NIO (NYSE: NIO), one of Tesla’s main competitors in China, is having some major cash flow issues. The company donned as “the Chinese Tesla” (NASDAQ: TSLA) struggled to pay its employees in January. Bloomberg reported that Chairman of NIO, William Li told employees that their compensation for the month would be six days late. He also encouraged them to forego their bonuses in place of stock in the company.
The cash flow problems were attributed to difficulties caused by the coronavirus outbreak in China, although NIO had been struggling to keep its head above water long before the virus took hold in the region. It was reported in its most recent earnings that it did not have enough cash reserves to last the year without new funding.
The Coronavirus’ effect on Chinese car sales
As the coronavirus keeps potential customers indoors, its effect on commerce in the area has been widespread and dour. Apple (NASDAQ: AAPL) just recently reined in its revenue estimations for the quarter due to store and factory closures, while Starbucks (NYSE: SBUX) shuttered half of its Chinese branches. Some economists estimate the virus could shave up to 1% off China’s GDP for 2020. The car industry is one, amongst many, that is heavily affected.
Sales to dealerships fell by 20% in January, its lowest monthly drop in 8 years. Electric vehicles are even more prone to this downturn as its customers generally come from big cities where the virus is more concentrated. New-energy sales in January fell by 54%. This is coming at a time when electric vehicles were already seeing a downturn as subsidies by the Chinese government had been restricted.
Will NIO survive?
The impact of this will be felt industry-wide, not just by NIO. Tesla’s promise to easily surpass 500,000 deliveries in 2020 may be in jeopardy due to slowed production from its Shanghai Gigafactory, while China remains General Motors’ (NYSE: GM) largest market and Ford’s (NYSE: F) second largest after the U.S.
However, NIO had been walking a tight rope before the epidemic gripped its core marketplace. Whether it has the resources to weather the storm is a big question that needs to be answered. I’ve always felt that the hype surrounding the company has led to investors looking past issues that would be deal-breakers elsewhere. The vast potential it possesses makes it easier to ignore a balance sheet that portrays a company spiraling.
This type of optimism is how you pick a ten-bagger, but it’s also how you end up on a sinking ship. Are NIO investors too busy looking at the horizon to notice the water filling up their boots?
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in Tesla, Apple and Starbucks. Read our full disclosure policy here.
Content Manager at MyWallSt
Michael's first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.