NIO Inc. Q1 FY2021 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated’s First Quarter 2021 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 and Investor Relations. Please go ahead, Eve.

Good morning, and good evening, everyone. Welcome to NIO’s first 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 the Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; Mr. Stanley Qu, VP of Finance; and Ms. Jade Wei, AVP of Capital Markets and 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 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 company does not assume any obligation to update any forward-looking statements, except as required under the 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 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.

Hello, everyone. Thank you for joining NIO’s 2021 Q1 earnings call. In the first quarter of 2021, NIO delivered 20,060 ES8, ES6, and EC6, representing a strong year-over-year growth of 422.7% and a solid quarter-over-quarter growth of 15.6%. All three models have achieved outstanding results in their respective segments, especially the EC6. With its comprehensive performance, streamlined silhouette, and superior digital experience, the EC6 has outperformed other competitors in the coupe SUV segment and has been well received among users, especially the younger audience. On April 7, 2021, over 100,000 production vehicles rolled off the line. It took NIO 26 months to reach the first 50,000 vehicles, but only nine months for the second 50,000. Together with our users, NIO has set a new speed record for delivering the first vehicle to 100,000 vehicles among premium auto brands. Driven by growing brand awareness, a competitive product portfolio, industry-leading technologies, outstanding services, and innovative business models, NIO has gained increasing recognition and support from our users. Our order momentum remains robust, although the risk of a global chip shortage still looms large in the second quarter. Despite these challenges, we expect to deliver between 20,000 and 22,000 vehicles in the second quarter. In terms of gross margin, we benefited from higher deliveries and solid average selling price. The vehicle gross margin reached 21.2%, while the overall gross margin increased to 19.5% in the first quarter. Building on the positive operating cash flow from the full year of 2020, we have continued to achieve positive cash flow from operating activities in the first quarter of 2021 while steadily improving operational and overall system efficiencies. We remain committed to increasing our investments in research and development and are determined to accelerate the deployment of our swapping and charging network, as well as our offline service channels. Next, I would like to share some recent key operational highlights of the company. After the launch of the ET7, our first flagship smart electric sedan at NIO Day, it has attracted significant attention from the market and industry. Our teams are fully focused and devoted to the production and testing of the ET7. On April 2, the first body-in-white of the ET7 rolled off the production line at the Hefei Manufacturing Centre. On April 19, the interior of the ET7 was unveiled at the Shanghai Auto Show, showcasing its second living room design concept, which has been well received by the media and public. On April 15, we launched the Power Swap Station 2.0, which can significantly enhance its service capacity to up to 312 swaps per day by shortening battery swapping time and carrying up to 13 battery packs. To further improve the swapping experience, we upgraded and optimized all NIO Pilot features based on the Power Swap Station 2.0 in NIO OS 2.10.0, released to users in April, enabling an automatic, one-click, park-and-swap experience without exiting the vehicle during the entire swapping process. All new users can enjoy this feature once they update their vehicle operating system. As part of NIO’s comprehensive charging and swapping network, the Power Swap Station 2.0 will be gradually deployed nationwide in China. NIO has developed an innovative battery subscription model based on vehicle battery separation, enabling chargeable, swappable, and upgradeable batteries. As more users become familiar with the benefits of Battery as a Service (BaaS) and more battery pack options become available, BaaS has grown in popularity. We believe that BaaS and NIO’s expanding charging and swapping network will enhance the electric vehicle ownership experience and attract more users to choose electric vehicles. Since its launch, the 100-kilowatt-hour battery pack has been eagerly welcomed by our users, surpassing our expectations for adoption. As of April 16, over 10,000 users have utilized the 100-kilowatt-hour battery pack. On April 18, we officially began offering flexible upgrades to the 100-kilowatt-hour battery pack for reservation, with the service available for users starting in June. In terms of production capacity, in late March and early April, due to a shortage of semiconductors, the JAC-NIO factory halted production for five working days, which negatively affected our production and delivery in April. In the second quarter, we anticipate that challenges to overall supply chain production capacity will persist. Despite the volatile environment, we are diligently working with our partners to secure supply chain resources. During the production downtime and holiday periods, we and our partners have modified our production lines to prepare for the mass production of the ET7. Recently, NIO signed a collaboration framework agreement with the Hefei government and announced plans to jointly build NeoPark, a smart electric vehicle industrial park in Xinqiao. On April 29, 2021, NIO participated in the kickoff ceremony of NeoPark and organized the NIO Partner Conference 2021 in Hefei. NIO aims to collaborate with partners in talent attraction and cultivation, research and development, supply chain, and manufacturing to support the development of smart electric vehicles in Hefei. To further bolster production of NIO’s future models, we will collaborate with our partners to plan and build a new factory in NeoPark. Discussions with our partners regarding the detailed execution plan and cooperation model are ongoing, and we will provide more information at the appropriate time. Regarding our sales and service network, we now have 23 NIO Houses and 211 NIO Spaces covering 123 cities in China. We will continue to strengthen the development of NIO Houses and NIO Spaces to expand our sales network, improve operational efficiency, and enhance brand influence. NIO has established 206 swap stations across 77 cities. We have begun the deployment of Power Swap Station 2.0. Our goal is to have at least 500 battery swap stations operational by the end of this year. Simultaneously, we will increase the availability of Power Chargers, our supercharging stations, and destination chargers. So far, we have deployed over 146 Power Charger stations and 1,826 destination chargers, with plans to increase these numbers to 600 and 15,000 respectively by the end of 2021. On April 15, NIO signed a strategic cooperation agreement with Sinopec to collaboratively build battery charging and swapping infrastructure. This strategic partnership will enhance the efficiency of site selection for NIO’s charging and swapping facilities, improve the user experience of EV ownership, and encourage more gasoline car users to transition to EVs. To further provide improved charging and swapping services to users in Northern China, we announced the Power North Plan at this year’s Shanghai Auto Show. Over the next three years, in the eight northern provinces and autonomous regions, we plan to deploy 100 Power Swap Stations, 120 Power Mobiles, 500 Power Charger stations with over 2,000 Power Chargers, and 10,000 destination chargers. We believe the Power North Plan will notably enhance electric vehicle usage experiences for users in the north and further drive the adoption of smart electric vehicles in those areas. To date, we have 33 NIO service centers and 162 authorized service centers in operation. Along with our commitment to continuously improving operational efficiency, we will keep expanding our after-sales service network and enhance the service operation system. As a user-centric enterprise, the trust and support of our users remain our most valued resources and the driving force behind our growth. At the recently concluded Shanghai Auto Show, 180 user volunteers from various cities collaborated with us to present NIO’s concepts, products, technology, and services to others. Fifteen NIO users joined forces with experts from different industries to host 14 sessions discussing how to cultivate a joyful lifestyle with smart technologies. Many users shared their original artworks at the NIO user museum at our Auto Show booth, showcasing the joyful lifestyle that NIO promotes and embodies. With the backing of our users and the efforts of our teams in 2020, NIO has successfully set the foundation for overall operations and has entered a phase of accelerated development. The year 2021 is crucial for NIO's growth. We will enhance the establishment of our sales and service networks to bolster NIO's brand reputation and provide the best overall experience for NIO users. More importantly, we will continue to make decisive and effective investments in new products and technology research and development to solidify the groundwork for NIO’s long-term growth. As always, thank you for your support. I will now turn the call over to Steven to provide the financial details for the quarter.

Thank you, William. I will now go over our key financial results for the first quarter of 2021. And 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 first quarter were RMB7.98 billion or US$1.22 billion, representing an increase of 481.8% year-over-year, an increase of 20.2% quarter-over-quarter. Our total revenues are made up of two parts: vehicle sales and other sales. Vehicle sale in the first quarter was RMB7.41 billion or US$1.13 billion, accounting for 93% of total revenues in this quarter. It represented an increase of 489.8% year-over-year, an increase of 20% quarter-over-quarter. The increase in vehicle sales year-over-year was mainly attributed to higher deliveries achieved from more product mix offered to our users, the expansion of our sales network since 2020, and the slowdown of vehicle sales in the first quarter of 2020 due to COVID-19 pandemic in China. The increase in vehicle sales quarter-over-quarter was mainly due to higher deliveries and higher average selling price. Other sales in the first quarter were RMB576.5 million or US$88 million, representing an increase of 395.3% year-over-year, an increase of 23.4% quarter-over-quarter. The increase in other sales year-over-year was in line with the incremental vehicle sales in the first quarter of 2021. The increase in other sales quarter-over-quarter was mainly due to the increased revenues derived from the 100-kilowatt-hour battery permanent upgrade service provided since December 2020, partially offset by sales of automotive regulatory credits in the fourth quarter of 2020. Cost of sales in the first quarter was RMB6.43 billion or US$0.98 billion, representing an increase of 317.5% year-over-year, an increase of 16.9% 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 first quarter of 2021. Gross profit in the first quarter was RMB1.55 billion or US$0.24 billion, representing an increase from a gross loss of RMB0.17 billion in the same quarter of 2020, an increase of 36.2% from the fourth quarter of 2020. The increase in gross profit was mainly contributed by increased vehicle sales and increased vehicle margin. Gross margin in the first quarter was 19.5% compared with negative 12.2% in the same quarter of 2020 and 17.2% in the fourth quarter of 2020. The increase in gross margin was mainly driven by the increase in vehicle margin in the first quarter of 2021. More specifically, vehicle margin in the first quarter was 21.2%, compared to negative 7.4% in the same quarter of 2020 and 17.2% in the fourth quarter of 2020. The increase of the vehicle margin year-over-year was mainly driven by the increase of vehicle delivery volume, higher average selling price, as well as lower material costs. The increase of vehicle margin quarter-over-quarter was mainly attributed to the higher take rate of NIO Pilot and the 100-kilowatt-hour battery package. R&D expenses in the first quarter were RMB686.5 million or US$104.8 million, representing an increase of 31.4% year-over-year and a decrease of 17.2% quarter-over-quarter. The increase of R&D expenses year-over-year was mainly attributed to less research and development activities in the first quarter of 2020 due to COVID-19 pandemic in China. The decrease in R&D expenses quarter-over-quarter reflected fluctuations due to different design and development stages with new products and core technologies. SG&A expenses in the first quarter were RMB1.2 billion or US$0.18 billion, representing an increase of 41.1% year-over-year and a decrease of 0.8% 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 in the first quarter of 2021. SG&A expenses remained relatively stable compared to the fourth quarter of 2020. Loss from operations in the first quarter was RMB295.9 million or US$45.2 million, representing a decrease of 81.2% year-over-year and a decrease of 68.2% quarter-over-quarter. Share-based compensation expenses in the first quarter were RMB96.5 million or US$14.7 million, representing an increase of 198.1% year-over-year and an increase of 60.3% quarter-over-quarter. The increase in share-based compensation expenses was primarily attributed to incremental options granted to relatively higher grant date fair values during the period. Net loss in the first quarter was RMB451 million or US$68.8 million, representing a decrease of 73.3% year-on-year and a decrease of 67.5% quarter-over-quarter. Net loss attributable to NIO’s ordinary shareholders in the first quarter was RMB4.88 billion or US$0.74 billion, representing an increase of 183% year-over-year, an increase of 226.7% quarter-over-quarter. In the first quarter of 2021, NIO purchased 3.305% equity interests in NIO China from minority strategic investors and recorded an amount of RMB4.4 billion or US$0.67 billion in accretion of redeemable non-controlling interests to redemption value. Excluding share-based compensation expenses and accretion on redeemable non-controlling interest to redemption value, non-GAAP adjusted net loss attributable to NIO’s ordinary shareholders was RMB354.5 million or US$54.1 million in the first quarter of 2021. Basic and diluted net loss per ADS in the first quarter were both RMB3.14 or US$0.48 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 RMB0.23 or US$0.04 per ADS. Our balance of cash and cash equivalents, restricted cash, and short-term investments was RMB47.5 billion or US$7.3 billion as of March 31, 2021. Additionally, we achieved further cash flow from operating activities for the first quarter of 2021. And now, for our business outlook. As William mentioned, for the second quarter of 2021, the company expects deliveries to be 21,000 to 22,000 vehicles, representing an increase of approximately 103% to 113% from the same quarter of 2020, and an increase of approximately 5% to 10% from the first quarter of 2021. The company also expects the total revenues of the second quarter 2021 to be between RMB8.15 billion and RMB8.50 billion or between US$1.24 billion and US$1.30 billion. This will represent an increase of approximately 119% to 128.7% from the same quarter of 2020, and an increase of approximately 2.1% to 6.5% from the first quarter of 2021. This business outlook reflects the company’s current and preliminary view on the business situation and the market condition, which is subject to change. Now, this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

Our first question comes from Nick Lai. Please go ahead and ask your question.

Good morning, William, Steven, and the management team. Congratulations on the impressive results. I have two simple questions. The first is about gross margin, and the second is regarding the chip shortage, which many investors are concerned about. On gross margin, there is indeed a notable improvement from the fourth quarter of last year to the first quarter of this year. Vehicle margins increased from approximately 17% to 21%. Could you provide some insights into the factors driving this 4 percentage point improvement, specifically how much is attributed to ASP volume versus the impact of raw material prices, batteries, and other costs? My second question pertains to the chip shortage, which is a widespread issue. I understand that the duration of this problem is likely two to three months. Meanwhile, we have adjusted our second quarter sales volume guidance down from the previously mentioned 7,500 per month to about 21,000 to 22,000 for the second quarter. Regarding the chip shortage, do we have any visibility on when we might see an easing of supply, potentially in the third quarter?

Overall speaking, the gross margin in the first quarter of 2021 is higher than our expectation. This is mainly driven by the higher take rate of certain options like the 100-kilowatt-hour battery pack and the NIO Pilot. Additionally, our costs have also decreased somewhat. We believe that the current gross margins around 20% represent a healthy situation for the company’s operations, as we have not reduced prices and we find this level comfortable. However, I would like to caution everyone to manage their expectations because achieving such rapid improvements in gross margin will be quite challenging for us. Nevertheless, I believe there is still potential for further improvement in gross margin, albeit not as significant. We should be cautious about being overly optimistic about these improvements. Currently, reaching a 20% gross margin is quite good for us and has come sooner than we expected. Our primary focus for the company remains on the product and the service. The second question is about the chip shortage. The current situation in the market is quite volatile. And we have been tracking the chip supply every day. This has been a very severe issue for the whole industry supply chain. For example, the fire incident at one factory has caused several days of delays for the chip shortage. And we believe this negative impact is going to kick in around the middle of May, and this is going to affect the whole industry supply chain. We believe such incidents will happen from time to time. That is why we believe the challenge for the whole industry will still be quite big in the following quarters or months. At the beginning of April and at the end of March, we suspended the production of our factory for five working days, which is going to impact our deliveries and production in April. For the full quarter, we believe that it will be possible, but still quite challenging for us to achieve 7,000 to 7,500 production units. We are trying our best to secure the supply and maintain the production speed. Of course, we are quite confident, but the challenge is still quite daunting. This is a common situation for the whole industry. The common understanding in the industry is the turning point will happen around the third quarter and the overall situation is going to improve around the fourth quarter. However, some are pessimistic and believe this situation could continue into next year. Our supply chain partners have shown very strong support for the production of NIO. Yesterday, we had our partner conference in Hefei, which was attended by hundreds of partners to showcase their support for NIO’s production. Overall speaking, we believe the situation is quite challenging, but our overall operations are relatively okay. Thank you, Nick.

Hi Nick, this is Stanley. Overall, our vehicle costs, including BOM and manufacturing costs, remained stable in Q1 2021. The increase of vehicle margin was mainly driven by the increase in the take rate of the 100-kilowatt battery pack and also the NIO Pilot, of which 5,000 is for the 100-kilowatt battery pack and 8,000 is for the NIO Pilot take rate. So the overall 100-kilowatt battery pack take rate in Q1 is 25. We think these trends will keep in the following quarters. So that’s the general reason why we achieved a higher gross profit margin in Q1.

Our next question comes from the line of Bin Wang from Credit Suisse. Please ask your question.

Thank you so much. Actually, I got two questions. Number one is about – I found that you have an announcement about ESG. Can you elaborate what’s the detail and why you host another ESG maybe for the first time? That’s the first question. Sorry. The second question is about the margin outlook. Actually, I found that a few factors may be impacting the second quarter. One is the NIO Pilot attach rate. Second is the penetration of about the 100-kilowatt-hour pack. Number three, I found that you offer a free insurance auto finance. Number four, maybe in the semiconductor pricing hike because not just the supply, but also – on the pricing also increase. Notably, lastly, it’s about the battery price. Can you provide guidance about dilution about the margin and the other key parts and movements? Thank you.

Thank you for your questions. This morning, we announced our plan to organize an extraordinary general meeting. There are several important topics to discuss at this meeting. First, we intend to increase the number of directors on the board. Currently, there are five members, and we aim to raise this number to enhance board diversity and flexibility. Another key issue is our desire to grant the user trust the right to nominate directors to the board. However, this will be a nomination right, not an appointment right, meaning the board will retain the authority to appoint directors. At the company's IPO, I transferred one-third of my shares to establish this user trust, which focuses on environmental protection, industry subcommittees, social welfare, and user care. We believe it is essential to allow the user trust to engage in our decision-making process, which is a significant strategy for us. This is why we are proposing it at the EGM. We believe this proposal will be advantageous for the company's long-term growth and will best align with the interests of our shareholders. It also highlights our mission to build a user-centric enterprise, which will strengthen our relationship with users over time.

Okay. Hi Wang Bin, as explained by William in the prior questions, 20% gross profit margin is quite healthy at the current stage for us. So we don’t expect the margin to dramatically improve this year, like quarter-on-quarter in 2020. But the 100-kilowatt battery pack and also the NIO Pilot features are both well accepted by our users, and we expect these two options will further bring higher profit margin for us.

Our next question comes from the line of Tim Hsiao from Morgan Stanley. Please ask your question.

Thanks for taking my questions and congratulations on the result. So two questions from my side. The first question is about competition because as you may notice that a lot of traditional players launched their models during the Auto Show this year. So if you look at the product pricing channel strategy, I think they are quick learners and catching up rapidly. Meanwhile, several tech names or smartphone makers also announced their EV plans. So I think William has shared a lot of initiatives during the quarters now. But what will really make NIO differentiated in the following years? Are we going to change our pricing or product strategy in mid- to long-term? So that’s my first question. And second question is about the launch of ET7 because as William just mentioned, I think the supply dynamics stay tight and might stay challenged throughout the whole year. Considering the more back-loaded second half, do you see any risk that the launch of ET7 might be delayed or face any production bottleneck, especially since I think ET7 carries quite a lot of new hardware and software features? Where could be the potential bottleneck in your view? So, thank you.

At this year’s Shanghai Auto Show, we have seen the vibrancy of China's smart EV industry. If you attended the show, you would have noticed the numerous innovations in our sector. In terms of overall competitiveness, NIO remains confident in our market segments. In the premium market, we have yet to see any brand that rivals our competitiveness regarding product quality, service, technology, user experience, and community engagement. Although traditional brands have made some strides with their premium offerings, they still lag in digital experiences and autonomous driving capabilities. It's essential for them to make decisive moves to transition into the era of smart electric vehicles. Many domestic players are quickly following NIO in terms of technology adoption, user connection, and direct services. However, establishing a premium brand will be challenging for them, and they will likely face significant pricing pressures. The auto market is not a winner-takes-all scenario, but we are focused on the premium segment. Currently, EVs represent only a small percentage compared to gasoline vehicles. While EV penetration reached 10% in March, gasoline cars still dominate the market, presenting ample opportunities for growth. For long-term differentiation, it's crucial to avoid significant weaknesses in the auto industry. With our broad strengths in product technology, service, user operations, and community, we believe we can strengthen our market position and stand out in competition. This differentiation and competitiveness will continue to grow over time. This is a long-term endeavor, not a quick race, and we are confident in our enduring competitive position. The second question is about the mass production of ET7. ET7 will be the first product on our second-generation platform, the NIO Technology Platform 2.0. This process is not solely focused on the production of ET7; it signifies the mass production of the second-generation platform. We are leading in various areas, including advanced sensors, computing power, SoC chipset, and other cutting-edge technology applications. Some companies have released products using earlier generation technology, but that is not the path we are taking. We aim to leap directly to next-generation technology and achieve notable breakthroughs. This commitment does present several challenges. For instance, we need to expedite the production timeline for advanced technologies such as LiDAR and the NVIDIA Orin SoC. This has increased pressure on our teams and partners. Nonetheless, we are optimistic about launching ET7 on schedule in the first quarter of next year. Our teams and partners are fully dedicated to this objective and are working diligently to overcome the obstacles. We aim to ensure the product meets our quality standards and address production bottlenecks, allowing us to gradually increase the production and delivery of our vehicles to customers. Historically, NIO has demonstrated a strong capability to introduce one new product each year, and our quality has consistently ranked at the top. Therefore, we are confident in our ability to deliver ET7 on time and with high quality.

Our next question comes from the line of Ming-Hsun Lee from BofA Securities. Please ask your question.

Thank you. Thank you, William and team, and congrats for the good results. So my first question is regarding the details of NeoPark. From the announcement that we saw, ultimately, it will reach a 1 million-unit capacity. So I want to understand that probably your near-term plan for this NeoPark. Is the 1 million capacity all for NIO? Or probably will have other EV companies? And also, for this NeoPark cooperation, will the current cooperation method continue? JAC built a plant and hired laborers, but NIO will purchase the equipment and the mold, et cetera. So that’s my question. And the second question is regarding the battery form factor. We are seeing more and more auto companies start to apply LFP battery to further control the cost, lower the selling price, and increase the penetration rate. From recent media, we also saw that NIO will probably consider using LFP battery by the end of the year. So could you give us more updates regarding the potential plan? Thank you, William and management.

Thank you for your question, Ming. Yesterday was significant as the Hefei government initiated the construction of NeoPark. I want to clarify that the correct spelling of this park is N-E-O, not N-I-O. The Chinese name for this industrial park is Xinqiao, which means 'new bridge.' This park is quite large, covering approximately 11.3 square kilometers. It will be an enormous project featuring manufacturing facilities, research and development, residential areas, and cultural spaces. NIO is set to be a key player in this park, but the Hefei government plans to welcome hundreds of other companies to NeoPark as well. Concerning the Hefei government's plans for NeoPark, NIO will not invest in the park's infrastructure; that investment will come from the Hefei government. However, NIO will play a crucial role in utilizing the park. As for the capacity of 1 million units and the 100-gigawatt-hour plan, this will not only benefit NIO but also potentially support other companies. If NIO continues its rapid growth, I believe the planning by the Hefei government will not hinder NIO's prospects. This indicates that NIO should have access to all the resources, capacities, and infrastructure established by the Hefei government in NeoPark. Yet, while this is the plan for NeoPark, we must be mindful that actual implementation may vary; we will proceed with caution. NIO is going to be an essential participant in NeoPark, which we believe will aid our long-term development by attracting talent and consolidating resources beneficial for NIO's growth. Just like what happened in Anting at our Shanghai headquarters, NIO was the first innovative company to establish offices there. Subsequently, many other companies followed and joined the office area in Anting. We believe that consolidating all resources with other partners in NeoPark will enhance our operational efficiency. Imagine having everyone, including our manufacturing and R&D teams, working and living in the same place. This will significantly boost our operational efficiency. An essential factor to consider is external operational efficiency. If NeoPark's planning includes a battery factory alongside a vehicle factory, we can transport battery packs directly to the vehicle factory over a short distance after production. This model will apply to other manufacturing processes, leading to substantial savings in logistics costs. For instance, with battery logistics costing around US$100 per battery pack, reaching a volume of 1 million units could result in immense logistics savings, thus improving overall operational efficiency. Regarding the operational cooperation model of the second factory, we will continue to prioritize manufacturing cooperation, focusing on processes, technologies, quality, and operations. We will invest in specific equipment for NIO but will not build the actual factories; the management of the second factory will fall under the joint venture between JAC and NIO, named Jianglai, which will oversee the overall operation and management at the plant. The next question pertains to the LFP battery pack. Yes, many traditional companies, including Tesla, use LFP battery packs because of their inherent cost advantages. However, there are some limitations and drawbacks associated with this technology, particularly its performance in low temperatures, which can adversely affect user experience in winter. If we can overcome these performance challenges in cold conditions, I believe the timing will be favorable for us to adopt LFP battery packs. Next question.

Our next question comes from the line of Lei Wang from CICC. Please ask your question.

Good morning. This is Lei Wang speaking. I would say, this is beyond our expectation to see the vehicle margin above 20%, so definitely congratulations to the team. I think most of my questions have been properly answered. I only have one follow-up question regarding the collaborations with Sinopec group on swap stations. Will Sinopec burden some of the CapEx investments in the second-generation service stations? Or will Sinopec share some of the revenues as well? So I’ll translate my question.

Thank you for your question. We will enhance our collaboration with Sinopec moving forward. However, currently, our partnership is quite basic. We primarily utilize their site and location resources. In the gas stations, they will need to have personnel, which presents an opportunity for us to collaborate and share service resources. At this time, we do not have any revenue-sharing arrangements between NIO and Sinopec. Next question.

Our next question comes from the line of Edison Yu from Deutsche Bank. Please ask your question.

Thank you and congratulations on the quarter. Two questions from the competitive angle. First, coming out of the Shanghai Auto Show, we obviously saw a lot of product, a lot of developments. Has this influenced or sped up your target about bringing in a mass-market brand into the market – I’m sorry, non-NIO brand? Is that effort kind of been accelerated? Or any sort of change to those kinds of plans going forward? And then the second question, it seems like a lot of automakers now also potentially considering doing chips themselves. I think it’s reported that NIO has considered doing that as well. What’s your latest thinking on moving away from NVIDIA and designing the chips yourself? Thank you.

Thank you for your question, Edison. Regarding the competition, I've examined various rivals and their new models. Honestly, the most notable one is from Wuling Hongguang, a sub-brand in Beijing, with a model called PV EV. We believe the mass market will see many new companies launching their products. As I mentioned, the innovation capability in the China smart EV industry has been quite strong, so we are confident about the future popularity and adoption of smart EVs. However, in the premium sector, we do not currently see any strong competitors. As for the second question about chipset research and development, we think the industry is moving toward chipset software and other smart technologies. In the long term, industry leaders will further invest in the research and development of smart technologies, which we see as a common focus. Currently, we do not have specific plans to disclose, but it is clear that NIO has always been committed to investing in new technologies. We are focused on building our full-stack capabilities in smart electric vehicle technologies, including autonomous driving, and we believe this will enhance the company's long-term competitiveness.

Our next question comes from the line of Paul Gong from UBS. Please ask your question.

Yeah, thanks, William, and thanks, everyone. Two questions. The first one is on the R&D and the second one, a bit of a follow-up on the gross margin. On the R&D, I see in this quarter, it’s actually a pretty moderate even sequentially decline from the 4Q at less than CNY700 million. I recall last time you said you’re going to double down on the R&D activity in 2021 and significantly increase the budget. So can you give us a little bit of an update on this strategy? More importantly, which key areas are going to be the focus for the R&D? Any rough breakdown how much percentage goes to vehicle development? What percentage goes to maybe autonomous driving, et cetera? This is my first question. My second question is a little bit of a follow-up on the gross margin. Obviously, this is pretty decent gross margin for a relatively young company like NIO. But in between this margin versus market share, do you think – will you strategically choose to – either add higher specs or kind of make the vehicle more competitive in the market to balance between margin versus market share? Also, how do you think about rising material costs impacting the next few quarters? Because some battery makers have indeed mentioned that it’s possible for the battery price to go up. I think I caught your comments just now that the 100-kilowatt-hour battery takes about 25% in Q1. What was the NIO Pilot take rate in Q1, please? Thank you.

Thank you for your question, Paul. Regarding R&D expenses, the amount in the first quarter is not particularly high, which aligns with the usual pace and development stages of our vehicles. Currently, the ET7 is still in the research and development phase, meaning we will begin to see an increase in R&D expenses in the second quarter due to testing and ETD costs with our suppliers. The expenses for the ET7 will gradually rise as we approach mass production. Simultaneously, we are developing several products in our pipeline to implement the NIO Technology Platform 2.0 more rapidly across various segments. Starting from the second quarter, we anticipate a rise in R&D expenses, primarily driven by the development of additional products in the pipeline. As you pointed out, we are committed to advancing full-stack capabilities in autonomous driving, software, and smart electric vehicle technologies. We will accelerate the development of the NIO Technology Platforms 2.0 and 3.0 and are also increasing our R&D personnel. In the first quarter, we saw a significant increase in the number of R&D staff, which we expect to continue in coming quarters. We have also boosted our investments in R&D resources for platform technologies, including the electric powertrain. This year presents challenges in efficiently spending RMB5 billion on R&D expenses, but we are confident in our ability to achieve our goals and enhance our R&D capabilities effectively. The second question is about the balance between gross margin and market share. For any company, sustainable operations and development require maintaining a reasonable gross margin. The current gross margin is better than expected, but we have stated repeatedly that we will not lower prices. We prefer to utilize our margin to invest more in user services, including power infrastructure and community engagement. When considering market share, it’s important to look at different market segments. For instance, comparing the market share of Ferrari and Porsche with Wuling Hongguang in the mass market is not feasible. Our focus at NIO is on the premium market share. We do not intend to adopt strategies that involve cutting prices since we believe this could damage brand image and user trust. For example, Porsche sells around 300,000 units yet contributes 40% of the gross margin for the Volkswagen Group. To grow our market share in the premium segment, we need to invest more in managing our brand and user community. Our strategy does not involve cutting prices to increase market share because ultimately, such tactics won't lead to improved market share. Once we achieve a reasonable margin, we can use it to enhance our products, services, and infrastructure for users, which is a long-term approach. Currently, the global premium market volume is approximately CNY10 million, and we hold only a small share, indicating significant growth potential. The mass markets will require a different entry strategy. However, I can confirm with certainty that we will not leverage the NIO brand to enter the mass market.

Our next question comes from the line of Evelyn Zhang from Daiwa. Please ask your question.

Hello. Actually, it’s Kelvin from Daiwa. So I have two questions about the company. So first of all, I want to know, I noticed that you have kind of a Norway launching in Norway conference next week. So I want to know would there be any other overseas expansion plan that you can share with us? This is the first question. The second question is that can I know how – because what we know is that the raw material costs and also auto trip costs are all increasing. Do we expect like a month-on-month or even week-on-week increase affecting your component price? What’s the trend? Or how fast is this accelerated? Thank you.

Kelvin, this is Steven. Sure. First, Norway is our first stop for our long-term globalization strategy. But for the May 6 conference call, we will still focus on the Norwegian market. Just for information, actually, in March, we already set up our national sales company in Norway, and we also have already built up a local team, who will take charge of our local operation and service. And in the end, actually, we already selected the location for our NIO House in Oslo. For more details about the Norwegian market, please do join our May 6 media conference to get more details. Thank you.

The raw materials, we expect there will be some increase in the coming quarters. But compared with the overall selling price, I think the cost can be well controlled and won’t have a big impact on our gross profit margin.

On one hand, we have some routine cost reductions. On the other hand, there are some cost increases, especially regarding the chipset recently. But overall, the savings are greater than the cost increases. Therefore, we expect that material costs will continue to decline. Next question.

Our next question comes from the line of Vijay Rakesh from Mizuho. Please ask your question.

Hi, William and Steven. Good quarter and guide year. I just had a question on the longer term. When you look at your partnership with Sinopec, how do you expect them to roll out their stations? I know you have a 500-battery swap station target, but any thoughts on how Sinopec would be rolling out their 5,000 battery swap stations? Thanks.

Thank you, Vijay, for your questions. Yes, Sinopec announced that they will build 5,000 swap and charging facilities in their gas stations. However, NIO is not the only partner collaborating with Sinopec. They are not just building swap stations in gas stations, but they will also do charging facilities. Of course, we hope to deploy more charging and swapping facilities from NIO in the gas stations. We also have many partners locally and nationally. We believe that site resources will not be a big issue for us.

And also, on the solid-state battery roadmap – on your own solid-state battery roadmap, can you give us an update on when you see that in production or tests? That’s it. Thank you.

Overall, the current process, testing, and production of the solid-state battery are on track.

Moderator, we need to conclude our conference call today. It has been attended. And big thanks for all the great questions asked by the analysts. Operator?

Operator, we would like to conclude today’s conference call. 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.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.