, and advance steadily."

We have a mindset of being a follower; other companies have either become profitable or significantly narrowed their losses. Although we have launched three brands, we will face even more competition and need to prove ourselves. This time, coming out really depends on our own capabilities. In 2019, we relied on others for support; this time, we need to generate our own resources, which is a significant difference.

Q: The domestic market has entered a new round of price wars. How long do you think this round will last, and will it affect NIO's Q4 profit expectations?

Li Bin: I have seen that industry associations and regulatory authorities are also calling for opposition to involutionary competition. We certainly do not like price wars. NIO has always invested in R&D, charging and battery swapping networks, user experience, user value, and some invisible safety measures. If these investments are brutally dragged into a price war, it will definitely be very difficult for a company like ours that makes long-term investments.

NIO's forced participation in market promotions has been very restrained. We hope the entire industry can focus its energy on technological innovation and user service, avoiding the crude use of price wars to push the industry into a situation of unsustainable competition.

Because of homogeneous competition, everyone is just competing on volume and market share. In the end, what happens? The simplest way to achieve immediate benefits is to lower prices. I believe this is mainly due to low-level competition, and there is no other reason.

Behind the price war is still the "winner takes all" mentality. I have always felt that this does not conform to the overall development law of the automotive industry. After all, the automotive industry is not platform-based, and it will keep the entire industry in a state of low-level competition and vicious competition. I hope the entire industry can truly compete on technology, quality, and service, so that the entire industry can develop healthily and sustainably.

For example, the experience of Chinese motorcycles in Southeast Asia serves as a cautionary tale. The price war ultimately led to the disappearance of the entire industry. Back then, Chinese motorcycles were prevalent in Southeast Asia, but now they are hardly seen. If the industry can truly counter involution and compete on technological innovation, technology, service, and quality, these are areas where NIO is relatively strong.

Recent measures against involutionary competition in the industry will definitely help our Q4 profits. The gross margins of the ES6 and EC6 have returned to reasonable levels. I believe the gross margins of the ES6 and EC6 have returned to over 20%, and the ET5 and ET5T have also returned to reasonable gross margins. I hope that the price war will not force our gross margins down again; if it really comes to a fight, we still have "bullets."

Q: After Q4 profits, will NIO have relevant measures to reduce its debt ratio?

Li Bin: In fact, the debt ratio in the automotive industry is not considered low; this is a characteristic of the industry. Looking at the debt ratio is one thing, but we also need to consider the relationship between the debt amount and the overall revenue. As everyone knows, there has been some "real estate theory" recently, and the distinction is still very significant The ratio of the debt amount to the total revenue in the automotive industry is sometimes underestimated. In fact, it is relatively healthy.

Nio has had a relatively high debt ratio in recent years due to losses and investments. Since its establishment, Nio has invested nearly 60 billion in R&D, but its intangible assets on the balance sheet are only over 20 million. If all R&D investments were fully expensed, it would incur significant losses.

Nio's operational risks are within a controllable range, and our financing channels are very smooth. At the end of March, we completed a "lightning placement" in Hong Kong in just one day. From an operational perspective, on one hand, profitability will definitely improve the debt ratio. On the other hand, we also have sufficient means and channels to reduce the debt ratio when necessary.

Q: In the process of reducing costs and increasing efficiency, does Nio's label and tone change?

Li Bin: Nio aims to become a user enterprise that leads in technology and experience, and this will not change. Previously, we aimed to "become a user enterprise," which could be misunderstood. Last year, we emphasized that we want to "become a user enterprise that leads in technology and experience," which more comprehensively describes what kind of company Nio wants to be.

We used to focus on short-term efficiency and local efficiency, which led to poor user experience and troublesome handovers. From a systemic efficiency perspective, this was a mistake. We are now correcting this error; after reducing personnel, efficiency has actually increased, and service has not declined.

Q: Nio has formed a layout of three brands. At the mid and back office level, which resources are shared, and which resources need to be separated to form brand differentiation? How do you make decisions and trade-offs?

Li Bin: The foundational R&D for the three brands has long been a single team. In terms of internal R&D systems, we have completed the construction of basic R&D capabilities, platform capabilities, and delivery teams over the past few years, forming a layered R&D organization. We consolidate core capabilities, and some delivery teams at the front end ensure that each brand has its unique advantages and tone, maintaining a certain level of differentiation.

We still hope to maintain a certain level of differentiation in user experience-related aspects. In the unseen areas of the mid and back office, we still strive to enhance reuse as much as possible, whether in R&D, supply chain, manufacturing, or sales services, generally following the principle of large-scale reuse.

Q: After the third-generation platform, how much change can Nio's supply chain reuse and the reuse of the supply chain among the three brands bring, and how much improvement can be achieved in vehicle cost control?

Li Bin: Last year, we sorted out our system capabilities, and the direction for the supply chain is called layered decoupling and atomized cost management. Reuse within a single brand is still very high; all first-generation vehicles use the same operating system, the same battery pack, and the EDS is also quite similar. In fact, 60%-70% of the costs on the vehicle are the same, indicating a very high level of reuse Now in terms of cross-branding, we definitely need to achieve layered decoupling at a smaller atomic level. For example, can all the connectors be unified? Can all the wiring harness specifications be standardized? Even how to unify the small motors in the car, etc. We hope to achieve unification at the atomic level. In terms of seating, we were the first to implement the logic of layered decoupling, and the results are good now.

Originally, the supply chain of Leida was a relatively small team, and now it has been completely merged, which can better promote the supply chain strategy. In fact, the supply chain of our three brands is now a single supply chain team.

Q: NIO is a company that is not stingy in R&D. At the communication meeting in the first quarter, the management mentioned plans to control R&D expenses between RMB 2 billion and 2.5 billion per quarter. Is this a phased strategy?

Li Bin: Our R&D is mainly about improving efficiency. Although it is nearly RMB 3 billion each quarter, we will reduce it to RMB 2 billion to 2.5 billion, with an efficiency improvement of over 20%, ensuring our current R&D intensity. The main focus is to cancel some low ROI projects. Our internal R&D project approvals have gradually started to switch to this mechanism since the first quarter of this year, which is very useful and will not affect overall competitiveness.

Q: Will the company have further financing plans this year?

Li Bin: In the first quarter, due to seasonal reasons, cash will definitely decrease compared to the fourth quarter because sales are down, which is reasonable.

At the end of March, we conducted a lightning placement in Hong Kong, with many investors participating. Our operating cash flow should see significant improvement starting in Q2, and we are very confident about the improvement of the company's operating cash flow for the whole year, which will support the company's relatively good and stable development.

Q: We have been saying that this year is a "big product year." If that doesn't materialize, does NIO have a Plan B?

Qin Lihong: As mentioned earlier, the current public opinion environment is a typical "taking advantage of your illness to kill you" environment. I am also thinking about how to communicate with the market in the simplest way.

In summary, first, NIO is very large, with nearly one million vehicles in operation, possessing key core technologies, high user stickiness, and many state-owned investments. Second, the first quarter was the lowest point; quarterly reports reflect the situation from the previous quarter. In fact, things have already improved today, so let's wait for the Q2 report.

Yesterday, after the release of what many considered a terrible Q1 report, the stock price rose on the first trading day, indicating that it has already been digested by the capital market.

Li Bin: We are still confident. Although the expectations for the L60 were indeed a bit high originally, we are now returning to achievable goals. We are now setting goals that are within reach.

With improvements in various aspects, we are confident that in Q4, the Leida brand can reach 25,000 units, and the Firefly can reach levels of 3,000 to 5,000. There are still heavyweight models yet to be released, and the channel and many other layouts are gradually starting to show results. We have no reason to fail.

In the coming months, if we execute well, I believe that 50,000 units is not a pipe dream; what we want is not 500,000 units Qin Lihong: Even if we fall short of 50,000 units, there is no worry; the sales will likely grow by over 70% compared to the first quarter, and the gross margin will definitely improve, while expenses will further decrease.

Li Bin: From a financial perspective, achieving profitability is quite simple: sales volume × gross margin - expenses. We will definitely improve the efficiency of our expenses. In fact, you can see that although we have reduced some non-sales positions and canceled some unnecessary R&D projects with low ROI, we have been diligently delivering on user experience-related aspects, so operational efficiency will improve.

Reducing expenses does not necessarily mean doing fewer things; the output may actually be higher. This is the significance of improving efficiency, rather than simply cutting costs. Our worst quarter has indeed passed; sales in April and May are increasing, and during this process, we will also complete the transition of our main sales products. Many management actions have already shown results in the second quarter. The number of people in LeDao has decreased by 40%, while sales have increased by 40%, and we are already seeing results. We can observe more of what Nio is doing from these perspectives.

Q: When buying a car, people not only look at the product's value but also whether the company can provide long-term after-sales service. Could you talk about the current reform actions?

Li Bin: All businesses inherently carry risks; even peak companies can go bankrupt. If a product line is not well executed, it can lead to significant setbacks. From the user's perspective, buying a car certainly involves considering the company's sustainable operations, which are closely related to subsequent services and the resale value of used cars.

There are many examples of reform actions. To give you a broader perspective, this adjustment aims to establish a bottom-up awareness of operational responsibility among all employees, not just the boss being responsible for the company's operational results; everyone must be accountable for the outcomes of their own responsibilities.

Starting in May, each fellow user consultant will clearly know how much the company has spent on them and how much they have earned for the company. We view fellows as basic operational units.

Previously, when eliminating fellows based on performance, it was often a simple quantitative assessment. However, the resources invested by the company vary for each fellow selling cars. Some fellows serving old users do not require the company to spend money on leads, while others may have received many leads from the company but have a low conversion rate.

We need to lock in value creation to ensure we can calculate ROI. The same goes for R&D; now we need to assess whether a feature truly has user value. For example, if you think it can help sell the ET7, then the person in charge of the ET7 product line needs to invest. Anything that does not create user value or does not generate value for the company can be disregarded, thus eliminating the excess.

The key now is not simply to break down this matter but to form a mechanism where everyone participates in this process from the bottom up.

Q: Will the recently launched S800 from ZunJie take away some users from Nio's ET9?

Li Bin: The S800's ultra-luxury pricing is indeed lower than we expected. I asked Yu Chengdong about it the other day. However, I believe that buyers of the S800 and the ET9 are truly two different groups of people. We haven't seen any cancellations of ET9 orders after the S800's launch because everyone already knows this car; they are genuinely different users In simple terms, even if ET9 users are already very successful business leaders, they still feel the need to drive themselves sometimes. The S800 is truly a car meant for being driven in the back seat, and the overall temperament of the car is quite different.

Qin Lihong: I remember at the end of March, after Teacher Dong Maimai in Yunnan got the car, he directly drove the ET9 around the Yunnan-Tibet line.

Q: What are the internal expectations for the three models of LeDao L60, L80, and L90?

Li Bin: LeDao hopes to reach a monthly delivery volume of 25,000 units in Q4 this year. We certainly hope for as many L90 and L80 as possible, as the gross profit will be better. The L60 has the opportunity to return to a stable state of over 10,000 units sold per month; the combined monthly sales of L90 and L80 is around 15,000 units, which is our goal.

I believe both L90 and L80 can rewrite the big SUV segment in this industry, one being a large five-seat SUV and the other a three-row SUV. The products are very competitive because they were defined based on the family market.

Q: If we want to find incremental growth from the sinking market, are there any new plans in terms of channels?

Qin Lihong: With the expansion of LeDao's sales, we have two ways to enter the sinking market, which can be understood as a combination of "position warfare" and "guerrilla warfare." Of course, this method will have relatively higher short-term investment; the second method is to enter quickly. As Li Bin mentioned earlier, we rely on battery swap stations and teams to interact with potential local users. The battery swap stations provide demonstration and experience assurance. Currently, we are practicing this method extensively, and the results are good, allowing us to extend the pace of building stores.

Now, the sales teams of NIO and LeDao have collaborated with over 400 existing dealer stores nationwide.

Q: NIO's reputation in intelligent driving has formed relatively slowly. What is the current investment ratio in world models?

Li Bin: We are indeed about half a year behind our peers in urban areas. If we categorize intelligent driving, its value lies in reducing accidents and freeing up mental energy. Reducing accidents has always been our top priority, but the public perception is indeed a bit lacking. Last year at NIODay, we announced that four insurance companies verified that our accident rate had decreased by over 20%, and it is certainly more than that now.

In urban scenarios, we are indeed a bit late in delivering end-to-end solutions compared to others. It should have been earlier, but we had to wait for the Ministry of Industry and Information Technology's filing and announcement. The development was almost ready, just a few months late. We will have two versions continuously updated by the end of June, and the progress will be very fast