NIO has redefined what it means to be a car company. The China-based electric vehicle (EV) maker was founded just nine years ago and has transformed from a humble start-up to an innovative powerhouse, accomplishing feats unparalleled in its industry. This past autumn, KraneShares was fortunate to host NIO Group Vice President Hui Zhang at the Milan leg of our European roadshow and also visit the Netherlands’ first “NIO house” in Rotterdam.

In Milan, Zhang’s excitement for NIO was infectious, and through our engagement with him, we got a glimpse into the future of the EV industry. The KraneShares Electric Vehicles & Future Mobility Index UCITS ETF (Ticker: KARS) provides exposure to NIO and companies like Tesla, Xpeng, BYD, Li Auto, Geely, and others engaged in EV production, autonomous driving, shared mobility, essential metal and battery production, hydrogen fuel cell manufacturing, and electric infrastructure businesses.

NIO produced its first small-batch EV in 2015, a racecar made to compete in Germany’s Formula E tournament. NIO was the first-ever Chinese carmaker to participate in the tournament and won the annual championship in its first season, setting a world record in the 20.8-kilometer stretch.¹ Now, NIO offers luxury sedans, SUVs, and coupes and has expanded globally, with a presence in China, Norway, Germany, Sweden, Denmark, and the Netherlands. With its cutting-edge technology, advanced AI-powered features, and battery-swapping technology, NIO EVs offer a sustainable, luxurious, and convenient driving experience that heavily incorporates user engagement.

User Engagement & Luxurious Lifestyle:

NIO's user operations model has set a gold standard for its industry. The company has devoted significant resources to its system capabilities, which Zhang believes “has played a crucial role in enhancing user satisfaction and unlocking value throughout the user life cycle.”

NIO has opted out of the traditional car dealership-selling model. Instead, it has constructed signature locations called “NIO houses” and “NIO spaces,” which are part of its service network to reach more users. The company currently operates 134 NIO houses and 286 NIO spaces across China and Europe, serving as hubs for NIO-exclusive events ranging from car shows to art shows. ¹

Zhang told us that “NIO seeks to differentiate through user referrals, with high user satisfaction driving higher referral rates,” all while significantly reducing marketing and sales costs. While visiting the Netherlands’ NIO house, we experienced the company’s obsession with user experience first-hand. Our team was immediately greeted by NIO fellows, workers who enhance the visitor experience rather than attempt to sell merchandise like traditional salesmen. KraneShares’ Head of International, Dr. Xiaolin Chen, described customer service at the NIO house as a blend between Tesla and Apple, but much better. “NIO was remarkably accommodating. They allowed my team to present to KraneShares’ investors within the NIO house itself. We truly felt like part of the NIO family and left as believers in the company,” said Dr. Chen.

NIO shares more than just exceptional customer service practices with Apple; it has recently expanded its product portfolio to include its inaugural smartphone. The company unveiled intricate details about its Android-based phone during its 2023 Innovation Day presentation held in September. This venture into the smartphone market was initiated in March 2022, with NIO’s founder and CEO, William Li, confirming the company’s ambitious plan to introduce a phone designed as a direct competitor to Apple. Tailored for NIO's EV owners, the smartphone boasts a distinctive action button designed for drivers to access over 30 functions related to their electric vehicle controls. NIO intends to launch a new version of the phone annually, aligning with its strategy to unlock value throughout the user life cycle.

In addition to its service network and new product launch, NIO encourages users to support and shape the company’s brand through its User Advisory Board (UAB). The UAB plays a crucial role in fostering a sense of growth shared between customers and the company. This communal dynamic has inspired over 8,000 volunteers to dedicate their time to NIO's various events. Car owners can also serve as council members of the NIO User Trust, an advisory branch initiated by William Li. Li granted the User Trust 50 million of his beneficially owned shares, fulfilling a promise he made in NIO’s initial public offering prospectus.

Perhaps the most impressive aspect of the company’s user engagement model is the NIO app. The app boasts a thriving user community, with 5.6 million registered users and over 2 million active users daily.¹ Back in Milan, Zhang stated, “This group represents a vast potential consumer pipeline, with over ten times the number of registered users compared to NIO cars on the road.” Within the NIO application, there are a range of capabilities. Registered members can read up-to-date news shared by NIO users, NIO staff, and even William Li. NIO users can also chat in real-time with other NIO users or with NIO employees to schedule a test drive. Additionally, users can purchase company merchandise or customize and buy a vehicle directly in-app.

NIO's unique user-centric model and focus on user operations have allowed the company to command a premium in the market. While NIO doesn’t follow the traditional automotive industry's operating logic and corporate structure, the company remains committed to providing high-quality services and products to its users. The company believes that a consistent underlying logic across the industry, like theirs, can lead to the broader adoption of smart EVs, benefiting the entire sector. Zhang said he looks forward to a future where the definition of a "good product" evolves.

Technological Superiority:

Innovation and in-house technology development are central to NIO's success. The company has invested significantly in core technologies, including battery packs, electric motors, gateways, and software, accumulating an impressive portfolio of over 7,000 patents.¹ NIO's technology is highly user-centric, enabling continuous improvement through over-the-air updates. Additionally, the feedback from its vast user community directly informs the work of the company's 11,000+ strong R&D team. ¹

Perhaps one of the biggest challenges the EV industry faces is range anxiety, and NIO looks to solve it head-on. A study by AAA, an emergency road service company in America, found that 58 percent of EV owners were afraid of running out of battery and becoming stranded. Zhang told us he believes NIO is the best-equipped EV company to prevent range anxiety, as it is the only EV provider incorporating fast charging and battery swapping capabilities into their vehicles. The company’s signature battery swap technology allows users to switch out uncharged batteries for fully charged ones at NIO Power Stations. These advanced stations are fully automated, allowing users to charge up in just three to five minutes without leaving the comfort of their car.

On our visit to the Netherlands, KraneShares’ was able to test NIO’s battery swap technology and was amazed by the result.

While most EV companies engage in the singular pursuit of battery charging, it isn’t necessarily the most efficient method. Comparatively, this process is significantly more time-consuming, with the fastest chargers requiring about 30 minutes for a full charge. NIO is the only company in its industry that offers users the best of both worlds, allowing a choice based on convenience.

The same AAA survey also concluded that 87 percent of EV owners cited anxiety about finding a charging station. NIO’s significant investment in infrastructure development has made battery swapping easy for 300,000+ NIO drivers on the road. ¹ As of September 2023, the company has 1,821 swapping stations and 18,174 power chargers operational.¹ Additionally, the company has garnered access to over 1.37 million third-party chargers and expanded its operations to Europe, where 26 power swap stations are now active in five countries.¹ NIO has also grown its ecosystem by partnering with EMB, Germany's largest fast-charging network operator, and Shell, a global leader in supplying energy. NIO plans to continue working towards building an extensive charging and swap station network for its customers.

EV Outlook

While EV ecosystem stocks have faced short-term volatility as macroeconomic conditions weigh on sentiment, adopting a long-term perspective is crucial for investors. Electrification is a marathon as we embark on a mission, not a race, to replace 1.3 billion internal combustion engines (ICE) with EVs.²

The Bloomberg New Energy Finance (BNEF) 2023 outlook projects that the EV market will reach approximately $8 trillion by 2030 and $56 trillion by 2050, with passenger vehicles being the major driver. In addition to its long-term growth potential, KARS ETF’s broad exposure to the EV ecosystem and its low overlap with MSCI ACWI and the S&P 500 (Less than 2.3%)³ make it a good potential diversifier* to any global equity portfolio. We believe a basket approach is more desirable, as single stocks can be rewarding but volatile.

Traditional car makers like Ford, General Motors (GM), and Volkswagen seem to be facing more challenges than expected in designing EVs and scaling their EV operations. That leaves the pure EV automakers, like NIO, Tesla, BYD, and others, firmly in the lead for the foreseeable future. Additionally, continuous government support and shifting consumer tastes may serve as a conducive backdrop for these companies to thrive and potentially beat expectations moving forward.

With all this said, NIO is currently trading at about $7, the same price it was trading at in June 2020.⁴ However, over the same period, NIO has grown its revenue by over 200%, claimed a 59% share of China’s luxury EV market, and built over 1,500 additional battery-swapping stations across China and Europe.^1,4 Many investors believe NIO's current share price is not reflective of its company-wide growth in recent years.

Conclusion

NIO has positioned itself as a key player in the evolving EV landscape. The company's commitment to a unique and luxurious user-centric model, as evidenced by the thriving NIO app community and strategic service network, sets it apart from traditional automotive companies and its EV peers. While NIO has demonstrated outstanding innovation, we believe that the entire EV ecosystem could be an appealing opportunity for investors as the electrification of the global economy intensifies over the next decade. At KraneShares, we offer investors the opportunity to own NIO and other equities intended to capture the entire EV ecosystem through the KraneShares Electric Vehicles & Future Mobility Index UCITS ETF (Ticker: KARS).

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*Diversification does not ensure a profit or guarantee against a loss.

This should not be regarded as investment advice or a recommendation of specific securities. Holdings are subject to change. Securities mentioned do not make up the entire portfolio and, in the aggregate, may represent a small percentage of the fund.

This is a marketing communication. Please refer to the prospectus of the UCITS, the KIID, and the PRIIP before making any final investment decisions.

Citations:

1. NIO Company Website as of 11/14/2023.
2. Data from FactSet as of June 2023.
3. Data from Morningstar as of June 2023.
4. Data from Bloomberg as of 11/14/2023.