On Wednesday, Chinese electric vehicle firm Nio (NYSE:NIO) reminded investors how volatile the segment can be. After slipping 7% during the morning session, NIO stock closed down a little bit more than 6%.
What has frustrated investors about this particular downturn is that it’s occurring on apparently no company-related news. Perusing through the news cycle, the likeliest explanation is rising cases of Covid-19 cases in China.
Specifically, China appears committed to its zero-Covid policy. Earlier this year, the government ordered the economically critical port city of Shanghai to lock down. For companies operating in the city, like Nio, this caused production delays and other challenges. A repeat of the above policy could be detrimental again.
Worryingly, that’s the direction Beijing is signaling toward. Recently, Shanghai ordered three days of mass testing for Covid-19 in the district of Pudong, sparking concerns of what could come next.
Further, CNBC reported that the number of cities in China enforcing Covid-related restrictions has doubled. One such affected area is Anhui province, where the EV manufacturer has a factory. Under this context, it’s not necessarily surprising that investors took a dim view on NIO stock today.
Global Ambitions Clash With NIO Stock
Although the recent downturn in NIO stock also aligns with general bearishness in the underlying industry, it’s important to point out that Nio has a critical advantage in its home market. While the U.S. and Western nations are suffering from soaring costs of goods, China’s inflation rate is relatively low.
A contributing factor is that the Chinese government only provided limited stimulus during the pandemic. Therefore, Nio is theoretically able to dominate its home turf, an advantage that global EV makers may not enjoy in their home markets. However, that alone might not be a sustaining catalyst for NIO stock.
As Electrive.com explained earlier this year, Nio has “concretised its expansion plans in Europe and beyond. By 2025, Nio plans to expand its presence to over 25 countries and regions worldwide.” Unfortunately, regions like Europe do have high inflation, which can easily impact Nio’s strategic goals.
In addition, while the company’s NIO Power Day 2022 presentation offered many impressive developments, it’s also clear that competition from rival EV makers like Xpeng (NYSE:XPEV) is heating up. Therefore, the risk is that heated rivalries could eventually lead to a commoditization of the sector.
Accessibility Will Be Important
At this point, fewer people are questioning the viability of the EV industry. What’s more, rising gasoline prices have sparked tremendous interest in making the transition to electric. However, interest is one thing, demand is another.
With the average transaction price of a new EV hitting slightly over $60,000 in the U.S., consumer accessibility will be the key for NIO stock or any other EV player. Whoever can figure out this equation in a global market largely suffering from inflation may eventually take the checkered flag.
On the date of publication, Josh Enomoto 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.