What happened

Shares of Chinese electric vehicle (EV) maker NIO (NIO -0.69%) have been on a downward trend recently. They're down 20% in the last month, and almost 40% year to date. Their slide continued Tuesday as shares dropped more than 6% at the market open, and remained down by about 4% as of 9:35 a.m. EDT.

So what

Growth stocks in general have been shunned by traders recently as the market rotates toward cyclical and value names. And the electric vehicle sector is being hit particularly hard, as many of the stocks' valuations have outrun the growth in the underlying businesses. NIO has been no exception. But Tuesday's drop may have been exacerbated by news that sales of Tesla (TSLA 0.79%) vehicles in China, which are manufactured at its Shanghai facility, dropped by 27% in April compared to March, according to China's Passenger Car Association. However, that isn't necessarily a sign that Chinese consumer demand for electric vehicles is changing. 

red NIO ES6 electric SUV

NIO ES6 electric SUV. Image source: NIO.

Now what

In the first quarter, NIO's vehicle sales rose by almost 500% compared to the prior-year period, and by 20% compared to Q4 2020. But like many automakers around the world, it has been hit by the global semiconductor shortage. Management says the scarcity of automotive chips will hinder its ability to further ramp up production in the coming months. 

If investors fear that Tesla's falling China sales reflect an EV demand issue, it would make sense to shy away from stocks like NIO that will need strong business growth to justify their valuations. But Tesla also increased exports from its Shanghai factory to Europe, which is a market that NIO just announced it will enter this fall.

It's also worth remembering that the EV market in China is just getting started, and that the government in Beijing wants to reduce that nation's reliance on imported fuel, cut air pollution, and attract manufacturing investment for a robust domestic auto industry. It's fair to question NIO's $50 billion valuation, but lack of demand for electric vehicles in its domestic market shouldn't be a real investor concern.