蔚來 (NIO) 2022 Q3 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated's third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded.

I will now turn the call over to your host, Ms. Eve Tang from Capital Markets. Please go ahead, Eve.

Good morning and good evening, everyone. Welcome to NIO's third quarter 2022 earnings conference call. The Company's financial and operating results were published in the press release earlier today and are posted at the Company's IR website.

On today's call, we have Mr. William Li, Founder, Chairman of the Board, and Chief Executive Officer, Mr. Steven Feng, Chief Financial Officer, Mr. Stanley Qu, Senior Vice President of Finance.

Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties. As such, the Company's actual results may be materially different from the views expressed today.

Further information regarding risks and uncertainties is included in certain filings of the Company with the U.S. Securities and Exchange Commission, the Stock Exchange of Hong Kong Limited and the Singapore Exchange Securities Trading Limited.

The Company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Please also note that NIO's earnings press release and this conference call includes discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to NIO's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

With that, I will now turn the call over to our CEO, Mr. William Li. William, please go ahead.

(Interpreted) Hello everyone. Thank you for joining NIO's third quarter 2022 earnings call.

In the third quarter 2022 NIO delivered a total of 31,607 smart electric vehicles, up 29.3% year-over-year, setting a new quarterly high.

Based on our latest technology program, NT2.0, we have launched and delivered three new products, which has improved the competitiveness of our product line-up in all aspects, and enabled NIO to enter more premium segments, capitalizing continuous demand growth.

In October, overcoming the production and supply chain volatilities, we delivered 10,059 vehicles, representing a 174.3% increase year-over-year. We will continue to collaborate closely with our supply chain partners, to stabilize component supply and further accelerate the vehicle production and delivery. We expect the total number of deliveries in the fourth quarter of 2022 to be between 43,000 to 48,000.

Next, I would like to share some recent highlights of our R&D and operations.

In September, as the show cars of ET5, a smart electric mid-size sedan began to be on display in our stores, Store traffic reached a record high, and order intake witnessed a strong growth momentum.

On 30 September we officially kicked off the delivery of ET5, and the preliminary user satisfaction rate exceeded our expectations.

Over the past couple of months, Banyan, the digital system of NT2, has iterated and upgraded multiple times, with continuous user experience improvement. We have strong confidence in the market competitiveness of the new models, based on the NT2 platform.

With respect to the sales and service network, we now have 399 new houses and new spaces in 149 cities and 280 service centers and delivery centers in 163 cities.

In terms of the charging and swapping network, NIO has installed a total of 1210 power swap stations, and provided 14 million battery swaps for users. NIO has installed 2055 charging stations with 5765 power chargers and 6077 destination chargers in place. In the meantime, our power map has connected to over 590,000 third party chargers in China and more than 380,000 chargers in Europe.

Since we entered the Norwegian market last September, our products and services have been well received by local users and the user community has been growing rapidly, which has laid a solid foundation for, and boosted our confidence in entering more markets in Europe.

On 7 October this year we held NIO Berlin 2022, where we comprehensively introduced our products and services to users in Europe, marking our official market entry in Germany, the Netherlands, Denmark and Sweden.

NIO Berlin drew a lot of attention and recognition from users and auto industry in Europe. We are now organizing large scale test drives and kicked off user delivery in Europe.

Yesterday, NIO ET7 won the 2022 Golden Steering Wheel Award, granted by the prestigious German magazine, Auto Bild, as ET7 was voted the best car in the medium and upper-class category. Both our products and the innovative technology have been highly recognized by the users, industry experts and the professional media in Europe.

To better serve user communities in Europe, we plan to open NIO Houses and NIO Spaces in 10 major European cities, such as Berlin, Frankfurt, Rotterdam, Copenhagen and Stockholm.

We also plan to install 20 Power Swap Stations in Europe by the year end and another 100 by the end of 2023, so that more users can experience NIO's chargeable, swappable and upgradable power system in Europe.

In addition, we have established an R&D center in Berlin for localized development and deployment of digital cockpit and ADAS, to continuously improve the intelligent digital experience of local users.

On 27 September, NIO announced the collaboration with the Danish Society for Natural Conservation and the Danish Nature Foundation on the Clean Parks initiative. NIO hopes to actively engage with the local communities, share the responsibilities and jointly make contributions to a more sustainable future.

On 30 September, upholding NIO's original aspiration of Blue Sky Coming, NIO released the first NIO Environment Social and Governance Report 2021, where NIO shared its ESG management practices and performance in 2021.

In 2022, NIO has further advanced in products, core technologies, charging and swapping network as well as its sales and service network, which has laid a solid foundation for us to compete in the global market for the long run.

In spite of the operation challenges brought forward by the changing macro environment, we believe that NIO is fully capable of staying focused on product and technology innovations, as well as service capability improvement, while further optimizing the cost structure and improving operational efficiency, to introduce more beyond-experience products and services to users worldwide.

As always, thank you for your support. With that, I will now turn the call over to Steven, to provide the financial details for the third quarter 2022. Over to you, Steven.

Thank you, William. I will now go over our key financial results for the third quarter of 2022. And to be mindful of the length of this call, I will reference to RMB only in my discussion today. I encourage listeners to refer to our earnings press release, which is posted online for additional details.

Our total revenues in the third quarter were RMB13.0 billion, representing an increase of 32.6% year-over-year and 26.3% quarter-over-quarter.

Our total revenues are made of two parts, vehicle sales and other sales. Vehicle sales in the third quarter were RMB 11.9 billion, representing an increase of 38.2% year-over-year and 24.7% quarter-over-quarter. The increase in vehicle sales year-over-year and quarter-over-quarter was mainly attributed to higher deliveries as a result of more diversified product mix offered to our users.

Other sales in the third quarter were RMB1.1 billion, representing a decrease of 8.5% year-over-year, an increase of 48.2% quarter-over-quarter. The decrease of sales year-over-year was mainly due to the decreased revenue derived from sales of automotive regulatory credits, offset by the increase in other revenues in line with the incremental vehicle sales. The increase in other sales quarter-over-quarter was mainly attributed to the increased revenue derived from sales of automotive regulatory credits and increase in other revenues in line with incremental vehicle sales.

Gross margin in the third quarter of 2022 was 13.3%, compared with 20.3% in the third quarter of 2021 and 13.0% in the second quarter of 2022. The decrease of gross margin year-over-year was mainly attributed to, first the decreased revenue derived from sales of automotive regulatory credits with high sales margin, second, the decrease of vehicle margin, and third, the reduction in other sales margin, resulting from expanded investment in power and service network. The increase of gross margin quarter-over-quarter was mainly attributed to sales of automotive regulatory credits with high sales margin.

More specifically, vehicle margin in the third quarter was 16.4%, compared with 18.0% in the third quarter of 2021, and 16.7% in the second quarter of 2022. The decrease of vehicle margin year-over-year was mainly attributed to the increased battery cost per unit, which was partially offset by the decrease in subsidization in user vehicle financing arrangements. Vehicle margin remained stable quarter-over-quarter.

R&D expenses in third quarter were RMB2.9 billion, representing an increase of 146.8% year-over-year and 37% quarter-over-quarter. The increase in R&D expenses year-over-year and quarter-over-quarter was mainly attributed to the increased personnel costs in research and development functions, as well as incremental design and development costs for new products and technologies.

SG&A expenses in third quarter were RMB2.7 billion, representing an increase of 48.6% year-over-year and 18.8% quarter-over-quarter. The increase in SG&A expenses year-over-year and quarter-over-quarter was primarily due to first, the increase in personnel costs related to sales and the general corporate functions, second, the increased expenses related to the Company's sales and service network expansion, third, increase in marketing and promotional activities to promote our vehicles in China and Europe.

Loss from operations in the third quarter was RMB3.9 billion, representing an increase of 290.2% year-over-year and 36.0% quarter-over-quarter. Other losses in the third quarter of 2022 was RMB495.6 million, representing an increase of RMB528.2 million from other income of RMB32.6 million in the third quarter of 2021 and an increase of RMB305.6 million from the second quarter of 2022.

The increase of other losses over the third quarter of 2021 and second quarter of 2022 was mainly due to the loss from the revaluation of our overseas Renminbi-related assets as a result of the depreciation of Renminbi against US dollar in the third quarter of 2022.

Net loss in the third quarter was RMB4.1 billion, representing an increase of 392.1% year-over-year and 49.1% quarter-over-quarter.

Net loss attributable to NIO's ordinary shareholders in the third quarter was RMB4.1 billion, representing an increase of 44.9% year-over-year and 50.9% quarter-over-quarter.

Our balance of cash and cash equivalents, restricted cash, short-term investment and long-term [time] (added by the company after the call) deposits were RMB51.4 billion as of September 30, 2022.

Now, this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

Thank you. We will now begin the question-and-answer session. (Operator instructions). At this time, we will pause momentarily to assemble our roster. Our first question comes from Ming Hsun Lee with Bank of America. Please go ahead.

(Spoken in Chinese). Previously, your capacity is capped by component supply, especially the welding part as well as the chips, so could you also update your latest component capacity if there is no COVID control impact? Thank you.

(Interpreted) Thank you, Ming, for your question. Yes, regarding the production in October, there has been some impacts due to several reasons and the impact is around several thousand. One factor is because of the subframes, just like you mentioned, but we expect that this will be resolved in November and then the second reason is the new EDS for ET5. We actually have a new EDS plant next to our Factory 2 and the automation level of the new EDS plant is very high. We only need to have around 30,000 people to support the overall operation of this new EDS plant. Due to the ramp-up volatilities of the EDS, our production is affected by around 2000 to 3000.

The third reason is the COVID-19 situations. I believe this has impacted the production for around one week. So, overall speaking, all those factors have affected the production in October but we have resumed normal production now and we expect to have a new production line for the new EDS next week and probably by the end of this month, this new EDS line will be ready and we can ramp up the production.

We have already solved the subframe issue and I believe probably in December, ET5 production will not be an issue and as of now, I don't believe that there is any production issue for the ET7 and the ES7.

(Spoken in Chinese). The US semi ban, how will this impact the development for the industry and also NIO, besides NVIDIA currently can sell A800 chips to China, if compared to A100, how do you see the impact to the progress of our autonomous driving training?

(Interpreted) Thank you for your question. Regarding the chip act, I believe this mainly affected the chip used for cloud training. Right now, I believe that we have sufficient chips, like the A100, to satisfy the need for the AD training in the long run but at the same time, we're also exploring different opportunities. For example, we are considering working together with some cloud service providers and we are also evaluating some long-term solutions to support the iteration of our AD solutions. As of now, I don't actually see any impact on our operations.

Thank you, Ming.

(Spoken in Chinese).

Your next question comes from Paul Gong with UBS. Please go ahead.

(Spoken in Chinese). So, my first question is regarding the ET5 order. Just now, you mentioned that the satisfaction level has beat your expectation but you didn't mention how the orders' intake has been. How do you see the orders intake since the launch and especially after late October after Tesla launched another wave of price cuts? Do you see any impacts from there? This is my first question.

(Interpreted) Thank you, Paul for your question. Of course, I understand regarding the ET5 orders, the more important thing for us is right now to find a way to deliver the ET5 to users and shorten the waiting time for the users. So, generally speaking, order is not an issue for us regarding ET5. Regarding the ramp-up of ET5, because this is still at a relatively early stage, we would like to pay more attention to the quality improvement and make sure we can stabilize the quality of the ET5.

The demand for ET5 is very strong, as we expected. Of course, if the order can be even stronger, the stronger the better, but at the same time we don't want the users to wait for a really long time. If we come back to Tesla, Tesla often cuts its prices so we don't actually think this affect the user demand regarding NIO products.

If we look at the specific product, like the Model 3, there is a big price gap compared to our product and if we compare the Model Y with our ES6, we don't actually believe that we are competing in the same segment. So, if we look at the pricing of our products and the positioning of our products, strictly speaking we're not competing with Tesla in the same segment.

(Spoken in Chinese). So, my second question is regarding the expenses, including both R&D and SG&A. It seems to be climbing up a lot Q-on-Q this quarter. Is that just temporary because you have new products and trying to explore the new market in Europe, or is that more like structural and if so, what is your expectation for its trend going forward?

Hi, Paul. This is Stanley. The increase of SG&A in Q3 compared with Q2 is because our sales and service network in China and also in Europe, since we entered more country market in Europe this third quarter, and also more marketing and promotional activities in Q3 compared with Q2.

For the long-term, I think also you can check with this result from Q3, SG&A as a percentage of sales revenue will continue to be optimized along with the improvement for our operation efficiency. I think in 2023 and also the coming years, you will see a stable trend for further improvements of this ratio. Thank you, Paul.

(Interpreted) Regarding the R&D expenses, yes, we do see some increase in the third quarter compared with the second quarter and this is mainly because of our new product development cadence as well as other initiatives like the battery, chipsets and the tests and the validations when we enter new markets, as well as the employee cost and the EDD costs. This is actually part of our plan and we don't think there is any other additional R&D expenses that is out of the planning of the Company.

Regarding the R&D operations, I believe that right now we have entered a relatively stable phase regarding the R&D development work as well as the operations, so for us we believe when it comes to the R&D expenses, including the human resources cost, it will stay at a relatively stable level, for example probably every quarter it should be around RMB3 billion.

Of course, at the same time we will continue to improve the system efficiency of our R&D efforts but for some time right now, I believe it will stay at this level to make sure we can have more products and technology and innovations to provide better experience for the users.

(Spoken in Chinese).

(Spoken in Chinese). So what is roughly ratio of Europe account for this quarter's SG&A?

Yes, hi Paul. You know Europe is now at quite initial stage. So currently the overall expense is not a big percentage of the overall SG&A, yes. Now the sales and marketing team for our Europe business is about 500 headcount. So yes, that's basically the information for our Europe business.

Okay, thank you very much. (Spoken in Chinese).

Our next question comes from Tim Hsiao with Morgan Stanley, please go ahead.

(Spoken in Chinese) So my first question is about the production and delivery. So I think, based on the fourth quarter guidance, that basically the average delivery in November/December could be around 17,000 to 19,000. So what would be the peak monthly output NIO can reach by end of this year and how the trajectory looks like into first half next year? Will the supply chain bottleneck become a structural issue given the unchanged COVID policy and more new model, new players and a likely longer time for supplier to expand their capacity, they increase their production yield? (Spoken in Chinese).

(Interpreted) Overall speaking, it's quite difficult for us to make estimation regarding the impact of the COVID control and prevention measures on the operation of the Company. But if we talk about the supply chain and the vehicle production, I believe the vehicle production capability should be able to meet the delivery target we set for next year.

And if we speak of the supply chain, we do see some challenges, for example, in December. We will face some constraints regarding the supply of the silicon carbide. But if we look at 2023, I believe the supply chain and the production capacity have the flexibility to meet the demands and the target we set out for ourselves.

For 2023 I believe for the vehicle production we will have a relatively sufficient production capacity to meet the demand. If we can achieve a 150,000 production capacity on one shift, I believe the production of the vehicle will be carried out in a very smooth manner.

(Spoken in Chinese). So my second question is about the profitability. Because based on our own observation, we noticed the lifecycle with smart EV in China is actually getting shorter, rather than longer than traditional cars. So, considering the very sizable R&D and manufacturing investment, what would be the more reasonable terminal growth or operating margins we should look for? Especially I think as competition is getting more intense. Thank you.

(Interpreted) Thank you for your question. Regarding the smart electrical vehicles, I believe we have a much faster iteration cycle, compared with the traditional vehicles. We believe the iteration cycle should be around three years and this is how we're iterating our smart technologies in NIO.

Of course different companies have different strategies and different iteration cycles. But in NIO, if we look at our technology platforms and we believe with one technology platform we actually have the same kind of hardware and software for all the vehicles based on this technology platform. So, for example, as previously we have explained, we have the NIO Technology 1.0 and the NIO Technology 2.0. For all the products based on NIO Technology 1.0, they have the same kind of software and hardware when it comes to the smart technologies. And that's the same for NIO Technology 2.0.

At the same time we also have the unified battery pack and we also share a lot of commonalities when it comes to the vehicle platforms. Of course, previously we mentioned we would like to offer a different kind of top head to meet the diversified demands of and tastes for different users.

So if we think about the technology platforms and platform strategy, I think that 20% to 25% vehicle gross margin is not a very big challenge for us.

But if we look at 2022 specifically, the cost of the battery has skyrocketed. So of course at the same time we have increased the price of our products. And even against this backdrop we have, I believe, achieved a relatively reasonable vehicle gross margin.

Previously we have also achieved a 20% vehicle gross margin the past. In the past we didn't have the battery cost increase. So this is a relatively reasonable vehicle gross margin for our products. In the future if the battery cost can come down to a reasonable level, I think it's possible for us to regain the 20% to 25% vehicle gross margin with our products.

In addition to that, with our vehicle technology vertical integrations, including the battery, the chipset, I believe we will have more room to improve for the vehicle gross margin and it's possible for us to achieve a 25% to 30% vehicle gross margin.

If we look at the mass market, I believe the challenge is much bigger because if we combine all the companies in the mass market right now, I think the overall gross margin is actually negative. Of course BYD is an exception because they have the vertical integration of the batteries and other technologies.

So if we do not have the vertical integration capabilities in the mass market, it will be quite challenging to survive in the mass market. But if we have these capabilities in place, I think it is possible for us to also achieve 20% to 25% with other mass market products.

Thank you Tim.

(Spoken in Chinese).

Our next question comes from Bin Wang with Credit Suisse. Please go ahead.

(Spoken in Chinese). My question, first of all, is about your guidance. You actually guided three things, number 1, the ET5 will be higher volume than BMW 3 Series. And then 2 guidance is that you will break even in the number 4 quarter next year. Number 3 guidance is that this year you have 18% to 20% gross margin for the vehicle. Did you maintain this guidance for this? Thank you.

(Interpreted) Thank you, Bin, for your question. Overall speaking, that's still the direction we're aiming for. For the core business of NIO, we are still aiming to achieve breakeven in the [fourth] (corrected by the company after the call) quarter of 2023 and this is still our plan.

At the same time, we're also working on different strategic new business. For example, we have two new brands and the battery chipset and the smartphone business at the same time. So, if we look at 2023, the investment for those strategic new business is going to be around RMB3 billion to RMB4 billion. It means that probably around RMB1 billion every quarter. If we take all those strategic new business aside, we are still very confident to achieve a breakeven for new core business in the fourth quarter of 2023.

So, for the second question regarding ET5, you mentioned previously our co-founder mentioned that ET5 volume is going to exceed the volume of the BMW 3 Series in an event. And of course, this is not a guidance for us, but because I believe ET5 is much, much better than BMW 3 Series, so we're very confident to achieve this target.

For the vehicle gross margin, in 2022 I believe there are still many challenges for us, especially when it comes to the lithium carbonate cost. Right now, the lithium carbonate cost is still stayed at a very high level.

Previously, it has dropped to around RMB400,000 and now is going back or actually reached a new high that is around RMB600,000. This has significantly affected the battery cost, and for us, this is actually out of our control and is very difficult for us to predict. But I believe we can still remain a relatively stable vehicle gross margin in the fourth quarter compared with the third quarter.

For the lithium carbonate cost I'd like to probably share some insights. I don't think the price or the cost of the lithium carbonate is due to the supply situation, because right now if you look at the car companies in China, I don't think there's any car companies that cannot deliver their products because of the battery shortage.

So, of course in the future we believe the lithium carbonate cost will go down, but we cannot predict when. This has a relatively big impact on us because for all of our products, we have a relatively high battery capacity. Averagely speaking, for each of our vehicles, the battery is around 80 to 90 kilowatt hours. So if the lithium carbonate cost stays at a very high level, this is going to have a big impact on the vehicle gross margin.

For us, maybe I can give you some numbers, which will probably help you to understand that situation. If we think about RMB100,000 cost for the lithium carbonate. This is actually affecting our vehicle gross margin by around 2 point or 2%. And if we can see the lithium carbonate cost drop from RMB600,000 to RMB400,000, then this is going to improve our vehicle gross margin by around 4%.

So, if the lithium carbonate cost can drop to even lower, probably around RMB100,000, which is a reasonable price for the lithium carbonate, then it means that our vehicle gross margin can improve by probably around 8%. So, this is the reality we are facing.

(Spoken in Chinese). Actually, we just want to give a check that ET5, you place order today you actually can only get a car in February or March. (Inaudible) product is NIO's Model 3. So, my question's about what is the NIO's model Y? From the media we learn that NIO may launch the protocol of ET5 wagon and is it going to be showcased in the upcoming NIO Day in December this year? Thank you.

(Interpreted) So, for the product line-up in the first half of next year, we're going to have five new products and I believe probably one of them is going to be like the Model Y to Tesla, like you mentioned. But for us, we focus more on the overall volume of all the product line-up.

We are in the premium market segment, so our philosophy is to satisfy the diversified user demand with high efficiency. In the price range from RMB300,000 to RMB500,000, we will provide the different product to satisfy the diversified user demands and taste. So, I believe with our product line-up we should be able to achieve a good overall delivery volume that can meet our expectations.

I don't actually expect that one product can sell over 100,000 units in China. For example, for ET5, if it can sell probably over 30,000 units per month, it's going to be a very common streetcar and I don't think this is good for the ET5 or for NIO.

For the mass market, this is a different story. We just had a meeting today with the mass market team and for us, we believe that the mass market product can sell probably over 50,000 units per month because -- for one model, because this is different market segment and different target user group.

(Spoken in Chinese). Thank you, Bin.

Thank you.

Our next questions comes from Jeff Chung with Citi. Please go ahead.

(Spoken in Chinese). So, my first question is about the sales volume growth into November and December. So, in order to meet our median quarterly target for the 3000 units and if the month-on-month improvement to be linear at around 37%, we should be reaching around 19,000 units monthly run rate by December. So, from which -- could you break down the volume of ET5?

And the second questions is, if this ramped-up pace is going to be non-linear with most of the weight happening -- concentrating in December, so could you tell us what kind of elements will be determined on our run rate overshoot in December but not in November? Thank you.

(Interpreted) Thank you, Jeff, for your questions. In November, we will still need some time to ramp up production, including ET5, considering the factors I just mentioned, like the EDS.

In December, except the silicone carbide I just mentioned, I believe we will have more production compared with the production of November. Of course, in December we hope that we can still achieve over 20,000 production run rate.

(Spoken in Chinese). No more questions, thank you.

Thank you.

The next question comes from Nick Lai with JP Morgan. Please go ahead.

(Spoken in Chinese). I have two simple questions. Really, the first question is about the cash burn and the CapEx expectation as we move into '23 and '24 and also take into account of incremental investment in CapEx and potential CB.

The second questions again is on the AI chips supply strategy and if you can just talk about the potential alternative solution to Nvidia 100 chip, are you looking for (inaudible) solution. That's related algorithm, but what about the chip in the car? Thank you.

(Interpreted) Hi Nick, this is Stanley. As introduced by William and myself, we will further improve our SGA operating efficiency and furthermore, our R&D expense will keep relatively stable compared with 2022. So, operating cash flow wise, I think we are quite optimistic to achieve the positive operating cash flow in future years.

So, our cash burn mainly depends on the capital investment. Now we are planning our next year's budget and generally, I think the total scale of CapEx in next year will not increase so significantly compared with this year. As you know, we are planning more sales and service network and also we are planning more production and also supply chain capacity. So, at this moment I want to give you clear guidance, and we are also confident that our cash on hand can supply our ongoing operation until breakeven is finally achieved.

Thank you.

(Interpreted) Overall speaking, we understand there are still many uncertainties in the market, but I believe that with our current cash reserve and also the bank facilities, we should be able to support the Company's operation until we break even. So, we don't think this is going to be a huge challenge for the Company.

Regarding the chipset previously we have already addressed at the AI training chip that is NVIDIA A100 and now I would like to properly elaborate more the onboard chipset.

We are the first company in the world to launch our product that is equipped with NVIDIA Orin, which is actually six months earlier than other companies. We also have very close collaborations with NVIDIA. At the same time, last year, we have already kicked off the R&D of our AD chipset. By now we have around 500 people working on the AD chipset. I believe it is commonly acknowledged that AD chipset is closely coupled with the AD algorithm. If we can use the AD algorithm to define the design of the AD chipset the overall efficiency can be significantly improved, which can also contribute to overall vehicle gross margin. So, the overall progress of the AD chipset R&D is on track, and we have seen some positive achievement from the team.

(Spoken in Chinese). [That will surely be a good thing].

Yes.

Okay, thank you. (Spoken in Chinese).

The next question comes from [Jing Chang] with CICC. Please go ahead.

(Spoken in Chinese). So, my first question is about, in a current external environment, everyone encounters a lot of difficulties in production. So, in the longer term will we reconsider switching from OEM mode to self-build production. Are there any difficulties in obtaining qualifications and will it optimize our new product ramp up speed or manufacturing cost?

My second question is regarding to R&D investment and CapEx, about the boundaries of our in-house R&D. As we can see that in the third quarter our R&D expense further extends to RMB2.8 billion. So, considering the capital market environment and the much more intense competition in Chinese EV market in a few years, will we adopt a more conservative strategy for R&D and CapEx? So, under what circumstances we will adjust our current strategy and whether our organization is flexible enough to adjust?

The last question is about, just mentioned MPV models. So, what do we think of the MPV market, will we launch a new product pipeline in this segment in the future? Those are my three questions.

(Interpreted) For the Factory 2, we are still working together with JAC. I believe our joint manufacturing corporation has been quite positive. Regarding the vehicle production, I believe the vehicle production capacity can support the company's delivery target in the short-term. Previously I've already mentioned that for one plant we should be able to achieve 150,000 units under one shift and if we combine the two plants together, the Factory 1 and Factory 2, then it means that under one shift we should be able to achieve a production capacity of 300,000 units. If we double this to two shifts then the production capacity can also be doubled.

When it comes to the supply chain, of course there are some volatilities for the whole industry, not just for NIO, but as we ramp up our production capacity and the delivery, I believe that we have the capability to mitigate the risks of the supply chain.

For the second question regarding the boundaries of our investment. Previously I have already mentioned that we do have a sufficient cash reserve to support the Company's operations, and when it comes to the overall investment for R&D, every quarter we expect to invest around RMB3 billion for R&D efforts. So, this includes all the R&D initiatives we have explained previously.

For the CapEx we will improve the efficiency on the CapEx investment and we do have very strict management regarding the finance and the investment of the company.

Okay. With regard to the MPV market our strategy is very simple. In the short-term, we have no plan to launch a MPV model. Of course, long-term we'll keep monitoring this niche market. We have also noticed that recently this market is very hot. From a supply side several Chinese brands have launched their high-end MPV model, but from the demand side, at least right now, the MPV segment still remains a niche market, but that's why we would like to keep monitoring and then decide what to do in the next several years.

(Spoken in Chinese).

Our next question comes from Yuqian Ding with HSBC. Please go ahead.

(Spoken in Chinese). I've got two questions. The first is to follow up on the margin side. So, next year's gross profit margin improvement, will that be mainly coming from the increasing economies of scale? Could we have some quantification over there, because from the mix side it was more ET5 in the mix could be coming down a little bit. Also, we talked about a Q4 breakeven, is that based on the current lithium price assumption, or in our Q4 breakeven assumption, that basically baking normalizing of the lithium price.

And the second part is to ask, what's the city pilot on the autonomous driving side? What's our timeline to push for city pilot and when do we expect our autonomous driving capability to improve from a help-selling vehicle item to support materially on the margin side?

(Interpreted) Thank you Yuqian for your question. As of now, of course the lithium carbonate cost is not going down as we expected in the fourth quarter, but like I explained previously, I don't believe this is a supply issue because if we look at the market right now all the car companies can actually get sufficient supply of their batteries.

For us regarding the lithium resources, we have seen some lithium resources enter the market in the past and we expect that probably next year the cost of the lithium carbonate is going to be around RMB300,000 to RMB400,000.

When it comes to the budget planning of the Company, of course we would like it to be more conservative. So our assumption is around RMB400,000. This is basically our judgement regarding the lithium carbonate cost probably for the next two years.

For the autonomous driving, I believe we will still need some time to see the contributions of the autonomous driving to the vehicle gross margin and the overall gross margin. There are several factors. Part is because of the feature and function development and part is because of the legislation. Recently we do see some positive progress on the legislation front. For example, MIT has launched some pilot programs for autonomous driving and whilst we believe it will still need probably one to two years to get mature when it comes to autonomous driving technologies and also the legislations. So in the short term we expect probably there will not be any significant contributions from the autonomous driving to the vehicle gross margin and the overall gross margin.

Our next question comes from Xinchi Yin with CITIC Securities. Please go ahead.

(Spoken in a foreign language). So, my first question is about inventory. So the inventory is around RMB6.7 billion in quarter 3. It is nearly doubled compared to its quarter 2. So does this number imply around 10,000 more inventory cars on your balance sheet?

My second question is about ET5. It was really hot on the September but recently we see some negative comments and news on social media because of its poor performance on energy efficiency. So I was wondering, what's your next move to deal with the consumer's concerns?

Thank you for taking my questions.

Hi Xinchi, this is Stanley. For the inventory increase in Q3 I think mainly two reasons. One is about our increase of inventory cars in Q3. Our production was negatively impacted by our rear subframe in Q3, so we increased the production of ES8, ES6 and EC6 in Q3. Secondly, it's because the increase of the component inventory to secure the production in the coming months, we stored more key materials like chips and also other raw materials in Q3, so all of those factors led to the increase of our inventory stock.

(Interpreted) Regarding the second question, yes, for the ET5 different tires may have a different impact and a different performance when it comes to the power consumption. If the users choose a performance tire then the power consumption will be higher but if the user chooses a long-range tire or the low-resistance tire, then the power consumption performance is going to be much better.

So, we would also like to remind our users if you really enjoy driving and handling and you would like to experience the acceleration of ET5 within four seconds, then of course you can go with the performance tire but if you care more about the drive range then it's better for you to go with the long-range tire which will have a much better performance when it comes to the range.

(Spoken in Chinese).

As there are no further questions, now I'd like to turn the call back over to the Company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact NIO's Investor Relations team through the contact information provided on our website. This concludes the conference call. You may now disconnect your line. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.