• By subsidizing its EV makers, China has created a hyper-competitive industry.

• Significantly more models saw price cuts in 2024 than in the prior year.

• This price war has clobbered some automakers' financial and delivery results.

Nio, one of China's largest premium electric vehicle (EV) players by sales, was always an intriguing investment opportunity. It gave investors a path into China's booming EV market, which was heavily subsidized by the government and is poised to take over roads globally.

But be careful what you wish for, as investing in China's booming EV market also gets you a piece of a brutal price war. Here's why the ongoing price war might not derail Nio as an intriguing investment option.

How bad is it?

When China's government decided to subsidize its EV industry, it created a long list of very capable auto manufacturers. Those manufacturers proved capable of designing and manufacturing advanced EVs, and quickly the long list of competitors was engaged in a race to the bottom of prices to lure in consumers.

The price war has clobbered some financial results, it's challenged some delivery volume results, and it has largely sent foreign automakers scrambling back to the drawing board for a strategy to compete. It's also caused nations such as Europe and the U.S. to slap hefty tariffs on Chinese EVs to help protect their home turfs from being flooded with more affordable Chinese options.

In fact, China's EV price war has gotten so bad that more than 200 car models saw price cuts in 2024, up from the 148 models in 2023, according to the China Passenger Car Association's secretary general, Cui Dongshu. Taking it one step further, China's sales profit margins for the auto industry dropped to 4.4% during the first 11 months of 2024, down from 5% in 2023 and 6.2% in 2020.

While Nio might be an intriguing play for investors looking to get into China's booming EV industry, the price war gives reason for caution. But that brings me to a silver lining found in Nio's third-quarter results.

The silver lining

Despite the ongoing price war that threatens automaker margins, Nio actually posted an improvement. More specifically, Nio's vehicle margin was 13.1% during the third quarter of 2024, which was an improvement compared to the 11% mark during the prior year's third quarter, and better than the 12.2% achieved during the second quarter of 2024.

While Nio's ability to boost margins amid a price war is a huge win, investor focus will also be on whether or not the EV maker can boost its top-line growth. The good news is Nio appears positioned to do just that with the launch of two new brands recently, Onvo and Firefly. As those two brands continue to accelerate production and deliveries, Nio expects to nearly double its total deliveries to almost 440,000 units in 2025. That level of growth will provide a powerful boost to the company's revenue.

If Nio can continue to cut costs and improve margins amid a brutal price war, it will go a long way in convincing investors there's a profitable growth story developing. Nio's margins would also go a long way in validating management's belief that the company can break even in 2026.