Chinese Culture May Help Nio but Will Offer Little to NIO Stock

Saving face for China means having a successful EV company of its own

Amid increasing negativity, Nio (NYSE:NIO) continues its slide. A poorly-handled quarterly report and continuing downward revisions have weighed on Nio stock as the company continues to lose money.

Every Time You Think It Can't Get Worse for Nio Stock, It Does
Source: Sundry Photography /

However, traders often forget about the Chinese mindset when considering the behavior of the companies and stocks within the People’s Republic. Although the country’s culture could offer a lifeline to Nio, investors should not expect that to bring limited relief to Nio stock.

NIO’s Outlook Continues to Worsen

The outlook for Nio stock has continued to grow bleaker. Revenue growth looks promising. However, Wall Street also projects losses for the foreseeable future, as well as low cash reserves that threaten the company’s survival. Moreover, it faces competition from dozens of companies at home and will contend with even more when Tesla (NASDAQ:TSLA) opens its Shanghai Gigafactory.

Consequently, many of my InvestorPlace colleagues and I have turned bearish on Nio stock. David Moadel cites the earnings miss and the canceled conference call as reasons to doubt the company. Josh Enomoto describes it as “stuck in gear.” Luke Lango goes against consensus by stating it is “not the Chinese Tesla.” I have agreed with these points in previous articles.

Such conditions likely explain why Bernstein cut its outlook on NIO from $1.70 per share to just 90 cents per share in late September. The Nio stock price stands at around $1.70 per share as of the time of this writing.

“Saving Face” Could Save Nio Stock

However, traders often forget once cultural nuance about the Chinese people, and by extension, their companies. As a result, they neglect to consider the value of “saving face” in Chinese society.

So prevalent is this that it did not escape notice of the National Institutes of Health (NIH). An NIH study determined that the concept of face has a tremendous psychosocial impact on Confucian society. While this study reflected only on personal behavior, one can assume that these feelings extend to Chinese officials seeing their responsibility for the state as an extension of themselves.

One of these extensions for Chinese officials likely involves Nio stock. Nio is far from the only electric vehicle (EV) company in China. However, it has become the highest-profile EV firm and the first to trade on public markets. They also see Tesla’s success with EVs as well as Ford (NYSE:F) staking much of its future on these types of automobiles. For these reasons, saving face for China means having a successful EV company of its own.

Bailout Offers Little Help to Nio Stock

This translates into a need to bail out Nio. Unfortunately for investors, bailouts tend to focus on survival rather than success. Even if a rescue preserves Nio, it will not necessarily revive Nio stock. Investors tend to buy equities for their growth prospects. Survival leaves little incentive for investors to bid NIO significantly higher.

Moreover, depending on how they structure the bailout, it may not save NIO at all. One might recall that the bailout of General Motors (NYSE:GM) involved a bankruptcy. While I believe the need to save face will probably preclude such a move, investors should still not assume that a Nio bailout is a Nio stock rescue.

The Bottom Line

A possible bailout of Nio will probably offer little help to NIO shareholders. Many analysts have turned negative on Nio due to continuing losses and dwindling cash reserves.

Still, despite this bleak outlook, many in China feel the need for their country to save face in the EV market. Given Nio’s high profile, this could work in the company’s favor.

Unfortunately for holders of Nio stock, the act of survival will likely not attract investors to the equity. Moreover, bailouts have sometimes meant a restructuring in bankruptcy, as was the case with GM. While saving face may avert this option, it will do little more than keep NIO above $0 per share.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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