Perhaps single most exciting aspect of Nio earnings report was commitment to massive 100% plus increase in 2022 R&D spending.
Editor's note: This is a guest post from Rafi Khan, an Nio investor, and does not represent the views of CnEVPost.
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Massive returns/Priceless benefits of large-scale Nio R&D – Spells doom for BBA Premium Luxury aspirations.
Nio (NYSE: NIO, HKG: 9866) R&D expenditure in 2021 was $720 million.
It is anticipated that will rise to $1.5 to $2 billion in 2022.
That is high number even compared to TSLA R&D of $1.5 billion in 2020 & $2.5 billion in 2021 especially given TSLA market cap. is $1 trillion or approx. 30 times that of Nio.
Strong case can be made that Nio R&D input in 2022 is comparable to TSLA as emoluments for Phd's in China is much smaller than their counterparts in US & Europe (despite Nio R&D presence globally still majority Nio R&D efforts are in China)
China has produced the most number of graduates with doctorate degrees in recent years with large numbers having AI, software, engineering, battery, smartphone expertise – so perhaps perfect country for such hirings.
1. Now consider Nio 2021 R&D of $720 million
a) Consider 100% spent on just ET7.
Of course that is an extreme, unrealistic position as Nio R&D spans numerous fields including AI, autonomy, engineering, current batteries, solid-state batteries, digital cockpit, LiDAR/safety, battery swap, charging, energy management, solar, ecosystem, OTA, smartphone, mass-market brand, cloud servicing, connectivity, AR, VR, audio, video, vehicle upgrades etc.
b) Consider that Nio sells 100,000 ET7 in 2023 at ASP of $75,000.
c) Consider vehicle gross margin (“VGM”) of ET7 to be 20% which is extremely conservative, with ET7 being Nio's highest priced EV, as VGM number with capitalizing ADaaS monthly payments of RMB 680 may be over 30%.
d) Then Nio ET7 revenues in 2023 will be $7.5 billion.
e) ET7 gross profits, based on 20% VGM, will be $1.5 billion.
That would be a more than 200% return on 2020 R&D of $720 million which, for illustrative purposes, we allocated entirely to just the ET7.
That 200% return in first full year of ET7 sales will:
a) Repeat in future years of ET7 product life cycle.
b) Increase as ET7 is sold in more markets/ countries.
c) Increase as ET7 sales increase in Chinese market as Nio expands to Tier 3 & 4 cities with greater number of Sales & Battery Swap / Charging outlets.
Priceless benefits include:
● Added brand value from ET7 introduction
● Expanded price bandwidth in premium luxury segment
● Critical addition of much-needed luxury sedan in product line
● Added sales of other Nio products from having pre-eminent ET7 “Rolls Royce” flagship product
● Enhanced moat created by ET7 in premium luxury segment
● Dagger to BBA (Mercedes, BMW, Audi) ICE & EV sales caused by ET7 introduction, for at least 2-3 years it will take competition to catch up in design, technology, production capacity of competing product to ET7.
Most critically by time competition catches up with ET7, $2 billion 2022 Nio R&D budget will take Nio further ahead or maintain its lead.
Now as Nio investors/owners ask yourself:
Could there have been any better investment than to have spent $720 million R&D in 2021 on ET7 generating 200% & rising annual ROI for multiple years with numerous priceless benefits?
2. Now consider 2022 Nio R&D investment of, say, $2 billion
a) Consider 100% spent on ET5 & ES7 – directly competing against TSLA Model 3 & Model Y.
b) Let us say Nio sells 300,000 ET5s in 2023 at ASP $60,000.
c) Let us say Nio sells 100,000 ES7s in 2023 at ASP $65,000.
d) Est 2023 ET5 revenues $18 billion gross profit @ 20% $3.6 billion.
e) Est 2023 ES7 revenues $6.5 billion gross profit @ 20% $1.3 billion.
f) Total 2023 gross profit ET5 & ES7 would be $3.9 billion 2023 gross profits of $3.9 billion on ET5 & ES7 would be close to 200% of 2022 Nio R&D estimated to be $2 billion.
Again with strong arguments for that 200% R&D ROI to be increasing & recurring similar to arguments made for ET7.
Priceless benefits in addition to ones mentioned above for ET7 include:
a) Nio becomes EV poster child for Chinese premium luxury EV technology.
b) Nio provides China, much craved, after global premium luxury technology leadership.
c) Numerous cities offer Nio full funding for additional NeoPark type facilities.
d) Numerous countries like Poland & UK offer Nio incentives to open Nio plants in their countries.
e) Large MIC related orders for ET7, ET5 & ES7.
f) Large corporate, taxi, rental car orders.
g) Legacy Big Auto adopt Nio battery swap.
h) Enhanced Nio ability to sell in mass market segment under different brand.
i) Nio optimized premium luxury product line & bandwidth from RMB 300,000 to 700,000.
j) Creation of “perfect” platform to launch multimillion production demand & capacity for Nio products in 2024 & beyond.
Given Nio RMB 55 billion ($8.7 billion) cash mountain, arguably there can be no better investment for Nio than “massive” focused R&D.
Nio passion & commitment to R&D has already created:
● EV premium luxury market leadership/dominance
● Big moat that already may be impossible for BBA to cross
● Potential for exceptional ROI on R&D investment
● Numerous potential suitors for NeoPark type new capacity funding
● Potential for massive corporate/ fleet/ government sales
● Ultimate user experience that is in Nio DNA
● Industry leading lowest product failures
● Industry leading highest customer satisfaction
● Industry leading highest existing customer referrals
● Industry leading Brand Value & recognition
Perhaps single most exciting aspect of Nio earnings report was commitment to massive 100% plus increase in 2022 R&D spending.
Hopefully spelling doom & destruction to both BBA ICE & EV sales aspirations.
Not a financial analyst nor auto analyst JMHO DYODD
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