THE WALL STREET JOURNAL. Tuesday, December 1, 2020 |B5
NIOWave
StartupNIO’sstockhasralliedthisyearastheelectric-vehicle
companyhassteadilyincreasedsalesandclosedthegaponTesla.NIOstockprice,yeartodate VehiclesalesinChinain2020Sources: FactSet (stock price); Automobility (sales)15,00005,00010,000Jan. April July Oct.Tesla
NIO$6002040Jan. April July Oct.Monday
$50.53
t6.43%ally heavy on those days and
would help boost liquidity on
the day of Tesla’s inclusion,
several investors said.
“We’re expecting to see a
day where volume is much
higher,” said Matthew Barto-
lini, head of SPDR Americas
Research at State Street
Global Advisors.
Still, several traders and in-
vestors had said that adding
Tesla on two separate dates
rather than at once would
have made for a smoother
transition. Some even advo-
cated for adding Tesla in two
separate tranches, one in De-
cember and one in March.
In what appears to be an
acknowledgment of that pro-
posal, S&P said some of the
suggestions it received from
investors were beyond those it
had initially proposed.
“There will be less aggre-
gate market impact if it’s bro-
ken down into tranches by
S&P,” said Patrick Nichols, a
partner at trading firm Old
Mission Holdings, ahead of the
decision.
That problem is com-pounded by the fact that index
funds typically buy and sell
shares near the close of the
trading session, ensuring they
get the last price of the day
and to avoid deviations from
their indexes, added Greg Sut-
ton, head of portfolio trading
at Citadel Securities LLC.
“This name is substantial.
Tracking error is a significant
concern,” said Mr. Sutton.
Tesla’s size and the billions
of dollars put to work around
its inclusion have led investors
to position for greater gains in
its shares, some even antici-
pating a flurry of demand
from index giants. The stock
has jumped 39% since its in-
clusion was announced on
Nov. 16, and there has been a
frenzy of options trading tied
to the shares jumping.
Some of the most popular
options bets tied to Tesla re-
cently have been bullish calls
tied to the shares advancing to
$650 or $700, according to
data provider Trade Alert, at
least a 15% jump from the
close of $567.60 Monday.
“It’s kind of the perfectstorm for speculators,” said
Steve Sosnick, chief strategist
at Interactive Brokers.
Tesla’s unusual addition has
also highlighted some oddities
surrounding the S&P 500 in-
dex itself and how induction
into the S&P 500 club isn’t
strictly formulaic. Rules gov-
ern which companies are eligi-
ble for the S&P 500, such as
around profitability and that
stocks need to trade on a U.S.exchange. But a secretive com-
mittee makes the final call on
what goes in and what
doesn’t.
Tesla was first eligible for
inclusion during the Septem-
ber rebalance after the car
maker finally met certain cri-
teria over the summer. In-stead, the committee added
online marketplace Etsy Inc.
and two other stocks that to-
gether represented a tenth of
Tesla’s market cap. The com-
mittee also initially passed on
other companies, such as
Google Inc. (now known as Al-
phabet Inc.), before adding
them later.
“It’s a super great case
study of what goes on behind
the curtain and why the
benchmark methodology mat-
ters so much,” said Stephanie
Hill, head of index at Mellon.
“There’s little transparency on
what drives the qualitative cri-
teria.”
The S&P 500 isn’t the only
index affected. Several other
benchmarks will be rejiggered
to accommodate the car
maker, as well as any deletions
from the S&P 500.
Tesla, for example, is the
largest weighted stock in
S&P’s completion index, a
benchmark tracking all U.S.
stocks except those in the S&P
500, and will have to be re-
moved. Any stock taken out of
the S&P 500 will trigger itsaddition back into the comple-
tion index, as well as step
downs into S&P’s mid and
smallcap benchmarks.
State Street’s Mr. Bartolini
said at least five of its ETFs
will have to be rebalanced as a
result of Tesla’s addition, in-
cluding the biggest ETF in the
world, theSPDR S&P 500
Trust ETF, and its growth-fo-
cused ETF, theSPDR Portfolio
S&P 500 Growth ETF.
Tesla’s inclusion “will re-
quire a fairly numerous
amount of trades,” said Mr.
Bartolini. But he said the big-
gest managers of index funds
are well prepared considering
the additional lead time given
by the index giant ahead of in-
clusion. He added that fund
managers have handled other
complex rebalancings before,
such as the addition of Face-
book in 2013 and the creation
of the S&P 500’s communica-
tions sector in 2018. Still,
Tesla’s size is hard to ignore.
“It’s a glamorous issue,” Mr.
Bartolini said. “From our per-
spective, that’s where the glitz
and glamour end.”half the $2 billion Mr. Li had
been hoping for, scrambling
his financial plans.
A costly battery recall then
strained NIO’s finances fur-
ther, as did a surprise down-
turn in the Chinese auto mar-
ket, during which EV sales
declined 4% in 2019.
An exodus of senior execu-
tives followed, as Shanghai-
based NIO slashed its global
head count by a quarter to
fewer than 7,500 staff mem-
bers. That included job losses
at its American office in San
Jose, Calif.
As it entered a make-or-
break phase in late 2019, NIO
had one advantage that most
other startups lacked, accord-
ing to Mr. Li—it was actually
selling cars, with the roughly
8,000 vehicles it delivered in
the fourth quarter of last year
generating $400 million in
precious cash flow.
“That was very important
to us because at that point we
had no other financing chan-
nels,” said the 46-year-old.
Even so, auto analysts said
NIO was weeks away from fail-
ure unless it could find a
white knight.
A savior arrived: the gov-ernment of Hefei, a city about
300 miles west of Shanghai in
Mr. Li’s home province of An-
hui that has emerged as a cen-
ter of EV production. NIO
agreed to a $683 million fi-
nancing package with the
city’s officials in April.
The capital injection res-
cued NIO, chiefly by giving
suppliers and customers confi-
dence that the company had afuture, Mr. Li said.
Since then, NIO’s shares
have rallied, topping $57 on
Nov. 25 before falling back
slightly. As of Friday, the com-
pany had a market capitaliza-
tion of about $73.6 billion, still
well short of Tesla’s $555 bil-
lion valuation.
Aside from its own restruc-
turing efforts, the company’s
rally is also thanks to Tesla,which has stoked China’s EV
market since starting produc-
tion in Shanghai late last year.
Tesla sold more than 72,000
locally built Model 3 sedans in
the six months to October, ac-
cording to the China Passen-
ger Car Association.
Other EV companies have
accelerated in Tesla’s slip-
stream. NIO sold more than
24,000 vehicles in the same
six-month period and topped
5,000 monthly sales for the
first time in October.
Mr. Li acknowledged Tesla’s
contribution to developing the
EV market. As for Chief Execu-
tive Elon Musk, he said: “Of
course I respect him a lot, but
he’s not exactly my idol.”
Like Mr. Musk, Mr. Li is a
serial entrepreneur, having
founded or made major invest-
ments in more than 40 compa-
nies.Asaboy,heherdedcat-
tle with his farmer
grandparents in Anhui prov-
ince. He went on to attend the
prestigious Peking University
in the nation’s capital.
A sociology major who says
he did better in his computer
science classes, Mr. Li co-
founded his first company—a
kind of data center—while inTECHNOLOGY
college. In 2000, he founded
BitAuto, an automotive ser-
vices portal that was listed on
the New York Stock Exchange
from 2010 until earlier in No-
vember, when shareholders
took the company private.
Often seen in polo shirts,
jeans and sneakers, Mr. Li is
estimated to be worth more
than $8 billion, according to
Forbes.
Mr. Li said NIO aims to pro-
duce 7,500 cars a month start-
ing in January; it contract-man-
ufactures its vehicles in Hefei.
It plans to start selling cars in
Europe next year—and eventu-
ally in the U.S.—Mr. Li said.
It is aiming to outflank
Tesla and others with a bat-
tery-swap system that enables
NIO drivers to switch batteries
within a couple of minutes
rather than waiting hours to
recharge.
While battery swapping po-
tentially solves the charging
issue that deters many con-
sumers from buying EVs, it re-
quires NIO to build a costly
network of spots where driv-
ers can swap their batteries. It
has built 162 such stations so
far.
The company is also giving
customers the option of buy-
ing a car minus the battery.
That reduces the cost of NIO’s
ES6 sport-utility vehicle from
about $52,200 to $41,600,
though customers would then
pay a $150 monthly fee to rent
a battery. A third of NIO buy-
ers are now choosing this
rental option, Mr. Li said.
NIO still has its detractors.
Earlier in November short
seller Citron Research said
NIO shares had become over-
valued and dismissed investor
enthusiasm for Chinese EV
startups as “mania.” NIO’s
share price has kept rising,
however.
Mr. Li defended his com-
pany’s high valuation relative
to that of traditional auto
makers. They still produce far
more cars than NIO, he said,
but for nuts-and-bolts manu-
facturers “it would be difficult
to adapt to an era where the
car is defined by software.”
—Raffaele Huang
contributed to this article.SHANGHAI—A year ago,
Chinese electric-vehicle startup
NIOInc. was near ruin. Today
it is worth more thanGeneral
MotorsCo.
NIO’s brush with bank-
ruptcy and its subsequent re-
vival to become the world’s
fourth-most-valuable auto
maker—only Tesla Inc., Toyota
Motor Corp. and Volkswagen
AG are worth more by market
capitalization—is a measure of
investors’ seesawing faith in
Chinese EV startups, which for
years promised a high-tech au-
tomotive revolution that
proved elusive.
From its founding in 2014,
NIO led a pack of Chinese EV
startups that became a mag-
net for investors seeking the
next Tesla. But many investors
eventually lost confidence,
frustrated by the unprofitable
companies’ limited progress.
By 2019 China had 635 EV
startups on paper, according
to the government-backed
NEV State Monitoring Center.
Few had produced a single car
and most looked doomed as
government subsidies and pri-
vate financing evaporated.
NIO’s demise looked set to
be the most spectacular of all.
Once feted in the local me-
dia as “China’s Tesla killer,”
the company lost $3.67 billion
between 2017 and 2019 while
selling fewer than 32,000 cars.
NIO shares, worth about $10
when the company went pub-
lic, sank to $1.39 late last year
as investors fled.
“We called it an extreme
stress test,” said William Li,
NIO’s founder and chief execu-
tive, recalling last year’s crisis
in an interview. The com-
pany’s troubles started, he
said, when the U.S.-China
trade war deterred American
investors from subscribing to
NIO’s 2018 initial public offer-
ing on the New York Stock Ex-
change. The company raised
BYTREFORMOSS
China EV Startup Takes on Large Rivals
NIO is now the world’s
fourth most valuable
auto maker, surpassing
GM and Daimler
The company is aiming to outflank Tesla and others with a battery-swap system that lets drivers switch batteries in a couple of minutes.WU HONG/EPA/SHUTTERSTOCKthe step of polling investors
on how to proceed with the
addition, and the decision
comes after asset managers
and trading desks across Wall
Street deliberated on how best
to manage an inclusion of
Tesla’s size.
Ultimately, S&P opted to
put Tesla into the S&P 500 all
at once. The company said the
decision was based partly on
the responses it received from
its survey as well as expecta-
tions of ample liquidity on the
day most index funds plan to
add Tesla shares.
That Friday coincides with
a once-quarterly event where
options and futures on both
indexes and stocks expire si-
multaneously. Volume is usu-
Continued from page B1
S&P Sets
Date to
Add Tesla
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hoped Tesla would
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