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Why China’s Nio Should Resist the Siren Song of Norway

China’s Nio Inc. is a self-proclaimed Tesla Inc. rival that wants to go big in Europe. That shouldn’t be a surprise: The continent is fast-becoming the world’s largest electric car market. But ambitiously following favorable green policies around the globe isn’t going to cut it for the new-age car maker.

New York-listed Nio last week announced its Norway plan, venturing into its first market outside China. It’s already hired people to open a service and delivery center in the Scandinavian nation in September and to establish its charging and battery systems there.

It isn’t hard to see why the company wants to start with Norway: All-electric cars accounted for over 50% of all new ones purchased last year. The market is small but adoption rates are high because of government policies that encourage ownership of green vehicles. Norway wants to become the first country to end the sale of internal combustion engine vehicles by 2025.

That isn’t enough to guarantee success for Nio, however.

Despite supportive policies and financial backing in China, the firm hasn’t been able to make its own cars or money there. In early 2020, Nio was effectively bailed out by Beijing. As it continued to burn cash and couldn’t afford to pay its workers on time, Nio entered into an investment agreement with the government of Anhui province, which invested 7 billion yuan ($1.08 billion) of cash into the company. A group of related strategic investors holds just over 24% of the firm’s main entity, NIO China.

Profitability has eluded the company since its inception. And it’s dealing with an existential problem: Nio doesn’t make its own cars. It has a manufacturing arrangement with Jianghuai Automobile Group Co., or JAC, which is set to expire this month. As part of that, Nio pays on a per-vehicle basis and compensates the state-owned auto manufacturer for operating losses.

Meanwhile, even as Nio has flip-flopped on plans to build its own factory, it hasn’t been able to bring down the cost of selling vehicles. As of April 30, the company had delivered a total of 102,803 vehicles over the last three years. But those haven’t translated to economies of scale.

If Nio can’t figure out how to master high-volume manufacturing in its home-market — the famed factory floor of the world where Elon Musk now seeks production refuge — then it’s worth wondering how the company will make ends meet elsewhere.

It isn’t clear how Nio will fund the expansion into Norway, either. That plan seems to overlook a key challenge: The European electric car market has vaulted ahead because large, traditional automakers have brought a whole range of car options to market as supportive policies underpin the market. Last year, over 60 new electric-vehicle models were launched across the continent. That’s double the number in China and far more than the 15 launches in North America. In Norway, Volkswagen AG-backed Audi’s e-tron was the bestselling new car last year, ahead of Tesla Inc.’s Model 3, which had topped the charts in 2019. Nio will just be one more newcomer on an already long list.

Nio should bear in mind that life after subsidies is painful, as Tesla learned early on. Lured by small markets like Denmark and Hong Kong that were seemingly perfect playgrounds for electric cars, Musk made a big push, only to meet harsh reality when incentives were pulled back and sales crashed.

Policies can only take you so far. Nio needs to straighten out its operations at home first. If it gets squeezed out there, then getting a toehold in Norway — or anywhere else in the world — won’t really matter.

Bloomberg