The ‘Tesla of China’ had staged a furious Wall Street comeback. Then came a freak car crash and a damning short-selling report

NIO CEO William Li introduces the Nio ET7, the flagship sedan for the Chinese electric car manufacturer, during its launch ceremony in Chengdu, in China's southwest Sichuan province on Jan. 9, 2021.

Last Wednesday, a car lay upside down below a parking garage at the Shanghai headquarters of electric vehicle firm Nio. Shards of glass encircled the vehicle, as did a crowd of stunned onlookers that had just witnessed the Nio car plunge three stories from the parking structure above to the pavement below. The crash killed one passenger and a driver, and so far little is known about how and why the car punched through the third-floor wall to its deadly descent.

The company claimed that the accident was “not caused by an issue with the vehicle.” Social media users called the response callous and defensive, but investors seemed convinced. Nio shares barely budged in trading in Hong Kong and New York that day. The stock’s resilience was a sign of Wall Street’s recent fixation with the automaker, whose better-than-expected sales figures and lineup of new cars have won investors over. The freak accident didn’t dim investor optimism, but Nio’s next crisis just might.

On Wednesday, Grizzly Research, a short-selling firm, published a report accusing Nio of illegally inflating its revenue and profit figures for the past few years through a firm called Wuhan Weining. Nio did not return Fortune‘s request for comment. Its shares closed down 11% and 2.6% in Hong Kong and New York, respectively, for the day.

Nio denies Grizzly Research’s claims, and some investors remain upbeat, but the short-seller account is likely to inflict more lasting damage than the parking garage crash, providing another test for Nio, which only recently came back from the near-dead.

A bumpy ride

At times, Wall Street has fawned over Nio’s potential, calling it the the ‘Tesla of China.’ At other times, Wall Street has written Nio off as nothing more than a money-burning machine.

Nio’s ES8 displayed in Oslo, Norway, on Sept. 30, 2021.
Zhu Sheng—Xinhua via Getty Images

Chinese businessman William Li launched the electric vehicle startup NextEV in November 2014. In 2016, Nio released its first car—and changed its name to Nio—helping cement the firm as one of China’s leading EV startups. Initially, Li, a veteran of China’s tech industry, raised funds from Chinese tech billionaires like Pony Ma, founder of social media giant Tencent, and Lei Jun, founder of phone maker Xiaomi. But it attracted foreign investment too. Sequoia Capital was part of a $500 million series B funding round in 2015, while TPG was part of a $600 million late venture capital round the following year. Li’s background in tech and the auto industry—he had previously built a successful car comparison website—helped convince investors he could replicate his past success. And investors were impressed with Nio’s technology; in 2017, the firm built a flashy, limited-edition electric sports car that broke speed records during testing in Europe.

Nio launched its first mass-market car, an SUV called the ES8, in June 2018 exclusively in the Chinese market. Nio got a boost from a Chinese government program that awarded government subsidies to electric vehiclemakers like Nio for each car sold. Nio rode the momentum of ES8 launch to a successful debut on the New York Stock Exchange later that year. In December 2018, the firm delivered 3,318 cars—its highest monthly total ever. But the hype started to fizzle when deliveries fell by half the next month and continued their downward spiral throughout 2019, dragged down by the end of the stimulus program. In all of 2019, Nio sold 20,946 cars, half its initial projection of 40,000, while burning through billions in cash reserves. A year after its New York IPO, Nio’s share price had dropped 85%, and the firm’s market cap reached a low of $1.4 billion.

Nio was already struggling when early COVID outbreaks all but halted China’s economy in early 2020, taking the firm to the brink of bankruptcy. But Nio received a lifeline from the municipal government of Hefei in China’s central Anhui Province, where the company is headquartered. The automaker got a $787 million bailout in exchange for ceding Heifei’s government a 17% stake.

With the injection of cash, Nio more than doubled its annual vehicle deliveries to 43,000 in 2020, generating $2.4 billion in sales, roughly double its 2019 total. Nio’s 2020 comeback wooed previously wary investors. In early 2021, Nio reached a peak market capitalization of over $100 billion and was so flush with cash that it opted not to raise funds when it debuted in a secondary listing in Hong Kong that March. But the comeback was short-lived. Early last year, supply chain snarls chocked Nio’s production, and its stock dropped from a high of nearly $60 per share to $30 in New York as investors carried out a broad selloff of tech stocks. Since then, Nio’s share price tumbled further, down nearly 60% since its peak last year.

“They had a spectacular climb, and then a spectacular fall from grace,” says Michael Dunne, CEO of auto industry advisory firm ZoZo Go.

Bulls and bears

Earlier this year, Wall Street had been convinced that Nio’s worst days were behind it.

Nio delivered 25,768 cars in the first quarter of 2022, its highest quarterly total since 2019. But the meager growth encouraged investors given ongoing supply-chain headwinds. Nio announced in early June that its factories in Shanghai, which endured months of lockdowns, had fully recovered to pre-lockdown production levels.

William Li, CEO of Nio Inc., speaks during an event marking the rollout of the company’s 100,000th electric vehicle at its factory in Hefei, China, on April 7, 2021.
Qilai Shen—Bloomberg via Getty Images

Earlier this month, Vijay Rakesh, an analyst for Japanese bank Mizuho, projected Nio’s stock price to nearly triple this year to $55 per share in New York.

“Despite short-term headwind, we believe NIO remains well-positioned to benefit from multiyear EV ramp, leadership in premium EVs in China the largest EV market, with future growth as EU/Global expansion and mass-market entry ahead,” Rakesh wrote in a note.

Nio has differentiated itself from competitors by building a high-quality product and paying “incomparable attention” to their customers, Dunne says. The company also pioneered battery swap stations, which let Nio customers switch out their batteries at select locations instead of waiting for their own batteries to recharge. “The question is whether Nio can sustain momentum and keep their head above water in an increasing increasingly competitive market,” Dunne says.

Until last year, all of Nio’s sales had taken place in China. In 2021, it started selling vehicles in Norway, a market CEO Li says he selected for its ultra-fast adoption of EVs. This year, Nio plans to enter four new European markets: Germany, the Netherlands, Sweden, and Denmark. The firm also plans to launch three new cars this year, including a new midsize sedan and an SUV, doubling the number of models it sells.

Earlier this month, 14 analysts unanimously issued buy ratings for Nio stock. “We believe that if the company can report a solid sales bounce of 11,000 to 13,000 [units] in June, this should help NIO restore investor confidence,” Morgan Stanley analyst Tim Hsiao recently wrote in a note to investors.

“Nio is a Wall Street favorite,” says Brock Silvers, chief investment officer of Kaiyuan Capital. “Nio has new models and factories coming online, should benefit from eventual COVID reopening, and seems like a reasonable bet.” In the last month, Nio’s stock price has jumped 33% in Hong Kong and 25% in New York.

But Silvers says that Nio’s response to the recent crash at its headquarters “was problematic.” Nio’s initial statement about the crash went viral as social media users questioned how the car company could so quickly absolve itself of responsibility in the accident. Nio removed the statement an hour after posting it and replaced it with another statement with the phrase “not caused by an issue with the vehicle” in brackets, an apparent attempt to de-emphasize the language. “The company simultaneously tried to reassure that the car was not at fault but that the cause of the crash was unknown… and understandably faced online skepticism and condemnation,” Silvers says.

Dunne said the crash may make consumers “think twice” about buying a Nio car. “It’s highly unusual that a car drops off of a parking structure from a couple of stories up,” says Dunne. Some of the online speculation about the accident cites the crashed car’s self-driving capability, though it is unclear whether the system was activated at the time of the crash. “Would I want to put my money down on a Nio? I’m not as sure as I was yesterday. This is not a comforting development,” Dunne says.

Nor was the report U.S.-based short-selling firm Grizzly Research published on Wednesday.

The report accuses Nio of illegally inflating its revenue and profit figures for the past few years through a firm called Wuhan Weining. Weining is a leasing company that rents $10,000 Nio car batteries on a subscription basis to Nio customers who may not own their own batteries. Nio pioneered this renting model, calling it “battery-as-a-service.” But Grizzly accuses Nio of misclassifying future payments from Weining subscriptions as revenue already in the company’s pocket.

“It’s outrageous behavior,” Grizzly Research CEO Siegfried G. Eggert said in a live call on Twitter following the publication of the report. “We believe [Nio] is a charade to take advantage of retail investors.” Nio denied the allegations, saying the report is “without merit and contains numerous errors, unsupported speculations and misleading conclusions and interpretations.” But it appears at least some investors were spooked. After the report was released, Nio’s stock price dipped 11% in Hong Kong on Wednesday before bouncing back for a 4% gain on Thursday. Nio’s stock price in New York fell over 2% in Wednesday trading.

“The Grizzly report raises massive red flags and could be devastating for NIO investors,” says Silvers. “The report is detailed and logical as it exposes many uncomfortable facts about Nio’s management and operational practices.”

Yet some investors were quick to back Nio.

“If all the dirt they could dig on Nio was related to the battery swap company, then I am now even more relaxed and confident in my Nio positions,” Rafi Khan, a Nio investor, wrote in a blog post on Wednesday.

Nio is likely hoping that Khan’s view prevails. “The single most important thing to watch is will they be able to sustain access to capital to fund their ambitious global plans,” says Dunne. “They need to sustain confidence among investors.”

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