Nio (NYSE:NIO) says they have a practical challenge to Tesla (NASDAQ:TSLA) in luxury electric vehicles. For investors in NIO stock, that’s a great thing.
So, what’s this practical challenge? It’s called battery swaps.
Everyone knows the key to win the electric vehicle race is in the battery, not the car. Tesla has won until now, thanks to scaled battery production.
But for customers, there’s a downside. Batteries wear down. The more they’re recharged, the less charge they hold. The result is less range and more time spent charging.
Nio’s answer is to swap out the batteries. Some Nio stations can do this in three minutes. This can maintain an electric car’s range in less time than it takes to fill up at Buc-ee’s. It takes 15 minutes to get 200 miles of content on a Tesla Supercharger.
Saving Nio
At the start of the decade, Nio was threatened with bankruptcy. It won a government bailout in 2020, which brought scaled production capacity.
The bailout sent the stock rocketing, but as SpaceX learned recently, rockets fall. At $7.77 per share, however, Nio is still priced at nearly twice what it was when the government stepped in.
Today, Nio has a market cap of about $13 billion on a 2022 revenue of about $1 billion. It delivered over 122,000 cars last year. The production target for 2023 is 200,000.
Nio is scaling battery production by buying into lithium miners and building its battery plant. This makes it less dependent on CATL (OTCMKTS:PCRFY), which also supplies Tesla.
A Different Business Model
Battery swaps are just one way Nio differentiates itself.
Nio now has 1,300 swap stations in China. It wants to nearly double that by the end of this year. Most take a half-hour to replace a battery pack, competitive with a recharge. But 900 now do “fast swapping,” The company is bringing the strategy to Europe, with 120 swap stations due there by year-end.
Nio is also building a second factory in China to produce mid-market electrics for Europe, costing $30,000 against Tesla’s $42,000. It’s also going with a leasing-first model, with current models priced at $1,300 per month. The new business model will change Nio’s financial picture, delivering small amounts of steady income instead of pure sales revenue.
The China Challenge
Nio needs to export and enter the mid-market to compete with growing competition. Li Auto (NASDAQ:LI) is scaling production faster. It’s now worth nearly two-thirds more than Nio. BYD (OTCMKTS:BYDDF), which won early backing from Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), dominates China’s mid-market and is worth nearly $100 billion. Geely (OTCMKTS:GELYF) controls Polestar (NASDAQ:PSNY), which plans to make its Polestar 3 at a U.S. factory next year and become eligible for tax credits under the Inflation Reduction Act.
The competitive market in China has trained Nio and its competitors to go toe-to-toe with Tesla in Europe and, eventually, the U.S., where hybrids still dominate the mid-market. Nio delivered 31,000 cars in the first quarter, meaning its scaling must accelerate to meet its growth target. The company is expected to release first-quarter earnings on May 8.
The Bottom Line
The growth of Nio and other Chinese companies is why I can’t recommend Tesla stock.
Nio has unique advantages with respect to its competition, namely battery swaps and leasing. It has the government support needed to scale into Europe and the mid-market.
Other Chinese producers are also scaling. As the year goes on, this will increase pressure on Tesla and its charging networks. Everyone’s margins will be compressed as mid-market electrics arrive on the market over the next year.
A car market once dominated by U.S. nameplates is about to change. Nio will be at the center of it.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article.