How China's Push for EV Consolidation Could Hurt (and Help) Nio

Last month, a senior Chinese official said that the country's government wants to encourage consolidation in its sprawling electric-vehicle industry. That's no surprise: China has over 300 EV start-ups, many of which have no hope of ever becoming profitable.

But what does it mean for companies like Nio (NIO -4.60%), Xpeng (XPEV -3.56%), and Li Auto (LI -8.81%) that have become popular with U.S. electric-vehicle investors? 

In this Motley Fool Live broadcast, recorded on Sept. 23, Industry Focus host Nick Sciple and Motley Fool senior auto specialist John Rosevear look more closely at the government's likely intentions, how they could be both good and not-so-good for Nio and its rivals -- and why a similar wave of EV consolidation is likely to play out elsewhere as well.

A transcript is below the video.

Nick Sciple: You mentioned China earlier in supply chains, wanted to talk a little bit about China here. Earlier this month, the Chinese Industry and Information Technology minister Xiao Yaqing. Hopefully, I said that right, drew headlines saying China has, "Too many electric vehicle maker and that the government would encourage consolidation." This comes amid this big disruption we've seen in the tech sector in China following sudden government intervention. Should investors in Chinese EV companies have concerns around these government comments?

John Rosevear: Well, the companies we look at, companies like NIO, Xpeng, Li Auto, BYD. Those are the companies that stand out from the crowd because they've had some success. They're shipping vehicles, they have happy customers, their sales are rising. It's harder to see from the United States, is there are like 300 electric vehicle start-ups in China, many of which are nothing more than a shingle on a warehouse. At this point, they never got anywhere. There was a period where subsidies from national and local authorities were quite generous. A lot of people said, "We'll try and give us some subsidies." There was some level of probably scam going on, but there are a lot of sincere efforts that just never got off the ground, including some fairly large ones. To the extent they are encouraging consolidation. If I were an investor in say, NIO, what I'd be worried about is that the government is going to put pressure on me to buy up some rivals that maybe I don't need what they've got. Some, it's just traction. That's maybe not the best use of capital or so forth. I think for the companies, again, the ones we talked about, this is going to be more bump on the road at most stuff. It may even help them to some extent from a Chinese consumer perspective. The thing to understand about the Chinese auto market is every brand of auto you've ever heard of as a westerner is for sale in China plus a whole bunch of Chinese brands that maybe you've never heard out. By clearing the field somewhat, they can stand out more. If we go from having 300 electric vehicles in China, electric vehicle companies in China. To having eight then the consumers know what they're buying and know who's got what and they can see more clearly rather than it being overwhelming. That could be good for NIO or Xpeng.

Nick Sciple: We'll see what happens. I think anytime we have the government getting involved in business operations, it adds a level of unpredictability to a business that's already on the very cutting edge. We'll see what happens and we'll be paying attention to that. Outside of this government macro involved events, what are you paying attention to in China as far as EVs these days?

John Rosevear: Well, what I'm watching right now is Xpeng just began production of a new model. It's called the P5. It's a smaller sedan than their P7. Everybody is probably, if you have paid any attention at China electric vehicles at all, you've seen pictures of the P7. It's a really pretty sleek sedan. The P5 is more steady, more upright. Not quite as pretty, but it starts after subsidies around $25,000 which is going to be very appealing in China. They have started production. They say deliveries begin next month. What I will be interested in to see is how well this does in the near-term keeping in mind that rival Neo, which is a company that a lot of us have watched for a while. In America, a lot of Fools have been interested in it. NIO doesn't have any new models coming until next year. Their growth may level off a little bit while Xpeng still some share with their new low-cost, presumably higher volume products. I'm going to watch that over the next couple of months and see how that starts split out.

Nick Sciple: When we see this growth of these new EV companies, you mentioned Xpeng, NIO, there's others. As someone who lives in North America, is there credible route to these vehicles being available for sale here or is there still a China only store?

John Rosevear: They're looking at Europe and some extent, Norway got everybody's attention because that's the one country that has led the world in adoption of EVs. Tesla had a lot of sales there, Ford Motor Company is selling every Mach-E they can ship to Norway, et cetera. NIO and Xpeng have targeted this. I think Xpeng has already delivered some cars in Norway and NIO is in the process of opening their business. They may have already shipped some for delivery there. I think at some point later on, they might try to come to America if they get a beachhead in Europe and can build that into a profitable, steady business. But at the same time, what we're going to see over the next few years is the avalanche of EVs from the established automakers who already have the production capacity. Who already have the supplier relationships, who already have the customer loyalties and so forth. That makes me think that what might not be on radars yet is some consolidation coming both among legacy automakers and among these new entrants. I think we're headed for a shakeout. Certainly, as we talked about, there's one coming in China. But elsewhere as well. Is there room for Nikola and Lucid and all of these other companies, Workhorse, Lordstown Motors that we've talked about for the last couple of years? Not all of these companies are going to make it. It's going to be interesting to see who the acquirers are and who the acquired become. I think a shakeout is coming and it's going to be interesting to watch. That's my take.