Charting NIO's Course in the Competitive EV Market

Leadership insights on autonomous driving, charging solutions, and value creation

On April 18, 2023, at the Shanghai Auto Show, NIO showcased its entire range of models, including the new ES6 and the recently launched 2023 ET7. Over the next three months, NIO will fully transition from its first-generation (NT1) platform to the second-generation (NT2) platform, marking a significant milestone amid intense competition in the domestic automotive market.

Following the auto show press conference, NIO's founder and CEO, William Li, and Vice President Shen Fei, participated in a group interview with the media. They discussed a wide range of topics, including autonomous driving, charging, and product roadmap. I previously shared the highlights of the interview, but today I wanted to add my own commentary on each of these aspects as well.

A Check-in on NIO's Progress @ Shanghai Autoshow

01

Autonomous Driving: Subscription Model, Standardization, and Full-Stack Capabilities

Recently, advanced intelligent driving on open urban roads has become a controversial topic in the industry. The debate is divided into two camps. One, led by companies like XPeng and Huawei, believes that their technology is far ahead and holds high expectations for the future.

Richard Yu (Executive Director of Huawei’s Consumer Business) recently spoke at the Shanghai Auto Show about one of their partner brands, AVATR:

AVATR recently drove approximately 1,500 kilometers from Shenzhen to Shanghai, with only two interventions. We hope to achieve zero interventions in the future.

Compared to our competitors, including Tesla, our intelligent driving technology is far ahead.

We wouldn't boast if we couldn't achieve it, but now we can confidently say that we are indeed far ahead.

The other camp, led by Wang Chuanfu (Founder & CEO of BYD), argues that autonomous driving is nonsense and deceptive.

During the Shanghai Auto Show, both sides voiced their opinions. Although no names were mentioned, industry insiders understood the situation and paid close attention. In an interview, NIO's CEO, William Li, shared his own framework.

He emphasized that there is currently no common industry standard for evaluating autonomous driving, and everyone uses their own narratives. From his perspective, three aspects should be considered:

1. Hardware and compute power is crucial, as it determines the system's ceiling. Continuous software capabilities can only be achieved with solid hardware that is future-proof.

2. Standardization of autonomous driving hardware, such as chip computing power and sensor solutions, is necessary. While implementing different combinations on one platform might work short-term, it's not ideal for managing complexity and maintainability in the long run. It’s also difficult to form an effective closed-loop system for gathering and deploying training data. Data collection will have to be redone for each generation of hardware, slowing down progress.

3. Full-stack capabilities are essential, including software abilities from perception to regulation, data loop formation, subsequent iterations, and operational capabilities. Relying on a mix of in-house development and external providers is not a systematic approach.

On the product front, Li shared two important updates on the company's autonomous driving products: NOP+ (comparable to Tesla’s EAP) and the upcoming NAD system (similar to Tesla’s FSD). Firstly, NOP+ has been undergoing internal testing and is set to launch commercially on July 1st, with a monthly subscription fee of 380 yuan (around $60). Li believes this pricing is reasonable, offering good value for those who drive at least 10 hours a month compared to hiring a driver.

Secondly, Li also hopes to introduce a Beta version of the NAD autonomous driving system in Shanghai by June this year. However, NIO has yet to announce a specific timeline for its widespread commercial release.

Li also stressed that developing autonomous driving capabilities is really a long-term investment. It’s similar to building a skyscraper: the last 2-3 years were spent building a solid foundation, and very little progress can be observed from the outside. This phase is critical before construction can accelerate. He believes that NIO is now just above ground level and progress will accelerate from here.

02

Charging and Battery Swapping: The Future of Electric Vehicle Charging Solutions

The charging network and battery swap were also interesting points of discussion. The interview mainly revolved around the recent hot topics of 500 kW supercharging and 800V platforms. There was one particularly interesting comment that Shen Fei made during the interview:

I particularly dislike promoting the wattage of ultra-fast charging. Our charging pile has 500kW, but it can actually go higher. It can reach 1000V 660A, but there's no point, as no car can handle that. The charging speed of a charging pile depends on the weakest link between the power grid, charging pile, and the car.

Shen Fei, EVP Nio Charging Infrastructure

Shen Fei further explained that the deployment of supercharging stations should be considered based on different situations. While the national power grid can easily accommodate electric vehicles' total power consumption, local power grids might face challenges, such as deploying multiple supercharging stations in residential community parking garages.

Translating what he is saying here: With ultra-fast charging (500 kW+), the current key constraint lies in the grid and the car, rather than the charging pile. To enable this, the car will switch to an 800V architecture, which isn’t hard. As for the grid, it would require substantial investments to upgrade the infrastructure to handle the additional load. To put it in perspective, the typical power needs of a household are usually around 1-2 kW. This means a single 500 kW charging pile could potentially power up to 500 residential homes! The local power grid is simply not designed for such high-power applications.

This is where battery swap stations hold an advantage. With V3 swap stations, for the first time, they can be used as bi-directional energy storage facilities, offering not only charging efficiency but also the ability to balance charging costs by using the batteries as a buffer during peak demand periods. As a result, battery swapping has both significant business opportunities and social value.

To do some rough calculations, each V3 battery swap station has about 1.8 MWh of battery storage within. Assuming they deploy 1,000 V3 stations in 2023, they'll end up managing a 1.8 GWh distributed battery storage system. If they retrofit their existing battery swap stations to be bi-directional, that’s another approximately 1.4 GWh, bringing the total up to 3.2 GWh.

As far as what's been reported publicly, this would make it the largest battery storage project to date and by far the largest distributed one. The next largest one is the 1.4 GWh Crimson Energy Storage plant that came online in Riverside, California in late 2022 (link).

With that said, NIO doesn't view charging and battery swapping as mutually exclusive. Besides battery swap stations, they are also aiming to install 10,000 charging stations with varying power levels this year. These stations are primarily used to supplement other charging scenarios, allowing users to conveniently charge their vehicles in places like shopping malls and cinemas.

NIO believes that the future of electric vehicle charging lies in integrating charging and battery swapping together so they can provide the most convenient charging solution in all possible scenarios.

03

Market Competition: NIO Focuses On Value Rather Than Price

In today's Chinese auto market, price and feature competitions are prevalent. Everyone (including myself) is curious whether NIO will feel the pressure to jump into the fray.

During this interview, Li essentially dismissed that approach outright. He said NIO should focus on creating value instead of competing on price (i.e., invest heavily in battery swap stations and charging stations, focus on customer service, etc.). As for the pricing of the new ES6, Li also said, "Don't expect us to set a particularly low price for the ES6. We won't do that."

This is in direct contrast to Tesla's approach in the past year, where they have dropped prices by as much as 30% to keep the factory running. On the earnings call, Elon basically said as much. Tesla is willing to effectively operate at 0% margin because FSD will bring in substantial revenue/profit once autonomous driving is fully realized.

While Li is confident about NIO's product competitiveness, he did concede that there are many issues the company has to work through and that others have done better. As an example, Li pointed out that the current ES6 test drive to order conversion rate appeared ordinary compared to traditional luxury brands like BBA (approximately 25%). In contrast, when the older ES8 model debuted, the conversion rate after test drives reached 80%-90%.

Part of this is undoubtedly due to ES6 being an aged platform coming to EOL and there are plenty of 5-seat SUV options that Chinese consumers can choose from today. But Li also believes that NIO's service has not kept up with its growth. Its reputation from the early days has masked many underlying issues. In his words, "We have deviated from our original intention of prioritizing our users and our service." He vowed to tackle those issues head-on this year.

04

Final Takeaway

The way I see it, NIO's strategy is simultaneously the correct one and the hardest to execute on. They will face substantial headwinds in the short term. NIO is a brand that needs to be experienced to be appreciated; however, today, consumers have an easier time ascribing value to tangible aspects like lower prices, bigger batteries, and wider screens, as opposed to service.

This level of competition, of course, unsustainable in the long run. Many of NIO's competitors are running at 0 or negative gross margin in hopes of gaining market share. But in order to see the bright future tomorrow, you have to first survive today. How well NIO executes in the next three months on their product launches and manufacturing ramp will set the tone for the rest of the year and largely determine whether they can hit their sales target for the year (240,000 units/year).