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Why Nio Stock Dropped the Last Day of 2021 | The Motley Fool

nio et5 sedan

What happened

After a torrid run the previous day, electric vehicle (EV) stock Nio (NYSE:NIO) lost momentum the last day of 2021 and was down about 1.1% as of 12:50 a.m. ET. A major development in China is to blame for Nio shares ending Dec. 31 on a muted note.

So what

This morning, China’s Finance Ministry announced a steep cut in and eventual scrapping of subsidies it currently offers to buyers of new energy vehicles (NEV). The Ministry said NEV subsidies will be cut by 30% in 2022 and then stopped altogether after Dec. 31, 2022.

Nio's newly launched ET5, a mid-size sedan, is parked inside a large interior space.

Image source: Nio.

China is the world’s largest market for NEVs, which include all-electric as well as plug-in and hybrid electric vehicles. While subsidies initially fueled China’s NEV boom, production and sales are on such a solid growth trajectory now that the nation believes it doesn’t need to subsidize purchases anymore. For example, NEV sales in China hit a record in the month of November and accounted for nearly 21% of total passenger car sales during the month. China’s NEV sales are expected to be around 3.3 million in 2021 and surge to 5 million units in 2022, according to S&P Global Platts.

So far, subsidies have been one of the biggest competitive advantages for local Chinese EV manufacturers like Nio over foreign rivals such as Tesla (NASDAQ:TSLA). Importantly for Nio, this comes at a time when it’s launching the ET5, a Tesla Model 3-competing mid-size sedan that it plans to start delivering in late 2022. A subsidy may have helped boost ET5 sales at a time when demand for Tesla’s cars is booming in China. For perspective, demand is so strong that Tesla has just raised the prices of both the models it sells in China, Model 3 and Model Y, for the second time within a matter of weeks.

Now what

While it’s true that the scrapping of subsidies will mean greater competition for Chinese EV makers like Nio, the move doesn’t really come as a surprise as the Chinese government had cut subsidies for 2021 as well and had hinted of a phase-out. Moreover, the subsidies were primarily available for lower-priced cars, so that shouldn’t hurt Nio much. What matters is what Nio is doing to beat competition. For now, Nio’s plans for 2022 look hugely promising, and that’s what investors should focus on as we step into the new year.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Read More: Why Nio Stock Dropped the Last Day of 2021 | The Motley Fool


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