Earnings Call Transcript - NIO Q2 2023

Operator, Operator

Hello, ladies and gentlemen, and thank you for standing by for the NIO Incorporated second quarter 2023 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 Tang, Director of Investor Relations

Good morning and good evening, everyone. Welcome to NIO's second quarter 2023 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 VP of Finance; and Ms. Jade Wei, VP of Capital Markets. 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 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.

William Li, CEO

Hello, everyone. Thank you for joining NIO's 2023 Q2 earnings call. In the second quarter of 2023, NIO delivered a total of 23,520 smart electric vehicles. In July 2023, as we began mass production and ramping up more new models, NIO's monthly delivery volume increased rapidly to 20,462 units, which represents a year-over-year growth of 104% and a new monthly high. According to retail statistics, in July, NIO was the best-selling brand in the premium electric vehicle segment with a transaction price exceeding RMB300,000, holding a 59% market share. As NIO completes its product lineup and further expands the sales and service network, along with enhancing sales capability and marketing strategy, the competitiveness of the NT2 products has improved significantly. We anticipate that delivery volume in the third quarter of 2023 will be between 50,000 and 57,000 units. Now, I would like to share highlights regarding our products, R&D, and operations. After delivering the flagship coupe SUV EC7, the flagship sedan 2023 new EC7, and the all-new SUV ES6 earlier this year, we also started delivering the ET5 Touring or ET5T and the flagship SUV all-new ES8 in June. In the second quarter, NIO achieved high-quality delivery of five new models, and user satisfaction was beyond our expectations, demonstrating our ability to rapidly iterate our products and manage product complexity. In September, we plan to launch and deliver the new mid-sized coupe SUV EC6, completing our product transition to the NT2 platform. With this, NIO's entire NT2 product lineup, which includes eight different models, will be present in the premium BEV market, catering to the diverse needs of premium segment users and driving steady delivery growth. NIO's product safety has been highly recognized globally. On July 12, 2023, both the ET5 and the mid-large SUV EL7, known as ES7 in China, received the 5-star safety rating from Euro NCAP, making NIO the first car brand to achieve this rating since Euro NCAP updated its testing protocols for 2023. With full stack technologies developed in-house and closed-loop data management, NIO has made significant progress in assisted and intelligent driving. Our user base and engagement continue to grow; currently, over 100,000 NIO users have activated Navigate on Pilot Plus, or NOP Plus, and have driven over 80 million kilometers. The mileage penetration rate of NOP Plus has reached 53%. We have also conducted several early bird programs for NOP Plus in urban areas, including Beijing and Shanghai. Regarding our sales and service network, we currently have 420 NIO Houses, NIO Spaces, and pop-up stores across 143 cities, along with 304 service centers and 58 delivery centers in 201 cities worldwide. Since July, we have taken a more proactive approach in expanding user touchpoints and sales channels in China, which will enhance our sales capabilities and drive growth. As for our charging and swapping network, we have installed 1,747 power swap stations globally, providing more than 27 million battery swaps. Our expressway battery swap network in China includes 476 swap stations along 10 major expressways, connecting 68 cities. We have also set up over 7,900 power chargers and 9,700 destination chargers, making NIO the brand with the most public chargers and expressway chargers in China. Additionally, NIO's charging map has linked with over 1.36 million third-party chargers worldwide. On July 20, we launched a flexible battery upgrade service, offering users more options and use cases. In July, we held the host city election for NIO Day 2023, and Xi'an was selected by new users as this year's host city. On August 20, we collaborated with the Worldwide Fund for Nature and Qilian Mountain National Park to install the world's first photovoltaic self-consumption system with V2G capability, featuring solar power stations, V2G chargers, and battery electric vehicles. We also initiated the Clean Parks Citizen Scientist program to involve more users and the public in biodiversity conservation and support the establishment of a volunteer system for national parks, aiming for a vision of clean skies. In July, NIO secured a strategic equity investment from CYVN Holdings, an investment vehicle primarily owned by the Abu Dhabi government, totaling US$1.1 billion. Furthermore, we will collaborate with this new strategic investor to explore opportunities in our international business. Despite challenges in the smart EV market and increasing competition, we are ready to face these challenges through our commitment to core technologies, product diversification, sales capabilities, and manufacturing and logistics improvements. We are confident that focused marketing, strategic execution, and optimizing our cost structure will enable NIO to maintain steady sales and delivery growth while enhancing operational efficiency. We look forward to NIO's strong market performance in the second half of the year. Thank you for your support. Now, I will hand the call over to Steven for the financial details of the second quarter. Over to you, Steven.

Steven Feng, CFO

Thank you, William. I will now go over our key financial results for the second quarter of 2023. And to be mindful of the length of this call, I will reference 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 second quarter were RMB8.8 billion, representing a decrease of 14.8% year-over-year and a decrease of 17.8% quarter-over-quarter. Our total revenues are made of two parts: vehicle sales and other sales. Vehicle sales in the second quarter were RMB7.2 billion, representing a decrease of 24.9% year-over-year and 22.1% quarter-over-quarter. The decrease in vehicle sales year-over-year was mainly due to the lower average selling price as a result of a higher proportion of ET5 and 75-kilowatt hour standard-range battery pack deliveries and a decrease in delivery volume. The decrease in vehicle sales quarter-over-quarter was mainly due to a decrease in delivery volume. Other sales in the second quarter were RMB1.6 billion, representing an increase of 119.9% year-over-year and 9.3% quarter-over-quarter. The increase in other sales year-over-year was mainly due to the increase in sales of used cars, accessories, and provision of power solutions, as a result of continued growth of our users. The increase in other sales quarter-over-quarter was mainly due to the increase in sales of used cars and provision of power solutions, as a result of continued growth of our users, partially offset by a decrease in revenue from provision of auto financing services. Gross margin in the second quarter of 2023 was 1.0% compared with 13.0% in the second quarter of 2022 and 1.5% in the first quarter of 2023. Vehicle margins in the second quarter were 6.2% compared with 16.7% in the second quarter of 2022 and 1.1% in the first quarter of 2023. The decrease in vehicle margin year-over-year was mainly attributed to changes in product mix, partially offset by decreased battery cost per unit. The increase in vehicle margin quarter-over-quarter was mainly due to decreased promotion discounts for the previous generation of ES8, ES6 and EC6. R&D expenses in the second quarter were RMB3.3 billion, representing an increase of 55.6% year-over-year and an increase of 8.7% quarter-over-quarter. The increase in research and development expenses year-over-year and quarter-over-quarter was mainly attributed to: first, the increased personnel costs in R&D functions and increased share-based compensation expenses recognized in the second quarter of 2023; and second, the incremental design and development costs for new products and technologies. SG&A expenses in the second quarter were RMB2.9 billion, representing an increase of 25.2% year-over-year and an increase of 16.8% 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 functions; second, the increase in sales and marketing activities, including the launch of new products; and third, increased rental and related expenses related to the company's sales and service network expansion. Loss from operations in the second quarter was RMB6.1 billion, representing an increase of 113.5% year-over-year and an increase of 18.8% quarter-over-quarter. Net loss in the second quarter was RMB6.1 billion, representing an increase of 119.6% year-over-year and an increase of 27.8% quarter-over-quarter. Our balance of cash and cash equivalents, restricted cash, short-term investment, and long-term time deposits was RMB31.5 billion as of June 30, 2023. Now, this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

Operator, Operator

Thank you. The first question will come from Bin Wang of Credit Suisse. Please go ahead.

Bin Wang, Analyst

Thank you. My question is about your sales network structure. Recently, I heard you hired a few salespersons from other luxury brands such as BMW, Mercedes, and Audi. So, what's the reason you hired non-NIO salespersons recently? And how is the impact so far for your sales volume increase? We also found that in your third quarter guidance, you actually implied that in August and September, September will be lower compared to July. So, kind of what's the reason behind it? Is it because of supply chain issues? Thank you so much.

William Li, CEO

Well, thank you, Bin Wang. For your first question, around June, we discovered that our salesforce and product selling capabilities were not on par with our competitors. Luxury brands like BMW and Mercedes have sales teams that are six to seven times larger than ours. Without enough personnel or customer touchpoints, we struggle to achieve high user satisfaction, effective test drives, or strong conversion rates. Therefore, in June, July, and August, we adopted a more proactive strategy to enhance our sales capabilities. We aim to support new orders of 30,000 units monthly as our sales network and team grow, expecting to meet this target by the end of September. Training personnel and finding locations will take time, but we plan to have initial capabilities ready by the end of September, with real effects starting in October. This is our strategy for improvement, which is why we've taken action to expand our sales network and touchpoints, particularly in lower-tier cities where our presence is limited. We intend to hire experienced salespeople who already have networks and customer bases to assist with sales. Regarding your second question, in July, we delivered over 20,000 vehicles. As we indicated in our guidance, our delivery volumes in August and September are expected to be lower than in July. This is primarily because, at the end of July, we adjusted the user benefits for power swaps, removing the free swap options for new orders starting August 1. This change led to a spike in orders from users keen on power swaps in July, impacting our delivery volume then. For August, we believe it will take time for order momentum to return to normal. However, in August, we also saw record numbers in test drives and leads, averaging over 10,000 test drives during weekends, which is a significant rise from last month. We recognize that it will take time for these test drives to convert into orders, and we are prepared to be patient. Overall, we are confident in stabilizing order intake and delivery volumes while being aware of external challenges, especially from the macroeconomic environment. Our forecasts consider these factors, and we remain confident in our delivery volume estimates. Additionally, in July, we achieved a 59% market share in the premium battery electric vehicle segment priced over RMB300,000, establishing a strong presence in this market. We will continue efforts to convert ICE users to EVs in the premium segment and expand our channels and touchpoints. Thank you, Wang Bin.

Bin Wang, Analyst

Thank you.

Operator, Operator

The next question comes from Tim Hsiao of Morgan Stanley. Please go ahead.

Tim Hsiao, Analyst

Hi. Thanks for taking my question. So, my first question, basically, I just want to follow up regarding the sales volumes into the second half. Because as William just mentioned, we successfully upgraded our sales team and sales network. So, looking into the fourth quarter, I recall that we expect our monthly sales can stay above 20,000. So, if that's the case, looking into the fourth quarter, should we expect NIO to grow the sales further to above 20,000 or even like 25,000? And what could the contribution from the four volume-driving models covering like ET5, ES6? So, could you just provide some update regarding volume? And my second question is about the gross profit margin. Because according to management's previous guidance, I think the vehicle gross profit margin could get back to double digits in the second half. So, after the RMB30,000 cost in late June, do you still stick to your previous view on sequential margin expansion into the second half? What would be the pace in the quarter and fourth quarter, respectively? That's my second question. Thank you.

William Li, CEO

Thank you, Tim, for your question. Regarding your first question, we aim to achieve and maintain our monthly delivery at over 20,000 units starting in the fourth quarter of this year. In the meantime, we are enhancing our sales capabilities to support new orders of 30,000 units per month. This involves expanding our channels and personnel. We plan to have these initial capabilities by the end of September, but there will be a period of preparation and ramp-up. We expect to see improvements in our sales capabilities starting in October and November. When it comes to the NT1 product, it typically takes one to two years for a new product to reach a stable monthly volume. For instance, our first-generation ES6 launched in 2019, but it wasn't until 2021 that it achieved steady monthly deliveries. We are very optimistic about our new products. In terms of volume, we have the ET5, ET5T, ES6, and EC6 as our main offerings. The EC6 will begin deliveries in September, but it will take time for production and delivery to ramp up. However, we believe it will capture a significant market share within its segment. Combined, we expect these four models to stabilize at about 15,000 to 20,000 units monthly. We also anticipate increases in sales for higher volume products like the EC7, ET7, ES7, and ES8. Yes, Stanley will address the second question.

Stanley Qu, Senior VP of Finance

Yeah. Hi, Tim. Regarding the gross profit margin, as shown in our Q2 financials, the vehicle margin is 6.2%, similar to Q1. The key reasons are sales and production volume at a lower level, driving higher manufacturing costs and other cost allocations, and also more promotions to users during the product transition period. But along with our sales and volume ramp-up of all our NT2 products, we target to achieve a double-digit gross profit margin in Q3 and 15% in Q4 if we can control battery costs and other expenses effectively.

William Li, CEO

We have already factored in the effects of the price reduction.

Tim Hsiao, Analyst

Got it. Thank you very much, William and Stanley. Thank you.

Stanley Qu, Senior VP of Finance

Thank you, Tim.

William Li, CEO

Thank you, Tim.

Operator, Operator

The next question comes from Yuqian Ding of HSBC. Please go ahead.

Yuqian Ding, Analyst

Thanks, team. Yuqian here. I got two. First question is, we practically have all the models are now refreshed and newly launched based on the 2.0 platform model, which has pretty comprehensive coverage. We will be expecting strong ramp-up in the coming six months in a visible way. But how do we expect the key growth drivers, if we're looking at 12 to 18 months, especially in terms of new products? How do we fill in the already comprehensive product portfolio or the software is going to be the next leg of growth? The second question is on the OpEx side. So, this year, we have new model launches and we have the sales channel upgrade. But next year, when we're rolling into next year, could we see the absolute OpEx value dialed down a little bit? Thank you.

William Li, CEO

Thank you for your question. Regarding your first point, starting in September, we will launch our EC6 in the market along with all its models on the NT2 platforms. Over the past few months, we have introduced five new models and a facelift, achieving high-quality deliveries in a short period. This is a testament to our R&D efficiency and strong execution. However, we acknowledge that the rise of smart electric vehicles presents challenges for the entire industry, as we needed to quickly adapt to technological changes. For all NT2 products, we are planning to update and release more software features, such as new assisted and intelligent driving capabilities. In the upcoming months, we will introduce new features and services to enhance product competitiveness. Additionally, we are building our sales capabilities to reach wider channels with more sales personnel to support new orders of 30,000 units per month. This will provide a solid foundation for ongoing growth in sales and deliveries in the coming months. Our eight NT2 models currently fulfill 80% of the premium market needs. Furthermore, we have restructured our organization starting in the third quarter to establish dedicated teams managing each model throughout its lifecycle, reflecting our efforts in sales and marketing.

Stanley Qu, Senior VP of Finance

Hi, Yuqian. Regarding the OpEx of next year, the budget for next year has not been finalized yet. So at this moment, I may not be able to provide the precise number. However, I can provide some insights. Regarding the R&D expense, as introduced in last quarters, on average, each quarter this year, the non-GAAP R&D investments will be RMB3 billion to RMB3.5 billion. I think for next year, we will maintain a similar level for R&D activities. Regarding the SG&A expense, as explained by William, we have relatively more aggressive sales targets for the second half of this year, and I think this will continue for next year. Hence, the absolute value for SG&A will grow accordingly, given we need more marketing activities and events. However, the percentage of total sales revenue will decline compared to the first half of this year and the whole of 2023, because of improvements in both delivery volume and operating efficiency. Thank you, Yuqian.

Operator, Operator

The next question comes from Jeff Chung of Citi. Please go ahead.

Jeff Chung, Analyst

Hello. I have two questions. First question is our refinancing plan going forward. And the second question is our cash flow projection into the third quarter and fourth quarter. So, why I am asking this is because we saw in the first quarter, the net cash outflow was RMB10.6 billion, but improved to a cash outflow of RMB5.9 billion in the second quarter. And within the second quarter, we also saw the inventory quarter-on-quarter delta of around RMB5 billion, while the account receivable remained stable. So that said, if the third quarter inventory came down plus the operating leverage with a volume hike, whether we should see the cash outflow narrowing further? This is my first question. And my second question is about the third quarter and fourth quarter GP margin guidance. When can we return to a 10% or double-digit level as well as the third quarter and fourth quarter SG&A as a percentage of the revenue guidance? That's all from me. Thank you.

William Li, CEO

Okay. Thank you, Jeff. Stanley, please answer the first question.

Stanley Qu, Senior VP of Finance

Yes, regarding cash flow, I think several points are important. One is regarding operating cash flow; as the delivery volume ramps up from Q3 this year, our operating cash flow will significantly improve compared to Q1 and Q2 of this year. Additionally, we have implemented a series of measures to control the CapEx investment and manage our investment cadence prudently, which includes delaying or canceling certain CapEx investments. This will also help us manage a healthy cash flow. Furthermore, as explained in William's comments, we received a US$740 million strategic investment from CYVN. We also completed the offering of our first off-balance sheet ABS in Q3. Both our U.S. dollar and RMB financing channels remain active. All these will enable us to maintain a healthy cash position and support the ongoing business development of the company. Regarding the refinancing plan, we will disclose our plan accordingly if there are any capital market-related updates. However, at this moment, we don't have precise information to comment on.

Jeff Chung, Analyst

Thank you. Just a correction here. I mentioned that the inventory quarter-on-quarter delta was RMB5 billion, which was wrong. I just checked that the quarter-on-quarter data was only RMB2 billion. That's it from my side. Thank you.

Stanley Qu, Senior VP of Finance

Yes, welcome. Thank you.

Operator, Operator

The next question comes from Ming-Hsun Lee of Bank of America. Please go ahead.

Ming-Hsun Lee, Analyst

I have two questions. First, you currently have eight products covering most of the luxury car segment. Could you provide more information about any new product plans for next year under the NIO brand and the ALPS brand? Second, what is your latest update on the progress of the mobile business? Thank you.

William Li, CEO

Thank you for your question. For the NIO brand, we do not plan to launch any new products in 2024. We will implement some routine facelifts or product upgrades, but we have not scheduled any new launches for next year. We believe it is more important to focus on our existing eight products on the NT2 platform to continuously enhance their quality and market performance. Similar to 2021, we didn't introduce any new models but still achieved strong gross margins, sales volume, and quality performance. That is our plan for the NIO brand. Regarding our mass market brand, ALPS, we intend to launch its very first model in the second half of next year. Currently, the R&D activities are progressing as planned, and we have just released the verification build of ALPS's first model, which will be highly competitive in its segment. Additionally, the R&D philosophy for the ALPS brand is different from NIO's. ALPS targets the mass market, and we won't have many products in its lineup. In contrast, NIO targets the premium segment, focusing on personalization and differentiation. Similar to how Mercedes and BMW sell 40 to 50 models in China, this is characteristic of the premium segment. ALPS will be more family-oriented and we will place greater emphasis on sales volume for each model launched. Regarding our mobile business, our mobile phone will be primarily developed for new users, particularly those with our NT2 products. The phone is designed around the vehicles, enhancing mobility and connectivity. We believe that this phone business can bolster our vehicle product competitiveness, as it is not intended to compete with traditional phone makers. Instead, we aim to offer the best experience to our vehicle users through this phone. Moreover, the underlying software and systems between the phone and the cars share many similarities. As for the launch plan, we expect to introduce our first phone product in the second half of the year or by late September.

Operator, Operator

The next question comes from Paul Gong of UBS. Please go ahead.

Paul Gong, Analyst

Thank you for taking my questions. I have two questions. The first one is about the sales channel. You mentioned plans to expand, noting that you believe you are behind BMW and Mercedes-Benz regarding channel and sales personnel. How do you compare to other EV startups? Are we ahead or behind them? Additionally, how do you weigh the expansion of the store network and sales personnel against improving sales efficiency? You also mentioned a target monthly sales capability of 30,000 units. How does that compare to our current capabilities? Is it reasonable to say we can currently sell 20,000 units monthly, considering we reached that in July, and do you see expanding to 30,000 as a 50% increase? How does this math add up? This is my first question. The second question relates to battery swapping versus fast charging. With the rollout of batteries, semiconductors, and DC charging stations, how do you see the relationship between battery swapping and fast charging? While having both options is beneficial, do you think introducing fast charging could diminish the convenience and competitive advantage of battery swapping for NIO's cars? Thank you.

William Li, CEO

Thank you for your questions. If you compare the size of our sales teams to other EV startups in China, by the end of June, our sales team was only half the size of those at other companies. However, we have specialized teams for power swap stations, roadside services, and new homes that make our service and community teams larger than others. Despite this, our actual sales personnel, whom we refer to as fellows, are fewer than those at other companies in the industry. In April and May of this year, our delivery volume was low, and we did not fully recognize the importance of sales capabilities, resulting in no significant actions. Starting in June, as our delivery volumes increased, we came to understand that our smaller sales team affected customer satisfaction and execution of key areas, including test drives and order conversions. Therefore, in July, we began to develop our sales channels and expand our sales team. To reach a comparability level, we estimate that we need around 5,000 people in our sales team, though building and training this team will take time. In July, we delivered over 20,000 cars, showcasing our delivery capabilities, which are easier to achieve than enhancing sales capabilities. Our sales distribution shows that Jiangsu, Fujian, and Shanghai account for half of our sales volume, while in provinces like Anhui, one city contributes about 80% to 90% of our sales. For example, other brands like BMW and Mercedes have dealerships throughout Anhui Province. We have recently opened a NIO House in Wuhu, the second largest city in Anhui, and we need to increase our presence in lower-tier cities. In conjunction with building sales channels, we are also expanding our power swap networks into additional cities. Over the past few months, we have been accelerating the development of our power swap stations, and in August, we plan to deploy and install more than 100 of them. While it will take time for these initiatives to show results, they are vital for our long-term capabilities. Regarding your second question about power swapping versus fast charging, our philosophy has always revolved around creating chargeable, swappable, and upgradable solutions. We focus on providing the best experience for our users based on real scenarios and use cases. As we expand our power swapping network, we are also the automotive brand with the most public chargers in China. We believe that advances in fast charging technology will enhance our power swap operations by increasing the service capacity of our swap stations. Notably, many of the stations we have installed are integrated facilities with both chargers and power swapping capabilities. While we've discussed both technologies, we believe that power swapping currently offers a significantly better experience than fast charging and will remain a unique advantage and competitive edge for NIO.

Paul Gong, Analyst

Thank you very much. That's very helpful. Thank you, William.

William Li, CEO

Thank you, Paul.

Operator, Operator

The next question comes from Jing Chang of CICC. Please go ahead.

Jing Chang, Analyst

Okay, thank you for your sharing. I have two follow-up questions. The first is about our other sales revenue and profit margin. As we can see that after our policy adjustment, what is our expectation for the future revenue and profit margin for other sales after our battery swap started to gain profit? In particular, do we have any internal calculation of the profitability of the battery swapping business? What is the upward trend of our gross profit margin for other sales in the following few quarters? And when will it turn positive? This is my first question. The second is about technology improvement. We have always been focused on R&D investment and technology accumulation. Looking forward regarding our next generation platform, NT3, what improvements can we expect? What are the major areas of our effort?

Stanley Qu, Senior VP of Finance

Hi, Jing. This is Stanley. Regarding your first question about the other sales revenue and margin, as we mentioned, we canceled the free battery swap policies in Q3. Therefore, there will be more users paying for battery swap services. As sales keep growing, we expect more battery swap service revenue can be realized. However, it's only been one month since the policy adjustment, so we still need some time to observe and assess the impact of this policy change. Secondly, with the third generation of power swap stations put into operation starting this April, we will accelerate the deployment of these stations in the coming quarters. Our plan for this year is to build 1,000 stations. However, at this current stage, the capacity won't be fully utilized, which will increase losses from the accelerated construction of power swap stations. I think that's basically the guidance for the other sales revenue.

William Li, CEO

Actually, the inherent efficiency of the power swap business is quite high. Previously, we experienced negative margins in this area largely because we were providing free power swaps that included electricity costs. Now, we are charging for that separately. In addition, we are charging our users RMB30 per swap as a service fee. We are seeing an increase in demand for paid power swap services, particularly among used car users. The proportion of users choosing the paid swap service is also on the rise. It mainly appeals to our existing user base. Our estimates suggest that when the third-generation power swap stations complete 60 swaps a day, they will essentially break even, as service revenues will cover operating expenses. Currently, around 20% of our third-generation stations can achieve this performance. Therefore, we believe that power swap is a sustainable business in the long run. Besides power swap services, we have other diversified business models, including energy storage. Regarding your second question about our next generation technology, we will utilize our full stack capabilities developed in-house. This will allow us to enhance the experience and performance of our products, giving us strong product competitiveness globally. Ongoing investments in research and development of core technologies will further optimize vehicle margins and improve operational and R&D efficiency. Thank you, Jing.

Jing Chang, Analyst

Okay, thank you. That's all my questions.

Operator, Operator

The next question comes from Edison Yu of Deutsche Bank. Please go ahead.

Edison Yu, Analyst

Thank you. I have a question about the management team's willingness to take additional strategic actions. We've seen considerable activity from European OEMs in China as they attempt to revive or restructure their initiatives. Additionally, I believe NIO has made some missteps. We discussed sales and the sales force today, and we faced numerous supply chain challenges last year, many of which stem from the traditional automotive sector. Is there a possibility for us to establish closer strategic relationships with some of the OEMs? Thank you.

William Li, CEO

Thank you, Edison, for your question. We are very open to various forms of collaboration with industry peers. At this time, we don't have significant updates to share. Our objective is to leverage our smart technologies, along with our charging and swapping networks, to drive change across the industry. As we announced at Power Day 2023, we are ready to share our next-generation battery technologies and charging and swapping networks with the entire industry. Currently, we are in initial talks with certain OEMs considering our battery technologies for swapping networks. However, for these technologies to be implemented, they will need to adapt their products to our standards, which may take time for them to finalize their decisions. Overall, we welcome all types of cooperation. Notably, 80% of our electricity is being used by non-NIO users. Recently in Xinjiang, at Sayram Lake, a popular tourist destination, we had to restrict access to our public chargers for non-NIO users at certain times due to complaints. This situation highlights that our existing charging and swapping facilities serve many EV users, not just those with NIO vehicles.

Edison Yu, Analyst

Great. Thank you.

William Li, CEO

Thank you, Edison.

Operator, Operator

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

Eve Tang, Director of Investor Relations

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 lines. Thank you.