How Far Can NIO Go: Opportunities and Challenges Ahead


NIO is a Chinese electronic vehicle (EV) manufacturer. Because of its focus on high-end market, it is often considered China’s Tesla. What’s interesting about this company is that its stock price has skyrocketed this year from less than $2 per share to $41.7 as of November 6, 2020.

One reason for the price increase is the company’s rapid growth. The company’s second quarter sales jumped by more than 100% year-over-year (YOY). In September and October, it has delivery has also more than doubled YOY. Moreover, the company’s gross profit turned to positive territory for the first time in the second quarter. Will NIO’s growth continue in the long term? I will address its advantages and challenges via a detailed market research.

Drives of Recent Growth

The strong growth of NIO is supported by the strong growth in the demand for new energy vehicles (including EV and hybrid vehicles) in China. According to official reports, the production and sales of new energy vehicle in China in September alone rose by 48% and 67.7% (YOY) respectively. In particularly, the production and sales of EV in September rose by 40% and 71% (YOY) respectively, and those of hybrid vehicles 89% and 53.9% respectively. Here, it is interesting that although manufacturers focused on producing hybrid vehicles, it is EV that faces stronger demand growth.

One source of the growth is attributable to the fact that the COVID-19 pandemic suppressed consumer demand for nearly half year. For example, despite jump in sales in the fall, the production and sales of new energy vehicle between January and September dropped 18.7% and 17.7% respectively. Additionally, as fall is usually a good season for car shopping, it is not very surprising to see a significant jump in demand.

Another source of the growth in demand comes from government policies. Like governments around the world, Chinese government subsidizes EV purchases. Additionally, as the sales of EVs grows, the level of subsidy has been scaled back. It is no surprise that many people want to take advantage of the subsidies before they go away.

In addition to the economic motivation, Chinese EV owners also enjoy other privileges. For example, in order to alleviate congestion, Chinese local governments, especially those in mega cities such as Beijing and Shanghai, impose quotas on the number of new tag plates can be issued every year (the distribution of tags is conducted via a lottery system).

So, in practice, prospective drivers need to secure a tag plate before buying a car. If they don’t want to rely entirely on their luck in the lottery, then it is not uncommon for them to buy a tag in the secondary market at a price similar to that of a low-end car itself.

Besides restriction on number of cars, to mitigate air pollution and congestion, local governments often impose restrictions on the number of cars on the road (e.g. based on parity of tag number or energy efficiency). EV owners do not face these sorts of restrictions. Thus, an EV is not only a tool of transportation but also literally solve a practical problem for drivers.

Overview of EV Market in China

According to a report prepared by Chinese Automobile Dealers Association (Table 1), EVs have accounted for approximately 80% of all new energy vehicles in China every year since 2017, and most of the EVs are not for commercial rental purposes.

2017201820192020 (2 quarters)
Total (as % of New Energy Vehicles)85767978
Table 1. Usage of EVs in Chinese Market (in %)

If we examine sales by regions (Table 2), we find that most of the growth in EV demand has been contributed by mega cities where drivers face the most traffic restrictions. As of 2020, 44% of the EVs on road are running in mega cities. In comparison, the demand for EVs in major, middle, and small cities declined comparing to 2017.

Regions2017201820192020 (2 quarters)
Mega Cities35303644
Major Cities22191719
Middle Cities 20201712
Small Cities 17222214
Counties and Towns 69810
Table 2. Distribution of EVs in China (in %)

Where is NIO in the Big Picture

Despite being called China’s Tesla, NIO accounts for 6.7% of EV market, or the 4th place (Table 4).

BrandsMegaMajorMiddle Small Countries and Township Total
Tesla 4032155325
GAC Motor8.
Great Wall33.
Table 3. Top 10 EV Manufacturers in China (%)


One advantage NIO has over its competitor is its battery swapping model. Unlike other EV manufacturers, NIO adopts battery swapping as its main “refuel” solution from the start (NIO cars can recharge like regular EV too). It should be noted that battery swapping isn’t a new idea. Tesla tested this idea but had to end it in 2015 due to its unpopularity. Although battery swapping is fast, it has a major issue for customers. When customers buy an EV, battery is sold as a part of a car. So the quality of battery affects the value and function of the car. When customers swap out their newer batteries, they may get others’ older batteries, which results in loss in car value.

NIO’s recent innovative Battery As A Service (BAAS) solves this issue for customers. Under BAAS, car and battery are sold separately. When a customer purchases a car, the car itself is sold to the customer. But the battery is sold to Wuhan Weineng Battery Asset (Weineng), a joint venture between NIO and CATL who is world’s third largest and China’s largest battery manufacturer for new energy vehicles.

Then, customers would sign a separate contract with Weineng to rent batteries. In this arrangement, car value is separated and shielded from battery quality, and users no longer need to worry about battery quality or upgrade as it is taken care of by Weineng, the real owner of battery.

Another important advantage for NIO is that battery swapping model recently received official support from the Chinese government. The main reason for the government support is that most people in China don’t have access to charging devices at home. And when people recharge, they do it during the day time, when the national power grid system face the heaviest burden. Battery swapping could not only quickly put people back on road but also batteries can be recharged at swapping stations during off-peak time.


The long-term growth of NIO can be affected by long-term demand, cost of operation, market share, technology standardization. Regarding long-term demand, the recent jumps in production and sales for NIO cars and in the overall Chinese new energy vehicle industry can be partly attributed to the suppressed consumption during the pandemic and government subsidies. As the pandemic and government subsidies approach ending in China, it is possible that the high growth in demand for EVs overall will not be long-lasting.

Regarding the demand for NIO cars, the company may face some challenges. First, at the national level, NIO’s market share (6.7%) has long way to go to catch up with the forerunners such as Tesla and BYD. Second, NIO may need to more accurately target its market.

Looking closely at the data (Table 3), the major market for EV is in mega cities. But NIO has only 7% of the market share there and ranks the fourth. Moreover, in major cities, where NIO has 10.5% market share, the existing data do not show rapid growth in this market. The situation in small cities is even worse (declining demand for EV). So, in order for more growth, NIO will need to focus on mega cities.

How competitive is NIO in the (mega city) market? Let’s look at who typical NIO customers are. Branded as a high-end EV manufacturer, NIO cars are not cheap. In fact, the price of NIO cars are close to that of foreign luxury brands such as Tesla, BMW and Mercedes-Benz. Given that cars in China is more than a method of transportation (e.g. to show social status), most NIO customers (upper-middle class or upper class) purchase their cars as the second or even the third one for non-essential purposes. Thus, the demand may not be sustainable when new EV fashion emerges or macro-economic conditions change for this group of people.

For the people who have the money and shop for their first car, they are more likely to choose other more reputable brands than NIO.

Besides, NIO faces increasing competition in the high end market from multiple directions. The biggest competitor of NIO for now is Tesla. Not only does Tesla enjoy superior brand recognition, but also its mega factory in Shanghai allows it to lower prices to force other competitors out of the market. Additionally, other traditional Chinese auto manufacturers such as BYD and GAC Motor have entered the game and proven their competitiveness in the mega city market (Table 3).

The third challenge comes from NIO’s battery swapping model. The fact that the model is supported by government means that the government will create industry standards for battery swapping and that many more players will join the competition. NIO will maintain its advantage only if its technology is adopted as the industry standard. Despite being the first one to taste crab and remains the only one to provide battery swapping to private EVs for now, NIO may not be able to maintain its advantage due to its small market share and battery swapping capacity.

So far, NIO has the second most (155) battery swapping stations in China and 40% of them are in Beijing. However, each NIO swapping station has only 5 swappable batteries and can swap at most 70 batteries a day.

In comparison, one of NIO’s battery swapping competitors, Aulton Energy, serves commercial and rental EVs. But it has twice as many stations and each of its station carries 28 batteries and can serve 300 cars per day.

Another major player in the battery swapping business, BJEV, also has similar swapping capacity to commercial vehicles as Aulton Energy. They will play major roles in making batter swapping standards in China and can quickly outnumber NIO stations if they choose to serve private EVs one day.

Not to mention that new competitors have joined the game with new technologies. For instance, it takes about 10 minutes plus one NIO employee to complete a battery swapping process. Recently, Chery, another major auto manufacturer, introduced a 90-second battery swapping technology and it requires no personal intervention.

Building more swapping stations is easier said than done. On the one hand, NIO will have to build more swapping stations to attract more customers and avoid long waiting time for drivers (long lines have reportedly happened in some areas).

On the other hand, battery swapping stations are extremely costly especially in big cities. It is estimated that it costs about $500,000 to build a swapping station, nearly twice as much as a recharging station. This price tag does not include operating, maintenance, labor, or energy costs (NIO offers free battery swapping for its customers). And it is estimated that it takes on average 200-300 cars per day for a swapping station to be profitable.

A third approach NIO adopts to mitigate customer anxiety is NIO Service (a NIO shuttle comes to you to recharge your car where it is parked or NIO sends someone to take your car to a swapping station for you). But such personalized customer service would inevitably increase operating costs. To cut cost, NIO recently cancelled its free battery swapping for new NIO customers. It is uncertain how this change would affect long-term demand. If NIO keep operating on the current business model, it will require a very deep pocket and investors will be prepared for a very red balance sheet for a long time.


The rapid growth in the Chinese EV industry has benefited many companies in the industry. NIO has advantages in its battery swapping model and innovative BAAS business model, and has been going through a very rapid growth period. However, it faces long-term challenges of low market share, not-so-competitive pricing strategy, and uncertain technological advantage in setting battery swapping industry standards.

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