Nio Takes Critical Step for Its Next Growth Phase

Nio (NYSE: NIO) investors had been patiently waiting for this growth phase to take off. It was only a matter of time before Nio's recently launched, and more affordable, brands Firefly and Onvo gained traction and drove deliveries higher. In October, Nio's deliveries jumped 92.6% compared to the prior year, and year-to-date deliveries are up nearly 42%. Meanwhile, despite being in the middle of this growth phase, the automaker is already putting its fingerprints on the next phase.

What's going on?

Nio's Firefly brand is the youngest of its brands and still has immense near-term upside, as the brand's total of 5,912 vehicles delivered in October was only about 14% of the automaker's monthly total. What's intriguing about Firefly, for investors, is that the brand was designed with global markets in mind. More specifically, it was largely focused on the compact car segment that accounts for about 17% of global annual sales, and Europe is home to a third of those compact cars.

Nio's recent move goes beyond just preparing to sell overseas, and it's specifically seeking growth in right-hand-drive markets that don't have punitive tariffs on Chinese electric vehicles (EVs). Just this week Nio rolled out its first round of right-hand-drive vehicles for export to Singapore; the automaker plans to enter Thailand and Great Britain next year.

Europe will be a critical aspect to Nio's overseas expansion, and Nio took European consumer preferences into consideration when it was designing Firefly's digital system interface. The automaker will have to overcome some headwinds as tariffs forced Nio to increase the price on its vehicles, but they remain very competitive on price.

Nio's Firefly brand. Image source: Nio.

The elephant in the room

Nio's move to begin expanding into right-hand-drive territory tells investors two things. First, it tells investors that Nio is still under immense pressure to improve financials at a time its home market is in a brutal price war that's eroding margins. In fact, Nio isn't the only Chinese automaker trying to drive its top and bottom lines with exports: At the beginning of the decade, Chinese automakers barely exported 1 million vehicles; this year, that figure is expected to reach 7.5 million.

Second, it also shows investors the automaker is inching closer to potentially entering the lucrative U.S. market, which is currently protected by steep tariffs on imported vehicles, but it's not the next step. Detroit automakers such as Ford Motor Company (NYSE: F), General Motors (NYSE: GM) and Stellantis (NYSE: STLA) are well aware of the approaching Chinese auto threat. Ford CEO Jim Farley went as far to call it an "existential threat".

What it all means

For Nio investors, the automaker dipping its toes into right-hand-driving markets is great not only to expand sales in the near term; exporting vehicles from China also helps occupy production capacity at a time the industry has overcapacity. It also prepares the company's products to adapt for broader international expansion. Nio is currently going through a growth phase with its newly launched Onvo and Firefly brands, but its expansion overseas is already in the works and could take the company to another level.

On the flip side, for Detroit automakers, with EVs quickly taking market share in China's automotive market and subsidized automakers focusing on EV technology, Chinese-made autos could soon find their way to U.S. shores because tariffs can't protect domestic autos forever. It will be imperative for investors to keep track of developments such as Ford's recently unveiled universal EV platform and assembly tree production, which will simultaneously build multiple parts of the vehicle before combining them at the end to save time and cost. In fact, Ford's first EV to roll off this new production system will be an EV truck that Ford expects to be profitable very early in its life cycle -- a big step to begin competing with the Chinese EVs.

Nio is still an unprofitable company in a capital-intensive industry and is facing increasing competition in its home market and abroad. Investors would be wise to limit Nio to small positions or watch this from the sidelines, but for long-term investors, Nio's path forward looks solid.

Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors and Stellantis. The Motley Fool has a disclosure policy.