What can we learn from NIO?
Background
The 2019 Q2 financial report issued in late September by NIO Inc. (hereinafter referred to as "NIO") has taken the headlines of major automobile news. From a "loss of 40 billion" to a "self-proved loss of only 20 billion", numerous discussions have been triggered and people are anxious to know "whether NIO still has a future". Although NIO has not performed up to the expectations of investors at the financial level, I believe that NIO has inspired China's electric vehicle industry, and many of its practices on products and services are accepted by some traditional OEMs.
At present, apart from focusing on the actual losses of NIO, it is more meaningful to analyze the sources of these losses and the possible turnaround in the future. it is necessary to explore the possibility of NIO regaining its momentum and the lessons we can draw on. In this article, I would like to analyze NIO objectively from the perspective of the enterprise's operation, and illustrate what OEMs can learn from NIO, which not only refers to lessons, but also inspirations.
Framework
The issues in the automobile industry possess specific breadth and depth in both products and operations, and it is hard to cover all aspects. Therefore, it is necessary to set up a complete analysis framework , which fully reflects the complexity of the issues, but also highlights the focus of this article.
1. Relevance behind financial figures (specifically on operation level of the enterprise): Financial figures including income, gross profit and sales expenses are the results of an enterprise's operation. Profits or losses reflect underlying policies of products and operation strategies, which are determined by the organization and strategy of the enterprise. For NIO, an entrepreneurial enterprise, close connections can be found between the strategy and the style of founders. Therefore, we need to carry out relevance analysis on three levels, namely financial figures, operation strategy and organization (the three black boxes in the framework diagram). Since the financial analysis of NIO has been covered by many reports, this article will mainly dig into the other two aspects.
2. Complexity of cost composition (focus on sales and service operation): An enterprise’s financial statement normally discloses the three major costs, namely research and development (R&D), production (COGS), sales and administration (SG&A). In the automobile industry, these costs are respectively represented at the operation level: creating, building and selling cars (the top of the analysis framework). According to the financial report of NIO, in 2018, 2019 Q1 and Q2, the ratio of these three costs to income is relatively high (as shown in the figure below)
Apart from the extra COGS cost incurred in 2019 Q2 due to the recall, to sell an ES8 at the price of more than RMB 400,000, it takes a production cost (COGS) of some RMB 400,000, as well as RMB 400,000 SG&A. therefore, it is necessary to address the logic behind COGS and SG&A.
On one hand, many articles have analyzed COGS and R&D, the two product-related costs (the green part in the analysis framework) as well as NIO's product capabilities. In the past few years, the author has done multiple product definition and experience design for OEM. The process from definition to realization is a quite bumpy ride. Automobile covers many parts involving space, interior and networking. Any good idea on product needs to follow the platform strategy of the OEM, automobile-grade and volume production requirements, etc. Moreover, from the user's point of view, driving experience comes from the joint force of multiple components, which leads to extremely high complexity.
On the other hand:R&D involves the long-term research and development strategy of OEM, thus short-term adjustment is difficult. COGS is linked to production system, which results in limited room for short-term adjustment. SG&A is relatively easy to adjust in the short term, and therefore becomes the key determinant for NIO to avoid “another RMB 3 billion loss” in the next quarter.
From the operation perspective, SG&A covers all the processes (the middle blue part in the analysis framework) of OEM for the purpose of sales and after-sales services, which are the main responsibility of domestic JVs at present. SG&A-to-income ratio in NIO has been fluctuating around 100%. The ratio for Tesla, which also takes direct sales model, was 20%, 13% and 16% respectively in 2017, 2018 and 2019 H1. Due to the adoption of dealer model, traditional OEMs need to bear their own and dealers’ SG&A, which in total account for 10-13% of the income. Therefore, it’s worthwhile to explore the gap between NIO and other OEMs in SG&A.
3. Particularity of auto sales and service operation (judging NIO's sales and service input from a comprehensive perspective): Automobile is the largest 2C consumable except house, thus the spending of automakers on SG&A is different from FMCG, household appliances and retail.
To start with, auto salesis a "Lead-based" model. As shown in the first pyramid in the blue part of the analysis framework, consumers do not place orders immediately when they intent to buy a car (unlike e-commerce), and it usually takes several months before a deal can be concluded. During this period, automakers (or dealers) need to the potential car owners (i.e. leads) interested, otherwise they are likely to switch to other brands. Throughout the process from intention to deal, automakers need to invest a lot, which is listed under SG&A, including:
1. Awareness raising (e.g. through advertising)
2. Get in contact with leads (e.g. purchasing from vertical medias like Autohome)
3. Product introduction on-site
4. Test drive
5. Order placing and delivery
Different brands will prioritize investment in different steps based on their own advantages. For instance, Tesla seldom spends money on advertising and purchasing leads from vertical media, rather, it relies on direct sales to generate walk-in traffic. Traditional OEMs often spend heavily on brand advertising and dealers’ lead acquiring from Autohome. Therefore, to comment on NIO's spending on sales and operation, we cannot simply look at the total amount, but the effective conversion rate through such spending.
Secondly, the after-sales of automobile plays an important role in operation, with a profit margin much higher than that of sales. As shown in the second blue pyramid in the analysis framework, after-sales is divided into different types, from high to low in frequency, namely maintenance, repair (including roadside assistance) and driving service (including car washing, parking, etc.). Electric vehicles have highly frequent demand in charging service. In addition, automakers including NIO and Mercedes-Benz are also trying to create life services for car owners in recent years.
While the above services generate revenue, they will also incur costs. A major challenge for after-sales is that charging, repair and maintenance services should precede sales. For instance, NIO can set up a store in Shanghai and attract customers from neighboring cities (such as Wuxi) to place orders. But when these car owners return to their cities of residence, corresponding after-sales systems need to be set up locally. Therefore, the core to evaluate NIO's spending on service operations is to see whether the after-sales supply and demand can be matched. If the service layout lags behind demands, the after-sales experience and subsequent sales performance shall be affected. However, if the layout is too radical and redundant, huge losses will be generated.
4. The hard choice in operation:the nature of auto sales and after-sales is a service model. Every OEM can make a strategic choice on its model, and we need a framework to specify such choices.
Here I think of a classical model to explain service operation, namely the "time-quality-cost" model, which I learned in the Operation Management MBA Course at MIT (the three circles in the middle of the analysis framework). Any service model possesses inputs and outputs, and the inputs are time, quality and cost. It is impossible for any brand to perform well in all three elements, since excellent quality of time is bound to require high cost as a price, while low cost requires moderate sacrifice of service quality and time. Brands need to balance the three based on their own features.
From users’ perspective, the quality and time of automobile service are the embodiment of user experience. Input leads to output, and the output of service model can be measured by efficiency: the efficiency of sales service can be measured by lead cost and conversion rate during initial contact, and by test drive conversion rate and single-store sales volume after the test drive. The efficiency of after-sales can be measured by service usage rate. If the output of the service cannot cover the costs incurred by the input, then the automaker will burn through its capital and incur great losses.
Therefore, the analysis of NIO's investment in sales and service operation cannot be based solely on the high cost of NIO House. The dealer stores of the traditional luxury OEMs also incur extremely high cost in sales service. However, it is obvious that in the electric vehicle industry, we can find players like Tesla, which “complete great things with little investment”, as well as NIO, which pursues "extreme experience". It is necessary to speculate the strategy behind NIO's operation from the input of "time-quality-cost" and the output of efficiency, so as to judge the rationality of this strategy in the short and long term.
After spending so much time explaining the analysis framework, we will come to the key point, namely what we can learn from NIO
What to Learn from NIO: what traps NIO has fallen into in sales and service operation?
1. Excessive reliance on experience, namely quality and time.
It needs to be stressed again that pursuing for experience is not wrong. On the contrary, in today's market with homogenous products, experience is becoming extremely important, and NIO's concept of "users’ enterprise" is also admirable. However, experience is the embodiment of quality and time, at the price of increased cost, meanwhile leading to high efficiency. If the balance between quality, time and cost cannot be reached, excellent experience will drag down the overall performance of operation. I used to work in the food delivery business of two leading global catering brands. In this industry, efficiency and operation are highly focused, and the performance in experience is constrained by “cent” in terms of cost, and “second” in terms of time.
As a "users’ enterprise", NIO has obviously focused on experience in the recent building of NIO House, charging and maintenance system. However, what NIO encounters is that experience leads to high cost, yet the investment failed to bring about reasonable efficiency output.
1.1 NIO House (including after-sales life service system for auto owners)
NIO House is a typical manifestation of NIO prioritizing user experience more than cost. There is no denying that NIO House's extreme user experience has greatly inspired the entire automobile industry, especially the six (potential) owner areas including Library, Joy Camp etc. and services from fellow team. Yet the whole cost is surely astonishing (e.g. downtown location, large area, etc.).
If we go back to the analysis framework, NIO House aims to meet all the steps of auto sales process. With a strong brand effect, NIO House can actually save some cost of traditional OEMs, including brand marketing (for awareness raising) and customer acquisition (attracting walk-in traffic with advantageous location). However, unlike Tesla, which does not advertise at all, NIO has invested certain amount in advertising, including airport ads and NIO Day. Under such circumstances, NIO House's brand effect is not well played.
In addition, it is feasible in concept to use attract walk-in traffic with stores as an alternative to lead purchase. Li bin once publicly expressed that NIO House is very efficient in raising traffic, "40 or 50 NIO Houses can match hundreds of 4S stores." However, it is debatable to replace the economical plan with the current high-cost one, for instance, NIO House. According to our industry research and on-site visits, it is presumed that more than half of Tesla's leads are from walk-in traffic in stores with a 250-square-meter low-cost design. Moreover, in terms of efficiency output, NIO House is not satisfactory. With annualizing NIO’s half year sales, divided by the number of NIO House, then the output of a single house is about 500 vehicles, which is at least half as few as a mature ABB store at the same price level. Apart from possible product issues, judging from the process of lead-based sales, either the walk-in lead is insufficient or the conversion rate is very low. Unless the existing efficiency is improved by several times, high-input solution such as NIO House won’t be sustainable.
In addition, NIO House has great room for improvement in standardization of efficiency. No matter whether it is the 4S store of traditional OEM or Tesla's direct-sales store (except service plus), the space areas are generally standardized. This is a common practice in the automobile industry and is intended to improve operational efficiency through standardized management. However, as of 2019 Q1, among the 13 NIO houses nationwide, the areas differ significantly, which makes them less unified and difficult to standardize. This approach may have resulted in sound user experience, yet the sacrifice on management efficiency is obvious.
NIO House does not provide any maintenance or repair services, but in addition to the service sales process, NIO House has six (potential) owner areas, which actually perform the lowest frequency of life services for auto owners during after-sales. At present, these areas haven’t generated significant revenue from vehicle owners. Based on NIO's financial report disclosed in 2019 Q1 and Q2, "other sales" account for only about 6% of the overall sales revenue. However, this part of area accounts for at least half of NIO House area. Although the user experience is excellent, the output efficiency is almost zero.
Future development: lead collection is the entrance for auto sales. Apart from the leads generated through the online community, the walk-in traffic in NIO House is important. Based on the cost-efficiency ratio of NIO House, cost reduction is urgent, and thus this model is not sustainable. In a recent analyst conference call, NIO purposed to launch NIO Space in new cities in the future, yet the exact model was not specified. However, I believe that most of owners’ areas should be cut off from the existing NIO House. In fact, NIO has started to adopt a standardized 200-square-meter format in second-tier cities (including the already-closed Wuhan Optics Valley K11 and Wenzhou Wanxiang City), and only part of user’s areas were kept for temporary exhibition. Although user experience is reduced, the bright side is improved cost-efficiency ratio.
1.2 Maintenance and repair system
Maintenance and repair are relatively high-frequency parts among after-sales services of automobiles. As the complexity of the electromechanical system is much lower than the fuel system, the maintenance demand of electric vehicles has been greatly reduced compared with their fuel counterparts. The maintenance for electric vehicles can be classified into electromechanical and metal plate painting. The former, which is a core technology of OEM, is of low frequency and high margin, while the latter is of high frequency and relatively low margin.
When planning the maintenance and repairing of electric vehicles, it is difficult for the traditional OEM to independently establish a brand-new after-sales network due to its bonding with the dealer system. Therefore, the maintenance and repair of electric vehicles are incorporated into the existing dealer 4S store system. The emerging automakers don’t have the burden of dealers. Theoretically, for efficiency and cost, they can separate low-frequency and high-margin electromechanical maintenance from high-frequency and low-margin metal plate painting under different after-sales services. This is also Tesla's current practice in China. Its own service center is responsible for electromechanical maintenance (charging), while its authorized service center takes care of metal plate painting.
Of course, user experience can be hurt under such approach. Because car owners would prefer all services to be provided in one place. At present, NIO's maintenance system should be based on such an idea: whether the direct service center or third-party store should deliver full set of maintenance services. Electromechanical services are high-tech and value-added. In NIO's current third-party stores, the provision of such services requires on-site NIO employees. This seriously undermines efficiency given the limited in-store traffic.
Future development: to reduce losses, NIO can fully optimize direct service centers and provide high value-added services based on electromechanical technologies. In addition, third-party stores should be improved, and a small number of them can be licensed with electromechanical services to boost user experience.
1.3 Charging Service System
NIO's charging service system is another proof of its "user-oriented thinking". In addition to private pile installation for car owners, NIO also provides a series of charging services, including battery swap stations, power express and valet charging. These services are spoken highly of by NIO car owners, yet they have drawn criticism from the capital market. By the same logic, the issue with service operation cannot be evaluated solely by experience or cost, and quality-time-cost, as well as efficiency need to be pieced together.
Charging is the major after-sales service for electric vehicles, which is different from fuel vehicles. It is also a valuable high-frequency touch point with customers. Charging is essentially the use of an asset, whether it is charging pile, charging express or battery swap. Output efficiency is reflected in the utilization of asset. Higher utilization (daily usage time) leads to better efficiency, and ultimately stronger service revenue.
According to industry research, the installation rate of private piles for high-end electric vehicles (including Tesla and NIO) is around 80%. Leaving aside the cross-city trip, private pile, which works at night in car owner’s home, can basically meet the travelling need during the day. Other charging facilities can meet the emergency needs of private pile owners and commuting of car owners without private piles.
From the perspective of efficiency, if all the above-mentioned emergency and daily needs can be met by one type of charging facility alone, then OEM should adopt such facility only. For instance, Tesla currently only uses Supercharger. According to industry interviews and on-site observation, the utilization rate of Tesla's Supercharger in the city has reached about 8%. If Tesla starts to charge car owners, then the Supercharger in urban areas can break even. It should be noted that the utilization rate of public charging piles in China in 2018 was only 3-4% (Source: Teld and China Electric Vehicle Charging Infrastructure Promotion Alliance).
Since one charging facility (e.g. Supercharger) can meet the commuting needs of most car owners, then why NIO still established a huge system covering charging express, battery swap stations and valet charging? To understand the decision-making process at that time can be hard, yet it is obvious that NIO emphasized heavily on experience. The original intention of battery swap stations was to beat Supercharger in user experience, since the stations would greatly save charging time. However, the investment in such stations was terrifying: the total fixed investment for one station is close to 2 million yuan, covering associated equipment, construction and spare battery. Based on a depreciation period of 5 years, plus operating costs including labor, rents and utility, then the annual amortization and operating cost of the station will be several times that of Supercharger. Based on RMB 180 per battery swap, It would be a burning through of cash if the station is not several times more efficient than Supercharger.
Although NIO did not disclose the utilization rate of the station, the building of new stations has not been heard since 2019. At the Shanghai Auto Show 2019, Shen Fei, vice president of NIO Energy, also said in an interview with EV Century that at present, only a small percentage of NIO users took battery swap. Based on our observation, the current utilization of battery swap stations is far less than the theoretical break-even point. My guess is that swap stations would fade away in NIO's future charging system. The building of Superchargers announced by NIO earlier this year should replace battery swap stations.
There are two causes of weak efficiency from the swap stations with extreme user experience. For one thing, NIO failed to anticipate the car owners' concern on swapping new battery with old one; for the other, there is the mutual exclusion among elements in the charging system. NIO invested into three elements to fully ensure the charging user experience, namely battery swap station, charging express and valet charging. In this system, the station with the best experience should be the basis, which means the highest expected utilization. Otherwise, the stations shouldn’t cost so much, with a total number of more than 100 nationwide. Charging express should be a supplement in areas stations can’t cover, while valet charging should be an emergent means. However, according to our investigation of NIO car owners, charging express has become the most frequently means, while swap stations lag far behind.
This is understandable from human nature. It is more cost-effective to wait for a charging express instead of queuing at a station and worrying about the quality of the battery. Although the experience of the station is sound, the charging express actually brings more convenience. As a result, the actual utilization of charging express and battery swap station are the reverse of expectation. Judging from our market research, the efficiency of NIO charging express should be close to about half of the break-even point. Therefore, it is easy to understand that NIO has opened its charging service to other BEV brands and plans to spin off the charging service. when the charging demands from owners of other brands are considered, the charging express is very likely to break even.
To sum up, in the planning of the charging system, NIO spares no effort in user experience, but it fails to strike a balance between cost-time-quality and efficiency.
Redundancy caused by excessive investment in sales and service
From the above analysis, for NIO House in the sales system and charging and maintenance model in the after-sales system, NIO has clearly chosen quality and time to boost user experience. However, the surge in was not made up for by sufficient efficiency gains, which is bound to cause financial losses. If NIO only opened a few stores, then such losses could be managed. However, NIO spread this model nationwide in a lightning speed, and losses were amplified when vehicle sales was lower than expected. This is another trap in sales and service operation that I think NIO has fallen into.
Firstly, let's look at the sales system: between 2014 to the end of 2018, Tesla delivered about 48,000 cars in China and opened 34 stores (including 5 service plus) in 20 cities. NIO started delivery from 2018 and the total volume should not exceed 20,000 vehicles by June 2019. However, by March 2019, 13 NIO Houses and more than 10 small temporary exhibition halls (over 200 square meters) have been opened in 26 cities. In less than 2 years, NIO has covered more cities than Tesla with only half the number of car owners. Strategically speaking, the sales network should be built earlier than the actual sales. Yet the sales of electric vehicle is highly urban-intensive, and entering into non-mainstream cities too early could only result in cash burning.
When we take a second look at the after-sales system, we can find the same issues. Tesla's after-sales system in China is divided into direct and third party. The direct service center is only responsible for electromechanical maintenance, while third party stores are responsible for metal plate painting. From industry research, Tesla has some 25+ direct centers (including 5 service plus) and 55 third party stores in China as of 2019 Q1, with a ratio of nearly 1:2. Geographically, third party stores are relatively close to direct service centers, which is a cautious choice.
Now let’s turn to NIO. Based on secondary research and interviews, it is estimated that by the 2019 Q1, NIO had some 20 direct service centers, and as many as 100+ third-party stores in 40+ cities nationwide, with a ratio of 1:5. Since the number of car owners was not sufficient and the stores are not concentrated (entering some non-mainstream cities), a large number of third-party stores will inevitably suffer financially. For the sake of experience, NIO encourages car owners to choose nearby service units and reduce the waiting time. However, the efficiency will suffer since many third-party stores have "irregular small" service traffic. In addition, NIO provides vehicle collection for most car owners, thus third-party stores can’t get direct contact with customers. As a result, NIO's service system and management are under great pressure.
The rapid layout of the sales and service network has accelerated the consumption of the "experience-oriented” model which is highly capital-intensive. I believe that such a strategy should be based on the over-optimistic expectations of sales when a large number of orders were received in 2018. According to media disclosure, 18,000 orders were received after the ES8 was released in 2018. Considering the time factor and high conversion rate, it was estimated that the actual number of orders for ES8 should be at least 2 times of 18,000. Assuming that the total quantity was 50,000 units, even with 100% conversion, it was only close to Tesla's total delivery in China from 2014 to 2018. Yet NIO's after-sales expansion was much faster and wider than Tesla, which caused significant redundancy.
The rapid expansion of after-sales system has also brought challenges to management efficiency. For instance, when choosing third-party stores, Tesla and NIO share the similar standard by only selecting partners with luxury car maintenance experience. But Tesla has enforced such standard more strictly. After randomly picking out some third-party stores of Tesla and NIO, we found that Tesla's stores basically have served luxury car before, yet a considerable portion of NIO's stores lack such experience.
Future development: at present, NIO is "correcting" its own over-shooting strategy in layout. NIO Space should be viewed as a repackaging of existing small-scale sales stores. In the after-sales system, the battery swap station will be replaced by the more efficient Supercharger. The maintenance and repair model will prioritize direct service center in the future, and thus third-party network won’t be expanded further. Therefore, under weakened sales expectation, the after-sales demands shall mainly be met with direct service centers, so as to mobilize existing assets.
What to Learn from NIO: how NIO has inspired the Industry in sales and service operation?
After all, NIO is the pioneer of innovation in China's electric vehicle industry, and many practices are the embodiment of corporate gene. Therefore, a thorough analysis of NIO can help other OEMs industry to avoid similar traps. Despite of the issues mentioned, NIO has inspired China's electric vehicle industry. From its establishment to the delivery of ES8 in 2018, NIO spent less than 5 years to win the recognition of the market with 400,000-500,000 sales volume, which was a great achievement. In addition, NOMI is a vehicle-mounted intelligent application, boosting the user experience. I had the honor to lead an external consultancy to participate in the experience design of ES8 and NOMI from the end of 2017 to the beginning of 2018. For the first time in many years, I found an OEM positioning its products entirely based on user experience. NIO true deserves the title “users’ enterprise”. Due to confidentiality, this article will not discuss any NIO products. The analysis of sales and service operation comes from secondary research, visits and interviews.
Here I would like to focus on NIO's user community, which I believe is a great inspiration to the automobile industry.
Establishing Direct Link from Brand to User: Operation of User Community from the Perspective of Leads
One major pain point for the employees of OEMs is the indirect user touchpoints due to dealership system. In the "lead-based" sales model, the direct influence of OEMs on users remains at the initial "interest raising" stage, through a large number of advertisements on television, media, magazines, etc. users may actively contact OEM if they are interested, yet these contacts, or leads will be passed down to the dealers. Then, the dealer will follow up the subsequent sales steps including after-sales services. This sense of distance has become a major concern for many OEMs.
NIO made a leading attempt to solve this issue. Before delivering ES8, NIO established a user community in which the founding team was deeply involved. The discussion of automobile and life is completely centered on users. Around the delivery of ES8, discussions on life services was completely user-centered, beyond the traditional scope of CRM for OEMs. If we use quality-time-cost framework to evaluate community services, both quality (the founding team personally respond to users’ demands) and time (quick response time) are emphasized, which is in line with NIO's strategy. One impressive example: one billboard was pup up in T2 terminal of Hongqiao Airport that read “the Diary of My Son” , and people passed by were often attracted by its content. The diary was written by the son of an owner of NIO ES8. After sharing an interesting story about his family on NIO app's "Moment", he was contacted by NIO employee.
In fact, traditional OEMs haven’t neglected users. In the process of after-sales, user community is targeted at car owners' life service, which has the lowest usage frequency. With low commercialization possibility, this service hasn’t been prioritized. At present, NIO hasn’t generated significant income from life services. From the financial figure disclosed by 2019 Q1 and Q2, "other sales" only accounted for about 6% of the total sales revenue. Then why we still consider NIO’s user community an inspiring practice?
Returning to the framework of "quality-time-cost", under NIO’s focus on experience, user community has incurred considerable costs (labor cost and new user points). If there is not enough efficient output, this service is difficult to sustain. Although the output is tiny in terms of after-sales service, NIO has creatively used such an after-sales service to boost sales, though creating contact at the beginning of sales. Therefore, if we measure such boosting effect, the result can be different.
The contact and communication stay at the initial stage of sales, and the efficiency output are the number and cost of leads. According to Gasgoo Auto, the cost of leads has been rising gradually. The average cost is as high as 240 yuan per lead, and the conversion rate is about 3% (out of high-quality leads after careful selection). According to the secondary research, we speculate that by the end of 2018, NIO will guide potential customers to register on APP through various offline activities, H5 forwarding, word of mouth, SEO, etc. NIO APP has amassed 1 million users, with 200,000 daily active users. If we view 1 million users as 1 million leads, in fact NIO user community has contributed in collecting leads.
Considering NIO seldom purchases leads from vertical media, if their leads can cost less than the industry average, then the efficient output is appreciable. Since the average lead cost is RMB 240, then NIO can spend less than 240 million to cultivate 1 million users, generating high efficiency. Although the actual cost hasn’t been announced yet, it can be properly estimated. Apart from customer acquisition, we need to count in the labor cost in APP O&M, and the points for attracting new users. We assume that there is a team with 250-300 people for O&M, and the exchange value of points in NIO Shopping Mall is used to calculate (a reasonable assumption is that less than half of total points are rewarded to new users and the rest for service of car owners), then the total cost will be between RMB 200 to 240 million during 2017-2018. NIO has amassed a high-quality lead pool with lower than industry average cost. There is some good experience for traditional OEMs to draw from.
NIO's future: ideas behind operation strategy
I mentioned that behind the financial figures, there are a series of NIO-specific operation policy and strategy. Why NIO adopts such an operation strategy? Whether such a strategy will be adjusted in the future? To answer these questions, we need to form an opinion on the organization itself.
To sum up, from the current sales and service operation, the depletion on cash comes from two sources.
1. In terms of sales and service model, too much emphasis is placed on experience, namely quality and time, and the resulting high costs can’t be supported by sufficient efficiency.
2. The aggressive expansion has outrun with the actual demand, which sped up the cash burning.
Obviously, these two sources carry strong Internet features. The digital products of Internet companies are essentially services. Internet service places great emphasis on quality and time. In the framework of quality-time-cost, one important assumption is that the high cost due to pursuit in quality and time needs to be covered by efficiency gains. However, in the Internet era, this assumption has been rooted out. The cost from improving user experience will be directly incurred on capital. Only after a considerable period of time, we can make up for such spending by either the scale economy or other efficiency gains from huge user base (such as advertisements). As long as the upfront cash burning can form a significant user base for commercialization and the capital is patient enough, such business model can survive.
However, in the automobile industry, user accumulation is based on the cycle of lead, which involves too many uncertainties. Besides, even if the user base is formed, there are challenges ahead to generate actual income. Therefore, NIO failed to attract enough users after incurring extremely high cost. This Internet feature should be strongly influenced by the ideas of the founding team.
In addition, it is impossible that a company's operation is directly promoted by its founders, and the organizational structure must have a role to play. The organization is equivalent to the amplifier of the founding team at the time of implementation. NIO emphasizes on experience and fast expansion, yet neglects efficiency, the effect of which can be further amplified by the organization, leading to faster cash burning. NIO has not released its official organizational structure, but we can make some speculations from public information. According to 36Kr's report on August 22, the peak number of employees in NIO was 9,800. Meanwhile, the prospectus disclosed that R&D personnel accounted for nearly 45% of total employees. Therefore, there were about 5,400 sales service operators and administrators at the peak. Assuming that the percentage of employees involved in vehicle sales, service and charging is 70-80%, then the number should be 3,800-4,300. According to industry research, Tesla China should have no more than 1,500 employees in sales and service operation. The number of people in charge of sales, service and charging in NIO is about 2.5-3 times that in Tesla China. Considering the huge difference in delivery quantity, NIO's productivity in the sales and service operation has great room for improvement.
Why there are so many people? If the headcounts in each position is 2.5-3 times the number of Tesla, it is not particularly reasonable from a management perspective. One possibility is that there are different settings in the organizational structure. On recruitment websites, we found that NIO recruits sales, delivery, after-sales and charging personnel in different cities, which are consistent with the locations of NIO House and third-party service centers. Therefore, we boldly speculate that NIO has established a very large regional team, and each region owns its sales and service operation system similar to the headquarters. Assuming that the headcount for each function is 10, then there are nearly 50 employees in each city, and the entire regional team shall have 2,000 employees. This is a huge investment, especially for cities with relatively few NIO auto owners. What’s more, it would be a waste of resources if the regional team could coordinate well with the headquarters.
Why NIO launched such a huge regional team in a short period of time when the headquarters haven’t completed the trial and error on other business models? I guess it was also related to the high expectations from high initial orders. This organizational structure under Internet-specific ideology and strategy has weighed on efficiency.
When I was writing this article, Qin Lihong, president of NIO, was interviewed when attending the opening ceremony of NIO Chongqing. He said, "as long as the products and services are sound, the improvement of financial indicators is only a matter of time." I won’t comment on the product part, yet I’m not so optimistic on service. NIO has indeed done well in the sales and service experience, but the piling of costs was supported by high efficiency. As a result, the financial figures show no signs of turning up. At present, both the introduction of NIO Space and the adjustment of charging system are attempts to make up for the over-reliance on user experience. In addition, whether to correct the current over-expansion will greatly affect the SG&A of the sales and service system. The above changes can be easy or hard, depending on different perspectives. They are easy to implement in a short period, without jeopardizing the current model or specific area. Yet the drawback is that user experience will be undermined. Adjusting user expectation can be tricky. After all, it is always tough to downgrade from luxury to ordinary. Besides, these changes will be affected by the sheer size of the regional team, and thus organizational adjustment is imperative. Let’s see if NIO is determined enough to make the hard choice!
I hope NIO can get through the current crisis. After all, NIO is a leader, if something goes wrong with it, the whole market niche will be out of favor. In that case, the emerging players with product delivery will be worse off, and those without delivery yet will strive for later-mover advantage.
Note:
1. The information in this article is from secondary research, market visits and industry interviews. The insights in this article are based on the author's reasonable assumption.
2. I’ m grateful for the contributions from Ms Yuan Ye, senior researcher of S.Point, Mr Chee-Kiang Lim, former senior expert of S.Point, and Ms Wang Zhiyan, former senior researcher.
Postscript:
1. When preparing this article, I read through a large number of articles on NIO, many of which were in-depth analysis, especially in product design, R&D and volume production. I hold opinions from different perspectives, yet I am not in a position to comment due to my past cooperation with NIO in product experience as a third party. Apart from products, the focus of many articles is on NIO's management team and financial figures. In fact, a company's financial performance and management style are determined by multiple factors, including strategy, organization, operation, etc. Considering the uniqueness of automobile industry, behind the financial performance there can be multiple causes. Therefore, I would like to comment on sales and service operation through secondary research and industry interviews.
2. Since 2014, I moved from strategy-and-operation-oriented management consultancy to experience-and-product-oriented design. It is a good to see that experience has received more attention from different industries over the past few years. I also strongly agree that experience generates value for enterprises and customers. However, I frown upon the phenomenon that people have overestimated the value of experience, considering it an a panacea for all problems. In fact, the purpose of experience is to amplify the value of products, not to make up for the lack of products. Another important point is that experience is constrained by business logic. From the framework of quality-time-cost, the price of elevating experience is high cost. If the cost increase can’t be hedged by the improvement of efficiency, the enterprise will be ultimately under financial strain. Of course, this is more for traditional industries, because the rise of cost in experience for the Internet industry is very limited, and the efficiency gains can be realized in the future. For traditional industries, the level of experience elevation is restrained by efficiency. This is best reflected in the catering industry, which extremely concerns about cost and efficiency. Please refer to the articles by my colleague Ms Guo Xiaoyan, who was McDonald's innovation director. Traditional industries need to learn how to optimize the experience under the weight of cost and efficiency. It requires not only creativity and design, but also research analysis and logical reasoning.