Understanding Nio’s Battery-as-a-Service
In the race to capture EV market share and gain traction with consumers, Chinese electric vehicle maker Nio is attempting to differentiate itself in a key way: by offering its batteries as a service (BaaS).
Many have wondered whether the service will work. After all, Tesla introduced battery swaps in 2013 but abandoned the service just two years later. And if Tesla didn’t succeed, surely another EV maker won’t either, right? It’s not that simple.
Part One of this series assessed Nio’s standalone operations and compared key metrics with Tesla. Read it here. This is Part Two, which looks specifically at Nio’s battery-as-a-service model and attempts to understand its viability under various demand scenarios. Part Three will analyze whether both Nio and Tesla can succeed by forecasting the size of the EV market, considering supply chain and capacity constraints, and exploring broader competitive dynamics.
Understanding BaaS
A Brief History
When Tesla attempted BaaS, the EV industry was in its nascent stages. There were roughly 25,000 Teslas on the road, and the entire EV industry represented just under 0.3% of the total auto industry. Furthermore, when shutting down the battery swap program, Elon Musk stated that lack of consumer interest, especially relative to the popularity of Tesla’s growing superchargers network, was a driving factor in discontinuing the service.
Notably, success can often come down to timing. If markets aren’t ready, sufficient infrastructure doesn’t yet exist, or regulatory standards haven’t evolved enough to embrace innovative technologies, the first mover may not be the last one standing. Consider how Spotify flourished just seven years after Napster failed, or how Pebble (the smartwatch pioneer you’ve probably never heard of) preceded the massively popular Apple watches and Fitbits by just a few years. Despite offering solid products, Napster and Pebble struggled because their target markets weren’t ready — regulation hampered progress, powerful incumbents in the industries being disrupted pushed back, and consumers didn’t show enough sustained interest.
In a narrow, battery-swap-market-only point of view, Nio looks a lot like a Spotify. Nio has at least triple the number of vehicles Tesla had, strong support from customers, and robust tailwinds from the growing EV industry. Timing seems to be in their favor.
Advantages
Nio’s bet on BaaS hinges on several key factors. First, battery swaps are fast — on average, it takes 3–5 minutes for cars to receive a new fully-charged battery, compared to ~75 minutes for a full charge at a supercharger. At the moment, battery swaps are also slightly cheaper than like-for-like alternatives. Nio’s current service offers 6 swaps/month, which in turn provides about 1500 miles of range. At a monthly subscription price of $150, that’s 10 cents/mile — roughly on par with the estimated 10.4 cents/mile at Tesla Superchargers and lower than the national average 11.62 cents/mile for gas-powered vehicles. [1, 2]
BaaS also helps lower retail prices by enabling Nio to decouple the battery from the sale of the actual vehicle. Nio customers have the option of purchasing cars with or without batteries — with the latter option retailing for roughly $10,000 less, making Nio cars more price competitive, affordable, and eligible for Chinese government subsidies. Decoupling batteries also means that Nio can secure high demand for battery upgrades; those enrolled in the battery swap service will want to upgrade when a better battery becomes available, and those not already in the program may enroll. Owners can also purchase new batteries on a case-by-case basis, which helps preserve most of the cars’ resale value and mitigates broader concerns of battery degradation.
Nio’s actions indicate that they see battery investments as a core part of their growth. The company currently has over 1,200 patents related to batteries and over 170 swap stations throughout China (with the goal of reaching 500 by year-end 2021). Furthermore, at Nio Day earlier this past January, the company announced a new 150 kWh, 620-mile range battery to be offered starting in 2022.
Disadvantages
In order to ensure new batteries fit with old cars, Nio’s has to standardize battery size. The batteries become a replaceable module in the broader construction of the vehicle. In some circumstances, modularity is great — it can reduce system complexity, provide product flexibility, and ease the process of upgrading. For instance, consider a couch. With separable cushions and seat structures, you can turn a loveseat into a sectional within minutes or easily replace a wine-stained pillow to make the sofa look good as new. Yet modularity is more difficult when dealing with technology. While it may provide the user with flexibility, modularity and standardization create unnecessary size constraints on the innovator.
In regards to battery technology, such limitations may hinder efforts to create denser, more-efficient storage capacity. For example, building each battery as cell-to-pack (as would need to be the case for modular batteries) both uses more space and weighs more than building batteries cell-to-vehicle (as Tesla is doing). The race to become the dominant EV company is highly correlated with who can build the best battery tech. Creating a model reliant on cell-to-pack may ultimately hinder Nio’s long term growth.
BaaS Sources of Revenue
Nio’s BaaS creates two main sources of revenue: battery swap services and individual purchases of new batteries. The battery swap service creates monthly recurring revenue — owners pay roughly $150/month and can receive up to six swaps each month. Owners who lack at-home charging, have difficulty accessing public charging stations, or opt to purchase their vehicle without the battery are the most likely to enroll in this program.
Approximately 40% of Nio owners currently pay for battery swaps. With ~75,500 Nios on the road, 40% would be 30,200 cars.[4] At $150/month, the battery swap service currently generates $4.5 million in monthly recurring revenue, or $54 million in annual revenue. That number will likely increase as Nio expands production, increases penetration among owners, and grows the number of swap stations.
Individual battery purchases, on the other hand, are a less consistent form of revenue. Nio should expect to see demand spikes whenever they release a new battery, as owners look to upgrade. This stream provides some additional revenue, but it is unlikely to significantly impact Nio’s top line. The main benefit is locking in demand, which helps eliminate the risk associated with steep R&D costs for innovative technologies — in the same way that government subsidies and promises to buy COVID-19 vaccines ensured pharmaceutical companies wouldn’t face significant (net) losses when investing billions of dollars in R&D to create a vaccine, Nio’s BaaS model creates a similar demand guarantee.
Are Battery Swaps a Sustainable Business Model?
How Swap Stations Work
When receiving a battery swap, the station takes the car’s depleted battery and replaces it with a fully charged one. The empty battery is placed into a charging port, where it waits until it is fully charged and ready to be swapped into another vehicle.
On average, it takes about an hour to recharge a battery. By decoupling the battery from the vehicle, Nio eliminates idle time the owner spends at a charging station. Think of it like the convenience of take out: you can pick up your food and go. The meal takes just as long to make as if you had cooked it yourself, but you don’t have to be there while it cooks. Similarly, each battery takes the same amount of time to charge regardless of whether the owner is sitting there with their car.
So far, these swap stations seem to offer consumers many benefits. But the logistics of developing an entire swap network are incredibly complex. Sporadic demand both throughout the day and across geographies complicates inventory management and creates service capacity constraints. Consider one hypothetical scenario: if 100 cars wish to swap their batteries and each station can conduct 12 swaps/hour, it would take ~8.3 hours to service all cars (assuming no hiccups). If each car arrives at evenly spaced intervals of 5 minutes, then the system works well enough and no one has to wait in line. But in reality, demand is often clustered — people may seek a swap on their way to or from work, or during their lunch hour. In this case, we could expect the hours of 7–9am, 12–1pm, and 5–7pm to be especially crowded. Similarly, weekends might be correlated with more concentrated demand. Hopefully at this point you can see the logistical headache beginning to arise…
The Best-Case Scenario and Identifying Critical Assumptions
Let’s work through this together. As mentioned, there are roughly 75,500* Nio cars on the road and approximately 40% of those (30,200) enroll in the battery swap service. Assuming each owner uses all six swaps, that’s 181,200 swaps each month or ~2.2 million/year. Nio currently has 177 swap stations so, if demand were distributed evenly across stations, each would conduct 1,024/month or an average of ~34/day. Stations are operational 24 hours a day, so 34 swaps a day would be a swap about every 42 minutes. Seems doable, so long as our key assumptions hold:
Assumption #1: demand is distributed evenly throughout the day.
Assumption #2: each day of the month is equally popular.
Assumption #3: each station receives similar demand, despite varying geographies.
All three assumptions focus on smoothing demand — distributing it evenly throughout the day, throughout the month, and across the country. In reality, demand is often clustered. Clusters, in turn, increase the potential for long lines, inventory shortages, and inefficient allocation of resources. Additionally, they reduce buffer times to fix issues — the greater the demand at a given time, the greater the impact of a disruption to the system.
Furthermore, before we start breaking down these assumptions, it is important to note that actual data is scarce. In order to test the limits of each of these assumptions, we’ll have to make other assumptions. The goal is to develop a general understanding of BaaS limitations and to identify crucial items we would want to monitor for additional data.
Unpacking Assumptions
Looking at our key assumptions, #1 is likely the least reasonable — less people will want a battery swap at 2am than at 5pm, so in reality demand is not spread evenly throughout the day. For our model, let’s assume that people realistically only want a battery swap between 6am and 9pm, shortening operations from 24 hours/day to only 15 hours/day (a ~37% decrease). Furthermore, let’s say 75% of demand occurs between the hours of 7–9am, 12–1pm, and 5–7pm (people going to and from work or getting a swap during their lunch hour). With 26 swaps in a total of 5 hours, stations would have to perform a swap on average every 11.5 minutes during those peak times. If all demand was concentrated into those select hours, swaps would have to occur about every 9 minutes — seemingly not a problem given that swaps take ~5 minutes max. But say, of those 26 expected swappers, 10 customers arrive at 7am. At 5 min/swap, the 10th customer in line may have to wait nearly an hour. Additionally, if the station is only expecting to service 5 customers/hour instead of 10, it may not have charged batteries available until 8am.
Next is assumption #2. Weekends may be more popular than weekdays, especially given that people are less likely to be at work and more likely to take longer road trips. We’re currently operating under the assumption that demand at each station is split evenly across days at ~34 swaps/day (a total of ~1,024/month). Importantly, weekends and weekdays likely have different demand dynamics: on weekends demand may be spread more evenly throughout the day, extend beyond our 6am-9pm time range, and include greater volume in stations in more remote areas. On average, there are about 8–9 weekend days and 21–22 weekdays in a month. If 50% of demand lands on weekends, then instead of 34 swaps/day each weekend day would have to handle ~64 swaps/day while each weekday would have ~24/day. Focusing on weekends, and maintaining our 6am-9pm operating hours, that would be a swap roughly every 14 minutes. If we were to cluster demand into a just few hours, we would likely start to see bottlenecks.
Finally, assumption #3 is related to geographic clusters. Stations in areas with higher densities of Nio owners are likely to experience greater demand than those in remote locations. Nio recognizes this, and so far has concentrated stations in major urban areas and along popular highways throughout China.
Scalability
Each swap takes ~5 minutes, which means stations can process up to 12 cars/hour. This works well given that it takes each battery around an hour to fully recharge. At such a rate, if a station processes 13 cars consecutively, the battery swapped out of the first car will be fully charged and ready for use by the time the 13th car is ready to be serviced. Additionally, each station has storage capacity for 13 batteries, which pairs nicely with current processing rates — hypothetically, each station will always have at least one extra, fully-charged battery ready to go.
Unfortunately, the system starts to break down (or at least need significant modifications) as demand grows. One way to handle increased demand is to decrease the time it takes for each swap. For example, reducing swap times from 5 minutes to 4 minutes adds an extra 3 cars/hour of servicing capacity. But stations only have charging ports for 13 batteries. By the time the 14th car enters for a swap — roughly 52 minutes after the first car arrives — the most-charged battery available would only be 86% full. Faster swap times mean stations would need to be retrofitted with additional charging capacity, which could add costs and inefficiencies.
The system is also poorly equipped to handle surges of demand. Even if average daily expected demand is ~34, if all of those customers come at the same time they’ll experience long lines, diminishing the “convenience” benefit noted earlier. Furthermore, if a battery within the station breaks (or is defunct, not working properly, etc.), operational capacity is significantly lowered and the station may struggle to service customers even during non-peak hours. At the moment it is unclear how Nio deals with such situations, but I would imagine both identification and replacement of damaged batteries increases overall system costs.
Data to Look For Moving Forward
As mentioned, part of the difficulty with understanding whether BaaS will work is that relevant data is scarce. Here’s the data I’m keeping an eye out for:
1. Take rate for BaaS among Nio owners (i.e. percent of owners enrolled in the service). As take rate increases, demand will too.
2. Where Nio decides to locate additional swap stations. Placement in urban vs. rural locations may provide insight into both the demographics of Nio’s customer base as well as where existing stations may be having difficulty satisfying demand.
3. The average number of swaps/month used per owner enrolled in the swap service. In some instances, it may be just as convenient for an owner to recharge their battery at home overnight rather than to utilize a swap. The analysis above assumes owners use all six swaps available per month, but lower average swaps/month would improve the system’s ability to scale.
4. Traffic data regarding when and which roads are busiest. This could help understand which hours of the day may experience demand surges or ideal locations for new stations.
In five years, we may look back on the initial battery swap stations either as the beginning of a revolutionary business model or as a spectacular failure. Only time will tell.
So, let me know your thoughts on battery swaps. Do you think they’ll work? Are there other challenges you foresee? Would you, personally, ever use a battery swap? Comment your thoughts below or engage with me on twitter @AlanaDLevin. And if you liked this article, make sure to read Part One of my series, “Can Nio Compete with Tesla?”
*Note that all data is as of mid-January 2021. On February 1, Nio announced January 2021 deliveries of 7,225 (a 352% YoY increase), bringing cumulative deliveries to 82,866.
Sources:
[1] https://www.caranddriver.com/news/a35152087/tesla-model-3-charging-costs-per-mile/
[2] https://exchange.aaa.com/automotive/driving-costs/#.YB4Qx-hKiU9
[3] https://twitter.com/skorusark/status/1333521715738136577
[4] Nio quarterly reports
