Great News for Nio's Massive Battery-Swapping Ambitions

Nio (NYSE: NIO) has always been a fascinating stock to follow with its many ups and downs. The Chinese automaker is poised for strong growth on the back of launching two entirely new brands, Onvo and Firefly.

Nio is also intriguing for its decision to push battery-swap technology, which it offers at thousands of locations. The idea is foreign to many U.S. investors, but it's far more popular in China. Nio recently received some good news regarding its battery-swap ambitions -- here's what you need to know.

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What's going on

A battery swap is simply when someone with an appropriate vehicle drives a depleted battery into a swap station, and replaces it with a fully charged battery. Nio's newest vehicles can do this in roughly two-and-a-half minutes.

Image source: Nio.

Now, let's get to the good news. Another Chinese battery maker, CATL, is working with a group of Chinese automakers on a battery swapping technology that takes just over 90 seconds. According to Car News China, 1,000 electric vehicle (EV) sedans with CATL's "Choco-SEB" swappable battery have been delivered to a taxi company -- a near-perfect application for battery swaps that would limit downtime for taxi drivers.

Why is this good news?

Wait a second, isn't more battery-swap competition a bad thing for Nio? Absolutely not. Nio's competition isn't truly other battery-swapping tech -- its competition is fast-charging stations. Nio needs to create an ecosystem of vehicles that use its setup to have a thriving userbase for its swapping stations, and CATL can help with this aim.

CATL is working to bring together a group of automakers to develop a standardized system for battery swaps that could vastly increase the number of swapping vehicles on the road. Furthermore, rumors are floating around that CATL is looking to purchase a controlling stake in Nio Power's battery swapping unit, which, depending on the potential agreement, could vastly increase the scale of battery-swapping technology. CATL is already working on building out a network of its stations.

It's also likely that Nio's more affordable and higher-volume brand, Firefly, could bring in a fleet of new vehicles to match this new standard. This all sounds great, so where's the drawback?

What's the catch?

The catch, if you want to call it that, is that competition with fast-charging stations is increasing as companies find ways to speed up the process. In fact, automakers are already hard at work to beat BYD's five-minute EV fast-charging benchmark. It's certainly a risky ambition to build out a capital-intensive network of battery-swap stations that may only save a few minutes compared to fast-chargers.

Another drawback is that the idea of a standardized battery development (so many platforms of vehicles can use the same battery-swap technology) means that these batteries and designs could be slower to evolve at a time when individual companies are trying to race ahead with breakthroughs.

What it all means

CATL, a juggernaut battery producer, coming on board to push battery-swapping networks with multiple automakers is a huge deal for Nio, and that's before considering the doors it could open as the two companies grow more ties. Furthermore, if CATL does purchase a controlling stake in Nio Power's battery-swap business, it could give a young cash-burning company some extra capital.

No matter how you spin it, this development is great news for Nio's massive battery-swap ambitions, one of the company's biggest risks.

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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.