It's Rough in China's Auto Market. When Will the Other Shoe Drop for Nio?

While most of the world is concerned about the rapid expansion of Chinese automakers that have the ability to severely undercut on price while still boasting advanced electric vehicles (EVs), Chinese companies have big issues at home. For them, the grass is truly greener on the other side, and exports are surging to support their businesses.

While many competitors in China are feeling the pain, one domestic automaker is bucking the trend: Nio (NYSE: NIO). Can that continue? Or is the other shoe about to drop, sending Nio's results more in line with domestic competitors?

What's going on

Chinese automakers might be scary-looking as they gain market share across the globe, but they're struggling on their home turf, with EV sales nationwide plunging, sending earnings and margins reeling. Investors looking for a culprit can quickly find it in a new-vehicle tax, reduced EV subsidies, and a stumbling economy. That's caused consumers to be cautious about big-ticket purchases, and that sentiment hasn't budged. Included in those challenges was that subsidies dropped to 8% of new-energy vehicle (NEV) prices.

China's domestic NEV sales in April declined 38% to roughly 443,000 vehicles, the fourth straight monthly decline, per the China Passenger Car Association. April's result was actually an improvement, considering year-to-date NEV sales have spiraled 47% lower. All of those factors sent net income at some of China's biggest players plunging. BYD's net income dropped a staggering 55% in the quarter ended March 31, while Geely's net income fell 26%, according to Automotive News.

While larger players are better equipped to handle and absorb these pressures, Nio has been a bright spot in China's auto industry.

Still thriving

Nio managed to buck the dreadful domestic trend in 2026 and delivered 37,705 vehicles in May, a staggering 62.3% increase compared to the prior year. While that was a bit of a slowdown, it certainly wasn't a one-hit wonder, as Nio's year-to-date deliveries through May have increased nearly 69% to 150,526 vehicles.

Part of Nio's strong comparisons are due to its sub-brands, Onvo and Firefly, gaining more traction. In fact, Nio's namesake premium brand still accounts for the majority of deliveries at 20,013 in May, but Onvo and Firefly are now generating serious results with deliveries of 12,029 and 5,663 vehicles, respectively. There's even a bit of upside as Nio drives through the remainder of the year, as it recently launched its ES9, a flagship executive SUV, with deliveries only starting on May 28.

Nio ES9 Image source: Nio.

Looking beyond Nio's thriving delivery results, its first-quarter vehicle margin checked in at 18.8%, compared to 10.2% during the prior year's first quarter. It still had momentum in the first quarter as it compared favorably to the fourth quarter of 2025's 18.1% vehicle margin. Despite all the domestic market headwinds, Nio also managed to generate an adjusted profit from operations during the first quarter.

What to expect

Nio isn't magically immune to the Chinese auto industry pressures, and investors should probably expect some bumps in the road with margins and adjusted profits through the remainder of the year. Further, Nio was a bit slower to begin exporting vehicles overseas, and it won't immediately offer the company enough support to offset potential domestic weakness, at least right away.

It's likely that incremental growth from its sub-brands can offset some delivery pressure as NEV sales continue to spiral lower nationwide, and Nio may continue to be more of a bright spot, but expecting Nio to continue improving vehicle and gross margins throughout 2026 is a lot to ask, despite the company's impressive efforts to improve efficiency and lower costs.

The key thing for investors to watch during the back half of the year is whether Nio can achieve its original guidance of generating a full-year adjusted operating profit for 2026. This was set up to be a special year for Nio and its investors, as it was intended to be its first full-year annual adjusted profit, but we'll have to wait for the second-quarter results and guidance to have more insight. If it can still achieve its guidance, that will indeed be a special year amid all the headwinds.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool recommends BYD Company. The Motley Fool has a disclosure policy.