NIO's battery swapping finally pays off | Insights from Dolphin Research

Every new force in the car manufacturing industry has its unique brand label. For example, Xiaopeng is known for its "high-end intelligent driving configuration," Li Auto for its "extended range and large volume," Zeekr and NIO for their "high cost-effectiveness," WM Motor for being "far ahead," and NIO for its "excellent customer experience and unique battery swapping service." NIO has made great efforts to establish and consolidate this brand label. However, due to the fact that battery swapping models are not mainstream in the market, NIO's attempt to promote the popularization of the battery swapping model alone has faced significant challenges, and its continuous high expenditure has raised doubts in the market. However, NIO's battery swapping business is now at a turning point. On November 21st, NIO signed a cooperation agreement with Changan Automobile for the battery swapping business. The two parties will cooperate in promoting the establishment of battery swapping standards, the construction and sharing of battery swapping networks, the development of battery swapping models, and the establishment of efficient battery asset management mechanisms. The first cooperation between NIO and Changan Automobile in the battery swapping field marks NIO's active search for industry partners and the expansion of the influence of its battery swapping technology. NIO stated that this cooperation is just the beginning, and they will continue to negotiate cooperation with another 4 to 5 companies. NIO's persistent investment in its battery swapping business is expected to achieve significant breakthroughs in terms of the range of vehicle models, the number of involved car companies, and market recognition, thereby promoting the popularization and acceptance of the battery swapping model in the market. 1. NIO's high investment in the battery swapping business receives praise but faces challenges As a key business that NIO has been investing in for 5 years, the battery swapping business has indeed made significant progress in terms of the number of related patents and the promotion of battery swapping stations. NIO has more than 1,600 patents related to battery swapping, and its battery swapping stations have reached the third generation. Compared to the first generation, the number of batteries has increased fourfold, the daily service capacity has increased fourfold, and the swapping time has been reduced by half. This convenience is NIO's solution to the pain point of slow charging. As of the end of October this year, the total number of battery swapping stations in China has reached 3,220, with NIO alone accounting for 64%, with a total of 2,067 stations. This is a 58% increase compared to the 1,305 stations at the end of last year, leaving other battery swapping station operators far behind. By the end of this year, the number of NIO's battery swapping stations is expected to exceed 2,300. However, behind the rapid expansion of NIO's battery swapping business is an increasing burn rate. In the second quarter of this year, NIO's sales and administrative expenses reached 2.86 billion yuan, a year-on-year increase of 25.2% and a quarter-on-quarter increase of 16.8%. R&D investment reached 3.345 billion yuan, surpassing 3 billion yuan for three consecutive quarters, with a year-on-year increase of 55.6% and a quarter-on-quarter increase of 8.7%. This also makes NIO the fastest burning cash among the NIO small rationality. In the second quarter of this year, NIO's cash and cash equivalents, restricted cash, short-term investments, and long-term fixed deposits decreased by a full 6.3 billion yuan to 31.5 billion yuan compared to the first quarter. More importantly, apart from NIO, although other new energy vehicle companies such as SAIC, Changan, Dongfeng, and Hezhong have also launched battery swapping models, there are almost no popular models, and the current mainstream energy supplement system is still the charging mode. NIO stated that although the battery swapping stations have been opened to the entire industry, they currently mainly serve their own models. Due to NIO's vehicle inventory of approximately 410,000 vehicles, the frequency of battery swapping station usage is not high. Only about 20% of the battery swapping stations have reached the breakeven point of 60 battery swaps per day, and most of the stations have not yet achieved profitability, resulting in a relatively long investment return cycle for NIO in the battery swapping field. Although NIO also reduces consumers' initial purchase costs by providing services such as vehicle-to-battery separation and battery leasing BAAS, in order to strengthen the competitiveness and attractiveness of their own products, and to increase the frequency of battery swapping services in the later stage, it has not been able to achieve this goal based on this year's overall sales level. NIO joins hands with Changan, no longer fighting alone Since NIO's own sales are difficult to make a big breakthrough in the short term, it is indeed a good choice to introduce strong partners and join the battery swapping army together. The cooperation between NIO and Changan Automobile is of great significance to both parties. Changan Automobile is one of China's major independent brands, performing strongly in the fuel vehicle field, and has launched brands such as Deep Blue, Avita, and Qiyuan in the new energy vehicle market, covering various power forms such as pure electric, extended-range, plug-in hybrid, and hydrogen fuel. In the first ten months of this year, Changan Automobile's total retail sales of passenger vehicles reached 1.131 million units, a year-on-year increase of 12.5%, with a market share of 6.5%, second only to BYD and FAW-Volkswagen. Among them, the retail sales of new energy passenger vehicles reached 298,000 units, a year-on-year increase of 96.6%, far exceeding the growth rate of fuel vehicles during the same period, ranking 6th in the retail sales rankings, with a market share of 5%. If Changan Automobile's future new energy vehicle models can also share NIO's battery swapping station equipment, both Changan and NIO will achieve a win-win situation. For NIO, the cooperation with Changan Automobile not only proves that its battery swapping business has been recognized by the industry, but also means that NIO's battery swapping stations will have more demand, which will help promote the battery swapping mode, increase consumer acceptance, and potentially achieve breakeven or even rapid profitability. At the same time, this collaboration helps to share the ongoing investment pressure in the battery swapping field for NIO. For Changan Automobile, although the charging mode is still mainstream at present, the battery swapping mode is gradually gaining attention and may enjoy better policy treatment in the future. For example, in June of this year, the Ministry of Finance, the State Administration of Taxation, and the Ministry of Industry and Information Technology jointly issued the "Announcement on the Continuation and Optimization of the Policy of Exemption from Vehicle Purchase Tax for New Energy Vehicles", which stated that only new energy vehicle products with a pre-tax price below 339,000 yuan are exempt from purchase tax, and the excess amount is subject to taxation. This may make battery swapping models more competitive in the market. The purchase tax policy for new energy vehicles provides obvious benefits for models that adopt the battery swapping mode. When the sales of the power battery and the vehicle itself are accounted for separately and separate invoices are issued, the purchase tax will be calculated based on the pre-tax price of the new energy vehicle without the power battery. This means that under the battery swapping mode, if the separation of the vehicle and the battery is implemented, the price of the new energy vehicle without the power battery can most likely enjoy complete exemption from purchase tax. This policy advantage makes battery swapping models of new energy vehicles more competitive and attractive in the market. NIO stated that it will jointly develop compatible new models with Changan, so that Changan can not only directly enjoy the convenience brought by NIO's mature battery swapping system, but also allow Changan's new energy brand to enjoy preferential treatment in terms of purchase tax after joining the battery swapping camp. NIO's continuous investment and significant strength in the battery swapping field have finally gained recognition from other new energy vehicle companies in the industry, marking NIO's transition from fighting alone to collaborating with other companies in the industry. Although this step is difficult, it is crucial for the promotion of battery swapping technology.