"While management still has a long way to go in restoring creditability among investors, this should be viewed as a meaningful step in the right direction," Edison Yu's team said.

(Image credit: CnEVPost)

Nio (NYSE: NIO) outlined an organizational optimization plan on November 3 that includes a reduction of about 10 percent of positions. To analysts, this is a step in the right direction.

Based on average employee compensation in 2022, the job cut Nio announced on Friday are expected to save between RMB 1.5 billion ($206 million) and RMB 2 billion per year going forward, Deutsche Bank analyst Edison Yu's team said in a research note sent to investors today.

"In our view, this is a much-needed rightsizing around costs given the current demand trends and capital markets backdrop," the team wrote.

Nio founder, chairman, and CEO William Li announced the layoff plan in an internal letter dated November 3, saying this would be completed in November.

As of December 31, 2022, Nio had 26,763 full-time employees, according to its 2022 annual report.

In addition to the layoff, Nio is looking to improve organizational efficiency by consolidating duplicate departments and roles, and reforming inefficient processes and the division of role responsibilities.

The company will also improve resource efficiency and defer or cut investments in projects that do not contribute to the company's financial performance over a three-year period, according to Li's internal letter.

Most of Nio's businesses will see layoffs, but the percentages will vary, with the battery and phone businesses being the most likely to be hit, a subsequent report from local media outlet 36kr said.

Like many emerging high-growth companies, Nio over-hired in the last few years assuming a much different business trajectory and was slow to adjust, Yu's team said.

For Nio's third-generation core platform, NT 3.0, the company's management has hinted that it may focus on fewer models to maximize efficiency, the team said, adding that they expect this to happen in 2025-2026.

Yu's team said they are encouraged by Nio's decision and expect cash burn to improve as these initiatives are implemented.

"While management still has a long way to go in restoring creditability among investors, this should be viewed as a meaningful step in the right direction," the team said.

Separately, 36kr reported on November 3 that Nio has seen significant price cuts from its supply chain in the recent past.

With these price cuts coupled with deliveries averaging nearly 20,000 units per month in the third quarter, Nio's gross margin is on track to reach a double-digit level, 36kr's report said.

After this business and organizational streamlining, Nio is clearly on track to achieve further cost optimization, the report added.

Nio's gross margin was 1.0 percent in the second quarter, down from 13.0 percent in the same period last year and from 1.5 percent in the first quarter, according to its second-quarter earnings report announced on August 29.

The company's second-quarter vehicle margin was 6.2 percent, down from 16.7 percent a year ago and an improvement from 5.1 percent in the first quarter.

Nio hopes to achieve double-digit gross margin in the third quarter and 15 percent in the fourth quarter, the company's management said in an analyst call following the August 29 earnings announcement.

Nio has yet to announce a date for its third-quarter results, with local peers Li Auto (NASDAQ: LI) and Xpeng (NYSE: XPEV) set to report their respective third-quarter results on November 9 and November 15, respectively.

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BREAKING: Nio lays out organizational optimization plan: To cut 10% of positions, emphasize on improving efficiency