Auto sales in China fell 47% in April due to the country’s zero-Covid policy. It’s hard for Nio (NYSE:NIO) and its peers to make cars when their workers are stuck in their homes and not in the factories. That’s one of the reasons NIO stock lost almost 21% of its value last month. However, if you’re a Nio shareholder, there is a silver lining: it could be making and selling internal combustion engine (ICE) -powered vehicles. ICE vehicle sales were down more than 50% in April, while electric vehicle (EV) sales last month fell by 36% from 465,000 in March to 299,000 in April. As the headline states, Nio shareholders are fortunate they’re making EVs, not ICE-powered cars. Here’s why.
The chief executive officer of Automobility, an investment advisory firm based in Shanghai, recently discussed the major issues affecting the global auto industry. In addition to Covid-19, the supply chain is top of mind for Bill Russo, who once led Chrysler’s Northeast Asia business.
Russo believes that EV companies will move to vertically integrate their businesses. That’s not good news for Fisker (NYSE:FSR) or Magna International (NYSE:MGA), its manufacturing partner for the Fisker Ocean SUV.
“If you want to scale up and that supply gets taken by a consumer electronics customer — which was what happened during Covid, they can’t scale up,” Russo told Forbes contributor Russell Flannery. “The solution will eventually be to source customized integrated circuits where you have the ability to control the buy and sell these components. Batteries and chips supply are the key battlegrounds for securing your position in the future of this industry.”
So, how is Nio doing on the vertical integration front? The International Institute for Management Development (IMD) has a Future Readiness Indicator for the automotive industry that ranks companies on their “readiness for deep, long-term, secular trends.” While Nio only ranks 18th on the list — Tesla (NASDAQ:TSLA) is number one — its pace of innovation is pushing higher. IMD notes that while Nio doesn’t focus on manufacturing, its software expertise puts it second-only to Tesla.
“NIO and BYD are built on the capabilities of the future, not of the past. Whether there’s a semiconductor shortage or not, they are busy preparing for the next battleground. Traditional carmakers should be on high alert,” IMD wrote in December.
As bad as things look now with NIO stock down 57.3% year-to-date and trading at its lowest level since August 2020 — it is doing what is necessary to be relevant 10 years from now. While Nio is relatively new to the EV game, IMD sees it as a possible candidate to become the next Tesla. That’s much better than becoming the next big ICE player.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.