With a cursory view from afar, Nio (NYSE:NIO) appears a no-brainer investment. Certainly, recent performance history gives credence to the bullish argument. Despite its lackluster performance so far in 2021, over the trailing year, NIO stock is up 913%. That’s an enviable metric, even compared to some of the highest-flying growth stocks.
Further, Nio plies its trade in an electric vehicle renaissance, at least as far as its home China market is concerned. According to the New York Times, a rush of money from Wall Street to Chinese governmental subsidies and incentives have turned the world’s second-biggest economy into the global leader for EV proliferation. As NYT reports:
China is erecting factories for electric cars almost as fast as the rest of the world combined. Chinese manufacturers are using the billions they have raised from international investors and sympathetic local leaders to beat established carmakers to the market.
In other words, the supporting cast couldn’t be better for NIO stock. As one of the flagship names in the burgeoning Chinese EV marketplace — and also one that carries significant resonance with western, particularly American investors — China is sure to bankroll the company if anything goes wrong. And it probably will.
Though the Chinese mega output for EV manufacturing beats American and other international manufacturers by a country mile or five, this is a volume comparison. It’s not a quality comparison. As Bloomberg reported in 2019, quality issues plagued China’s EV industry, including flagship Nio. I don’t see how ramping up production pressure, especially amid a semiconductor supply chain crisis, helps matters for NIO stock or anyone else.
To me, it’s a basic physics conundrum. If you convert potential energy (production capability) into kinetic energy (actual production), you necessarily have less of the former to draw from later. When you convert excessively, you invariably compromise other critical attributes like quality.
Nio Stock May Be a Pyrrhic Victory
To be sure, the production catalyst that the mainstream media is apparently obsessed about serves no insight beyond what we already know. China excels at manufacturing at high volume. No one can compete with those folks. But where the narrative for NIO stock gets cloudy is that no one should even bother.
According to the NYT report I referenced earlier, “In April, President Biden called for the United States to step up its electric vehicle efforts. During a virtual visit to an electric bus factory in South Carolina, he warned, ‘Right now, we’re running way behind China.’”
While I think Biden deserves credit for having his heart in the right place, I certainly hope that we’re not going to try to keep pace with China. This is not a sprint but a marathon. The only thing the Chinese will achieve is running themselves ragged.
First, China is an economic powerhouse but is not a sophisticated one. According to a NatLawReview.com summation of National Security Division head John Demers’ argument, “China’s typical modus operandi is to steal American IP [intellectual property], replicate it, replace the U.S. company originating that IP in the Chinese domestic market, then displace the United States in the global market.”
In other words, without Americans to steal from, China would be nowhere. Without Americans to whom to sell, China would be nothing. Otherwise, why would China need to steal anything if it were an inherently great economic power? You don’t see the Germans stealing American combustion car “technology.”
Second, all that China’s efforts into being an EV global leader will accomplish is to cannibalize sales from its most promising outfit. Look, as great of a ride that NIO stock has been, the underlying company is going to have challenges to break perceptions about Chinese vehicles. But when you flood the market with nameless, faceless Chinese brands, you just end up swamping your marquee players.
Nowhere But China
Of course, the ultimate goal of Nio and other Chinese automakers is not to gain credibility within the home market but abroad. China’s draconian communist government will take care of the former if there are any problems. As the meme goes, the beatings will continue until morale — sales, in this case — improves.
Likely, at least a sizable portion of speculation in NIO stock went toward the concept that, somewhere down the line, the EV maker will start pumping out vehicles in America. While you should never say never, I’ll say this much: I’ll be darn shocked if that were to happen.
Why? We’re talking about Chinese vehicles, not Japanese. Your average American may not be able to distinguish the two countries on a geography test, but believe me — when it comes to their wallet, they’re very astute.
Further, Americans have no shortage of automotive options, whether combustion or electric. For instance, Ford (NYSE:F) is really kicking butt with its Mustang Mach-E and will probably do the same for its upcoming F-150 Lightning. Why would American consumers buy second-rate junk from China?
Also, look at the global perception of China per the Pew Research Center. Basically, everybody hates China and not just for its impudent and arrogant handling of the novel coronavirus. And Americans, having suffered the worst from the crisis, arguably hates China the most.
Regrettably, this has turned into an outbreak of violence against the Asian American community. But eventually, and perhaps soon, Americans of all stripes will realize that the best way to handle China is to close our wallets: say “no” to their EVs, say “no” to capitalizing NIO stock and other Chinese securities.
What will the Chinese EV makers do? They’ll have to sell their junk to themselves. More than likely, that will be an unsustainable proposition.
On the date of publication, Josh Enomoto held a LONG position in F. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.
