By Trefor Moss
SHANGHAI--A year ago, Chinese electric-vehicle startup NIO Inc. was near ruin. Today it is worth more than General Motors Co.
NIO's brush with bankruptcy and its subsequent revival 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 automotive revolution that proved elusive.
From its founding in 2014, NIO led a pack of Chinese EV startups that became a magnet for investors seeking the next Tesla. But many investors eventually lost confidence, frustrated by the loss-making 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 private financing evaporated.
NIO's demise looked set to be the most spectacular of all.
Once feted in the local media 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 public, 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 executive, recalling last year's crisis in an interview. The company's troubles started, he said, when the U.S.-China trade war deterred American investors from subscribing to NIO's 2018 initial public offering on the New York Stock Exchange. The company raised half the $2 billion Mr. Li had been hoping for, scrambling his financial plans.
A costly battery recall then strained NIO's finances further, as did a surprise downturn in the Chinese auto market, during which EV sales declined 4% in 2019.
An exodus of senior executives followed, as Shanghai-based NIO slashed its global head count by a quarter to fewer than 7,500 staff members. 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, according 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 channels," said the 46-year-old.
Even so, auto analysts said NIO was weeks away from failure unless it could find a white knight.
A savior arrived: the government of Hefei, a city about 300 miles west of Shanghai in Mr. Li's home province of Anhui that has emerged as a center of EV production. NIO agreed to a $683 million financing package with the city's officials in April.
The capital injection rescued NIO, chiefly by giving suppliers and customers confidence that the company had a future, Mr. Li said.
Since then, NIO's shares have rallied, topping $57 on Nov. 25 before falling back slightly. As of Friday, the company had a market capitalization of about $73.6 billion, still well short of Tesla's $555 billion valuation.
Aside from its own restructuring efforts, the company's rally is also thanks to Tesla, which has stoked China's EV market since starting production in Shanghai late last year. Tesla sold more than 72,000 locally built Model 3 sedans in the six months to October, according to the China Passenger Car Association.
Other EV companies have accelerated in Tesla's slipstream. 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.
Like Mr. Musk, Mr. Li is a serial entrepreneur, having founded or made major investments in more than 40 companies. As a boy, he herded cattle with his farmer grandparents in Anhui province. 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 in college. In 2000, he founded BitAuto, an automotive services portal that was listed on the New York Stock Exchange from 2010 until earlier this month, 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 produce 7,500 cars a month starting in January; it contract-manufactures its vehicles in Hefei. It plans to start selling cars in Europe next year--and eventually in the U.S.--Mr. Li said.
It is aiming to outflank Tesla and others with a battery-swap system that enables NIO drivers to switch batteries within a couple of minutes rather than waiting hours to recharge.
While battery swapping potentially solves the charging issue that deters many consumers from buying EVs, it requires NIO to build a costly network of spots where drivers can swap their batteries. It has built 162 such stations so far.
The company is also giving customers the option of buying 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 buyers are now choosing this rental option, Mr. Li said.
NIO still has its detractors. Earlier this month short seller Citron Research said NIO shares had become overvalued and dismissed investor enthusiasm for Chinese EV startups as "mania." NIO's share price has kept rising, however.
Mr. Li defended his company'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 manufacturers "it would be difficult to adapt to an era where the car is defined by software."
Raffaele Huang contributed to this article.
Write to Trefor Moss at Trefor.Moss@wsj.com
(END) Dow Jones Newswires