What happened

Shares of NIO (NIO 4.06%), a leading designer and manufacturer of premium electric vehicles (EVs), are tumbling more than 12% lower Monday afternoon because trade tensions between the U.S. and China have escalated and made auto investors more uncertain.

So what

U.S. President Donald Trump added more fuel to the trade tension fire last Thursday when he proposed adding 10% tariffs on another $300 billion in Chinese goods starting Sept. 1, which led to China's retaliation measures of devaluing the yuan and asking state-owned enterprises to stop purchases of U.S. agricultural products. The trade tensions also impacted numerous companies within the auto sector, including NIO, which posted one of the steepest declines. Other slides included Delphi Technologies' 6% decline, Tesla's 3.3% decline, and American Axle & Manufacturing's 7% decline.

NIO's ES6 electric SUV.

NIO's ES6 electric SUV. Image source: NIO.

Now what

The bad news for NIO investors is that trade tensions are escalating at the same time the company is dealing with a major slowdown in China light-vehicle and electric-vehicle sales, as well as reduced subsidies for electric vehicles -- making it a tough market for NIO. NIO investors are also likely more skittish after Tesla recently recorded a 42% surge in China revenue during the first half of 2019, suggesting a major rival is gaining traction on NIO's home turf.

The silver lining for investors is that while NIO can't control trade tensions or China's slowing automotive market, it appears to be controlling what it can: vehicle quality. NIO recently ranked highest in J.D. Power's inaugural China New Energy Vehicle Experience Index Study. The study measures problems reported by owners within the first two to six months of ownership and ranks them on problems per 100 vehicles, suggesting that lower numbers mean higher-quality vehicles. The good news is that NIO scored the best at 67 per 100, a much better score than two well-known Chinese automakers, Chery Automobile and GAC Motor Co., which scored 84 per 100.

Ultimately, it's been a rough year for NIO, which has shed roughly 55% of its value year to date. But if the company can carve out its niche in the premium EV market in China and continue to develop new and high-quality vehicles, its long-term growth story remains compelling even if trade tensions and subsidy reductions deliver a short-term speed bump.