China’s Guangzhou Automobile Group (GAC) on Thursday confirmed that it is in talks with Nio regarding an investment of up to $150 million.
Why it matters: A successful deal with southern China’s biggest automaker will help Shanghai-based Nio with its cash flow issue, which has dogged the company for months, and significantly lower costs along its supply chain.
- Nio reported combined net losses of RMB 8.43 billion ($1.22 billion) over the first three quarters of 2019, with cash and equivalents plunging more than 70% to RMB 1.96 billion as of September.
- It warned investors that it would be unable to continue operations beyond the next 12 months without sufficient financing in its Q3 earnings report.
Details: In an announcement released Thursday morning, Shanghai and Hong Kong-listed GAC said it has been discussing a financing proposal with Nio, but had not yet reached a binding agreement.
- GAC expects the total amount of the funding will not exceed $150 million, which will not have a major impact on its balance sheet, it said in the notice.
- GAC warned investors that talks were in the early stages and there was still “great uncertainty” about the deal. Nio declined to comment.
- GAC shares declined 2.7% to RMB 11.76 on Shanghai Stock Exchange on Thursday. Shares for Nio surged by more than 14% to $4.29 by market close on Wednesday, before dropping 5.3% in after-hours trading.
- Rumors about the potential investment began circulating on Wednesday when Yu Linglin, a former auto reporter, said GAC was raising funds for an up to $1 billion investment deal in Nio.
- In an article published Wednesday on her WeChat public account, Yu said that Geely and China’s FAW were also on a list of Nio’s potential investors, without revealing further details.
- Another Chinese auto media outlet, Chedongxi, reported that the two companies have been in talks for months and GAC has conducted several rounds of due diligence on Nio, citing persons with knowledge of the matter.
- Some in the industry expect that the possible deal would not only provide Nio relief, but also allow for extensive supply chain cost-cutting, as it may gain access to GAC’s suppliers and favorable pricing.
- The five-year-old EV maker currently manufactures its own powertrain and battery pack in a production base in Nanjing, which sharply increased costs compared with direct purchase. It also reportedly has struggled with limited bargaining power in negotiations with local suppliers because of its short sales history.
- Some of the EV maker’s components are sourced from a single supplier, an operational risk. It plans to adopt a multi-source volume purchasing strategy for “better cost competitiveness,” the company wrote in its annual report released April 2019.
Context: GAC and Nio forged an alliance in December 2017 followed by a joint venture in the southern Chinese city of Guangzhou months later in a bid to nab share of low- and mid-level auto markets and reduce supply chain costs.
- The JV released late last month its first mass-market SUV with an estimated range of 643 kilometers (400 miles) and a starting price of RMB 260,000, and is reportedly targeting RMB 1.5 billion funding to finance growth.
- A long-time manufacturing partner to Toyota and Honda in China, GAC is China’s fifth-largest automaker by revenue as ranked on the Fortune 500 list. It reported a 4% decrease in general auto annual sales to around 2 million units last year, but more than doubled year on year its new energy vehicle sales to 42,200 units.