Major headwinds to the competition faced by traditional luxury automakers as NIO master plans to dominate the premium luxury segment.
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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Premium Luxury is the segment of RMB 250,000 to 600,000 for purposes of this article, which though 12 percent of the total market may represent over 50 percent of profits.
This is the fastest-growing segment catering to China's burgeoning upper middle class -- many of them millionaires courtesy of spiraling property prices over the past decade.
Be under no delusion -- BBA death spiral in ICE sales has already started in China's top 4 cities Beijing, Shanghai, Guangzhou & Shenzhen.
Black Markets for License Plates in Chinese Megacities
There is ICE Vehicle Plate lottery in Beijing with wait list of 3 million, whilst in other Top 4 cities there is Bid Auction where the current year 2022 prices to win ICE vehicle plate license approval may be RMB 20,000 to 90,000.
In addition, such bid auctions also exist in Tianjin & Hangzhou, 2 other Top 10 cities plus strict ICE quotas for the number of license plates issued.
Practically speaking to get just the opportunity to start purchasing of ICE vehicle, you typically will pay:
- Bid / Auction Fee of RMB 20,000 to 90,000
- 10 percent Vehicle Purchase Tax (“VPT”) not paid by EVs
- Agent fee of RMB 10,000 who can guide you through the tiresome process
Such restrictive policies plus quotas will result in total ICE passenger sales in Top Chinese cities being circa 20,000 in 2023 or less than 20 percent of the total market for new cars sold.
November 2022 CPCA estimates of 600,000 NEVs sold would be historical high 32.3 percent of total market.
Bottom Line -- The death spiral in Premium Luxury sales is already well underway in Top Chinese cities & fast spreading to Tier 2,3 & 4 cities.
Be under no illusion that Chinese government EV incentives expire YE 2022.
In addition to Lotteries, Bid/Auction Fees, VPT, quotas for ICE, there are EVs regulatory credits.
How China's quasi-carbon market for electric vehicles works:
China adopts & will continue to adopt a “dual credit” system which:
- Punishes production of fossil fuel cars
- Rewards production of EVs
Before 2021, producing an EV typically could earn the company between two and eight credits. That means one EV can equate to thousands of dollars of extra profit in a given year.
But from media reports and numbers released by the government, it's clear that the average price of a NEV credit has changed drastically over the years. It went from about $50 in 2019 to $180 in 2020.
While results aren't out yet for 2021, analysts said it had reached nearly $500. Some even speculate that the price could reach $900 per credit next year.
NIO regulatory credit per EV may approx. 6 & this number will rise as NIO introduces 150 kWh SSSB WeLion battery.
So additional EV incentive to NIO from regulatory credits may be over $3,000 per EV.
BBA has another major problem -- their EVs do not sell, there is a fast-developing negative status / image stigma over owning BBA EV Audi e-tron, Mercedes EQS & other models have difficulty in selling 100 EVs per month with even some of those paltry numbers rotting in dealerships.
All this results in “death by a thousand cuts” on an increasing annual scale to BBA ICE sales which is primary NIO target to garner market share.
Adding up all incentives for EVs is RMB 100,000 to 150,000 package in 2023.
In addition to Chinese incentives / policies designed to totally kill all ICE sales by the end of this decades, NIO has developed its own complementary master plan to dominate Premium Luxury segment comprising:
- Expanded product line
- Expanded China coverage to lower Tier cities
- Expanded target age group
- Expanded country presence
- Technological superiority
- Award-winning superiority
- Expanded Price Range / Sub Brand strategy
- Focus on User satisfaction
- Depreciation the Mother of Problems for NIO competitors
Expanded product line -- Introduction of Next Gen EC6, ES6, ES8 plus ES5, EC7 & ET5 Shooting Brake model all expected in 1H 2023 provide almost blanket coverage in Premium Luxury segment up to price RMB 600,000. Elimination of Li Auto PHEVs from Green Plate status in Shanghai starting 2023 further benefits NIO.
Expanded China coverage to lower Tier cities -- NIO's primary & China's largest market for EV sales is Shanghai.
Where Shanghai goes, the rest of China follows.
BBA EVs sales are measly & the majority BBA ICE sales come from more rural lower Tier cities that have yet not adopted the enlightened policies of the major cities.
NIO unveiled record 12 new NIO Houses in October 2022 highlighting NIO's focus on replicating its success in Tier 1 cities to all other parts of China.
Expanded target age group -- EC6, ES6 & ES8 attracted 45 to 65 age group at typical prices over RMB 350,000. ET5 additionally appeals to the younger 25 to 45 age group.
Expanded country presence -- We can expect NIO to be marketing in 10 European countries in 2023 including selling Right Hand Drive EVs in UK.
Technological superiority -- VOLKSWAGEN just wrote off $6 billion & 5000 software engineers after still being 10 years behind TSLA & leading Chinese EV companies in EV software. BBA is pretty much in the same dire situation on technology failings relative to TSLA & NIO.
SiC, AR/VR, Pano Cinema, and Dolby Surround Sound give NIO superior attributes. The launch of NIO smartphone is expected in 2023. Gen 3 Battery Swap should yield 22 batteries per Swap Station, high-level Grid arbitrage resulting in low net power costs, super fast 500-volt charging & ultimate user satisfaction & experience which NIO craves. Multitude of fast chargers do not have ability to buy cheap & sell expensive electricity to Power Grid all in a 24-hour day cycle.
NIO has a highly productive R&D team whilst having R&D spending levels not much less than global EV behemoth BYD & twice those of Li & others. All this suggests NIO maintains technological superiority in the Premium Luxury segment.
Award-winning superiority -- Ultimate objective recognition of NIO technological pre-eminence is recent Best in Class awards from Germany & Denmark plus all J.D Power awards in competition with the Germans auto giants who have been winning those awards for decades.
Expanded Price Range / Sub Brand strategy – With a road map firmly in place for a price range of RMB 250,000 to 600,000 & attributes that BBA will not be able to even come close to in at least next 2-3 years, NIO already has teams, ALPS for price range RMB 100,000 to 250,000 to compete with TSLA, Toyota & VOLKSWAGEN plus HIMLAYA for sub-RMB 100,000 market.
The final foray will be a price range over RMB 600,000 domain of Porsche, Model S, Model X, MB EQS & higher-priced BMW offerings.
Expanded margin potential -- Expansion of all models to Next-Gen Platform, ADaaS monthly premium introduction, Mass 2023 production of Sodium Ion EV batteries at the low end of EV market transforming lithium supply-demand equation with a disproportionate effect on lithium pricing all suggest gross margin expansion for NIO in 2023.
Focus on User satisfaction – Highest customer satisfaction, lowest product failures, lowest customer complaints, highest customer referrals, most loyal customer community.
Depreciation is the Mother of Problems for NIO competitors -- Soon cost of EV battery replacements will loom large for increasing numbers of NIO EV competitors.
Soon BBA ICE buyers will understand that paying RMB 500,000 for the vehicle plus over RMB 100,000 (VPT, Bid/Auction etc) just for the chance to buy that vehicle in a major Chinese city makes NO sense when that vehicle may have no value in just 4-5 years when the viable resale market for old ICE vehicles in China may not exist.
The EV S-Curve now stands at 32.3 percent of all vehicles sold tells you that.
The ultimate reward, result & recognition of the NIO Master Plan is that there is not a legitimate EV competitor in sight to challenge the potential Premium Luxury segment dominance of NIO for at least next 2 years.
TSLA certainly is not a challenger to NIO in the Premium Luxury space.
William Li has repeatedly said that he does not regard TSLA as a competitor.
NIO ASP is 40 percent higher (more than that if you exclude Model S & Model X).
Battery Swap, BaaS, AR/VR, NIO Life, NIO Houses, NIO Warranty, NIO 5-Star Valet White Glove Service, NIO build quality & finish, NIO community, NIO customer referrals combine to highlight that NIO & TSLA are in two different price segments.
- TSLA main competitors are Toyota, VOLKSWAGEN & recently BYD with TSLA seeking a Global Sales leader mantle with a short-term profit focus.
- NIO bulls eye target main competitor is BBA ICE with NIO seeking optimum User satisfaction & longer-term profit focus.
TSLA seems to have no plan to challenge NIO in the Premium Luxury space but rather to focus on Cyber Truck.
BBA does not currently have the technology to challenge NIO.
Chinese State & Local Government Incentives / Policies guarantee the demise of ICE whilst BBA lack of competitive Product / Vision has guaranteed dismal performance of their EV offerings until at least 2025.
For BBA reality is:
- Dying old ICE carcass
- EV fledgling doomed for failure
- Possibly insurmountable image / brand / status / technology problems with current EV offerings
- BBA so messed up their EV entry with Chinese consumers that a comeback seems next to impossible.
Now, all we need is some good fortune on Covid & Supply Chain matters.
So NIO can be the new heir apparent in the Premium Luxury segment.
Not a Financial Advisor Nor Auto Analyst JMHO DYODD