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Nio inks a $1.4 billion bailout as coronavirus sinks sales

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The company was struggling even before the outbreak

Images: Nio

Leading Chinese electric vehicle startup Nio has struggled over the last year or so, and recently warned shareholders that it needs new outside investment in order to make it through 2020. This week, the Tencent-backed company announced a potential $1.4 billion deal with a local government that just might fit that bill. And with the coronavirus cratering car sales in China, it couldn’t have come at a better time — if the deal closes.

Nio said Tuesday that it has entered a “framework agreement” with the municipal government of Hefei, the capital of China’s Anhui province. In exchange for a fresh $1.4 billion injection, Nio will establish a new headquarters in the city and will “further expand its operations and deepen its relationship with local ecosystem partners in Hefei,” according to the company.

Despite Nio’s financial stresses, the company also announced Tuesday that it is beginning production on its third vehicle, a sporty electric SUV called the EC6, even though deliveries don’t start until September.

Expanding operations to a new city will eat into some of that investment. But it’s hard to imagine Nio saying no to the demands of any investor at this point. The company, which started delivering vehicles in mid-2018, finished the third quarter of 2019 with just $274 million in cash. Considering the company has yet to crack $300 million worth of sales in any quarter and has been losing more than $300 million per quarter as it tries to scale its business, that meant Nio finished last year in a rather precarious spot.

Nio, which became a publicly traded company in the US in 2018 and has lost more than $6 billion since it was founded in 2014, didn’t mince words about this either. At the end of 2019, Nio announced that its “cash balance is not adequate to provide the required working capital and liquidity for continuous operation in the next 12 months,” and admitted that its “continuous operation ... depends on the Company’s capability to obtain sufficient external equity or debt financing.”

This is all after the company laid off thousands of workers in 2019 (including a few hundred in the US), sold its Formula E electric racing team, indefinitely delayed plans for an electric sedan, and abandoned a plan to build a factory near Shanghai.

Nio said at the end of 2019 that it was working on multiple financing options, and in the meantime, it was able to squeeze $200 million out of two undisclosed Asian investment funds to help fund operations in early 2020.

But Nio needs far more than $200 million to shore up its balance sheet — especially because the coronavirus is deflating the new car market in China. Nio already reported that its sales dropped sharply in January, and since the crisis has only grown more real in the month since, February’s figures are likely to be worse. (Representatives for Nio and the Hefei government are even seen wearing protective masks in the photos taken for the announcement of the framework agreement.)

Nio representatives and Hefei officials signing the framework agreement while wearing masks to prevent coronavirus spread.

All this makes the Hefei deal seem more crucial. It shouldn’t be considered a done deal, though, as Nio has been linked to multiple deals like it in the past year that never materialized. The startup announced a $1.45 billion deal with Beijing’s economic development agency in May of last year that went nowhere, for example.

That said, Hefei is the home of JAC, the state-owned automaker that makes all of Nio’s cars. That could help pave the way for this deal to go through, according to Michael Dunne, head of ZoZo Go, an automotive consulting group focused on the Chinese market.

“Every automaker in China eventually needs a government ally, a commercial and political godfather. NIO is no exception,” says Dunne. “The deal looks a bit more credible because Hefei is already the production center. And Anhui Province has ambitions to build its automotive portfolio beyond Chery [another state-owned automaker] and JAC.”

But nothing is set in stone, Dunne warns, especially with the coronavirus crisis in the mix.

“Everything is so up in the air right now with the virus and the economy that this deal would not be the Province’s highest priority,” he says.

Update February 27th, 4:32PM ET: This story has been updated to reflect that Nio has clarified it is opening a secondary headquarters in Hefei, not moving its current one in Shanghai.