Nio founder William Li predicted that the company will achieve long-awaited per-car profits by mid-year as it reported disappointing earnings for the fourth quarter of 2019 on its Wednesday earnings call.

Nio shares tumbled 16% to $2.43 on Wednesday after it reported a 21% year-on-year decrease in vehicle sales and a worse-than-expected net loss of RMB 2.9 billion ($411.5 million) in its fourth quarter financial results. The electric vehicle maker earned RMB 7.82 billion in full year revenue, also below market expectations of RMB 7.95 billion, while posting another annual loss of RMB 11.3 billion, although that number has more than halved compared with the year prior.

Things look desperate for the high-end electric auto maker, as the disruption to the global auto supply chain brought by the Covid-19 outbreak will probably linger for months. Meanwhile, it is facing tough competition from Tesla, which swept 30% of the country’s EV market last month with a production ramp-up at its Shanghai facility.

To the evident surprise of analysts on the call, Li made big promises to hit a positive vehicle gross margin from the current 9.9% loss and double-digit profit margins by the end of this year. “Gross margin improvement is one of the top objectives for Nio in 2020,” Li said during the call.

With the company’s cash reserves having fallen further according to Q4 filings, it’s on a clock to convince increasingly skeptical investors that its largely unproven business model can be profitable. But a pending deal with the government of Hefei to inject a reported RMB 10 billion could buy it time to fulfill Li’s promises.

Cost efficiency becomes a top priority

Nio’s sales continued to bounce back from the withdrawal of government subsidies which began in June. After reporting a record output of 8,224 cars in Q4, Shanghai-based Nio deserves the title as a top Chinese EV maker with aggregate deliveries of 31,913 cars nationwide over an 18-month period as of last year, the highest in the premium EV segment.

Nio’s sales bottomed out in the second half of last year after July, when it reported its second-lowest monthly sales figure of just 837 cars, an immediate result of the Chinese government cutting EV purchase subsidies by more than half. It later posted double-digit sequential increases in the third and fourth quarters, bucking a broader slowdown in overall car sales.

Investors have long been skeptical about Nio due to its stunning cash burn amid an extended market slump. Losing more than RMB 17.2 billion over three years ending in 2018, the company has only RMB 1.05 billion in cash and equivalents as of December, down from RMB 1.96 billion in Q3. The company said its cash reserves were inadequate for “continuous operation in the next 12 months,” repeating a warning made three months ago.

Li declined to share an annual sales target or to lay out specifics on how the company will achieve double-digit gross profit margin by year-end, but said a monthly output of 4,000 cars would “basically support its operational target.” He added that the company has secured more than 2,100 non-refundable orders over the past month or so, with manufacturing to fully resume after pandemic-related disruptions by the end of April. In late February, Nio also began production of the compact crossover EC6, set for release in September.

Nio cited a variety of favorable trends that support its gross profit goals, including a substantial reduction in cost of production with supply chain optimization, falling battery costs, and economies of scale as it ramps up production. Nio financial chief Feng Wei said a 10% decrease in the cost of raw materials and car parts other than batteries would also be “reasonable” according to the company’s estimates.

Reducing sales and a cutback in marketing will also help cut costs as the company fights to stabilize its cash position. 

Nio is reining in a costly marketing strategy that’s included everything from star-studded press events joined by popular singers to the company’s unique club-style showrooms. Known as “Nio Houses,” the 22 elegant showrooms are mostly located in prime urban locations, with footprints of at least 1,000 square meters. The clubhouses offer cafés, meeting rooms, event spaces, and even daycare centers available only to car owners. 

Li confirmed that “basically” no new Nio Houses will open this year, while the company will continue plans to open around 200 “Nio Spaces,” a type of smaller and more capital-efficient franchise store by the end of this year. Closure of some “less efficient Houses” is also expected, Chinese media reported earlier this year citing Zhu Jiang, vice president of user development.

Another 30% drop in manufacturing costs may also be achievable by year-end, since the company will pay less to manufacturing partner JAC for operating losses, a result of lower-than-anticipated sales volume.

But these cuts are not enough to keep the company afloat without more cash from investors.  Its lifeline is an expected investment from the government of Hefei, the capital of eastern Anhui province. Li confirmed plans to sign the deal by the end of April. The major financing project is “necessary if Nio is to remain solvent,” wrote analysts at Bernstein led by Robin Zhu.

Jill Shen is Shanghai-based technology reporter. She covers Chinese mobility, autonomous vehicles, and electric vehicles. Connect with her via e-mail: jill.shen@technode.com More by Jill Shen