NIO Capital's Yao Li: New Opportunities in the “New Normality” of EV Competition

In 2024, NIO Capital announced that Yao Li had been promoted to Partner after seven years of working at the firm (read more here). 



During Li Yao's tenure, NIO Capital has achieved remarkable success in investing in the electric vehicle industry chain. Today, he will share some market observations and predictions to help us better articulate industry trends and future opportunities.


I. Unveiling New Opportunities in the Competitive Landscape


Over the past year, competition among auto companies has intensified, and this year, we have witnessed an escalation of price wars in the new car market. The price cuts implemented by car manufacturers have exerted significant pressure on the supply chain to reduce costs. As we enter 2024, it is expected that the automobile market will continue to remain in a state of "involution."


We believe that relying solely on a low-price strategy to capture market share is not conducive to the overall development of the industry. From a business perspective, engaging in sales with low or zero profitability through unjustifiable price reductions may lead to a decline in technology and product quality, ultimately impacting consumers' perception of the brand.


However, amidst these challenges, there are certain areas where new opportunities may emerge:


1. From a technological perspective, since 2023, the allure of autonomous driving has steadily increased, captivating consumers who are now more attentive to whether it can fulfill their daily commuting needs; 


2. In the realm of intelligent cabins, numerous automotive manufacturers and smart hardware providers are diligently augmenting their R&D endeavors in AI, all aimed at enhancing cabin experience;


3. Regarding batteries, amidst the continuous decline in prices, it becomes imperative to scrutinize whether advancements can be made in range and performance, as well as the convenience of recharging, thus effectively assuaging users' concerns about EVs' driving range. Should these challenges find suitable resolutions, we anticipate a remarkable twofold surge in the market penetration of new energy vehicles, exceeding a staggering 90%.


II. Autonomous Driving: Two Ongoing Trends to Watch


Since 2016, NIO Capital has been focusing on the ADAS industry. In 2017, we recognized the immense potential and investment prospects of autonomous driving as a substantial track. Therefore, we strategically invested in multiple autonomous driving companies, encompassing both horizontal and vertical dimensions, thereby establishing a comprehensive presence across the entire autonomous driving landscape.


Nowadays, the landscape of the domestic autonomous driving market has taken shape, with prominent companies emerging and the positions of other players gradually crystallizing. At present, our investment focus within the autonomous driving domain revolves around two key aspects:


1. New technologies that may subvert existing technology

We have been closely monitoring the possibility of new technologies that could disrupt rule-based algorithms and existing technical solutions.


When it comes to autonomous driving, three key elements are required: data, algorithms, and computing power. Startups' primary competitive edge lies in their algorithms. The introduction of a new algorithm could potentially be a game-changer. However, it's important to consider that the market responds quickly to such innovations. If other companies possess advantages in data scale and computing power, their speed in following new algorithms will be faster.


2. Opportunities stemming from autonomous driving

Once autonomous driving enters the commercialization stage, it is likely to give rise to new products or businesses, such as data annotation. With the large-scale application of autonomous driving, there will be more opportunities for derivative products and services.


These derivative targets can include suppliers to autonomous driving companies, such as those offering data annotation services to autonomous vehicle manufacturers. In the initial phases of autonomous driving R&D, car manufacturers could handle annotation tasks internally due to the relatively small workload. However, as the scale expands, leveraging automated annotation or outsourcing to specialized suppliers becomes more advantageous, given the potential cost reductions through economies of scale.


Furthermore, as autonomous driving technology matures and becomes more prevalent, there is a potential for the emergence of additional services within the vehicles themselves, akin to the gradual appearance of mobile apps with the advancement of mobile internet technology.


Currently, there is a clear path towards commercialization for L2-level autonomous driving, and we are witnessing the commencement of commercialization for L4-level autonomous driving in specific domains.


To achieve commercialization of L2-level autonomous driving, the primary approach is through collaboration with automakers, who would shoulder the cost of the technology. However, it is important to meet three prerequisites for successful implementation: i) the technology must be capable of being integrated into vehicles, ii) a seamless user experience must be ensured, and iii) the input-output ratio needs to be optimized to achieve cost-effectiveness.


The current market competition is fierce, and car manufacturers are under significant cost control pressure on their suppliers. This, in turn, imposes substantial cost burdens on autonomous driving companies. However, the advantage lies with software enterprises, as they have a relatively easier path to scalability. By expanding their operations and increasing their scale, the profit trajectory becomes much clearer.


Relatively speaking, the commercialization cycle for L4-level autonomous driving is longer. However, it has already begun to be applied in certain specific domains, such as ports and mines, where the traffic conditions are favorable. In these environments, L4-level autonomous driving for trucks and logistics vehicles has already been successfully commercialized. These settings are relatively straightforward and manageable, and the utilization of autonomous driving vehicles can greatly enhance operational efficiency. In summary, autonomous driving represents the future of intelligence in the automotive sector and is a highly promising field worthy of sustained attention.


III. The Ultimate Goal of Overseas Expansion


In 2023, China became the world's largest exporter of automobiles, capturing the attention of the market. Notably, EVs accounted for nearly one-third of the total exports. When compared to some well-established global automotive companies, China's strength in the EV sector is primarily demonstrated through the application of innovative technologies and effective cost control measures.


At the technical level, China has shown impressive agility in the implementation of new technologies. Many technologies that are still in the conceptual stage in some counties have already been or are on the cusp of being mass-produced in China. The market displays a strong inclination towards embracing and accepting these new technologies.


At the cost control level, a well-established industrial chain contributes to cost management. According to statistics, the cost of new energy vehicles in China has dropped by 20-30% compared to previous years, while the EV industry chain in Europe and the United States faces higher costs in areas such as batteries, motors, and intelligence systems, resulting in relatively lower cost-effectiveness of their products.


As the competitiveness of Chinese smart EVs and their associated supply chains continues to increase, expanding into international markets has become an undeniable trend. However, the global expansion of EVs poses various challenges, requiring the formulation of tailored strategies to address them.


Recently, many Chinese suppliers have opted to establish factories near their overseas customers. This strategic choice allows for easier servicing of the local market, leveraging trade policy support, and achieving a balance between labor and logistics costs.


The Middle East also represents a sizable market. However, the region faces labor shortages and an imperfect supply chain system. Hence, it becomes imperative to focus on exports initially, while simultaneously building service systems and sales networks to effectively cater to customers.


The ultimate goal of overseas expansion for businesses is to establish brand recognition in the local market, nurturing extensive consumer awareness and preference. This undertaking is an arduous and long-term one. Years ago, Chinese motorcycles captured an 80% market share in Southeast Asia due to their competitive pricing. However, a subsequent price war resulted in compromised product quality, damaging both brand reputation and customer perception. Consequently, Japanese motorcycles now dominate 90% of the Southeast Asian motorcycle market.


Merely sending Chinese EVs onto international roads can only be deemed as “Export Shipping”, rather than a genuine “Overseas Expansion”.


When it comes to establishing brand awareness in overseas markets, it is crucial for businesses to adopt a long-term perspective. This involves creating a robust service system and a comprehensive network of support services locally. It is also important to ensure the brand can gain a solid foothold to thrive in the local market.


Only by taking these strategic steps can a company genuinely embark on an“Overseas Expansion”journey.