China's Nio has the industry watching

HEIFEI, China — Few carmakers better embody the "try something new" spirit of China's mobility boom than Nio, the electric vehicle startup that boasts swappable batteries; a cutesy, animated, dash-mounted digital assistant; online-only sales; and stomach-clenching acceleration.

It is often billed as China's wannabe Tesla, although few Americans have heard of the company. Nio already has hundreds of mobile recharging vans on standby throughout China's biggest cities and operates a network of battery-swapping stations and fast chargers dotting the nation's highways and byways.

The carmaker also has built dozens of Apple Store-inspired customers-only Nio House cafes and has a smartphone app with more than 800,000 users. Moreover, its vehicles are churned out at a new assembly plant in this city west of Shanghai, whirring with modern robots and more than 2,000 workers.

But Nio also has something that no Western company would covet: It is awash in red ink. The 5-year-old startup so far has sold just 15,000 vehicles and last year reported a net loss of $3.39 billion — triple what it was the year before.

Nevertheless, this plucky upstart is turning heads at old-guard automakers.

Legacy players from Detroit to Toyota City see Nio, and countless Chinese startups like it, as a potential model for new ways of creating and selling autos in an industry under siege by new technologies, electrification, autonomous driving and connectivity.

The new challengers epitomize the ambition and creativity now bursting out of a culture of homegrown entrepreneurs in the world's biggest auto market.

"These startups have very innovative ideas," acknowledged Dong Changzheng, executive vice president of Toyota's China operation. "We are very serious about their products. We study them carefully."

Nio touts its innovation on several fronts:

• Its all-electric vehicles are packed with high-tech digital goodies.
• Its retail and marketing strategy leans heavily on social media and the "community" beyond cars.
• It contracts vehicle production to an outside manufacturer, as Apple does with cellphones.
• It has shortened product development lead time to under three years from the typical five.

"The auto industry needs fresh blood," Nio CEO William Li said during this month's Shanghai auto show, where he unveiled the ET Preview, a sedan concept that foreshadows a Nio nameplate possibly arriving as early as 2020. "Our mission is to build a community connected by cars."

It's enough to make traditional metal-benders jealous.

"The Chinese government says the future of the industry lies in electrification, and startups are coming from nowhere and addressing that," said Tim Slatter, Ford's executive director for product development in China. "We absolutely need to address that — but do it while running the rest of the company. We can't afford to be interested in only one thing."

Indeed, China is experiencing an EV gold rush, backed by government support. It has become the world's biggest market for battery-driven vehicles and has more than 100 EV players fighting for a piece. Besides Nio, the contenders include Singulato Motors, WM Motor, Xpeng Motors and Byton.

EV sales soared 51 percent to 984,000 last year, and first-quarter 2019 sales more than doubled to 227,000, according to the China Association of Automobile Manufacturers.

But strong headwinds are building. Beijing is now winding down subsidies for EVs and plug-in hybrids by the end of 2020. It cut government incentives by more than half this year.

Established Chinese automakers and overseas rivals are nonetheless piling into the segment. Volkswagen, the largest automotive brand in China, will offer 14 new-energy vehicles this year. The German group aims to produce 11.6 million battery-electric vehicles in China by 2028, more than half the group's global objective of 22 million.

Geely Automobile Holdings, the biggest domestic carmaker, currently has just two electric models — a compact sedan and a compact crossover. But at the Shanghai auto show, Geely unveiled a new EV subbrand, with a sporty compact sedan as its first product.

At the same time, Tesla is building its first assembly plant in China to duck pricey tariffs on imports and ramp up sales to China's increasingly affluent masses.

Many analysts predict that China's industry is ripe for a shakeout of weaker EV players. But the best of the new entrants also pose some challenges to their bigger, bureaucratic competitors.

"Old-guard automakers should be concerned about losing the younger demographic to EV startups, as their antiquated sales practices do not match up to EV startups' focus on selling an experience," said Zhou Lei, an auto analyst and partner at Monitor Deloitte.

"Car consumers in China are very open to new brand and product," Zhou said. "Consumers are willing to try their new services and consider EV startups as a fashion."

The homegrown EV startups fancy themselves as more than just carmakers. They pitch themselves as auto-tech companies, purveyors of rolling digital devices that promise autonomous driving, seamless connectivity and a customer experience reaching far beyond the vehicle. "Companies like Nio and Byton and WM represent not your typical Chinese auto company but a new breed of competitor that features Chinese funding and fast-moving companies with a global, tech mindset," said Michael Dunne, CEO of ZoZo Go, an investment advisory firm focused on China's autonomous and electrified vehicle markets. "China offers an ideal arena for development because investors there can bank on sustained government support for EVs at the national and local levels and, of course, a massive potential market."

At Nio, the new startup spirit is captured by Nio House showrooms, Li's vision for a community beyond cars.

Nio has 35 of these woody, window-encased, Apple-inspired outlets across the country. The downstairs showroom is open for the public to peruse Nio's vehicles. But owners and prospective buyers may go upstairs to a members-only space.

There, they can escape the crush of China's crowded cafes to catch up on email at the workspace or relax with a good book in the library. It offers a rental space for events, and even a day care area, called Joy Camp, where parents can drop off kids while they go shopping.

There's no need for cash. Visitors can buy Nio House's signature fruit mocktails or logo-emblazoned apparel with Nio points. People earn the virtual currency by recommending others to the brand, engaging with its smartphone app or "liking" Nio content on social media.

Nio's app has more than 800,000 users, a following far beyond the carmaker's meager customer base. In fact, the app is the only way to buy one of Nio's vehicles because all purchases must be completed online. There are no traditional dealerships. The company's salespeople are called "fellows."

"Our key strategy is to build a joyful lifestyle around the car to provide people a holistic experience," Nio President Lihong Qin said. "We adopt a strategy in which we own the network by ourselves and we face and deal with our customers directly."

A trademark feature of Nio's vehicles is Nomi, the digital assistant with emotive eyes that sits on the dashboard like a Magic 8 Ball. It responds to voice commands like a chirpy anime character.

Li knows that branding is key in image-conscious China. He cut his teeth by founding Bitauto Holdings, a marketing, advertising and transaction provider to China's mammoth auto sector.

Li then decided to try selling his own cars and founded Nio in 2014 with partner Qin. Deliveries of Nio's first vehicle, the ES8 crossover, began last June.

The midsize crossover seats up to seven people and, in sport mode, does 0 to 62 mph in 4.4 seconds. Its 70-kilowatt-hour battery powers a two-motor, all-wheel-drive system that delivers a 220-mile range, based on the New European Driving Cycle. An 84-kWh battery arriving this year will boost range to 264 miles.

But the ES8 is pricey — starting at just under $67,000 and topping out at $84,663. By the end of March, cumulative ES8 sales totaled just 15,337 vehicles.

Deliveries of Nio's second mass-produced nameplate, the smaller ES6 crossover, will begin in June. It starts at $53,362 and promises a range of up to 317 miles.

Nio also created a boutique-built supercar, the EP9, which had an initial run of six cars. Two years ago, Nio announced plans to build a second batch of 10, each made to order, with a sticker price of $1.48 million.

Nio has ambitions to someday sell in the U.S. and Europe. It already has a staff of 520 working at a North American headquarters in Silicon Valley. But for now, it is focusing on China. Its vehicles are manufactured here in Heifei, west of Shanghai, by the Chinese state-owned automaker Jianghuai Automobile Group Co. Nio has stationed about 200 managers and quality engineers at the factory to oversee its 2,000 JAC workers.

The plant has the capacity to produce 100,000 vehicles a year. By the end of 2019, it should be producing at a rate of 8,000 vehicles a month, covering both crossover models, Li said.

Li considers contract assembly a modern-day evolution. But it's not without its detractors.

"JAC is very low-end and has a pretty poor reputation for quality," said Yale Zhang, managing director of Automotive Foresight, a consultancy in Shanghai. "This was a mistake."

Serious automakers invest in their own plants because they want to control cost and quality. The traditional automakers now flooding into the EV market are able to offer better pricing, he said.

"Nio is not at a mass-production price yet," Zhang said. "If you are a Chinese startup with no history, how can you start at the premium segment? I don't think that's realistic."

Nio went public in September, and some investors also have issues with the company. A class-action lawsuit was filed this month against Nio in the U.S. on behalf of shareholders. It says Nio failed to disclose that the rollback in government subsidies would materially affect sales and that Nio would be relying on JAC to build its vehicles rather than a plant of its own.

Li said the phaseout of subsidies won't derail consumers' march toward EVs. That's because there are plenty of nonfinancial incentives that spur people to keep buying, such as being able to dodge China's draconian license plate restrictions on gasoline-burning cars.

Li also contends that tapping JAC has benefited the company and investors because Nio consumed much less capital. As for the mounting losses, Li also sees that in a different light.

"We don't think this is losing money. We think we are putting the money into the right places and right uses," Li said. "We are focused on product r&d and improving user services. The Chinese car market and EV market are still the world's largest. In the long run, we have confidence."