Why Did Former Allies Turn Their Backs on NIO?

NIO’s former allies have turned their backs just as the company pledged to achieve profitability in the fourth quarter — and the blow was nothing short of a “black swan” event.

On the afternoon of October 16, NIO’s shares — listed in Hong Kong, New York, and Singapore — suddenly plunged across all three markets. In Hong Kong, the stock once tumbled over 13%, hitting a low of HK$47 as trading volume spiked sharply. On the Singapore Exchange, shares sank 13.8%, while NIO’s U.S. pre-market price dropped more than 6%. Within hours, billions of dollars in market value evaporated.

The shock came after reports revealed that one of the world’s most conservative and respected institutional investors, Singapore’s sovereign wealth fund GIC Private Limited, had filed a lawsuit against NIO in the U.S. District Court for the Southern District of New York. The suit accuses NIO of securities fraud, alleging that the company exaggerated its revenue and profit through complex accounting maneuvers. This is no ordinary financial dispute — it marks the first time a top-tier sovereign wealth fund has independently sued a Chinese-listed company in U.S. court. However, NIO clarified that the case dates back to August and does not concern its current operations, claiming the allegations stem from short-seller Grizzly Research’s 2022 report filled with “false accusations.”

For a long-term investor like GIC — an institution tasked with safeguarding national wealth — to abandon its neutral stance and take legal action sends a signal that extends far beyond short-term stock turbulence. What vulnerabilities within NIO does this lawsuit expose? And how might it reshape the company’s future and the broader electric vehicle landscape?

01. GIC’s Landmark Lawsuit

The lawsuit names not only NIO but also its founder, chairman, and CEO William Li, as well as former CFO Feng Wei, as co-defendants.

The plaintiff, GIC, established in 1981, manages a substantial portion of Singapore’s foreign reserves with a mission to deliver long-term returns exceeding global inflation. With assets estimated between USD 800 billion and USD 936 billion, GIC ranks among the largest and most influential sovereign wealth funds in the world.

For an institution renowned for its caution and rarely known to resort to litigation, filing a securities fraud suit against one of its invested companies represents a severe reputational strike. As Caixin noted, this case is unprecedented — the first time a sovereign wealth fund has independently sued a U.S.-listed Chinese company.

At the heart of GIC’s complaint lies NIO’s “Battery-as-a-Service” (BaaS) model and a related entity, Wuhan Weineng Battery Asset Co., Ltd. (Weineng), founded in 2020 by NIO along with CATL, Guotai Junan International, and other partners. Weineng manages the battery assets used in NIO’s subscription-based service.

GIC alleges that NIO sold batteries to Weineng and immediately recognized the entire transaction value as revenue, even though BaaS is a long-term subscription model where users pay monthly fees. According to GIC, revenue should have been recognized gradually over several years, not upfront. This accounting method, they argue, inflated NIO’s near-term revenue and profitability.

By selling batteries to what GIC claims is only “nominally independent,” NIO allegedly shifted massive depreciation costs off its balance sheet, artificially improving profit margins. GIC maintains that these actions violated U.S. GAAP accounting standards and misled investors.

The lawsuit states that GIC purchased approximately 54.45 million NIO American Depositary Shares (ADS) between August 2020 and July 2022 at “artificially inflated prices,” resulting in substantial losses.

As of early October, the case is temporarily on hold while the court awaits the outcome of a related class-action lawsuit filed by U.S. investors in 2022, which involves similar allegations.

Interestingly, this is not GIC’s first time pursuing litigation. The fund has previously sued major corporations such as Qualcomm, Viatris, BP, and Merck over investment-related losses. Analysts suggest that beyond recovering damages, GIC’s legal actions often serve as a form of risk management — a way to hedge potential financial exposure during volatile markets.

02. The Accounting Puzzle Behind Grizzly’s Report

GIC’s claims echo those made by U.S. short-seller Grizzly Research in June 2022. In its report titled “We Believe NIO Is Playing Valeant-Esque Accounting Games,” Grizzly compared NIO’s financial practices to those of Valeant Pharmaceuticals, whose downfall was tied to hidden transactions with a related pharmacy network.

The report accused NIO of using its unconsolidated affiliate, Weineng, to inflate revenues and mask losses. Grizzly estimated that by selling batteries to Weineng, NIO prematurely recognized roughly RMB 1.15 billion in Q1 2021 revenue that should have been spread over seven years, thus “beautifying” financial results and understating its real net loss of about RMB 3 billion for that fiscal year. NIO’s share price fell over 7% in the two days following the report’s publication — the same allegations now central to GIC’s case.

At the core of this controversy is NIO’s pride — the BaaS model. Under BaaS, consumers can buy NIO vehicles without the battery, instead renting it monthly from Weineng, significantly reducing the upfront purchase cost and boosting market appeal.

But this innovative setup presents a tricky accounting question: when exactly should NIO recognize the revenue from selling batteries to Weineng?

NIO argues that once the batteries are sold and ownership transferred, its performance obligation ends, allowing for immediate revenue recognition under the accrual principle. Grizzly and GIC, however, contend that Weineng is not a truly independent entity, given NIO’s 19.8% ownership and strong influence. Therefore, transactions between them should be treated as related-party dealings, and revenue should be recognized progressively as end users pay monthly rental fees.

In response to Grizzly’s accusations, NIO swiftly dismissed the report as “groundless and misleading,” later commissioning an independent board-led review involving international law and accounting firms.

Two months later, in August 2022, the committee concluded that all allegations were unfounded. Major Wall Street firms such as Deutsche Bank and Morgan Stanley backed NIO’s defense, arguing that short-sellers misunderstood the complexities of the BaaS model.

From a broader perspective, this lawsuit underscores the growing tension between business innovation and regulatory frameworks.

BaaS is undeniably a groundbreaking model, but it also challenges traditional accounting standards that were never designed for subscription-based hardware ecosystems. Whether NIO’s accounting represents fraud or a bold interpretation within gray regulatory boundaries remains to be seen. The court’s final ruling will not only shape NIO’s destiny but could also set a global precedent for how “Hardware-as-a-Service” businesses report their financials — with ripple effects far beyond the electric vehicle industry.