Edison Yu's team believes that Nio can cut costs in five areas: battery cells, chip development, battery swap, dealer network, and phone.

(Image credit: CnEVPost)

Nio (NYSE: NIO) reduced its workforce by about 10 percent in November, though in Deutsche Bank's view, the company may need to rationalize further to properly align its cost structure.

That could take the form of additional headcount reductions or strategic actions that could result in incremental cost savings of about RMB 1.5 billion, analyst Edison Yu's team said in a research note sent to investors today.

Nio's selling, general and administrative expenses (SG&A) were RMB 1 billion higher than Li Auto's (NASDAQ: LI) in the third quarter, despite selling 50,000 fewer units and spending nearly 3 times more on research and development than Xpeng (NYSE: XPEV), the team noted.

"Beyond the obvious need to reduce cash burn, we think management might have misread the market backdrop, over-hiring and attempting to bring in-house capabilities that are no longer critical to the company's success," the team wrote.

Yu's team identified five areas where costs can be reduced: battery cell, chip development, battery swap, dealer network, and cell phones.

Nio's management confirmed during an earnings call on June 9, 2022, that the company would develop its own batteries, saying at the time that it would look at areas including battery materials, cells, and battery management systems.

On December 6, Reuters reported that Nio plans to spin off its battery manufacturing unit, a move that could take place as early as the end of this year, after which the battery unit will seek outside investors.

Yu's team estimated that there are over 500 employees in this division after the recent headcount reduction, down from 750, with annual operating expenses of between RMB 300 million and RMB 500 million.

Considering that China already has a very strong local supply chain and battery suppliers are competing for market share and driving technological advances, which naturally reduces costs, the spin-off makes sense, the team said, adding that lithium carbonate prices have also fallen precipitously so far this year.

"In other words, we don't see any meaningful advantage keeping battery cell production in-house," the team said.

Nio's first in-house chip, a LiDAR main control chip, began production in October. The company also plans to develop autonomous driving SoCs, cockpit infotainment chips, and even a CMOS image sensor chip, Yu's team noted.

The team believes that this division could also be spun off, as the real value-add to the Nio brand seems minimal, and some viable local alternatives are gaining traction, such as Horizon Robotics, and Black Sesame.

Even if the US government adopts more restrictions on Nvidia in terms of chips, Nio could source elsewhere for its next-generation platform, the team wrote.

In addition, semiconductor development is of strategic importance in China, which should make it an attractive area for local investors, according to the team.

"Considering Nio's strong team (led by ex-Huawei) and progress thus far, the chip division may even fetch a solid valuation, most likely higher than the battery unit in our view," the team said.

By opening up the battery swap network to more strategic partners in the industry, Nio will benefit from sharing the capex burden and potentially collecting future operating/licensing fees, Yu's team said.

The team estimated Nio's third-generation battery swap stations to have a capex of RMB 1 million to RMB 1.5 million per station.

Nio aims to have more than 4,000 stations by 2025, which would mean savings of about RMB 1 billion to RMB 1.25 billion if it can convince partners to fund about 50 percent of the remaining construction, the team said.

Changan Automobile and Geely Holding Group have partnered with Nio in the battery swap business, though details are currently unknown.

As of the end of November, Nio had 142 Nio Houses and 320 Nio Spaces and is reportedly bringing in dealers to help expand its reach, the team noted.

"We believe this will be used to expand presence amongst Tier 3-5 cities and also for the mass market Alps brand," the team said.

Xpeng closed several company-owned stores due to poor performance and Nio may eventually do the same, the team said.

On a related note, dealers could be important for further expansion in Europe, which has proven to be a difficult market to manage, the team noted.

"This unit is relatively low cost in our view, requiring about 200-300m RMB of opex per year (500 people) but we think represents a distraction for management," Yu's team wrote.

Nio might be better off letting smartphone OEMs lead the operation, such as the Porsche + Huawei phone model, according to the team.

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