I’m not a big fan of Chinese electric-vehicle manufacturer Nio (NYSE:NIO). That said, I understand why so many people are bullish on Nio stock, despite its incredible volatility. Essentially, it comes down to the idea that EVs represent the future of the automobile, and it may surprise you that I don’t disagree with that forecast. However, that future may not arrive for several years.
Furthermore, NIO optimists love the company’s associated tailwinds. Generally, demand for EVs is very strong in China. The Asian juggernaut already owns the world’s biggest automotive market. With a population size four times the U.S., China owns several leading markets. Plus, the country is undergoing its own technology and manufacturing revolution, bolstering the case for Nio stock.
Specifically for NIO, the company has tapped into what initially made Tesla (NASDAQ:TSLA) a standout success: its ability to deliver aesthetically appealing EVs that combine practicality with performance. And, while I’m ultimately bearish on Nio, I’ll easily concede that its cars are drop-dead gorgeous.
Still, the Nio stock price is down almost 50% year-to-date. Previously, I’ve argued that the underlying company has a credibility problem. Apparently, neither NIO cars nor the EV industry is ready for prime time.
And in the middle of a rising crisis with the U.S.-China trade war, the EV maker looks even more unattractive. Here are three reasons to stay away from Nio stock:
NIO’s Quality Is Unproven
For decades, the phrase “made in China” has been a punchline. In fairness, it’s a two-sided joke. Western nations demand cheap products, and China willingly supplies them. While overall, Chinese manufacturing has supposedly improved, NIO’s longer-term quality remains unproven.
Last month, I mentioned that some of the Chinese EV maker’s cars had a fatal flaw. According to multiple reports, battery defects have sparked fires. Obviously, that’s a distressing risk if you’re a prospective buyer. Moreover, it raises questions about the forward viability of the EV sector.
I’m also not moved by a J.D. Power report that states NIO scored the highest in new energy vehicle comparisons. The automaker has the fewest problems per 100 vehicles over a two-to-six-month period.
Initially, that sounds like a bullish argument for Nio stock. However, using similar criteria, J.D. Power recently listed Hyundai’s Genesis, Kia and Hyundai as the highest-ranked brands for new, fossil-fueled cars. Therefore, I’d take the seeming NIO compliment with a grain of salt.
Also, the reported problems from EV owners as reported by J.D. Power are quite serious. We’re talking slow charging speeds, reductions in mileage and powertrain issues. In summary, both EVs and NIO have much to prove.
EV Policies Greatly Hinder Nio Stock
With the hoopla surrounding the trade war, you’d think that souring U.S.-China relations would represent the biggest headwind for Nio stock. But that issue, while significant, doesn’t come close to the primary problem.
As it turns out, both the U.S. and China can agree on something. Both countries are scaling back their policies supporting EVs. With China in particular, changes in automotive licensing render a dramatically negative impact on the Nio stock price.
Consider that in the U.S., getting a driver’s license is considered a rite of passage. With open roads, a robust economy and access to cheap cars, it’s easy for anyone to get up and drive. But that’s not how things work in China. Instead, a license-plate lottery means that you may have to wait nearly a decade to get a car.
In years past, the Chinese government eased such restrictions for EVs. Naturally, demand for these next-generation cars skyrocketed. However, Beijing is now reversing their stance on fossil-fueled cars. That takes away a huge incentive for buying EVs, especially if you don’t have convenient access to electrical power.
Of course, this policy headwind is priced into Nio stock. Nevertheless, I don’t see how management can overcome this challenge, which leads to my next point.
Nowhere to Go
Here’s where the trade war and the EV policies get tricky for NIO. With the China market fading, management will naturally eye the second-biggest arena. But as I referenced earlier, the U.S. is also limiting their EV support. Specifically, funding for EV-purchase incentives are running out, and there’s no rush to replenish them.
But even if funding resumed, I’ve previously argued that we don’t have the infrastructure to support mass-scale EV adoption. We just had a heat wave that affected many states’ electrical grids. Imagine the stress of both air conditioners and EVs: it could cripple our operational readiness.
If somehow we get over that hump, then it must contend with increasingly hostile relations between the U.S. and China. Practically speaking, the U.S. market is off-limits to NIO.
That leaves the company with very limited options. Sure, it can market its products in Japan or Europe, but EVs are arguably less practical outside of the U.S.
Bottom line: Nio stock was already a troubling proposition without the trade war escalation. With it, I think you’re better off avoiding this one.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.