(Image credit: Nio)

China’s top economic planning agency has blocked homegrown electric vehicle maker Nio from building its own manufacturing facility in Shanghai, as enforcement of new rules aimed at curbing overcapacity in the auto sector kick in.

The decision not to allow Nio to follow through on previously announced plans to build its own car factory in Shanghai effectively means Nio may have to wait in line until rival Tesla’s plant in the city reaches capacity.

An industry source told TechNode that the National Development and Reform Commission (NDRC) stopped Shanghai authorities from approving the plant. The city will have to wait until Tesla, which recently began construction on its own factory in Shanghai, has reached production capacity before it can approve other manufacturing sites, according to the source.

Another source at a rival EV company also alluded to the government’s influence on the fate of Nio’s plant.

A Nio spokesperson told TechNode that the company has halted its construction plans as it can increase production capacity with its current manufacturing partner with relatively little investment. The company added that the government has allowed companies like itself to apply for relevant permits through existing manufacturers.

In its financial results released earlier this week, Nio said it had decided to terminate plans for its Shanghai plant, adding that it was instead opting to focus on “joint manufacturing” in the long term. Nio CEO William Li said in an earnings call that the cooperative mode is endorsed by the Chinese government.

Nio’s stock price had fallen by around 30% as of the close of markets on Thursday following the release of its latest earnings earlier in the week.

Tesla broke ground on its plant in January, with four main workshops to be completed by September and its power system workshop is expected to be finished by March 2020. As a result, it will likely be a matter of years before Nio gets approval to build a Shanghai-based factory. Tesla said on Thursday that it had secured a $500 million loan from Chinese lenders to fund the plant.

China is the largest automotive market in the world, despite a recent slowdown. The country has highlighted the EV sector’s crucial role in developing the economy by including it in its Made in China 2025 industrial plan. Apart from Nio, companies including Byton, Xiaopeng, and WM Motor, among others, are looking to make gains in the industry. Byton hopes to open its factory in the eastern Chinese city of Nanjing in May.

New regulations governing China’s automotive sector, which came into effect in January, show that the government is determined to combat overcapacity and phase out cars that use fossil fuels.

The NDRC said it would not approve any new independent companies wishing to build regular vehicles that use internal combustion engines while promoting the “healthy” development of new energy vehicles, which include hybrids and EVs.

The government is also encouraging partnerships between companies working on vehicle research and development and manufacturers with existing plants, aiming to use capacity at already built factories rather than constructing new ones, in a move that combats industry glut.

Nio’s EVs are currently produced in partnership with state-owned auto manufacturer JAC Motors in the eastern Chinese city of Hefei. Nio previously hoped to finish construction of its own site in Shanghai’s Jiading District by the end of 2020.

Some analysts TechNode spoke to believe the move has less to do with regulatory issues and more to do with Nio’s cash flow constraints and its struggle to sell cars. Its manufacturing costs can’t be helping: According to documents submitted to the Securities and Exchange Commission before Nio’s IPO, the company pays JAC for each vehicle produced at its plant.

At the time of the filing, Nio had begun delivering its flagship SUV, the ES8. The company said it could enter into similar manufacturing agreements for other vehicles. Since going public, Nio has launched another vehicle, the ES6.

“It costs them money to produce at JAC, and they would definitely prefer to control their own production process,” the industry source said.

The company has agreed to compensate JAC for any operating losses it incurs during the first three years of production. As of the end of June, the company had paid JAC RMB 65 million (around $10 million) for losses during the second quarter of 2018, according to Nio’s IPO filing.

Nio made losses of $1.4 billion in 2018, despite revenues of $720 million. The company expects its deliveries to witness a quarterly drop of more than 50% in the first few months of 2019, attributing the decline to macroeconomic factors, accelerated deliveries before subsidy reductions in 2019, and seasonal holidays. Nio predicts that the slowdown will continue into the second quarter.

Chris Udemans

Christopher Udemans is TechNode's former Shanghai-based data and graphics reporter. He covered Chinese artificial intelligence, mobility, cleantech, and cybersecurity.

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