Chinese entrepreneur William Li has tumbled out of the billionaire ranks as shares of his electric-car company, NIO, fell 58% this year. The 44-year-old tycoon, who’s been dubbed the “Elon Musk of China,” has seen his net worth plunge $1.2 billion in less than four months to its current level of $457 million.
The Beijing-based startup confirmed on Monday that two senior executives had recently departed. Its former head of software, Li Zhuang, and Angelika Sodian, who used to oversee NIO ‘s business in the United Kingdom, are no longer with the company.
Details of the departures follow just days after NIO revealed that it was recalling 4,803 of its flagship ES8 SUVs following a series of reports that they had been catching fire or emitting smoke. The recall amounts to roughly one-third of the vehicles sold by the company so far.
As if NIO’s safety issues weren’t enough of a problem already, analysts say the company is facing further obstacles that reflect wider problems in China’s once booming market for EVs. Beijing is phasing out subsidies for EV makers as its loosens restrictions on foreign ownership in the auto industry, and although NIO is likely to survive due to its larger scale and access to capital markets, its struggles are said to be dampening investor sentiment for the EV segment.
“In the next two years, many of these new EV companies, especially the second-tier brands, don’t have very long to live,” says Teng Yong, a Shanghai-based managing director of consultancy L.E.K. “They will have funding shortages and difficulties in boosting production, and won’t necessarily survive.”
For NIO, the cracks started to show earlier this year. In the first quarter, the company reported that it had delivered 3,989 units of its ES8 SUVs, down from 7,980 units in the previous quarter. The drop led to a 54.6% decrease in sales to $229 million, while its losses amounted to $395 million.
NIO’s finances will be under even more pressure as Beijing implements its plan to eliminate subsidies for the company and its peers by 2020 in order to encourage “real innovation” across the industry. NIO had been receiving 67,500 yuan ($9,865) in subsidies for each of its ES8 models that range in price from 448,000 to 506,000 yuan, but that amount is due to be cut to 11,520 yuan this year.
“We anticipate a sequential decrease in deliveries when the second quarter closes,” Chief Financial Officer Louis Hsieh said during a call with analysts in May. He pointed to weakness in the macro economy combined with sluggishness in the auto market and subsidy cuts. A company spokesperson said the key for NIO now is “focusing on business development, operational efficiency and long-term competitiveness.”
“We believe that the company will achieve sound performance in these areas that will be recognized by the capital market,” he says.
Investors say NIO’s smaller peers are further behind in terms of achieving mass production or reaching profitability. Many are shelving plans in this once red-hot space as investors grow increasingly skeptical as to the viability of their business models. During the January to April period, China’s private EV companies received $783 million in funding, a steep drop from the $5.97 billion raised the same period a year ago, according to data provider Pitchbook.
“When industry subsidies are getting reduced, it is time for real competition in vehicle price and performance,” says Ken Xu, a Shanghai-based partner at investment firm Gobi Partners, adding that he is no longer considering new EV makers. “Startups that don’t have mass production experience probably won’t make it, and there will just be two to three new EV companies left standing in the end.”
Alibaba-backed Xpeng is another EV startup vying to be a part of that group. Brian Gu, president of Xpeng, said the companies’ fundraising exercise is on track to raise an amount comparable to its previous funding round of $587 million that gave it a valuation of $4 billion. Xpeng’s founder, He Xiaopeng, is estimated to have a net worth of $1.3 billion.
“What’s challenging is that some of the listed EV industry leaders are currently underperforming in the secondary trading market, and that has created pressures for the sector’s short-term outlook,” Gu says in an e-mailed note. “We are seeing investors become more cautious, selective and keenly focused on the frontrunners.”
Still, analysts don’t expect startups like these to unseat the likes of BYD and Geely, which have better cost-control measures and chose not to hike prices amid dwindling subsidies, according to Yale Zhang, a Shanghai-based analyst at consultancy AutoForesight. What’s more, the competition will heat up even further when Tesla starts to produce and sell its mass-market Model 3 locally in China.
“Those have bigger scale and adapt better to local policies will continue to do well,” says L.E.K.’s Teng. “As for the new players, I don’t think many have the capabilities to keep going.”