Earnings Call Transcript - NIO Q2 2025

Operator, Operator

Hello, ladies and gentlemen. Thank you for standing by for NIO Inc. Second Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Rui Chen, Head of Investor Relations and Corporate Finance of the company. Please go ahead, Rui.

Rui Chen, Head of Investor Relations and Corporate Finance

Good morning and good evening, everyone. Welcome to NIO's Second Quarter 2025 Earnings Conference Call. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website. On today's call, we have Mr. William Li, Founder, Chairman of the Board and CEO, and Mr. Stanley Qu, CFO. 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 Security 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 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 2025 Q2 earnings call. In Q2, the company delivered 72,056 smart EVs, up 25.6% year over year. The new brand refreshed four products to model year 2025, further enhancing its product competitiveness. With improved organizational efficiency and growing brand awareness, the Envoy brand is gaining momentum in the mainstream family market. And thanks to the clear product positioning and deep market insight into the high-end small car market, the Firefly has been well received by the target audience. The company delivered 21,017 vehicles in July and 31,305 in August. The launch of the Envoy L90 in late July and the pre-launch of the new all-new ES8 in late August dropped strong market demand, boosted user confidence, and lifted overall sales. We expect total deliveries in Q3 to range from 87,000 to 91,000, representing a new high of 40.7% to 47.1% growth year over year. On the financial side, vehicle gross margin remained stable while other sales saw significant margin improvements. Moreover, the implementation of the cell business unit mechanism has begun to yield tangible cost reductions and efficiency gains. In Q2, the non-GAAP operating loss narrowed more than 30% quarter over quarter. Since the start of deliveries in Q2, NIO ET9 has performed strongly in the executive flagship sedan market. Building on continuous R&D investments, NIO was the first to bring the in-house developed smart driving chip and full domain vehicle operating system on production models such as ET9 as well as the 2025 ET5, ET5T, ES6, and EC6. In late June, we rolled out the new world model across all new vehicles equipped with our proprietary smart driving chip. Within just five months, this in-house developed chip enabled the mass release of functions and the seamless migration of core models and applications across five vehicle models, representing China's and also the industry's first full function delivery on a self-developed flagship smart driving chip. On August 21, NIO hosted the product and technology launch of its core strategic model, the all-new ES8. As an all-around tech flagship SUV designed for the success of business, family, and individuals, the third generation ES8 is an epitome of NIO's tech innovation. The all-new ES8 features original and distinctive design language, class-leading capacity and storage space, premium features and comfort experience, flagship safety as well as smart driving and cabin experience ahead of its time. It is the most competitive model in the premium large zero SUV segment, receiving significant attention and recognition from both media and users. Pre-orders have started with test drives beginning in mid-September followed by the official launch at NIO Day in late September and deliveries afterward. On July 31, the Ambo L90, a game-changing product among large three-row family SUVs, was launched with ingenious space and comfort design, all-around smart safety, competitive pricing, and comprehensive charging and swapping services. The Almighty redefines the large zero SUV experience, making it a good fit for large families. The Envoy L90's sales performance exceeds our expectations. In its first full delivery month, its deliveries reached a history high of 10,575. We are working closely with our supply chain partners for the ramp-up production capacity and keep pace with the strong market demand. The L90's strong market performance has also boosted Ango's brand awareness and the demand for the L60. In August, the L60's order intake also hit a new high this year. As for Firefly, since deliveries began, over 10,000 Firefly has been delivered within just three months. It is already the best-selling model in the high-end small bath market. Its novel design, flagship level safety, and agile driving dynamics have been well received. Notably, in recent tests, Firefly together with the ARMOR L60 achieved the highest safety rating ever. We are pleased to see the growing brand awareness driving growing demand for Firefly. In terms of product quality in June, NIO ET5 and ET5T ranked segment first in JD Power's NEV IQF study, while the EC6 and ES6 ranked top two in the premium segment in J.D. Power's NEV appeal study. With outstanding product quality, NIO has been the segment leader in J.D. Power's quality study for seven consecutive years in 2019. As of now, the company operates 176 NIO Houses and 416 NIO Spaces as well as 414 Ambo stores. On the service side, the company has 388 service centers and 68 delivery centers. Our sales and service network now operates efficiently and cohesively across all three brands earning recognition from our users. Regarding charging and swapping, the company has 3,542 power swap stations worldwide, including over 1,000 stations on highways in China and has provided over 84,000,000 swaps to users. By July, the battery swap network had thoroughly covered the highways between major cities in China, connecting 550 cities with three-minute swaps and eliminating users' anxieties on long trips. In August, we completed the power swap route along China's iconic G318 Sichuan Hizhang Highway. NIO and Ambo users now can drive their cars and swap all the way to the base camp of Mount Kumolama. Besides, the company has built over 27,000 superchargers and destination chargers. So far, NIO is the car company with the most chargers in China. In Q2, NIO has entered a new cycle where its continuous investment in technology innovation, infrastructure, and the multi-brand strategy in the past decade began to translate into market competitiveness. The strong sales momentum of the new All New ES8 and ARMOR L90 proves that our decade-long commitment to the battery roadmap with chargeable, swappable, and upgradable technologies can create user value beyond expectations, increasingly recognized and embraced by a growing base of users. We believe the all-new ES8 and L90 will drive the transition of the large rear-wheel SUV market towards full electrification and boost the sales growth across other models. At the same time with NIO's continued efforts in the charging and swapping infrastructure, its power swap network now covers major highways and expands into more counties in China. As the network effect of power swap becomes more evident, over time more users will experience and understand the unique benefits of the NIO Power Swap. Built on the company's 12 full stack technological capabilities and the nationwide charging and swapping network, the three brands are reaching a broader user base. Starting in Q3, the multi-brand strategy will drive our sales growth and capture greater market shares across various segments, helping to advance our mission of shaping a sustainable and brighter future. Since the beginning of this year, the company has focused on systematically enhancing operational efficiency and execution, leading to significant improvement in both R&D as well as sales and service. With rising sales, improving gross margin, and more efficient cost control, we expect to see a substantial improvement in the company's financial performance paving the way for the next phase of rapid growth. Thank you for your support. With that, I will now turn the call over to Stanley for Q2's financial details. Over to you, Stanley.

Stanley Qu, CFO

Thank you, William. Let's now review our key financial results for 2025 Q2. Our total revenues reached RMB19 billion, increased 9% year over year and 57.9% quarter over quarter. Vehicle sales were RMB16.1 billion, up 2.9% year over year and 62.3% quarter over quarter. The year-over-year growth was mainly due to higher deliveries, partially offset by a lower average selling price from product mix changes. The quarter-over-quarter increase was mainly from higher deliveries. Other sales were RMB2.9 billion, grew by 62.6% year over year and 37.1% quarter over quarter. The annual growth was driven by increased sales of used cars, technical R&D services, sales of parts, and after-sale vehicle services at Power Solutions, while the quarter-over-quarter increase was mainly due to the increase in revenues from used cars, technical R&D services, parts accessories, and after-sale vehicle services. Looking at margins, vehicle margin was 10.3% compared with 12.2% in Q2 last year and 10.2% last quarter. The year-over-year decline was mainly due to changes in product mix, partially offset by lower material cost per unit, while quarter-over-quarter vehicle margin remained stable. Overall gross margin was 10% versus 9.7% in Q2 last year and 7.6% last quarter. The year-over-year gross margin stayed stable, and the quarter-over-quarter increase was mainly attributable to positive mix effect driven by the increase in revenue from used cars and technical R&D services. Turning to OpEx. R&D expenses were RMB3 billion, decreased 6.6% year over year and 5.5% quarter over quarter. The decreases year over year and quarter over quarter were mainly driven by lower design and development costs from different development stages, with the year-over-year also reflecting reduced depreciation and amortization expenses. SG&A expenses were RMB4 billion, up 5.5% year over year and down 9.9% quarter over quarter. The year-over-year increase was mainly driven by higher personnel costs, rental, and related expenses associated with the expansion of the sales and service network, partially offset by decreased sales and marketing activities. The quarter-over-quarter decrease was mainly due to the decrease in personnel costs and marketing and promotional expenses, primarily driven by the company's comprehensive organizational optimization efforts in marketing and other supporting functions. Loss from operations was RMB4.9 billion, down 5.8% year over year and 23.5% quarter over quarter. Excluding share-based compensation expenses and organizational optimization charges, adjusted loss from operations was RMB4 billion, representing a decrease of 14% year over year and 32.1% quarter over quarter. Net loss was RMB5 billion, showing a decrease of 1% year over year and a decrease of 22% quarter over quarter. Excluding share-based compensation expenses and organizational optimization charges, adjusted net loss was RMB4.1 billion, representing a decrease of 9% year over year and 34.3% quarter over quarter. That wraps up our prepared remarks. For more information and the details of our unaudited second quarter 2025 financial results, please refer to our earnings press release. Now I will turn the call over to the operator to start our Q&A session.

Operator, Operator

Your first question comes from Geoff Chung from Citi. Please go ahead.

Geoff Chung, Analyst

Hi, this is Geoff from Citi. Thank you, Li Bin Zhong and Stanley Zhong and congratulations on the good result. My first question is about ES8 and L90's capacity ramp-up pace and the delivery target for the rest of the year. And due to the strong order backlog, can we expect the December single month run rate for the group to hit 55,000 units or above? This is my first question.

William Li, CEO

Thank you for the question. It's true that with the launch of the Envoy L90 and also the new All-New ES8, we actually see stronger market demand higher than what we've expected before the launch. In that case, we've been working closely with our supply chain partners to improve and enhance the production capacity throughout the value chain and also the supply chain. Our target is that in October the full supply chain capacity for the Envoy L90 can achieve and reach 15,000 units a month. And for the ES8 as the ramp up of production takes slightly longer, we hope that the full supply chain capacity can achieve 150,000 units in December. With that by looking at both the demand and the supply availabilities and capacity, our Q4 target is to achieve an average of 50,000 unit deliveries per month for all three brands, which means that in Q4 our quarterly delivery target combining all three brands is 150,000 units.

Geoff Chung, Analyst

Thank you, Li Bin Zhong. So my second question is about the gross profit margin and whether the fourth quarter can breakeven at the bottom line level. So if we look at the second quarter, our revenue was up 58%, but our gross profit was up more than 100% quarter on quarter. So could you give us more color on the second half vehicle GP margin trend and the non-vehicle GP margin trend? And also to be specific, how do you see the L90 and the ES8 GP margin independently? Thank you very much.

William Li, CEO

Thank you for the question. I would like to walk you through our Q2 product margin. In terms of the vehicle margin in the second quarter of this year, it was 10.3%. As in the second quarter, we have conducted the model year upgrades on the ET5, ET5T, EC6 and ES6, as the product upgrades happened in mid and late May. In that case, among the 72,000 units we've delivered in Q2, only around 20% were contributed by the model year '25 products. In that case, the actual margin improvement contributed by these four models is not that significant in comparison to Q1. And then in the third quarter, as we have the full quarter deliveries for the model year 2025 products as well as the start of deliveries of the L90, which will further help improve the vehicle gross margin. And then in Q4, as I mentioned, starting late September, we are going to start the deliveries of the ES8. We expect the vehicle margin to further grow. So Q4 also represents the first full quarter for the deliveries of both L90 and ES8. With that, we expect the Q4 vehicle gross margin to be around 16% to 17% for the entire group to be able to achieve breakeven. As based on the decade-long battery technology innovation, the in-house development of core parts and components as well as the continuous efforts in cost control and savings on the supply side as well as the product cost structure. We achieved not only competitive product performance for the L90 and beyond the ES8, but also a very competitive cost structure and pricing point. With that, in Q4, our gross margin target for the L90 and ES8 is 20%. In terms of the gross margin of other sales, it's expected at 8.2% in Q2 and it's mainly contributed by two factors. The first is regarding the revenues contributed by our existing users including via our aftermarket services, our auto financing business as well as the narrowed loss on the power services. And the second factor is regarding the margin contributed by our technological service provided to our partners. With these two combined, we've achieved a good and positive gross margin on other sales in Q2. And in terms of the revenues or margin contributed by the technological services we provide to the partners, as it is highly dependent on the product and the project stage, the actual revenues contributed may not be consistent from quarter to quarter. In that case, excluding that part, our expectation for the gross margin on other sales is to be breakeven or slightly with a slight loss quarter over quarter.

Geoff Chung, Analyst

Thank you for the new guidance. Looking forward to the fourth quarter. Thank you.

Operator, Operator

Thank you. Your next question comes from Bin Wang from Deutsche Bank. Please go ahead.

Bin Wang, Analyst

Thank you. I just want to ask for more details about the fourth quarter breakeven. Number one is that what's your R&D expense for the third and fourth quarters? I think you actually guide close to RMB1 billion in the fourth quarter. Do you still maintain the same guidance for the fourth quarter? And secondly, it's the same for SG&A. Lastly, what's the breakeven means? Do you breakeven in the OP level or net profit level? Is GAAP or non-GAAP? Thank you very much for my question.

William Li, CEO

Thank you for the question. Regarding the breakeven target, our quarterly breakeven target is based on a non-GAAP basis. And regarding the R&D and SG&A guidance, starting in Q2 this year, we have conducted a series of measures combining our CPU mechanism to control our R&D expenses. Our principle is that without compromising on the major and the core R&D activities and also product planning, we will keep improving the R&D efficiency. This means that without compromising or affecting our major product planning and R&D, we will push for higher efficiencies in the R&D activities. With that our target for the Q3 and Q4 R&D expenses on a non-GAAP basis will be RMB2 billion per quarter. And in terms of the SG&A expenses, also based on our CPU mechanism, we've conducted measures to improve overall SG&A efficiency. In the second quarter, our sales volume was at the magnitude of around 70,000 units. So the SG&A ratio to the sales revenue still accounts for a relatively high percentage. But as we grow our sales volume and sales revenue in Q3 and Q4, we expect the percentage of SG&A in the sales revenues to actually come down to a more reasonable range. But as in Q3, we're planning several new product launches, there will also be corresponding marketing and go-to-market expenses. In that case, in Q3, we are still not able to achieve a breakeven on the SG&A expenses. But in Q4, the non-GAAP target for the SG&A expenses will be within 10% of the sales revenue.

Bin Wang, Analyst

Thank you, Womin.

Operator, Operator

Thank you. Your next question comes from Tim Hsiao from Morgan Stanley. Please go ahead.

Tim Hsiao, Analyst

Hi. This is Tim from Morgan Stanley. Thanks for taking my question. So I have two questions. The first one is about the new model pipeline. Given the robust demand of L90 and ES8 that occupied our capacity, will the company adjust the launch schedule for the upcoming models? And we noticed that the NIO day has notably moved forward to late September. Can management also share more insight into the updated model pipeline in the following quarters? That's my first question. Thank you.

William Li, CEO

Thank you for the question. It's true that at the moment we actually prioritize the production of the L90 and also the All-New ES8 from the production capacity perspective. For the ARMOR brand, we even have to really give way to the L90 productions and compromising on the production of L60, so that we find that our L60 users are also waiting to pick up their cars. So right now we actually have four models with backlog order accumulated, and the users will need to wait for the new car pickup including L90, All-New ES8, L60, and Firefly. And regarding the production capacity for the ARMOR product, starting in October, we expect the capacity to come back to a normal range, mainly supported and fueled by the production capacity of the battery. As in the past several months, we've been working closely with our battery partners to ramp up the production capacity. With that in Q4, for the ARMOR brand, we expect the full supply chain production capacity to be around 25,000 units a month. And regarding the new brand for the launch of All-New ES8, we also have challenges regarding the supply of the brand new 102 kilowatt-hour battery. As the demand for the ES8 is actually stronger than we expected, we have underestimated the demand for the ES8 and also the volume assumption for the battery packs. We've been working closely with the battery suppliers and partners to secure the supply of this new battery pack. With that in Q4, we expect the full supply chain capacity for the new brand to also achieve a 25,000 units monthly capacity. And regarding Firefly, we are also steadily increasing its production and supply capacity. In Q4, we expect the production capacity to ramp up to up to 6,000 units a month at its peak. So it means that in Q4, the combined production capacity of all three brands will be as high as 56,000 units a month to support our demand. As we have already dedicated our full capacity to the production of the existing models in the market, so for this year, we will not have any new models launched or delivered to the market. Previously, we've mentioned that we plan to also launch the L80 of the Ambu brand, but as we now have run out of all the capacities available, we actually have to decide to delay the deliveries of this new model. But in terms of the launch or the go-to-market cadence for the L80, that's to be decided. In addition to the onboard L80, next year in the coming quarters, we also have another two new models coming under the new brand to also two large SUVs. One is the ES9 as many of the users and the public already know about it and also ES7, a large five-seater SUV model. As for NIO Day this year, as it is happening in September, the protagonist of this event will be definitely the all-new ES8.

Tim Hsiao, Analyst

Thank you, Lian. My second question is about the pricing strategy and also just a quick follow-up on the margin side. Because we noticed that both the L90 and the new ES8 have launched with aggressive pricing strategies. So I just want to know that will this pricing strategy be extended to all the upcoming models under both brands? And if that's the case, how should we think about NIO's gross profit margin trajectory into next year? What would be a more sustainable and ideal gross margin level once all the new models are upgraded next year? That's my second question. Thank you.

William Li, CEO

Thank you for the question. For the entire company, as we've also previously mentioned for the long-term, our group level product margin is actually 20%. More specifically on the gross margin by brand for the new brand, our target is to achieve 20% vehicle gross margin and even target a higher margin of 25%. For the ARMOR brand, no lower than 15% for the long term and for Firefly around 10%. For the ES8 and the L90 newly launched this year, as well as the new models coming up next year, we will also contribute to this target. At the product definition and design stage, we have already prepared for an aggressive pricing strategy and our cost structure can also support such strategy to achieve more competitive pricing of our products without compromising on the product competitiveness itself. This is actually driven and enabled by our decade-long tech innovation, technology accumulation, in-house development parts and systems, and also stringent cost control.

Operator, Operator

Your question comes from Jing Cheng from CICC. Please go ahead.

Jing Cheng, Analyst

Thank you for taking my questions. My first question is still about our L90 and also ES8. So we have already seen that these two new models have already demonstrated our enhanced product capability and also very competitive pricing still with a very solid gross profit margin. So besides previously, Stanley has already told us of the technology and also the platform upgrades. Could you share more about the underlying successful experience about these two new models such as our changes on maybe supply chain, maybe the dealers networks? This is my first question.

William Li, CEO

Regarding the overall product competitiveness of the third generation, it is actually getting stronger and better. This also allows for more competitive product competitiveness as well as the cost structure. As we've mentioned, this is enabled by our continuous tech innovation. Let's say the 900-volt high voltage architecture, this platform actually allows for more integrated and a lightweight design that's not only in the powertrain system but also the high voltage architecture throughout the vehicle to achieve high performance and lightweight design. Such lightweight design also allows for improved cost structure and user experience competitiveness. For example, on the ES8 and also L90, we've achieved a huge frunk and trunk space, such huge storage space is enabled by the high integration level of our architecture and systems. Another example is regarding the smart technologies and digital architecture. On the third generation, we adopted the innovative digital architecture with the central computing cluster plus the zonal controllers. This can help achieve a better cost, mass performance, and the management. Let me take e-fuels as an example. Previously on other older models, there was a physical fuse box that was as heavy as 10 kilos per car and it could take up eight liters of space. But with e-fuse, we are able to integrate them into the master board that can manage the power supplies throughout the vehicle at a very detailed and precise level, while still contributing to the mass reduction and cost improvement. This improvement in both cost structure and user experiences is enabled by the tech innovation. Another example is regarding our proprietary smart driving chip. Of course, we've made the major upfront investment in the chip development, but the performance of our in-house developed smart driving chip NX9031 can achieve performance on par with four flagship chips in the industry. So R&D wise, we made investment upfront, yet BOM cost-wise, this smart driving chip can also achieve savings. And another thing is regarding the technology roadmap, mainly the chargeable, swappable, and upgradeable technologies for our products. With this, we can select the most suitable and optimal battery packs including its capacity and the size for our users. For example, for some of our peers and competitors, they actually needed to strike a balance between the battery cost and also the battery range. Then they choose the LFP as the chemical system and they make a battery pack of around 90 or 100 kilowatt-hour capacity. But with that, the battery pack is actually very big and heavy. If you look at our battery packs for the Envoy L90, we put an 85-kilowatt-hour battery inside and for the ES8, a 102-kilowatt-hour battery inside. They can achieve the driving range and performance on par with those peers. But in terms of the mass, the 85-kilowatt-hour battery is only around 400 kilos and the 102-kilowatt-hour battery pack is only around 500 kilos. This is approximately 200 kilos lighter than many of our peers' solutions. This is also another mass and cost optimizations enabled by our chargeable, swappable, and upgradable tech solutions. In terms of a competitive product in both cost and user experience, I think three things will define the competitiveness of a product. The first is regarding the technology roadmap, the second is regarding product planning, and the third is regarding the product definition itself. Our past practices and experiences prove that our technology roadmap, including our multi-brand strategy, our chargeable, swappable, upgradable solutions, our full-stack tech capabilities developed in-house, as well as our product planning are in general in the right direction. Yet when it comes to product definition, we did have some lessons learned from the previous generations and platforms. With that on the third generation with our all-new ES8 and L90, we not only draw the best practices from the industry and peers, but also make corrections from within to achieve better product performance and success with ES8 and L90 as it draws from the effort of our competitive technology roadmap, reasonable product planning, and more precise product definition and market insights that can fit the users' needs in the Chinese market. In terms of supply chain, this is also playing a very important role in achieving the long-term competitiveness of our product cost structure by establishing a win-win cooperation with our partners. In the past year or two, we've also made adjustments to our supply chain and partner strategy. In general, we look for the partners who believe in the roadmap, technology decisions of the company, as well as believe in the long-term potentials of the company. We work closely with these partners to jointly define the cost targets and all types of targets. So for the existing products and upcoming platforms, we will also adopt this principle in our nomination and sourcing strategy to work closely with our partners.

Stanley Qu, CFO

Thank you, Tim.

Operator, Operator

Thank you. Your next question comes from Ming-Hsun Lee from Bank of America. Please go ahead.

Ming-Hsun Lee, Analyst

Thank you, Wei Lin, and congrats on the good results. I also have two questions. So my first question is, could you confirm your new model pipeline for 2026? Can I confirm there will be at least five new cars, which include ES6, ES7, ES9, L80, and also the second model under the Firefly brand?

William Li, CEO

Regarding our product strategy for 2026, as we've mentioned, we will focus on three large SUV models for the Envoy brand, and also the new brand. Regarding the ET5, ET5T, ES6, and ES6, we have just upgraded these four models to the model year 2025. For next year, we don't have major plans to upgrade or facelift these four models. As on the model year 2025, we've already upgraded interior, exterior, the smart system is also upgraded to the latest platform with both upgrades in the smart driving chip and operating system. Recently we have also announced to make the 100-kilowatt-hour battery a standard configuration on these four models. We believe that with all these changes, the competitiveness of these four models will continue to be strong in the coming quarters. Of course, it doesn't mean that we will make zero changes to this model. We will still roll out some product calendars, as earlier this year we have released the Champion Edition for the series five and six, and in the coming year we will also have such special versions and additions for these models. As for the Firefly brand, we don't have a plan for the second model next year.

Ming-Hsun Lee, Analyst

Thank you, William. And my second question is regarding the operating expense control. So in 2026, what level do we expect for your R&D expense per quarter? Do you think you can maintain around RMB2 billion non-GAAP R&D expense per quarter? And also, could you guide your latest CapEx plan for 2025 and 2026? Thank you.

William Li, CEO

Regarding the R&D expenses, starting this year, we've made major efforts based on the CPU mechanism to improve our R&D efficiencies and overall ROI of our R&D activities and investment. For next year, our quarterly R&D expense non-GAAP will be around RMB2 billion to RMB2.5 billion per quarter. That is a reasonable range for us to also maintain our long-term competitiveness from a technology perspective. The major liabilities will come from new model development as we believe that the investment for the foundational level R&D activities and technologies are mostly finished. Regarding CapEx, since we haven't started the operational target discussion and the setting for next year, I may not have a very clear or precise outlook regarding the CapEx for 2026, but I can share with you two principles we have. The first is regarding the power swap network. In general, we still hope to leverage as much as possible the resources for the Power Swap network construction. Regarding R&D CapEx, it's mainly dependent on the overall R&D cadence and also go-to-market strategies of the new models. Overall speaking for next year, we hope the CapEx can be similar to the level of this year or, if possible, achieve even better results next year. But as I've emphasized, it's highly dependent on the overall launch cadence and overall R&D cadence of the new models.

Operator, Operator

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

Paul Gong, Analyst

Thanks, William, for taking my question. My first question is regarding the impact of the 100 kilowatt hours of the battery that you are going to adopt across new brands. Can you share with us the financial impacts of this strategy? Definitely, we can see that the competitiveness of the vehicles is getting enhanced because of this 100 kilowatt hours of the battery. But what would be the incremental costs on your front? Thank you. This is my first question.

William Li, CEO

Thank you for the question. When we announced the policy changes on the 100-kilowatt-hour battery pack, we've already introduced the potential impact or implications on the financials of the product. When we launched the model year 2025 product, we offered a series of special offers and discounts to our users together with the products. At this time, when we make the 100-kilowatt-hour battery a standard configuration of the five and six series, we actually withdraw many of these offers we provided at the launch of the product. In exchange, we offer the 100-kilowatt-hour battery as a standard configuration. Therefore, from the transactional perspective, there is no major change from the users' perspective as well as from the vehicle margin perspective, there is also no major impact. Another impact is more on the sales and the upper funnel of our sales leads for the five and six series after announcing the change on the 100-kilowatt-hour battery. We have observed increases in the upper funnel incoming leads. Of course, this is a newly launched policy, and in terms of the long-term implication, we will still need some time to observe, but the overall impact is more positive than negative.

Paul Gong, Analyst

Okay. So my second question is regarding the impact of switching to your self-developed chips. Just now I think William mentioned that it saves cost and that it's depending on the volume because of the fixed cost versus the volume. Can you give us some color that, for example, if you are delivering 20,000 per month with a new self-developed chip, what would be the cost saving on a per-car basis? If this volume is coming to 50,000 per month, what would be the positive impacts from a cost-saving angle due to the switching of the self-developed chips? Just want to have a better estimate and sensitivity on that. Thank you.

William Li, CEO

Thank you for the question. Regarding the chip R&D expenses and investment, we actually recognize them in our immediate financials and the P&L, so its actual cost of savings per unit is not really closely tied to the actual volume we sell or the actual number of pieces we sell. As in terms of the production of these chips, we purchased the wafers directly from our chip manufacturing partners. In that case, the cost of saving per unit through the in-house developed chip is not tied to the delivery volumes we achieve. But in comparison to the chip solution we used on the second generation products, achieving the same level of computing performance, the cost is actually more advantageous with our own solution. Even on the third generation in comparison to the industry flagship smart driving chips, we still have cost advantages and competitiveness with our in-house solution. But here I will not elaborate on the specific savings achieved per piece.

Operator, Operator

Thank you. Your next question comes from Yuqian Ding from HSBC. Please go ahead.

Yuqian Ding, Analyst

Thank you, team. The first question would be more exploration on the pricing side. So ES8, L90 attractive pricing, good volume traction. How does management evaluate the potential internal cannibalization to the existing portfolio such as ES6 or L60 and the potential splash impact into next year's new model pipeline?

William Li, CEO

As we've mentioned, the pricing strategy for a product is highly dependent on market competition, the cost structure of the product, as well as the volume and pricing sensitivity of the product in the segment. For the L90, as we've mentioned, with its launch, it has actually helped boost the sales volume of the L60. Right now, even for the L60 users, they will have to wait for the new car deliveries and pickup. In August, we even achieved a new high for the order intake of L60 for this year. So the overall impact from L90 on L60 is positive. Regarding the all-new ES8, as we've also mentioned, we have made the 100-kilowatt-hour battery a standard configuration on the five and six series. The attractive pricing of ES8 is helping boost the brand awareness of the new brand, which can also introduce more attention to the five and six series. With this logical and clear pricing system set up for the brand, we believe that the overall impact will also be positive on the new brand. Maybe at the beginning, our fellow will struggle with how to allocate their focuses across different products. But for the long term, we believe that the impact of these two models and new models will be positive across the brands and the products. As we see strong demand for the all-new ES8 and L90, we've also observed successful product launches for large three-row battery electric SUV models not only by NIO but also by our competitors who previously only had products in the market. With all these large three-row SUVs coming to market, we also observed a market trend in the first half of this year. The growth rate of the large SUV segment increased by 39% year over year, while other segments were only 14%. If we consider the sales volume in July and August for both segments, I believe that the growth rate of the large three-row segment will be even faster than others. In that case, we are observing growing competitiveness of the products in the mid to large battery electric SUV segments, as this is more well received and evident to the public. This is why we say that the golden era of the large battery electric SUV is arriving, with more mature user mindset and stronger product competitiveness in the market. This will also help the long-term competitiveness and popularity of our existing SUV models including ES6 and L60.

Stanley Qu, CFO

Thank you, Richard.

Yuqian Ding, Analyst

Yes, got it. Thank you. The second question is a little bit more exploration on OpEx side. You touched upon the innovation redesign and R&D commitment. Could you give us a little bit more quantification and breakdown in terms of the OpEx cuts target, if there are any? Or just breakdown the cost optimization initiatives seeing a little bit more details? Thank you.

William Li, CEO

Thank you for the question. As we've introduced towards the Q4 non-GAAP breakeven target, our overall principle is that for the R&D expenses, without compromising on the major R&D activities and long-term competitiveness, we would like to control the quarterly R&D expenses to be within RMB2 billion for this year and for SG&A ratio to the sales revenue around 10% this year. That's our target for this year towards the quarterly breakeven. For the long term, as we've also mentioned, for the year of 2026, our R&D expenses will be around RMB2 billion to RMB2.5 billion per quarter depending on the product go-to-market and also development cadence. As for the SG&A expenses, we would like to continue to achieve higher efficiency and utilization of expenses. That's the overall principle.

Stanley Qu, CFO

Thank you, Yuxin.

Operator, Operator

Thank you. Your next question comes from Tina Hou from Goldman Sachs. Please go ahead.

Tina Hou, Analyst

Thanks, management for taking my question. Just a very quick one. So in the longer term, how should we think about the stabilized sales volume of L90 as well as ES8 on an average monthly basis? Thank you.

William Li, CEO

Thank you for the question. As the automotive industry here in China is highly competitive and if you look at the sales trend of the smart electric vehicles, you seldom see any new model that can capture a very stable market share and importantly maintain popularity in the market for a very long time. In that case, it's also difficult for us to really share with you a clear outlook regarding what the stabilized sales volume of the ES8 and L90 will be for the long term. However, we set ourselves a higher target, and we will also try our best. Starting this year for the new and ARMOR brands, we also started to build up the team capabilities by implementing a completely new sales and marketing paradigm. We hope that through this new sales and marketing paradigm, we can maintain and capture the market share of our new models as soon as possible to prolong their impact in the market and stabilize their sales volume against fierce competition as long as possible. However, as we have just implemented this paradigm, it will take time for us to understand if it is truly helping us stabilize the great models ES8 and L90. Overall, we hope this can achieve good results satisfying for the market, investors, and our users.

Rui Chen, Head of Investor Relations and Corporate Finance

Thank you. As there are no further questions now, I'd like to turn the call back over to the company for closing remarks. Thank you again for joining us today. If you have any further questions, please feel free to contact NIO's Investor Relations team through the contact information on the website. This concludes the conference call. You may now disconnect your lines. Thank you.