Here's Why Chinese Electric Vehicle Maker Nio Shot Up Today

Key Points

• A reduction in the price of electric vehicles has a much larger impact than the same reduction in price of a conventional vehicle.

• Nio's development of a more affordable car lays a marker down for what Tesla should do.

• 10 stocks we like better than Nio ›

Shares in Chinese electric vehicle (EV) automaker Nio (NYSE: NIO) soared by more than 14% by 11:30 a.m. ET today. The rise follows the launch of its new premium sport utility vehicle (SUV). Nio is primarily a player in the domestic market in China, and this latest model, which comes with a near 26% discount if bought on a battery-as-a-service (BaaS) basis, is seen as offering EV buyers a more affordable way to purchase a premium SUV.

Price matters for electric vehicles

There's an interesting comparison to be made with Tesla here, in that the market is rewarding an EV maker when it releases a lower-cost model, and particularly an SUV. Tesla's SUV Model Y's sales are declining this year in the face of aggressive competition, and the company is responding by releasing a lower-cost Y model later in the year.

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The issue of cost is critical to companies like Nio and Tesla, because EVs tend to have higher upfront costs, but much lower maintenance and fueling costs than internal combustion engines (ICE). As such, a reduction in the upfront cost to the consumer of an EV has a disproportionate impact on the long-term value of the car compared to the same cost reduction on an ICE car.

Image source: Getty Images.

What Tesla needs to do

This understanding is why Nio is being rewarded today and why Tesla could also be rewarded if it continues cutting its cost per vehicle, thereby enabling production of more affordable cars. It also explains why the robotaxi concept is an integral part of the case for Tesla and EVs. Simply put, high upfront costs and low running costs mean the optimal use of an EV is as a highly driven vehicle.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.