Aligning with the major indices, China’s electric vehicle (EV) stalwart Nio (NYSE:NIO) moved up slightly Wednesday afternoon after a stronger morning trading session. Helping lift sentiment was management’s announcement that it signed a strategic partnership agreement with automaker Geely Automobile (OTCMKTS:GELYY). Under the terms, the two enterprises will cooperate on standards, technology and model development regarding battery swapping. Still, NIO stock faces challenges on the matter.
According to a Reuters report, Geely — which owns the Volvo brand, among others — represents the second automaker to sign a battery-swapping deal with Nio. Last week, the EV giant announced a tie-up with Changan Automobile. Per the news agency, the underlying process “allows drivers to replace depleted packs quickly with fully charged packs, rather than plugging the vehicle into a charging point.”
Undergirding the motivation for battery swapping is the convenience factor. As industry journal Electrek stated, Nio claims the process can be done in as little as three minutes. That’s faster than “fast charging,” which can take between 15 minutes and an hour.
However, for this methodology to take off, battery compatibility is paramount. To that end, the recent agreement calls for Nio and Geely to develop EVs that are compatible with each other’s battery swap systems. Notably, Geely operates around 300 swap stations and will continue to expand its network. It aggressively aims to establish 5,000 stations by 2025.
Pros and Cons for NIO Stock Regarding the Swap
On the surface, investors have certain reasons to believe the partnership could help move the needle for NIO stock. Fundamentally, a key obstacle blocking the widespread adoption of EVs is the time spent during charging. For example, not every residential unit in the U.S. features a garage, making public charging infrastructure a necessity.
Also, for NIO stock, the partnership can help reduce costs by simultaneously spreading risk across partners and easing consumer concerns. In this way, the battery swapping deals could be a positive sum game for the EV ecosystem. And to InvestorPlace contributor Dana Blankenhorn’s point, Nio recently announced a 10% workforce reduction.
Combined, the latest decisions communicate to stakeholders of NIO stock that the company is serious about improving its financials. However, it’s not entirely clear whether the pivot can be successful.
Ironically, a key challenge regarding battery swapping is high infrastructural and operational costs. While Nio’s partnerships will spread these costs out, it’s still an expensive proposition. Technical challenges of compatibility, along with safety concerns, exist as well.
Further, battery swapping faces international difficulties, while inking deals with Chinese compatriots can help expand the domestic market. For instance, the U.S. already made significant investments in charging stations. So, moving to a completely different paradigm would likely be a gargantuan undertaking.
Why It Matters
In the last three months, analysts have rated NIO stock as a consensus moderate buy. This assessment breaks down as five buys, three holds and zero sells. On average, the price target lands at $13.61, implying an upside of around 88% at the time of writing.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.