"The short is answer is yes but we share investor frustration following the guidance cut last week," Edison Yu's team wrote.
(Image credit: CnEVPost)
NIO (NYSE: NIO) has disappointed many investors by running into a succession of operational problems over the past few months. Last week, the company added to the frustration by unexpectedly lowering its guidance for fourth-quarter deliveries.
Following this series of developments, Deutsche Bank analyst Edison Yu's team asked in a research note sent to investors today if NIO's operational issues will ever end.
"The short is answer is yes but we share investor frustration following the guidance cut last week especially in the context of LI and XPEV meeting/beating estimates and Zeekr managing to exceed its overall 2022 target which was set at the beginning of last year," the team said.
Over the past few quarters, NIO has experienced problems with metal casting parts, EDS assembly, silicon carbide supply and, more recently, delivery logistics. This resulted in deliveries of only 40,000 in the fourth quarter, below the initial guidance of 43,000-48,000, and 15,800 in December, below the about 20,000 expected by Deutsche Bank, the team said.
With NIO valued well below Li Auto at the end of 2022, this reflects investor concerns about NIO management's ability to execute, especially as it has ambitions to launch two other car brands and expand meaningfully into Europe, the note wrote.
"Said more bluntly, how can we trust management to launch multiple brands in different segments (and foreign countries) when it has consistently missed production targets?" Yu's team asked.
Moreover, as a side effect, there are concerns that these operational failures have led to the loss of thousands of cars sold because customers got tired of waiting while the models were still fresh, the team said, adding that could the ET7 be suffering from that now?
Yu's team believes that NIO has been too aggressive in trying to deploy new manufacturing process technologies, such as a highly automated EDS assembly line, mega-casting and simply not paying enough attention to supply chain risk mitigation.
"It is not clear if this is a structural or personnel issue (or both) but we think management team is now very aware of these shortcomings and would expect better execution in 2023. In particular, we anticipate all outstanding operational bottlenecks will be addressed by the end of the first quarter," Yu's team said.
NIO has qualified additional casting suppliers, eliminating capacity constraints for ET7. The company has added an EDS assembly line to support ET5 production, and silicon carbide supply issues related to Onsemi should be resolved this month, the team noted.
In addition, a surge in Covid cases across the country has led to increased worker absenteeism and delayed vehicle deliveries by buyers. NIO believes these factors reduced December deliveries by 4-6k units, the note wrote.
NIO has greater exposure in Tier 1 cities and larger Tier 2 cities, which have seen the largest surge in cases since the zero-Covid policy pivot. As the virus works its way through these cities, delivery logistics are expected to return to normal, according to the team.
"To be clear, we still believe NIO's broader strategy and brand value are second to none among EV upstarts but in the current backdrop, these qualities will not be rewarded by investors without reliable execution on hitting production/delivery targets," Yu's team wrote.
It's worth noting that there has been a long history of complaints about NIO's operational problems, and it exists not only among investors, but also among vehicle owners as well as supporters.
William Li, the company's founder, chairman and CEO, was asked several questions related to this during a conversation with some owners and potential consumers during the opening ceremony of a new NIO House in Dongguan, Guangdong, southern China, on November 27, 2022.
Some of these questions included, why are NIO's deliveries always affected by Covid and the supply chain? Why do other car brands seem to be less affected?
Li said at the time in his answer that there were many reasons behind these questions, but of course NIO could have done a little better on its own.
This is a very complicated matter, after all, there are big differences between different products, Li said.
For example, NIO's first production model, the ES8, faced a lot of difficulty in ramping up its production capacity with its all-aluminum body, and many of the joining processes are up to date, according to Li.
"Of course, there are some benefits to it. NIO has done a lot of work in a lot of places you can't see, so it's easy to be misunderstood and some people question why we're so slow," he said.
Each car company has a different strategy, and NIO is producing vehicles to order and delivering as many cars as they produce as capacity creeps up, Li said.
In the long run, the supply chain problem will definitely be solved, and the subframe issue is all but solved, he said.