蔚來 (NIO) 2021 Q2 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated second quarter 2021 earnings conference call. At this time, all participants are in a listen only mode. Today's conference is being recorded. I will turn the call over to your host, Ms. Eve Tang, Investor Relations of the Company. Please go ahead, Eve.

Good morning and good evening, everyone. Welcome to NIO's second quarter 2021 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, VP of Finance; and Ms. Jade Wei, AVP of Capital Markets and the Investor Relations.

Before we continue, please be kindly reminded that today's discussion will contain forward looking statements made under the Safe Harbor provisions of the US 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 US Securities and Exchange Commission.

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 include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial matters. 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 second quarter, 2021 earnings call. In the second quarter of 2021, NIO delivered 21,896 ES8s, ES6s and EC6s, a new quarterly record representing a strong increase of 111.9% year-over-year.

In July, NIO delivered 7,931 vehicles, representing a strong 124.5% growth from last year. All three models have achieved solid performance in the premium SUV market.

According to the data published by China Passenger Car Association, in the first half of 2021, the penetration rate of the battery electric vehicles has reached 8.4% in China. NIO's penetration in the tier 1 and the tier 2 cities in China has been growing at a much faster pace.

In Shanghai, the first half of this year has witnessed our penetration in the premium SUV segment, reaching 13.7% among all ICE and electric vehicles.

Our monthly order intake keeps growing but the delivery volume will be determined by the overall capacity of the supply chain. We expect the total delivery in the third quarter to be between 23,000 and 25,000 vehicles.

In terms of our gross margins, we have achieved a steady performance with vehicle gross margin and overall gross margin standing at 20.3% and 18.6% respectively.

Next, I'd like to share with you some recent operational highlights of the Company. Since the first validation build of ET7 rolled off the production line in May, a series of rigorous tests of vehicle functionality, performance and homologation have been kicked off. We are very confident with the on-time delivery of ET7 next year.

Meanwhile the development of NAD, NIO's new generation autonomous driving system, is also advancing smoothly. We believe that NAD will deliver the best experience of autonomous driving and lead the charge of autonomous driving technology development in the industry.

In 2022, we plan to deliver three new products based on NIO Technology Platform 2.0, including ET7. Our teams are devoting every effort to press forward the development of the new products.

In the meantime, we are also constantly optimizing and upgrading the NIO Technology Platform 1.0 to strengthen the competitiveness of our current three models.

In late August, we will release a NIO OS 3.0, which will roll out with a fresh new look of UI/UX design, new features and further optimization of the existing functions. Through continuous over-the-air updates, the functionality and experience of NIO Pilot have also been improved. As a result, more and more users have chosen and enjoyed NIO Pilot. In the second quarter, the take rate of the NIO Pilot exceeded 80%. As of July, NIO Pilot has been engaged for a total of over 200 million kilometers.

In terms of production capacity, despite the semi-conductor supply volatilities in the second quarter, with joint efforts of the teams and our the partners, the production and delivery have met expectations in the quarter.

Since July, the COVID-19 pandemic and extreme weather events have posed a series of challenges to the global supply chain. The most recent COVID situation in certain regions in China have already affected our production. We will continue to work closely with our supply chain partners to minimize the impact on the production and the delivery in the third quarter.

With regard to the sales and the service network, we now have 25 NIO Houses and 243 NIO Spaces in 128 cities in China. We will continue to deploy our NIO Houses and NIO Spaces, improve operational efficiency and quality and expand our sales network coverage to quickly build our presence in the tier 2 and tier 3 cities.

As of now, we have set up 36 NIO service centers and 171 authorized service centers in 133 cities. We will further increase the number of service centers to meet the rapidly growing user service demand.

Up until now, we have deployed 361 swap stations in 103 cities and completed over three million battery swaps for our users. In July, we announced NIO Power's battery swap station deployment plan by 2025.

We plan to increase the total number of battery swap stations to over 700 by the end of 2021, and to over 4000 globally by the end of 2025.

On the other hand, we are also expanding our NIO Power charging and the destination charging network. As of now, we have established over 238 power charging stations and installed 2416 destination chargers in China.

With the accelerated deployment of the charging and the swapping network and deepening understanding of BaaS, more and more people can truly experience and recognize the benefits of battery swapping and BaaS which has attracted more users to choose Battery as a Service.

On the front of the global market, the Norway market entry has been progressing as planned. The first batch of ES8s has been shipped and is expected to arrive in Norway in mid or late August to be ready for the pre-order and delivery in September.

Starting from September, NIO App, NIO Life, NIO House, NIO Power, it's a chargeable, swappable and upgradable service system. NIO Service Center and Delivery Center will gradually become available to users in Norway.

As a user enterprise, our users are playing an increasingly important role in the NIO community. The preparation for NIO Day 2021 has been kicked off with the active participation of our users, Suzhou, out of 10 candidate cities has been voted to be the host city of this year's NIO Day.

Our user community has also joined us in making a positive difference in the world. In July, the city of Zhengzhou and a few places in Henan Province were hit by heavy rainfalls and floods. NIO dispatched its service resources nationwide to support users in Henan, provided real-time usable charging power information to both NIO users and the users of other EV brands and supported the disaster response and relief work with donation and the special purpose fund of a NIO User Trust.

2021 is a critical year for NIO to lay a solid foundation for its long-term development. Going forward into the second half of 2021, we will accelerate the pace of new products and full stack technology development; enhance our charging and swapping networks as well as the sales and service network to be fully prepared for the delivery of the three new models in 2022.

At the same time we also stepped up our mass-market entry preparation. We will enter the mass market with a new brand. The core team of the new brand has been assembled, marking the first step of the strategic initiative of NIO.

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 quarter. Steven, please go ahead.

Thank you William. I will now go over our key financial results for the second quarter of 2021. To be mindful of the length of this call I encourage listeners to refer to our earnings press release which is posted online for additional details.

Our total revenues in the second quarter were RMB8.45 billion, or $1.31 billion. Representing an increase of 127.2% year-over-year, and an increase of 5.8% quarter-over-quarter. Our total revenues are made up of two parts: vehicle sales and other sales.

Vehicle sales in the second quarter were RMB7.91 billion, or $1.23 billion, accounting for 94% of total revenues in this quarter. It represented an increase of 127% year-over-year, an increase of 6.8% quarter-on-quarter. The increase in vehicle sales year-on-year was mainly attributed to higher deliveries achieved from more product mix offered to our users. The increase in vehicle sales quarter-over-quarter was mainly due to higher deliveries.

Other sales in the second quarter were RMB536.2 million, or $83.1 million. Representing an increase of 130.3% year-over-year, and a decrease of 7% quarter-over-quarter. The increase in other sales year-over-year was in line with the incremental vehicle sales in the second quarter of 2021. The decrease in other sales quarter-over-quarter was mainly due to the less revenues derived from 100kWh battery upgrade service.

Cost of sales in the second quarter was RMB6.87 billion, or $1.06 billion. Representing an increase of 101.8% year-over-year, an increase 6.9% quarter-over-quarter. The increase in the cost of sales was in line with revenue growth, which was mainly driven by the increase of vehicle delivery volume in the second quarter of 2021.

Gross profit in the second quarter was RMB1.57 billion, or $0.24 billion. Representing an increase of 402.7% from the same quarter of 2020, an increase of 1.2% from the first quarter of 2021. The increase in gross profit was mainly contributed by increased vehicle sales.

Gross margin in the second quarter was 18.6%, compared with 8.4% in the same quarter of 2020 and 19.5% in the first quarter of 2021. The increase of gross margin compared to the second quarter of 2020 was mainly driven by the increase of vehicle margin in the second quarter of 2021. Gross margin remained relatively stable compared to the first quarter of 2021.

More specifically, vehicle margin in the second quarter was 20.3%, compared with 9.7% in the same quarter of 2020, and 21.2% in the first quarter of 2021. The increase of vehicle margin year-over-year was mainly driven by the increase of vehicle delivery volume, higher average selling price, as well as lower material cost. Vehicle margin remained relatively stable quarter-over-quarter.

R&D expenses in the second quarter were RMB883.7 million, or $136.9 million. Representing an increase of 62.1% year-over-year, an increase of 28.7% quarter-over-quarter. The increase of R&D expenses year-over-year and quarter-over-quarter was mainly attributed to incremental design and development costs for new products and technologies. As well as the increased number of employees in research and development functions.

SG&A expenses in the second quarter were RMB1.5 billion, or $0.23 billion. Representing an increase of 59.9% year-over-year, an increase of 25.1% quarter-over-quarter. The increase in SG&A expenses year-over-year was primarily due to the increased marketing activities, as well as the increased number of employees in sales and service functions. The increase in SG&A expenses quarter-over-quarter was primarily due to the increased marketing and promotional activities and professional services.

Loss from operations in the second quarter was RMB763.3 million, or $118.2 million. Representing a decrease of 34.2% year-over-year, an increase of 158% quarter-over-quarter.

Share-based compensation expenses in the second were RMB251.4 million, or $38.9 million. Representing an increase of 455% year-over-year, an increase of 160.5% quarter-over-quarter. The increase in shared-based compensation expenses was primarily attributed to additional options and restricted shares granted.

Net loss in the second quarter was RMB587.2 million, or $90.9 million. Representing a decrease of 50.1% year-over-year, an increase of 30.2% quarter-over-quarter.

Net loss attributable to NIO's ordinary shareholders in the second quarter was RMB659.3 million, or $102.1 million. Representing a decrease of 45.4% year-over-year, and a decrease of 86.5% quarter-over-quarter in the second quarter of 2021.

Basic and diluted net loss per ADS in the second quarter were both RMB0.42, or $0.07 per ADS. Excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB0.21, or $0.03 per ADS.

Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB48.3 billion, or $7.5 billion, as of June 30, 2021.

Now for our business outlook. As William mentioned, for the third quarter of 2021, the Company expects deliveries to be between 23,000 vehicles and 25,000 vehicles. Representing an increase of approximately 88.4% to 104.8% from the same quarter of 2020, an increase of approximately 5% to 14.2% from the second quarter of 2021.

The Company also expects the total revenues of the third quarter of 2021 to be between RMB8.91 billion and RMB9.63 billion. Representing an increase of approximately 96.9% to 112.8% from the same quarter of 2020, an increase of approximately 5.5% to 14% from the second quarter of 2021.

This business outlook reflects the Company's current and preliminary view on the business situation and market condition, which is subject to change.

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

Thank you so much. (Operator Instructions) Our first question comes from the line of Tim Hsiao from MS. Tim, your line is now open.

Hi William, Steven and Team. Congratulations on the results, and thanks for taking my questions. Just a quick question from me. The first question is about the new models. Could you please elaborate a bit more about the two new models scheduled for 2022, other than ET7? Regarding the timing, spec and rough price range, etc.. As market previously anticipate to have just one new model next year, so I think this serves as a surprise. So any colors would be highly appreciated. So there's that first question.

My second question is that NIO's total battery consumptions likely reaching 16 gigawatt or 18 gigawatt hours next year, will there be any major changes to NIO's battery sourcing strategy? Will CATL stays as the sole supplier? Or NIO might consider looking for a second source?

In light of such a close tied-up with CATL, between CATL and NIO, for both EV and the battery asset management company, can you diversify to other partners to hedge the risk if needed? Those are my two questions, thank you.

(Interpreted) I believe everybody knows that the NIO Technology 2.0 is going to be first applied to ET7. The current development progress of ET7 and NAD is on track. We are quite confident about on-time delivery of ET7 next year, although the challenges are quite significant. For the other two products, I believe it probably is better for me to share more information at a more appropriate time.

Regarding the pricing, of course in recent years the battery cost has declined a little bit and as our volume goes up, our BOM cost will also have some opportunity to go down.

So for the next years' products, we probably will have one of the lowest pricing product under the NIO brand, but as I explained before, we are going to have a new brand for the mass market, so under the NIO brand we are not going to have many low pricing products.

Next year we believe the demand for the battery capacity is going to go up significantly, especially considering the new product line up. We believe the battery production capacity demand is going to jump significantly compared with this year. We are having intense discussions with CATL regarding the battery capacity supply.

Currently we believe CATL is a very good and important partner for us and we also have a very good relationship with CATL. We have very in-depth discussions regarding the battery technology as well as the battery production assurance. So we believe that this current strategy can serve the best interests of the Company at the current stage of development.

Thank you. Oh, very clear.

Thank you so much. Your next question comes from the line of Ming-Hsun Lee from BofA Securities. Ming, your line is now open.

Thank you. Good morning William, Steven and the team. Congrats for a good result. So I have two questions. The first question is regarding the component supply. We know you already have more larger size battery supply starting in June, but right now considering the pandemic in China and also overseas countries such as Malaysia, so what kind of impact do you expect on the production side, so especially for your component supply capacity?

So this is my question, the first question, and the second question is regarding your business in overseas markets. So in your third quarter of volume guidance, how many units do you expect to ship in Norway and will you start to provide battery service in overseas markets? Yes, that's my two questions, thank you.

(Interpreted) Yes, the pandemic situation is affecting the global supply chain. Last year I believe our supply chain partners and NIO have been trained significantly to cope with these kinds of challenges. In my prepared remarks I have also mentioned over the recent COVID situations in certain regions in China have affected our production. Specifically, is a just-in-time component partner located in Nanjing's high-risk area.

This partner has already suspended their production and we have seen some good news is coming out of Nanjing. It seems that the COVID cases in Nanjing has already dropped to zero so we hope this partner can resume the production as soon as possible.

The third quarter delivery volume will mainly be determined by the overall capacity of the supply chain, so there will be a lot of challenges that we need to deal with. For example, you also mentioned about the pandemic situation in Malaysia.

This has also affected the semiconductor supply to the global market, not just for NIO but also many other companies. But the pandemic situation in Malaysia, basically we believe that the impact for us is not that big and it should be under control.

Another situation is the flood in Germany. Our partner is also affected in the flooding because one factory is flooded during the extreme weather event in Germany and our partners have been working with us to identify the solution. Right now we believe that the situation is under control so overall speaking, the delivery volume in the third quarter will mainly be restrained by the overall capacity of the supply chain.

Regarding the delivery in Norway, we believe for this year the contribution is not going to be that significant because our priority is to make sure we can ensure high user satisfaction in the Norway market by building our brand, expanding our sales and service network.

For the global market, we believe the more important thing is to focus on the long term thinking and we would like to ask everyone's patience in this regard. Recently we have been working together with our prospective users in Norway to set up a user advisory.

They have helped us significantly and provided many constructive and good feedback to us. So we believe this is a very good beginning for us and this is part of our long term strategy for the global market.

Thank you, Ming.

Of course in global market, we also offer our BaaS model, because we believe BaaS together with battery swap can offer user a very holistic experience and combined together in a very efficient way for our users to get the cars charged at home and on the go.

(Interpreted) According to the preliminary feedback we got from the Norway User Advisory Board, it seems that everyone is quite excited about the battery swapping stations and the battery as a service business model.

Thank you.

Thank you so much. (Operator Instructions) Your next question comes from the line of Nick Lai from JP Morgan. Nick, your line is now open.

Yes, thank you William and Steven. A great result indeed. I have two number related questions. The first one is related to gross profit margin. I mean your 2Q against 1Q, roughly margin was flat but still, at the vehicle level or overall GP margin you were still down roughly about one percentage point.

Can you help us understand or explain a little bit more on the margin, less margin, (inaudible) for in 2Q? Is that related to BOM or improved material price or other factors? I mean I notice the second quarter ASP is slightly down from 1Q.

And how should we think about 3Q? So that's one margin related question. Can you help us understand a bit more or explain a bit more on 2Q margin dynamic against 1Q and how should we think about that as we enter third quarter?

Second question also related to number, looking at the cash on balance sheet, altogether cash equivalent and short-term investment, by the end of first half we have RMB48 billion cash, that's roughly about $7.5 billion and that's a lot of cash on balance sheet. If you can help us understand what's your strategy using the cash on balance sheet?

In terms of CapEx investment, I notice JAC has new capacity for expansion and presumably if we are launching more model in 2022, we will need to invest in R&D, new model tooling altogether. So if you can help us understand a bit more on our CapEx investment in the next one year or so, that would be very useful. Thank you.

Hi Nick, this is Stanley. Regarding your first question about the gross profit margin, there are two reasons when we breakdown into digitals. The first is average selling price decreased about 8000 per vehicle in Q2. The main reason is more ES6 were sold in Q2 compared with Q1.

Since ES6 is with a little bit lower gross profit margin and selling price. But due to our cost-saving efforts in Q2, the average vehicle cost also decreased about RMB3000 per vehicle. So combining the two factors together, our net gross profit margin per vehicle decreased about RMB5000. Okay that's the reason for the vehicle margin.

Today we announced three brand-new products that we will deliver in 2022 and we also refreshed our product plan. For the conservative perspective, we shortened our depreciation and amortizing period for our existing products. So that will lead to the D&A increase, so for the second half year of 2021, this impact to gross profit margin will be like 2% per vehicle.

So yes, that's the first question. The second one is regarding the cash balance. As you mentioned, the cash balance at the end of Q2 is RMB48 billion. As we mentioned, we will still focus on the research and development of our new products and technologies, and about the other usage, we will also increase our CapEx investment in including our new plant and new sales and marketing network infrastructure in the coming years.

So it will be in line with our business plan in the next years.

Yes, can you remind what CapEx target for the year? Do we have any number or guidance please?

Yes we expect the total CapEx in this year will be RMB5 billion, including like the new plant and also the service and sales network and also power swap station.

Yes, thank you very much.

Thank you so much.

Thank you Nick.

Thank you Nick.

Thank you so much and the next question comes from the line of Bin Wang from Credit Suisse. Bin, your line is now open.

Okay, thank you so much. My first one is more a follow up about gross margin. Because you guided NIO Pilot has been increased quite substantially in the attach rate to 80%. What's the number in the first quarter and what's the margin increase from this increasing NIO Pilot take rate? That is the number one question.

Number two is about your long term market share, because your peers, one peer is now 10% and the other one 20%. What's the NIO's plan for 2025 for the market share? Because you have a mass market plan.

Can I assume that the mass market plan will start to sell in 2023 because this year three products seem to be all came from NIO brand and because you're already accelerate the R&D since now so it's going to be 2023. That is the second one.

The third one is about your offline store station plan. If you see your peers who actually get more strategic cooperation with the big dealer group such as ZhongSheng, your existing pattern for NIO space is to be buy back by NIO. So this would mean in long term maybe NIO don't have any third party partners for NIO Space. Is this true? What's your long term strategy about the offline store expansion plan? Thank you.

(Interpreted) So regarding the margin contribution for the NIO Pilot, as we mentioned, the take rate of NIO Pilot has reached 80%. For this 80%, it includes both the selected pack and the full pack of the NIO Pilot. So we believe the overall contribution from the NIO Pilot is around 3% to 4%.

Yes, since NIO Pilot, the price of NIO Pilot is included in the selling price of vehicles. So we have no separate gross profit margin calculation for the NIO Pilot. Yes.

(Interpreted) For the NAD, because we're going to use the AD as a service model to provide the NAD services to our users. Long term speaking, we believe the AD as a service contribution is going to be included in our margin and the long term plan for the margin of the NT 2.0 is going to be much better than the margin of the NT 1.0.

For the vehicle gross margin, we believe the target for us in the long run is 25% excluding the carbon credits. Because the carbon credits should be included other margins and we believe the logic of other margin is about the instore base or the instore base of users.

For the long run it will get better, considering the future possibilities and opportunities including AD as a service, battery as a service, upgrade and NIO life, carbon credit. So we believe overall speaking, the overall gross margin and the vehicle gross margin will improve.

Regarding the long term target of the market share, for us of course we pay attention to our specific market share or the penetration in the corresponding segment of our products. So for example the ES8 in the large and midsize SUV market segment and the ES6 in the midsize SUV segment.

Internally of course we have a very aggressive market share target by 2025, but we don't actually want to disclose this target. For us, we believe our target as a company should be to build a company with the highest user satisfaction rate. So that is why our focus is on the product and service.

We believe if we can achieve the highest user satisfaction rate with our product and service, then it should be a natural thing for us to achieve satisfactory market share. In the China market, so I would like to talk a little bit about the battery electric SUV premium market segment.

For this segment, I would like to emphasize a little bit about the pricing. Because when we compare the specific sales volume of one brand or one product, I think it does not make sense to compare those kind of metrics without thinking about the specific pricing segment.

For example it does not make sense for us to compare the sales volume of Wuling MINI EV with the sales volumes of NIO because we don't have the same pricing and we don't actually compete in the same segment. In our specific pricing segment, we have companies like Audi, BMW, Mercedes and for Tesla, they also have Model S and Model X and Model Y.

So, in this specific pricing segment overall market share has already exceeded the 50%. So, we are quite confident to further improve our market share in this specific segment.

In Shanghai, as I mentioned before, in the premium SUV segment, including the ICEs and the electric vehicles, we have already reached close to 14% market penetration in the first half of this year. This is already quite high, and we have already achieved this in the Tier 1 cities. So, we believe this is a very good indicator for our next step to penetrating to more markets in different cities.

So, because, as I mentioned, our focus is to make sure we have the best product and the services and to achieve the highest user satisfaction. So, we believe, as long as we stick to this vision and to this objective, it should be a natural process to achieve our market share target in the long run.

Yes, from the second-half of 2019 to the first half of 2020, we have tried NIO Space partner approach. We believe the NIO Space partners have contributed to our expansion of the sales network and the sales volume growth. But right now, when we look at the overall brand and the management complexity, we believe it makes more sense for us to manage the NIO Spaces by ourselves.

So, starting from the third quarter of 2020, we have changed this strategy and we would like to make sure for the NIO Spaces that we can manage and build by NIO. So, we discussed with our NIO Space partners and reached agreements with the majority of the NIO Space partners to transform their NIO Spaces to the NIO Spaces operated by NIO.

So, the majority of the NIO Space partners have already signed the agreement with us and for the rest of the NIO Space partners, we will continue the cooperation with them until the termination of the contract. For all the new NIO Spaces, these are all built and operated by NIO.

Thank you, Bin.

Thank you. By the way, can you answer the question about whether it will be 2023 for the new mass market brand business? Thank you.

(Interpreted) Yes. Regarding the launch of the mass market products, of course, our R&D efficiency is quite high and I believe this is the common standing of everyone.

NIO has been able to launch products one after another in a very fast manner, so for the mass market brand, this is part of our long-term thinking and we believe that the efficiency and the speed of the product launch is going to be probably even faster, built on top of the capabilities that we have already accumulated under the NIO brand.

But regarding the specific timing and the launch cadence of those products under the mass market brand, we can still have time to decide, based on the market conditions and the R&D progress of those products. So, we believe it is still too early for us to share this information for now.

Thank you.

Thank you.

Operator: Thank you so much. Your next question comes from the line of Chang Liu, from CICC. Chang, your line's now open.

Yes. Thank you for taking my questions. My first question is about R&D. We know that there is fierce competition in acquiring talent people in autonomous driving development. So, could you share with us NIO's advantages in acquiring them?

More in details, could you show us our current team size of AD development and our targeted team size? Is there any updates on our R&D expenditure for this year? My third question is that could you update the take rate of BaaS and the new Pilot for us? Thank you.

(Interpreted) Thank you for your question. AD is a very important R&D initiative for us and we are quite decisive to make investment in autonomous driving technology and organization.

Our autonomous driving organization is quite different from other companies, so probably because we have four VPs that report directly to me personally. So, as you can see that the autonomous driving is not just one department, it's actually an initiative of overall Company.

We have teams focusing on hardware, autonomous driving system, autonomous driving algorithm and the autonomous driving operation, so we believe that this is not just the efforts of one AD department. We will need to leverage all the capabilities that we have across the Company.

Right now, for our AD department, we have around 500 people. By the end of this year, we expect to have additional 300 to 800 people for the AD team. We will continue to make a decisive investment in autonomous driving technology and the talent acquisition.

Starting from 2016, we have already built our ADAS team and autonomous driving team. NIO is the first company to have a mass production of the EyeQ4 chipset. We have built our domain controller, the autonomous driving system inhouse right from day one. So, we have already accumulated many experiences and capabilities in this regard.

Starting from last year, the main focus for us is to build up the capabilities in terms of the autonomous driving algorithm and the computer vision. We believe that right now we have already built a very strong team.

Regarding the R&D expenses, starting from the second quarter we have accelerated our research and development in the Company. As I mentioned, in 2022, we're going to deliver three new products. In 2023 and beyond probably we're going to deliver even more products.

I believe NIO is the fastest company in the industry to deliver products to the market. Averagely speaking, the R&D timeline for us is around two years, which is already the fastest in the auto industry.

This year we have already kicked off many different R&D programs. Starting from the third quarter of this year we believe we are going to step up our R&D expenses due to the team size and the programs that we have in the R&D pipeline. So previously we also mentioned that the R&D expenses in 2021 should be around RMB5 billion. We would like to see this RMB5 billion spent on according to the plan, because this shows that our R&D progress is actually on track.

So the current focus of us is to build up our R&D team and then make sure all the development, the projects is on track according to the plan. We believe probably by the end of this year the size of our R&D team is going to be doubled, compared with the size last year.

The take rate of Battery as a Service in July has reached 60% and is growing month-over month. Previously I have also mentioned the take rate of NIO Pilot has reached 80%, including the selected package and the full package. So overall speaking the take rate of BaaS on the NIO Pilot is on the rise.

Yes, thank you.

Thank you, Chang.

Thank you so much. Your next question comes from the line of Edison Yu from Deutsche Bank. Edison, your line is now open.

Thank you for taking our questions. I have two follow-ups on Europe. First, it seems there is quite a bit of hiring going on in the Netherlands and a little bit in Germany. Could you maybe discuss the next phase of Europe after Norway?

Then second question on Europe, it's very encouraging to see this User Advisory Board. Could you maybe discuss some of the things that you're doing differently in Europe relative to what's been going on in China? Thanks.

I wanted to share some numbers with our investors. First in Norway, our team size has already increased to 40 employees in Norway. Of course Norway is only our first stop to go overseas, to go global. So in the following years we will also entered other European countries and also other regions. So that's why we're continuing to hire more people in Amsterdam.

William Bin Li (Interpreted) On another point, starting actually in the second quarter of this year we have appointed the CEO of NIO Europe. He is already on board and he has been building up the team for NIO Europe. Of course we are going to enter more markets in Europe, including Germany.

For most of the products we are going to deliver to Europe is going to be based on the NIO Technology Platform 2.0, except the ES8. So this is our current strategy for the European market.

So for NIO as a user enterprise when we enter the markets or different regions we have always believed that the user participation and the supports is a very important principle that we should uphold. Of course for different markets they have different cultures, different environment, different use cases. We wanted to adapt to those different expectations.

But we believe the user community and the user enterprise concept should apply to over all markets in the world. Because our vision is to make sure that we can put the user experience and the user interest first. This is a general principle for us.

A very interesting fact that I would like to share with you is that in Norway when we initiated the User Advisory Board we thought that probably we should have around 200 people. But in the end 700 people to 800 people signed up to the User Advisory Board.

So from this example we can see that actually the Norwegian people are quite willing to participate in those community events.

Because previously through the media reports and other literatures they think that the Norwegian people are more cautious toward socializing with other peoples. But this example has proven this is the wrong interpretation, or the wrong stereotype, of the Norwegian people. We believe that the user community concept should apply to all people in the world.

Thank you Edison.

Thank you.

Thank you so much. Your next question comes from the line of Paul Gong from UBS. Paul, your line is now open.

Yes, thanks everyone. I have two questions. The first question is regarding your plan to add the three new models based on the NT2 in 2022. Given most of the NIO Space can't put six models together. Will you try to expand the average size of your NIO Space? Or are you going to gradually phase out the existing first generation of the products?

I've just note, you mentioned that you have shortened the depreciation and amortization of the first generation of your products. Does that mean it would be gradually phased out and migrated to the second generation of the platform? This is my first question.

My second question is regarding the mass market brand. I understand at this moment you are still pending decision in terms of the timing and how to position itself. But can we have a little bit of color, when you think about the relationship of NIO brand versus your NIO mass market brand. Would it be more similar to, let's say, Mercedes Benz and the Smart? Or BMW and Mini? Or Audi versus, say, Volkswagen brand?

How do you think about the relationship of the two brands? I recall in last quarter's result you mentioned that there is only one model in the Shanghai auto show that is Wuling Hongguang MINIEV version. Is that an indication that somehow the recent online discussions say NIO's mass market brand would also announce some tiny, small vehicles? Is it something you are bearing in mind at this moment? Thank you.

(Interpreted) Overall speaking we understand that different companies will have different strategies regarding their product offering. We would like to offer more diversified choices to our users. But we also need to strike a balance because we are not going to like the traditional OEMs to launch a sea of products for the users to choose from. We are also not going to like other companies as to just offer two-to-three products for the users to choose.

We believe different users will have different preferences and tastes regarding the body type of the design, so that is why we would like to offer a limited but diversified product offering to our users. We understand the era of Modal T happened 100 years ago and right now, the time and ages are quite different for us. That is why it's our strategy.

Regarding the product and the NIO Houses and the NIO Spaces, of course we are going to adopt the digital technologies or probably use the rotation mechanism to make sure users can still experience a product in the NIO Houses and the NIO Spaces. But according to the current data we have right now, it seems that the majority of the users actually place their orders online, so we believe this is not going to pose a significant issue for us.

Regarding the NIO Technology Platform 1.0. We understand of a current product based on the NT1.0 is actually quite competitive when compared with Audi, BMW. For example, their EV products, I believe our offer products are still quite competitive. When it comes to their ICE product, I think our product actually does not belong to the same generation with their ICE product.

For the NIO Technology Platform 1.0 product,-- we believe that they are still quite competitive, and we will continue to sell those products in the market. Regarding the three new products we are going to deliver in 2022, we believe this is not going to affect the upgrade pace, or the normal upgrade pace of the products on the NIO Technology Platform 1.0.

But just now, Stanley has also mentioned that we have taken a more prudent approach to shorten the depreciation and amortization period for the NIO Technology Platform 1.0. This also shows that in the future we are going to upgrade our products on the NT 1.0.

I believe you have a very good question, and you made a very good comparison. Yes, if we just take the positioning of the NIO brand and the new mass market brand, a simple comparison is going to be more like the relationship between Audi and Volkswagen, and Lexus with Toyota. But this is more about the positioning of these two new brands. Of course, we're not going to enter the segment of Wuling Hongguang. We believe that they have already done a very good job in their specific segment. We would like to do something different and offer different products for the mass market. Basically, our thinking is that we would like to launch a product that can have a competitive pricing compared with Tesla's product, but have much better products and services.

Better, it's much better. Better. Much better service, much better products.

(Interpreted) And have better products and much better services compared with Tesla.

Thank you very much. Very helpful. Thank you.

Thank you so much. And your next question comes from the line of Jeff Chung from Citi. Jeff your line is now open.

Hi, hello William and Steven. Great results. I have three questions. One is about the ET7. If this price is being set above RMB400,000, can we say that the GP margin should be much higher than the current level, let's say around 30-35% level of GP margin which is a potential.

And secondly, it is about the export margin, so let's say if the scale reaches like 2000 to 3000 units a month, can we say that that is GP margin accretive because we heard that exports to overseas ASP could be much higher. Could you give us a little bit of color or do you think the export margins with be similar than the China domestic?

That is the first area, and the second question is about the D&A as you just mentioned it is going to accelerate into the second half of the year. I just heard you said that that equivalent to the cost per car to increase by about three percent, right? Can I clarify this a little bit? Will this be mainly reflected in the GP margin or the EBIT margin.

And finally, it's about the R&D and SG&A. Previously we expected this year's R&D to be around RMB5.2 billion; SG&A around -- about RMB6 billion. Going forward in the 2022, do you see that there could be still a potential that this cost should be increasing faster than our revenue growth? And when do you think this cost growth will be slower than our revenue growth? Will is start from 2023 or 2024? That's my three questions, thank you.

(Interpreted) Thank you for your question, Jeff. Overall speaking for the gross margin target previously I have also mentioned that on the NIO Technology Platform 2.0, the vehicle gross margin target should be at the level of 25%.

From the current data we gathered, it seems that the ET7 should be able to reach this target. But the actual vehicle gross margin of ET7 will need to be validated until the mass production and the delivery of ET7 to our users.

So, for the other products or for the product on the NIO Technology Platform 2.0, including ET7, it will probably meet the 25% vehicle gross margin level. This is the overall target for us. For the other margins, just like I explained that we have AD as a service and NIO life, battery as a Service, upgrade and the swapping services, all these are included in the other margins. So, this will also contribute to the improvement of other margins.

For the export business, our current strategy is that we would like to have a global pricing. But for the specific of pricing in different markets, it will vary a little bit, considering the tax and the tariffs in different countries.

Yes. We accelerated our depreciation and amortization for the fixed assets for NT 1 products. That will be booked in the cost per vehicle. So, gross profit margin, starting from Q3, will decrease by 2%, as I mentioned in prior questions, yes.

Okay. Also, Jeff, with regard to expense ratio, we believe from now on the next 12 months is a very decisive window for us to accelerate our product development and our service and the charging infrastructure deployment. However, from the second half of 2022, our economy of scale will gradually manifest and our expense ratio will start to decline again.

Okay. Thank you. Thank you, Steven, thank you, William.

Operator: Thank you so much. 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, the Investor Relations team, through the contact information provided on our website. This concludes the conference call. You may now disconnect your line. Thank you.

Thank you.

Operator: That does conclude our conference for today. Thank you for participating. You may all now disconnect.