Chinas crackdown on income inequality could be a problem for the EV company.

Key Points

  • Nio isnt a full-blown luxury brand, but demand for its upscale EVs could slip amid a government campaign against income inequality.

What happened

Shares of Chinese electric vehicle maker Nio (NYSE:NIO) were trading lower on Thursday, under pressure amid a sell-off of luxury goods makers on concerns that China may take new actions to limit personal income and redistribute wealth. 

As of 10:45 a.m. EDT, Nios American depositary shares were down about 4.2% from Wednesdays closing price.

So what

Hermès International, LVMH Moët Hennessy, Gucci owner Kering, and Ferrari were among the big luxury names trading sharply lower on Thursday, after Chinas government signaled that a crackdown on income inequality is coming.

The goal was announced in a readout from an economic planning meeting attended by Chinas president, Xi Jinping, on Tuesday that was reported in Chinese state media on Thursday. It follows a series of steps by the government to rein in some of the countrys fastest-growing online businesses, including ride-hailing giant DiDi Global, as part of Xis broader campaign to reduce poverty in the worlds most populous nation. 

What does that have to do with Nio? While it isnt playing in the same lofty market segments as Hermès or Ferrari, its products are priced and positioned as upscale vehicles and direct rivals to Tesla. If Chinese consumers are urged to avoid status symbol purchases, demand for the sleek high-tech vehicles built by Nio (and Tesla) could well soften.

A

A government crackdown on high earners could limit demand for Nios stylish electric vehicles. The Nio ES8 starts around $70,000 in China. Image source: Nio.

Right now, thats just a possibility. But its a possibility that was almost certainly contributing to Nios share price decline on Thursday. 

Now what

Electric vehicle investors have been relieved to see that Nio, as a high-tech industrial company, hasnt had to face the kinds of consequences doled out by Chinas government against DiDi and others. But restrictions on income and consumer spending could crimp the companys growth -- particularly if consumers feel the need to stick with simpler vehicles for a while. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

John Rosevear has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NIO Inc. and Tesla. The Motley Fool recommends the following options: long December 2021 $130 calls on Ferrari. The Motley Fool has a disclosure policy.

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