Thoughts on Chinese EV Market Expansion in Europe
NIO’s First Battery Swap Station in Germany (Credit: NIO)
I. Background
The automotive industry is important in gauging a region's industrialization level and economic prowess. Chinese economic planners aspire to establish globally competitive auto companies to drive economic growth. Since 2008, China has emerged as the world's largest automobile producer, surpassing the European Union, the United States, and Japan, accounting for over 32% of global vehicle production. China’s central government encourages the development of clean and fuel-efficient vehicles to sustain its growth.
Consequently, China has become the world's leading producer of electric vehicles (EVs), responsible for approximately 57.4% of global EV production, with around 500,000 exports in 2021.
In the Chinese EV market, particularly the pure battery-backed EV segment (BEV), domestic companies dominate the landscape. Notably, BYD and SAIC Motor hold the top two spots, with five out of the top seven positions occupied by Chinese BEV manufacturers. Among these companies, NIO stands out as a Chinese multinational automobile manufacturer specializing in the design and development of electric vehicles. NIO first launched its brand in 2016 and gained recognition for its innovative battery-swapping stations, an alternative to conventional charging methods. Currently, NIO exclusively offers premium BEV products.
The flagship model from NIO, the ET7, is a battery-powered executive sedan boasting a range of 500km - 550km. Featuring two electric motors and all-wheel drive, the ET7 delivers a combined output of 653 PS, accelerating from 0 to 100 km/h in just 3.8 seconds. Equipped with NIO's proprietary NOMI AI assistant and Qualcomm 5G-based cockpit system, along with the NIO-owned Aquila autonomous driving system utilizing 33 sensors and LIDAR technology, the ET7 exemplifies NIO's technological prowess.
NIO's lineup also includes the ES8, a battery-powered 6-seat full-size luxury SUV introduced in 2019, serving as the company's flagship full-size SUV. Boasting a potential electric range of 900 km, the ES8 features an industry-first circular AMOLED display-based NOMI AI assistant, complemented by two high-resolution multi-touch displays.
In addition to its high-tier and premium models, NIO offers the ET5, a battery-powered compact executive sedan with a typical electric range of 550 km. Positioned as a formidable competitor to Tesla's Model Y, the ET5 supports NIO's proprietary power swap system. Noteworthy features of the ET5 include a panoramic digital cockpit with AR technology and a Dolby Atmos surround sound system. The ET5 employs AC induction and asynchronous permanent magnet motors, delivering 487 PS and achieving 0-100 km/h acceleration in 4.0 seconds.
As of 2022, NIO has established itself as the most competitive premium brand in China's smart EV market, commanding a 76% share of the country's premium BEV segment.
II. Why Market Expansion?
NIO, a successful Chinese BEV brand, has set its sights on entering the European markets, driven by several factors. Firstly, domestic market pressures in China have intensified with the emergence of over 200 domestic EV brands and increased focus from international automotive companies. NIO faces pricing pressures and a need for market share growth amidst fierce competition. Simultaneously, Europe has witnessed significant growth in its EV market, with strong government and customer support for cleaner transportation. For instance, BEV sales in the top five European markets grew by 39% in Q4 2022 compared to the same period in 2021, and by 28% for the entire year. Recognizing this growth, NIO aims to leverage the European market's potential to expand its global market share beyond China. Similarly, other leading Chinese EV brands such as BYD and XPENG are also interested in entering the European EV market to alleviate domestic competition pressure.
Secondly, the European automotive market is renowned for its stringent standards in safety, quality, and design. NIO views success in this market as an opportunity to demonstrate to customers worldwide that its products meet these high standards. A successful presence in Europe would enhance NIO's global reputation and brand image.
Thirdly, entering the European market enables NIO to diversify its revenue streams and reduce reliance on the Chinese market. This strategic move can help mitigate risks associated with economic fluctuations, changes in local regulations, and geopolitical uncertainties.
Fourthly, NIO's premium BEV proposition aligns well with the European market, as customers here exhibit a strong inclination towards high-quality and environmentally friendly vehicles. Through unique features, advanced technology, and exceptional customer service, NIO can differentiate itself from competitors and attract European consumers.
Lastly, entering the European market opens up extensive opportunities for collaboration with local companies, suppliers, and research institutions. Such collaborations not only provide NIO access to new resources, knowledge, and technologies but also enhance the company's international business practices, facilitating the advancement of its products and services.
Overall, NIO's expansion into the European markets is driven by a combination of factors, including market pressures, the pursuit of high standards and reputation, revenue diversification, customer preferences, and collaborative opportunities.
III. NIO's Market Entry Strategy in EU
NIO has formulated a meticulous strategy to overcome the challenges of Chinese companies entering the European B2C sector, with Norway serving as its entry point. Norway is Europe's leading EV market, boasting a 54% share. Moreover, the Norwegian government's commitment to achieving 100% EV sales by 2025 and its favorable import policies make it an attractive prospect for NIO.
NIO's Norwegian market expansion primarily revolves around three key areas:
Developing a robust sales business model
Establishing a comprehensive infrastructure
Enhancing the overall customer experience
Since 2018, NIO has proactively built its sales teams, ensuring direct control over the customer journey. They have also constructed an expansive experience center in Oslo, covering a substantial area of 2100 sq. meters, serving as a cornerstone for their brand presence.
Adopting a direct-to-consumer (DTC) strategy, NIO strongly emphasizes customer engagement, fostering a sense of community and loyalty. Showrooms with a home concept allow customers to explore NIO's latest models while offering unique lifestyle and design products through collaborations with independent designers and renowned design schools. NIO leverages online and offline channels to establish a unified pricing strategy, ensuring consistent customer experiences across multiple touchpoints.
NIO introduced its battery-as-a-service (BaaS) offering in Norway, addressing the substantial cost associated with EV batteries. NIO effectively enhances its price competitiveness by allowing customers to purchase the vehicle while renting the battery at a reduced price. To support this innovative approach, NIO has built six battery swap stations in Norway, drawing from their successful model with over 100 swap stations in Shanghai.
Expanding NIO's European value chain, NIO's ecosystem-building efforts extend to Hungary, where they launched a battery power plant dedicated to manufacturing battery swapping stations and providing after-sales service. Recognizing the significance of charging infrastructure and customer satisfaction, NIO has announced plans to develop more than 30,000 charging stations, battery-swapping stations, and power transmission stations across Europe.
While Norway serves as a starting point for NIO, the company is proactively expanding its presence into other European countries. NIO organized the NIO Day event in Berlin and announced further market expansion plans in the Netherlands, Denmark, Germany, and Sweden. NIO has established experience centers in key cities to support its expansion and strategically adjusted its sales strategies, focusing on leasing and subscription models through offline experience centers and online channels.
Regarding ecosystem development, NIO's focus extends beyond financial and leasing services, including UI/UX design and R&D innovation for localization. By collaborating with experts in Munich and establishing the Berlin Innovation Center, NIO aims to refine its digital cockpit, autonomous driving capabilities, and new energy R&D. Furthermore, NIO strategically refrains from competing on price, instead positioning itself on par with European brands, aiming to establish a premium brand image.
In conclusion, NIO's European market expansion is guided by an ecosystem-building approach, prioritizing customer experience through strategic sales channels, cutting-edge infrastructure, and innovation-driven UX design. While the company is still in its early stages, garnering brand recognition requires sustained effort. The efficacy of NIO's direct sales channels and innovative battery swap stations in attracting customers hinges on the effective execution of their strategies.
IV. NIO's Performance So Far
We use the number of car registration in NIO's launched European markets, ROI, Price-to-sales, and brand recognition as criteria to measure its progress. In 2022, NIO sold in Norway in total 1127 units. Sales grow monthly but are still far behind Tesla and local brands like Volkswagen Group and BMW Group. For example, the monthly registration number of Tesla Model Y last December in Norway peaked at 7,445 units. Compared to other Chinese EV competitors, NIO's performance is also weak. For example, BYD, another Chinese EV company whose global sales volume has surpassed Tesla, sold its new flagship model Tang in the first half of 2022 about 900 units using a partnership with local dealers rather than the direct-to-sales approach. Looking at the financial measures, NIO has dramatically increased its operating cost in 2022, 53% higher than in 2021, due to the marketing expansion in Europe. NIO's return on investment (ROI) reached -25% in September 2022, which is slightly lower than the previous year (-28% in September 2021). The price-to-sales ratio has consistently dropped from 10.09 in 2021 to 3.90 in 2022. Establishing a sales channel and charging infrastructure requires NIO a lot of capital and human resources investment. NIO must demonstrate steady sales volume to show its confidence to investors for further investment. NIO's situation is quite like Tesla's when it just entered European markets.
Nevertheless, NIO must know that its sales performance may require longer to take off. Regarding brand recognition, NIO did an excellent job in the EV enthusiast community and media. For example, the NIO ET7 and EL7 have won several European awards, including the Golden Steering Wheel in Germany and the "Car of the Year 2022" from the Swedish Auto Motor & Sport award. However, among local consumers, NIO is still a very new brand, and few consumers know about it.
V. Final Thoughts
So far, it is still too early to conclude whether NIO's doing business in Europe is successful. Its performance, however, indeed requires more self-inspection and consideration of fine-tuning. Compared to other Chinese EV brands, such as BYD, NIO has adopted a unique strategy that may make them less successful in the short term but could win in the long run. We summarize these reasons that NIO could become more successful.
Too much focus on the B2C model. NIO has invested heavily in B2C channels as its starting point in Europe. However, a fleet offering is essential to capture market share in Europe. The business-to-business (B2B) segment is around 40 to 50 percent in most European markets, including a large portion of company cars. NIO shall prioritize resource allocation in developing B2B partners, such as local rental companies for corporate fleets. On the one hand, this would guarantee the company's sales volume in the long run. On the other hand, when people rent cars, the barrier to trying new brands is low, which can help NIO build up brand awareness on a large scale. For example, its competitor BYD has partnered with German car rental company SIXT for a 100,000 units deal.
Adjustment of offers to local needs. Although NIO has established DTC channels to learn and adapt customer experiences, its car offering may not suit local user needs. Due to the electric energy cost surge and high inflation, the purchasing power of European new BEV buyers is somewhat declining. Looking at Norway's top 20 best-selling BEV models, consumers prefer mid-budget and compact car models such as VW ID4.0, Tesla Model Y, and Toyota BZ4X. NIO shall adjust its car offering to meet the buyers' requirements, which the company may have realized. For example, NIO just announced to launch of Europe-focused small electric cars with a budget range, namely Firefly. There is no difference in technology and building quality between Chinese and European car manufacturers. NIO shall leverage its production cost advantages to create a differentiated value proposition regarding car configuration and usage experience against local competitors.
Brand recognition. Although the BEV transition is an excellent opportunity window for unknown Chinese brands, NIO is still facing tough competition against Tesla, and Japanese and local European brands such as VW and BMV have been in the markets for years. It is correct that NIO develops lifecycle revenue to be part of the business model and build a community that feels loyal to the brand. For example, research has shown about 70 percent of European customers want to remain engaged with their OEMs over their vehicle's lifecycle. But their scaling progress is too slow, and it is a long-run approach. The company shall leverage any opportunities, e.g., the geopolitical situation, to create marketing campaigns to gain brand awareness quickly. Another strategy is that NIO shall look for any strong local brand as a partner to build its lifecycle and community engagement, e.g., Philip Hue for home concept lighting with what NIO offers. NIO's management team must be clear that the sales volume may not grow dramatically in 3 - 5 years.
Leveraging institutional engagement. The company is putting much effort into sales strategy and infrastructure building. It shall not overlook the engagement with institutions of local markets. First, it is the most efficient way of scaling up the brand's trust. Second, it will also help the company mitigate any unseen risk regarding regulation and policy changes when European markets face the flush of Chinese EV markets, just like the solar panel story in the 2010s. However, the political systems in Europe and China are different. NIO shall adjust its way of engagement with the local environment and culture.
As the vanguard of Chinese EV companies, NIO has showcased its prowess through pioneering initiatives such as the innovative battery swap business model and software upgrade-in-air capability. In its pursuit of entering the fiercely competitive European BEV market, NIO has successfully ticked the right boxes. They have established direct-to-consumer (DTC) channels to exert greater control over pricing and glean valuable consumer insights more efficiently. Simultaneously, NIO is diligently crafting an ecosystem in Europe, strategically focusing on sales and charging services. Moreover, NIO has placed considerable emphasis on building innovation capabilities within the market. Nevertheless, the company must maintain a vigilant eye on market dynamics and adapt its operational tactics accordingly to enhance brand awareness and achieve substantial sales growth. NIO must prepare for a protracted battle, recognizing the long-term nature of establishing a solid presence in the European market.
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