NIO Inc.'s Geely Deal Is Really a Bet on Battery-Swap Network Utilization

The Chinese electric vehicle (EV) industry, famous for being crowded and competitive, may be moving toward consolidation. Portions of NIO Inc. NIO and Zhejiang Geely Holding Group Co. will combine, the latest in a series of announcements from major Chinese EV makers indicating plans to merge. The deal draws attention to NIO's funding pressure but may not be enough to fundamentally alter the company's cash-burn concerns.

The terms of the deal include NIO's sale of a 30% stake in NIO Power, its battery-swapping unit, to Geely. In exchange, NIO will receive Geely's swap business in addition to 640 million yuan in cash (approx. $95 million). The deal values the unit at roughly ¥16 billion ($2.4 billion). On the surface, it appears that NIO found a partner willing to share the cost of its expensive battery-swapping network. However, a closer look at the terms of the deal and Geely's contribution may shift the focus to NIO's valuation and cash burn.

Higher Utilization of the Battery-Swapping Network May Be the Biggest Impact

The cash payment that Geely is set to make as part of the deal is a small portion of the overall transaction—most of the company's contribution is in the form of operating assets. The ¥16-billion valuation is a reflection of what the combined NIO Power business may be worth at the completion of the transaction—Geely's contribution is only a fraction of that.

What this means for NIO investors concerned about the company's cash position and liquidity is that there is little by way of immediate financial relief. Despite a 69% year-over-year (YOY) revenue improvement last quarter, the company had to contend with surging costs for memory chips, battery materials, and other components, which have limited its gross margin and profitability, even as it continues to burn through cash.

The result is that the deal may be most impactful for NIO's battery swapping operation, which could see improved economics and utilization as a result of Geely's plans to build swappable consumer models. It also gives an important benchmark for the size of NIO Power relative to the company as a whole—with a value of about $2.4 billion, the power network may represent between a quarter and a third of the firm's total market capitalization, depending upon share price.

Risks Include Profitability Concerns, Damage to Geely's Stake, and More

Just because NIO Power could be valued at $2.4 billion after the deal closes does not mean that this portion of the company—which has required years of investment to build and maintain and has yet to demonstrate the impressive profitability necessary to offset those costs—will suddenly transform NIO's financials. The question becomes whether integrating Geely's operations can bring utilization up sufficiently to change that calculation.

Besides this uncertainty, the deal comes with plenty of other risks as well. First, the agreement provides for a scenario in which Geely's ownership stake is reduced if NIO Power fails to achieve specified milestones—a potential sign that Geely sought protections against underperformance as part of the deal.

NIO will also acquire a 10% stake in Geely's charging business per the terms of the agreement, enhancing the strategic partnership between the companies. However, this also means that the exchange of infrastructure assets is complex and comprehensive, and potentially more likely to lead to integration hurdles.

Timing and regulation are other crucial factors. The deal must meet regulatory approval before closing, and it's unclear exactly how long this may take or when an agreement may be finalized. Beyond that, there will likely be a lag of some kind between the completion of the deal and any material changes to NIO's operations.

What Investors Can Watch For

There are ways that investors can track the progress of the deal, including via monthly deliveries, news updates about closing, and any announcements concerning Geely's first swappable model. Monthly deliveries remain one of the primary metrics of NIO's core business demand, and this figure surged by 49% YOY last quarter to nearly 108,000.

Regardless, the Geely partnership seems unlikely to fundamentally transform NIO's financials via the prie tag itself. If it will make a difference for the company when it comes to profitability metrics, it will likely come from the potential for increased utilization thanks to shared infrastructure. Whether and how quickly additional vehicles begin to use the network may be one of the key determining factors of the deal's success for NIO investors, but financial impact may take some time to reveal itself.