It almost seems impossible to think China's automotive market was once the most desirable in the world. At a time when China's automotive market sales were exploding, foreign automakers were quick to enter the market and make a buck while the young and inexperienced Chinese automakers watched and learned.
Fast forward to today, and the story has nearly flipped. While auto sales are still lucrative in volume, the country is embattled in a brutal price war that has eroded profits. And for competitors like Nio (NIO -0.44%), a little more bad news is on the way.
Overcapacity is a problem
If you're invested in global automakers, you've likely heard a thing or two about the situation in China. Market leader BYD continued to apply pressure in late May when it announced an aggressive pricing strategy that slashed prices as much as 34% on 22 of its electric and plug-in hybrid models until the end of June.
China's price war, which has become so devastating that it's forced government officials to call executives together in an attempt to soften the impacts and avoid a race to the bottom, is likely far from over. The price war might actually be distracting investors from a deeper issue for the automotive industry, and that's overcapacity.
According to data from Shanghai-based Gasgoo Automotive Research Institute, China's overall industry capacity utilization was a meager 49.5% -- leaving a massive chunk of the country's 55.5 million annual vehicle production capacity unused.
Then came the words that analysts have warned about and investors have feared: The price war may have no end. "As long as you have 50 percent capacity realization, you won't be able to end the price war in a normal market," said Jochen Siebert, managing director at auto consultancy JSC Automotive, according to Automotive News.
Nio's Firefly brand. Image source: Nio.
What's Nio to do?
For Nio and its investors, much of its problem in China is currently out of its control. At some point many automakers in China will be forced out of business or to consolidate, leaving a much healthier industry. Until that time comes, Nio's primary focus will be on cost improvement to offset margin pressure from the price war.
The good news is we've seen some tangible progress from Nio on cost cutting. In fact, during the first quarter of 2025, vehicle margin increased to 10.25% from the prior year's 9.2%. Gross profit also made a substantial 88.5% increase to $126.7 million, compared to the prior year. The price war still hurts and Nio's net loss widened during the first quarter, but more optimization is on the way.
"Since the first quarter, we have implemented a range of cost control measures, including organizational restructuring, cross-brand integration, and efficiency improvements in R&D, supply chain, sales and services," added Stanley Yu Qu, NIO's chief financial officer, in a press release. "Starting from the second quarter, the Company aims to achieve structural improvements in overall cost efficiency, with continued progress in operational performance."
At the end of the day, Nio is doing its best to control what it can and has made considerable improvements on costs. Now the company will have to pivot and also focus on accelerating production of its two newer brands, Onvo and Firefly, which should help drive deliveries as the year progresses. For investors, while Nio is an intriguing investment in the world's largest EV market, it might be wise to watch from the sidelines until China's overcapacity problem isn't so dire and its price war not so brutal.
