Shares for Chinese electric vehicle maker Nio fell 8.6% on Tuesday after the company posted better-than-expected gross profits for the second quarter amid concerns over the long-term scalability of its ambitious battery-swap program.

These second-quarter financial results are an important milestone for Nio, which, for the first time reported a positive vehicle margin of 9.7%, nearly double the 5% company management had guided.

Nio attributed the improvement primarily to a record number of deliveries during the quarter, during which it handed over 10,331 vehicles to customers in the three months ended June 30. Total revenues jumped 146% year on year to RMB 3.7 billion ($526.4 million), beating analyst estimates of RMB 3.49 billion. Losses attributable to shareholders meanwhile narrowed 63.6% year on year to RMB 1.13 billion ($160.1 million).

The margin improvement owed much to a significant cost reduction in battery packs, among other materials. Nio now enjoys a much lower purchase price for battery packs from its supplier, CATL. It now pays RMB 0.8 per watt-hour (Wh) compared with an earlier rate of over RMB 1 Wh, Chinese media reported citing persons familiar with the matter. The six-year-old EV maker became CATL’s biggest battery client in the passenger vehicle segment during the first half of this year, according to figures from Chinese consulting firm GGII.

BaaS ready for Q3 launch

Nio said it has achieved “profound progress” in its plans for a “Battery-as-a-Service” (BaaS) offering, in which a battery rental service will be sold separately from cars. CEO William Li said Tuesday during the earnings call that it was in the final stages of preparing to launch its BaaS solution offering in the third quarter. All the necessary validation procedures with the government have been completed, he said.

Beijing has traditionally required automakers include a battery pack with each new energy vehicle sold, but the restrictions are now being lifted. A government announcement (in Chinese) last month revealed that Nio will be allowed to sell the EC6, its third mass production model, without a battery.

“We believe this is going to be a very good boost to our vehicle sales… and help us with the gross margin,” Li said. Nio expects a battery-leasing program to considerably lower the price of a Nio-branded premium crossover by one third to around RMB 258,000, for example, when renting a battery pack for daily use.

The Chinese Tesla challenger is betting heavily on battery-swapping technology as part of its broader BaaS strategy, which it hopes will resolve consumer range anxiety and effectively remove the issue as a barrier for EV adoption. The company now has a network of 142 battery swap stations in 63 Chinese cities, and is rapidly expanding the swap infrastructure by opening one station on average per week, Li said last month at a company event.

Investors unconvinced

However, multiple industry people TechNode recently spoke with have expressed doubts about the scalability of such battery replacement service, given a constantly evolving vehicle driving range and the ever-shortening EV recharge time. The difficulty in reaching a shared battery standard among multiple automakers is another hurdle, making battery swap a less economical solution for EVs over the long term, UBS analyst Paul Gong said in June during an online conference.

Nio said that it recently completed 750,000 battery swaps nationwide, highlighting growing adoption from its vehicle owners. It also boasted that each battery replacement took just three minutes, far faster than even the average 15 minute charge time at a Tesla V3 supercharger.

Nio is forging an alliance with giant industry players to minimize its financial burden in the swappable battery program. Li on Tuesday revealed plans to form a battery asset management company with multiple partners, in which Nio will hold a minority stake. The joint business is scheduled to open this month, which CATL reportedly (in Chinese) intends to invest in.

Jill Shen

Jill Shen is Shanghai-based technology reporter. She covers Chinese mobility, autonomous vehicles, and electric cars. Connect with her via e-mail: jill.shen@technode.com or Twitter: @yushan_shen