When the electric vehicle boom unfolded, few investors bet on Chinese firms flooding the U.S. and European markets.
Investors know to avoid Chinese EV stocks that offer cheap vehicles. They are poorly made and their low price could invite trade restrictions. Governments will introduce tariffs and investigations against Chinese firms like Nio (NIO) or XPeng (XPEV) to protect their domestic markets.
In October, Nio posted deliveries growing by 59.8% to 16,074. Still, Bloomberg reported on Nov. 3 that Nio would cut 10% of staff positions. Growth companies do not cut jobs. Nio faces fierce competition. Its loss per vehicle sold is not sustainable. More importantly, it does not have the competitive positioning to compete against Tesla (TSLA), the most established, global EV company today.
The U.S. and China trade war shows no sign of getting better. President Xi visited Biden in San Francisco. The two leaders discussed the Taiwan tensions. They agreed to an open dialogue should those tensions escalate. The outcome suggests that the U.S. will not let Chinese EV companies export their inexpensive vehicles to its market.
The economic slowdown in China will hurt EV sales. This will accelerate losses for Nio and XPeng. They will need to issue shares or sell debt to avoid bankruptcy. Neither scenario will help their share price.
U.S. investors should steer clear from NIO and XPEV stock.
