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Coronavirus Outbreak is Threatening to Bankrupt China’s Tesla Rival

Last Updated September 23, 2020 1:34 PM
Ayush Singh
Last Updated September 23, 2020 1:34 PM
  • The coronavirus outbreak is having a sizable impact on the Chinese economy.
  • Car sales have slumped and will probably stay subdued for the entire year.
  • Chinese electric car-maker—Nio—was already cash strapped, and the coronavirus outbreak will likely push it into bankruptcy.

The growing number of coronavirus cases has crippled the Chinese economy. All the industries are negatively affected, but the automobile sector is bearing the full brunt of the economic slowdown.

As China continues to struggle to contain coronavirus, carmakers are in for a rough year. While all auto manufacturers in China will struggle, the impact from coronavirus will kill Nio Limited (NYSE:NIO), a Chinese Electric Vehicle (EV) maker that went public in 2018.

Nio a Failing Business Model

Even before coronavirus plagued China, Nio—often referred to as China’s Tesla—was struggling. The company was unprofitable and had a structurally bankrupt business model. A look at Nio’s horrible margins is all one needs to grasp the dire situation of the company.

Nio fundamentals
Nio is a cash-incinerator. | Source: Wall Street Journal 

With a double-digit negative gross margin, there’s no path to profitability.  Last year, Nio even announced it didn’t have enough cash to survive for another year. And to make matters worse, Nio is also debt-laden.

Nio's cash and debt
Nio’s debt has been in an uptrend. | Source: Wall Street Journal

Making cars, especially EVs, is a difficult and capital intensive business. This means unless Nio quickly turns profitable, it will consistently require a lot of money to fund its operations.

And if Nio doesn’t turn a profit soon, the new funding will dry up, pushing it into bankruptcy.

China’s Tesla Rival is Severely Cash-Strapped

Earlier in February, Nio decided to raise $100 million via convertible notes . The notes don’t pay interest, but can be converted into Nio shares at the price of $3.07/share after six months.

The deal is highly dilutive for the existing shareholders, but Nio is running out of options. The desperate raise is indicative of low on cash the company is right now.

Just yesterday, reports revealed that Nio is delayed its January salary payments by six days due to difficulties stemming from the coronavirus outbreak . Payments will be made Feb. 14 instead of Feb. 8. Coincidentally, 14 Feb is also when the company will receive the proceeds from the capital raise.

The timing of the events suggests that Nio didn’t have enough money to pay its employees before the capital raise. Considering that the total salary of the employees is around $30 million, the situation looks dreadful.

Although Nio has successfully managed to kick the can further down the road, the $100 million won’t last long. Considering that Nio lost over $300 million in the last quarter, a bankruptcy looks inevitable.

Coronavirus Adds to Nio’s Woes

Coronavirus has battered the Chinese automobile industry. The near-term impact on the industry has been much worse than it was during the SARS outbreak.

Coronavirus impact on China auto sales
China’s automobile sales slumped in January. | Source: Twitter 

Nio’s sales were down 11.5% year-over-year, which was almost in-line with the overall decline in Chinese automobile sales.

China’s efforts to contain the outbreak have not been bearing fruits. The number of cases has continued to grow at a rapid pace.

Cars sales will stay subdued in 2020 according to China Association of Automobile Manufacturers assistant secretary-general Xu Haidong :

The domestic auto market is expected to see a short-term consumption peak after the end of the epidemic, but we should not be optimistic about the sector for the whole year.

Coronavirus couldn’t have come at a worse time for Nio. The company was already in a precarious situation, and the outbreak has made things worse.

With profitability not in sight and sources of funding running out, bankruptcy looks inevitable. The only thing that can save Nio now is a bailout by the Community Party of China.