For a number of reasons, I’ve grown skeptical about electric vehicle makers such as Nio (NYSE:NIO). Mainly, while EV technology is undoubtedly exciting, it requires a massive paradigm shift. For all the inefficiencies involved with combustion engine vehicles, they are convenient in terms of refueling. Even the most advanced EV and charging system requires about 20 to 30 minutes of downtime, which doesn’t necessarily favor investments like Nio stock.
However, like virtually all industries, the novel coronavirus has radically changed the automotive market. And on the surface, the shift appears unfavorable to Nio stock, along with rival investments such as Tesla (NASDAQ:TSLA). As the pandemic imposed a hard stop on many first-world economies, demand for crude oil, which was already softening, cratered. Thus, with cheaper prices for drivers, the economic incentive for buying an EV was significantly reduced.
As well, the demand destruction also caused inventory to overflow for used vehicles. Not helping matters is the devastation suffered by rental car companies like Hertz (NYSE:HTZ) and Avis Budget Group (NASDAQ:CAR). With air travel decimated, this has dramatically reduced the need for rental cars. Additionally, rental cars often dump their vehicles into the wholesale market, which has bulged to ridiculous levels.
Now, this has caused deals to rise for EVs. But for the most part, traditional car brands are likely to see the greatest demand. Plus, car makers will be incentivized to cut prices on their new vehicles to keep the supply chain flowing.
At the present juncture, the situation doesn’t bode well for Nio stock. But over time, rising geopolitical tensions could see China unleash its manufacturing prowess, potentially boosting NIO.
Relatively Cheap Production Can Lift Nio Stock
One of the factors that I admittedly didn’t appreciate much about EVs is their ease of manufacturing. According to research from Goldman Sachs, combustion engine cars utilize approximately 30,000 components. On the other hand, EVs only require about 11,000 parts. That immediately saves costs, along with research and development expenditures.
Also, it’s one of the main reasons why Tesla has been so disruptive. Although I’m oversimplifying, the main catalyst for the EV is the electric battery. When you have that, you can slap on some axles and wheels and you’re ready to go. Especially if you operate exclusively as an EV manufacturer, you can upend the old, stodgy establishment.
At the same time, lower barriers to entry means that you have more competitors to deal with. Further, because the global EV infrastructure isn’t nearly as fleshed out like it is for combustion vehicles, it can become an economically un-viable situation. This was the reason why Dyson – best known for its vacuum cleaners – dropped out of the EV arms race.
Frankly, this low barrier and lack of immediate viability is still a headwind for Nio stock. But the geopolitical winds have also shifted.
Due to the implications of the coronavirus for the 2020 presidential election, President Donald Trump has shifted toward an aggressive policy against China. This shift has also spilled over into some unfortunately regrettable or unprofessional incidents. And that suggests we’re in for a protracted conflict (again) with China.
Naturally, the Chinese don’t like to lose face. Therefore, I anticipate them fighting fire with fire. In the not-too-distant future, they could flood the global market with cheap EVs, which could be positive for Nio stock.
Sure, a low barrier to entry is a problem … unless you’re China. They’re specialists in cost cutting.
Challenges to American Competitiveness
Indeed, many if not most Chinese companies would not think twice to cut costs, whether those methods are ethical or not; hence, the shoddy reputation of Chinese manufacturing. Honestly, this stereotype isn’t undeserved given the country’s almost brutal bottom-line mentality.
Of course, Americans can’t keep up, nor should they on an ethical principle level. But that leaves U.S.-based companies at a clear disadvantage — Tesla being an exception due to its tremendously powerful brand. Further, our big corporations have embraced globalized supply chains over the last several years. As the Harvard Business Review argued last month, bringing that manufacturing base back, especially on a large scale, is a complicated proposition.
Therefore, should the future turn electric – and persuasive evidence suggests this could be the case – the U.S. could find itself behind the eight-ball, especially if Trump wins reelection. A nasty conflict will stoke nationalism on both fronts, meaning China wouldn’t care about global economic parity one bit.
Potentially, this could result in a surge of EV manufacturing. And with NIO forwarding some very compelling vehicles, Nio stock could be a standout performer. In the meantime, the U.S. can be competitive with star performers like Tesla. However, many other domestic companies may find themselves competing with higher-priced products due to our overall higher standard of living.
However, this narrative isn’t without serious risks. But with the coronavirus changing the tone of our relationship with China, the comeback argument for NIO is suddenly more credible.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.