Earnings Call
NIO Inc. (NIO)
Earnings Call Transcript - NIO Q3 2021
Operator, Operator
Hello, ladies and gentlemen, thank you for standing by for NIO Incorporated’s Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. Today’s conference call is being recorded. I would now turn the call over to your host, Ms. Eve Tang from Capital Markets and Investor Relations. Please go ahead, Eve.
Eve Tang, Head of Investor Relations
Good morning and good evening everyone. Welcome to NIO’s Third Quarter 2021 Earnings Conference Call. The company’s financial and operating results were published in the press release earlier today and are posted at the company’s IR website. On today’s call, we have Mr. William Li, Founder, Chairman of the Board, and Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; and Mr. Stanley Qu, Senior Vice President of Finance. Before we continue, please be kindly reminded that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in recent 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 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 third quarter 2021 earnings call. In the third quarter of 2021, we delivered 24,439 ES8, ES6, and EC6 vehicles, setting a new quarterly record with a growth of 100.2% year-over-year. From September 28 to October 15, we made upgrades and restructuring to our manufacturing lines at the Hefei JAC-NIO advanced manufacturing center to support further capacity expansion and the introduction of new products, including the ET7. These upgrades affected our October deliveries, resulting in 3,667 vehicles delivered, but normal production resumed in late October. According to the China Passenger Car Association, the penetration rate of battery electric vehicles among passenger vehicles reached 17.5% in September. The automotive industry is rapidly transforming towards smart technology and electrification, leading more consumers to choose smart EVs over traditional internal combustion engine vehicles. The momentum for orders remains strong, and our new orders reached an all-time high in October. Currently, our delivery volume is primarily limited by supply chain fluctuations, and we expect total deliveries in the fourth quarter of 2021 to be between 23,500 and 25,500 vehicles. In the third quarter, our vehicle gross margin was 18.0%, while our overall gross margin was 20.3%, thanks to sales of regulatory credits. Next, I would like to share some recent operational highlights. In September, we completed the trial production of the ET7, indicating that the overall manufacturing process is ready, and preparations for its mass production are underway. We have made various optimizations to the ET7 during this process, including improving its drag coefficient from 0.23 to 0.208. We are confident in the competitiveness and market performance of the ET7. The software and hardware development of NAD is also on track, and the development of two additional products on the NIO technology platform 2.0 is progressing smoothly, with deliveries expected to start in the second half of next year, details of which will be shared at NIO Day 2021. In September, we launched a 75 kWh standard range battery pack with LFP/NCM hybrid cells, enhancing the competitiveness of NIO’s battery systems through our industry-first hybrid cell layout and advanced thermal management and state-of-charge estimation technologies. Our battery system team worked closely with our partners to address the challenges associated with LFP cells, such as low-temperature performance and state-of-charge estimation. Additionally, compared to the 70 kWh NCM battery pack, the 75 kWh hybrid battery pack offers higher energy density, longer driving range, and lower cost. Regarding production capacity, construction is ongoing for our second manufacturing site at NIO Park in Hefei, which commenced on April 29. We finished the main structure construction by August 26 and plan to start installing equipment by the end of this month, with official production expected to begin in the third quarter of 2022. On the supply side, the global COVID-19 pandemic, extreme weather events, and other factors continue to pose challenges to our supply chain. Our supply chain, R&D teams, and partners are implementing measures to maintain our record-high quarterly deliveries and secure supply for upcoming deliveries and new product manufacturing. In terms of our sales and service network, we currently operate 32 NIO houses and 285 NIO spaces across 132 cities in China. We will keep expanding and optimizing coverage in other cities, particularly in Tier 2 and Tier 3 areas. We also have 43 NIO service centers and 181 authorized service centers in 141 cities, with plans to add more to ensure high-quality services to our growing user base. To date, we have deployed 608 battery swap stations in 153 cities across China, completing over 4.74 million swaps. Additionally, we have installed over 460 power charger stations and 3,155 destination chargers nationwide. As we accelerate the deployment of battery and charging infrastructure, the advantages of our battery swapping technology and Battery-as-a-Service contribute to our appeal to users. In the global market, we opened our NIO house in Norway on September 30, which has garnered significant attention. On the same day, we began delivering the ES8 and providing services in Norway. The ES8 achieved a Euro NCAP 5-star safety rating and received positive feedback from local users and media. The order intake has exceeded our expectations, with 92% of users choosing our brand. NIO’s products, services, and innovative business model are well-received not only in China but also in the global market. We plan to expand our presence in more global markets in 2022. Users are the foundation of NIO, and a diverse user community enriches our organization and drives improvement. In October, NIO collaborated with the NIO User Trust and the Sanjiangyuan Ecology Protection Foundation to create a sustainable ecosystem in the Sanjiangyuan National Park. We are excited to announce that NIO Day 2021 will take place in Suzhou on December 18 this year, with our NIO user advisors and organizing committee working hard on preparations. Thank you for your support, and with that, I will now hand the call over to Steven, who will provide the financial details for the quarter.
Steven Feng, CFO
Thank you, William. I will now go over our key financial results. For the third 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 third quarter were RMB9.81 billion or $1.52 billion, representing an increase of 116.6% year-over-year, an increase of 16.1% quarter-over-quarter. Our total revenues are made of two parts: vehicle sales and other sales. Vehicle sales in the third quarter were RMB8.64 billion or $1.34 billion, accounting for 88% of total revenues in this quarter. It represented an increase of 102.4% year-over-year, an increase of 9.2% quarter-over-quarter. The increase in vehicle sales year-over-year and quarter-over-quarter was mainly attributed to the increase in vehicle delivery volume. Other sales this third quarter were RMB1.1 billion or $181.4 million, representing an increase of 350.8% year-over-year, an increase of 117.9% quarter-over-quarter. The increase in other sales year-over-year and quarter-over-quarter was mainly due to the sales of automotive regulatory credits, and the battery upgrade service, as well as other revenues, which increased in line with incremental vehicle sales in the third quarter of 2021. Cost of sales in the third quarter was RMB10.81 billion or $1.21 billion, representing an increase of 98.3% year-over-year and an increase of 13.6% quarter-over-quarter. The increase in cost of sales was in line with revenue growth, which was mainly driven by the increase of vehicle delivery volume in the third quarter of 2021. Gross profit in the third quarter was RMB1.99 billion or $0.31 billion, representing an increase of 240.3% year-over-year, and an increase of 26.6% quarter-over-quarter. Gross margin in the third quarter was 20.3%, compared with 12.9% in the same quarter of 2020, and 18.6% in the second quarter of 2021. The increase in gross margin year-over-year was mainly driven by the increase of vehicle margin and sales of automotive regulatory credits. The increase in gross margin quarter-over-quarter was mainly due to the sales of automotive regulatory credits. More specifically, vehicle margin in the third quarter was 18.0%, compared with 14.5% in the same quarter of 2020, and 20.3% in the second quarter of 2021. The increase of vehicle margin year-over-year was mainly driven by the higher average selling price, as well as lower material costs. The decrease of vehicle margin quarter-over-quarter was mainly due to the increased financing at subsidized rates for vehicle purchases, which resulted in a deduction of vehicle revenue and an increase in tooling depreciation costs. R&D expenses in the third quarter were RMB1.19 billion or $185.2 million, representing an increase of 101.9% year-over-year, an increase of 35% quarter-over-quarter. The increase in R&D expenses year-over-year and quarter-over-quarter was mainly attributed to increased personnel costs, new research and development functions, as well as incremental design and development costs for new products and technologies. SG&A expenses in the third quarter were RMB1.82 billion or $0.28 billion, representing an increase of 94.1% year-over-year, an increase of 21.8% quarter-over-quarter. The increase in SG&A expenses year-over-year and quarter-over-quarter was primarily due to the increase of personnel costs in sales and service functions and costs related to sales and service network expansion. Loss from operations in the third quarter was RMB0.99 billion or $153.9 million, representing an increase of 4.9% year-over-year and an increase of 29.9% quarter-over-quarter. Share-based compensation expenses in the third quarter were RMB255.6 million or $41.2 million, representing an increase of 439.8% year-over-year, an increase of 5.6% quarter-over-quarter. The increase in share-based compensation expenses year-over-year was primarily attributed to additional options and restricted shares granted. Net loss in the third quarter was RMB835.3 million or $129.6 million, representing a decrease of 20.2% year-over-year, an increase of 42.3% quarter-over-quarter. Net loss attributable to NIO’s ordinary shareholders in the third quarter was RMB2.86 billion or $443.7 million, representing an increase of 140.7% year-over-year, an increase of 333.6% quarter-over-quarter. In the third quarter of 2021, NIO repurchased 1.418% equity interest in NIO China from a minority strategic investor for a total consideration of RMB2.5 billion and recorded an amount of RMB2.02 billion in accretion on redeemable non-controlling interest to redemption value. Basic and diluted net loss per ADS in the third quarter were both RMB1.82 or $0.28 per ADS. Excluding share-based compensation expenses and accretion on redeemable non-controlling interest to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB0.36 or $0.06 per ADS. Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB47 billion or $10.3 billion as of September 30, 2021. And now for all of this outlook, as William mentioned, for the fourth quarter of 2021, the company expects deliveries to be between 23,500 and 25,500 vehicles, representing an increase of approximately 35.4% to 46.9% from the same quarter of 2020 and a decrease of approximately 3.8% to an increase of approximately 4.3% from the third quarter of 2021. The company also expects total revenues in the fourth quarter of 2021 to be between RMB9.38 billion and RMB10.11 billion, representing an increase of approximately 41.2% to 52.2% from the same quarter of 2020 and a decrease of approximately 4.4% to an increase of approximately 3.1% from the third quarter of 2021. This business outlook reflects the company’s current and preliminary view on the business situation and market condition, which is subject to change. Now, this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A.
Operator, Operator
Your first question comes from Tim Hsiao of Morgan Stanley. Please ask your question.
Tim Hsiao, Analyst
Hi Will, and Steven, and team. Thanks for taking my question. It’s great to see NIO manage to navigate through the component crunch and production hiccup in the first half. Just two quick questions from my side. The first one, we have seen restructuring and upgrade of the production lines, costs around two rounds of disruption to our delivery and production this year. Just wanted to confirm that, if we completed all the necessary restructuring for the three new models next year or should we expect any similar disruption sometime next year? My second question is about the details of the other sales. Could you share more information about NIO’s third quarter other sales, because it has been surging quite a lot? I think a more significant revenue increase was attributable to the sales of EV credits and the battery upgrade services. Can we have the further breakdowns regarding the contribution from both items, and what could be the scale, as well as the contribution into the fourth quarter? Because if you look at the current fourth quarter revenue guidance, it seems that it just mainly reflected the contribution from the weaker sales. So should we expect a contribution from other sales to rise further? Those are my two questions. Thank you.
William Li, CEO
Tim, thank you for your question. I will address the first one while Stanley will handle the second. In our earlier comments, we discussed the progress of capacity expansion at our two plants. For the first half of funds, as you noted, from the end of September to mid-October, we are implementing some restructuring and upgrades on our manufacturing lines to enhance production capacity and prepare for new product launches. After this upgrade, we may undertake some minor restructurings and modifications of the production lines, but we anticipate that these changes will not significantly impact the normal production of vehicles. Regarding the new products, some will be produced at the second plant, which means we will need time to ramp up production for these new items, but this will not disrupt the manufacturing of our existing products.
Stanley Qu, SVP of Finance
Hi, Tim. Regarding the second question, among the other revenue, RMB517 million was contributed by the EV credit sales and after deduction of this EV credit sales, our total gross margin for other revenue decreased from minus 5.6% to 12.6%, that’s because it’s driven by the expansion of our sales and service network in Q3. And as mentioned by William in his explanation, the construction of our sales and service network infrastructure moved earlier and faster than our sales increase, especially this year. So, we are expecting the total revenue of other service will increase, but the gross profit margin for these products will decrease a little bit in Q4. Yes.
Tim Hsiao, Analyst
Okay. Great. Could you - sorry, just a quick follow-up. Could you highlight some potential contribution from the sales of credit into fourth quarter?
Stanley Qu, SVP of Finance
Yes. Almost, the majority of the EV credit sales was realized in Q3. So in Q4, we don’t expect a significant revenue from this part. Yes.
Tim Hsiao, Analyst
Got it great. Thank you.
William Li, CEO
Yes, as Stanley mentioned, this year is different from last year. We recognized the sales of the regulatory credits much earlier than we did last year.
Operator, Operator
Your next question comes from Nick Lai of JP Morgan. Please ask your question.
Nick Lai, Analyst
Thank you for taking my question. It’s Nick from JP Morgan. Good morning, William and Steven. My two simple questions are, number one related to margin, and the second question is related to ET7, the new exciting model. First of all on the margin front, yes, vehicle margin in the third quarter was 18%, slightly down from 20% in 2Q. I wonder how should we think about the margin into 4Q or the first half of next year taking into account of two factors; the first factor is the pricing dynamic or competition from peers, and the second is improved raw material prices, especially on the battery front. That’s the first question. And I mean, I think you answered part of my question earlier on credit sales. So, second question on ET7, it’s simply a very exciting product, when should we expect the car to hit a showroom in the near term? And medium to longer term, after production is ramped up, how should we think about the volume and the possibility of ET7, relative to our current high-end product, ES8? ES8’s current monthly run rate sales volume is about 1,500. How should we think about the profit margin and the volume for ET7? Those are two simple questions. Thank you.
Stanley Qu, SVP of Finance
Hi, Nick. This is Stanley. About your first question regarding the gross profit margin and our 75-kilowatt hour battery start will start to be delivered from November. And gross profit margin will be improved a little bit, compared with the 70-kilowatt hour battery. But prices of our key materials like aluminum, copper, and also chips are increasing - are increasing, which will be pressures for our cost controlling. But we are confident to continuously improve our gross profit margin, which combines efforts from product design and supply chain optimization. So for Q4, we are expecting that gross profit margin will keep stable and for next year, our target is to achieve a 20% gross profit margin for vehicles. And along with our launch of NT2.0 products from a long-run perspective, we aim to achieve a higher profit margin of about 25% for vehicles.
William Li, CEO
As Stanley mentioned, for the NT2.0 product, we expect that with economies of scale, increased volume, and optimizations across all areas, we should be able to maintain an average vehicle gross margin of 25% in the long run. Initially, we will need some time to ramp up production of the new products based on the NIO Technology Platform 2.0. According to our internal preliminary estimates, we believe the vehicle gross margin for the new product should be quite favorable. Regarding the ET7 delivery, we plan to begin ET7 deliveries in the first quarter of next year. This means the vehicles will be available in our NIO Houses and NIO Spaces around the time of the spring festival, after which we will start delivering to users. The ET7 features numerous advanced chips and sensors, which has increased the pressure on mass production. However, we believe everything is on track. Thank you, Nick.
Operator, Operator
Your next question comes from Mr. Ming-Hsun Lee of Bank of America Securities. Please ask your question.
Ming-Hsun Lee, Analyst
Thank you. Good morning. William, Steven, and Stanley. My question is regarding your supply chain. Currently, we are hearing some auto companies expect the chip shortage situation will not be fully resolved by the middle of next year. So right now, I want to hear your latest view regarding your chip supply situation and also the large size battery pack supply situation. If consumers place orders to you, I think the waiting time is more than two months already. How will you retain long-term consumers? Also, next year, we expect the EV purchase subsidy to be cut further. So in this case, if the consumer priced order before year-end, but they need to get a car delivered after, should we continue to give them a similar subsidy amount, for us to absorb the subsidy cut? That is my question. Thank you.
William Li, CEO
Thank you, Ming, for the question. The chip shortage situation is currently better than in Q3, but challenges remain due to the unpredictability of chip supply. We are aware of the situation at STMicro in Malaysia, and overall, conditions are improving. Our teams have adapted well to these challenges, consistently finding solutions. Our volume is still relatively small compared to larger OEMs, making our challenges less severe. Many domain controllers in our vehicles are developed in-house, allowing us to swiftly find alternatives and expedite validation and production if certain chips are in short supply. Thanks to these capabilities, we have managed to address some chip shortages affecting our vehicles. Regarding the 75-kilowatt hour battery pack, we announced in September that deliveries will begin gradually in late November and we expect production to reach a suitable level by the first quarter of next year. The battery supply remains a significant constraint for us, and our partner, CATL, has invested in supporting our vehicle production. Currently, if orders are placed, there will be a wait for car delivery. We've announced policies to support our customers during this waiting period, such as providing NIO credit or points, which have helped us in the past. Since 2018, these policies have been effective, and we don't anticipate them affecting our users during the wait. About the EV subsidy, we believe it won't significantly impact us because our average selling price is relatively high compared to our products. Even with the subsidy considered, it will not be a large amount in relation to the vehicle prices. Thank you.
Operator, Operator
Your next question comes from Bin Wang of Credit Suisse. Please ask the question.
Bin Wang, Analyst
Thank you for taking my question. I have two. The first one is about the application IPO because one of the key constraints is that NIO seems to be the only one still just in the U.S. and also some media reports suggest it’s because of the NIO User Trust. Can you explain a little bit why NIO User Trust could be one of the reasons when you come back to IPO? That is the first question. And the second thing is about gross margin. Actually, you mentioned one of the reasons was due to the auto finance, resulting in margin decline. However, if you have seen that demand has been very good and short on supply, I’m just curious why we would still increase auto finance due to falling margin. Theoretically, should we not reduce the auto finance line? And also, I told some friends that you actually may remove or reduce the auto price in the number four quarter. Can I confirm if this is the case? Can I assume the gross margin will increase in the number four quarter, compared to three, because you don’t provide auto finance anymore? And the average ASP has also increased because auto finance seems to be one of the reasons for ASP decline in the third quarter compared to the second quarter. Thank you.
Steven Feng, CFO
Bin, this is Steven. Thank you for your questions. I would like to make two comments regarding your first question. First, we're open-minded. We are closely monitoring the market and will make the right choice in the best interest of our shareholders. Second, we are exploring the possibilities to get listed in the Hong Kong market and we are indeed doing what’s necessary to evaluate and communicate.
William Li, CEO
Thank you, Bin, for your question. Yes, we will make decisions that serve the interests of our investors and remain open to various options. Regarding the impact of auto financing on our margins, if you are familiar with our operations, you will see that we need to take measures such as balancing supply with product needs and user demands. For instance, we announced the 75-kilowatt hour battery pack in September, and many users are eager to wait for it. However, we will begin delivering this battery pack in late November, and we will need time to ramp up its production to an acceptable level. This is why we need to balance user demand with product configurations and battery supply, and we are encouraging users to opt for the 100-kilowatt hour battery pack instead. We believe that the best course of action is not to lower product prices or offer discounts to our users on the vehicle prices. That’s why we aim to take measures to balance demand and supply. However, these will only be short-term strategies to address the current supply and demand situation. Once we reach a reasonable supply level in the long term, we anticipate improvements in overall and vehicle gross margins.
Operator, Operator
Your next question comes from Edison Yu of Deutsche Bank. Please ask your question.
Edison Yu, Analyst
Hi, everyone. Thank you for taking our questions. First question is on the ET7 ADAS capabilities. Could you discuss what kind of features we could expect at launch? If you can’t reveal that right now, would you expect to do demonstrations on the road in the coming months, similar to what other competitors have done? Then, second question, more long-term, last year at NIO Day, you teased a solid-state battery or a hybrid solid-state battery coming to the vehicles, I believe at the end of next year. Is there any update on this? Is this still on track? Any details you could provide there would be great. Thank you.
William Li, CEO
Actually, I believe many people are currently working on the demos. We prefer that the teams concentrate their efforts on mass production of the technology and the introduction of new products like the ET7. As for the ET7 NAD, we will need some time to progressively roll out these advanced features to users. We plan to base all features on our proprietary full stack technology. I have previously mentioned that NAD features will be available to users through a subscription model, similar to the ADS service. This innovative approach allows us flexibility in determining how and when we offer these services and features. We must find a balance among various factors, including regulations, safety, and reliability. Once we achieve this balance, we can begin providing those services to users. Currently, many companies are working on similar demos, so we do not want to expend our energy on that. Concerning the 150-kilowatt hour battery pack, we are collaborating with our partners, and everything is progressing as planned. We previously stated that we would start delivering this battery pack in the fourth quarter of next year, and we believe we will meet this timeline.
Edison Yu, Analyst
Thank you.
William Li, CEO
Thank you, Edison.
Operator, Operator
Your next question comes from Jeff Chung of Citi. Please ask your question.
Jeff Chung, Analyst
Hi, William, Steven. I got three questions. Number one, what kind of annualized total volume production from the NT2.0 platform should lead to the 25% GP margin according to your guidance? Secondly, apart from the three brand new products launching in 2022, how likely are we going to launch a facelift version of the existing products, the ES8, ES6, and EC6? How likely are we to launch six new products next year instead of three brand new products? Finally, about the EV credit, could you guide us how many points we sold in the third quarter? From there, we can estimate the ASP and credit compared with previous quarters? Thank you, William. Thank you, Steven.
Steven Feng, CFO
Jeff, regarding your first question about GP margin, our 25% GP margin for the NP2.0 platform is based on the annual production volume of 300,000 units per year.
William Li, CEO
Just like Steven mentioned, our plan is that if we can achieve an annual production of 300,000 units, we should be able to reach a 25% vehicle gross margin on the NIO Technology Platform 2.0. We are very confident about achieving this target. For our existing products, we plan to upgrade them to the NIO Technology Platform 2.0. We believe this is crucial for the company, and we will need to carefully manage the schedule for these product upgrades. Internally, we have already started development to work on this and are considering how to upgrade the different products to the NIO Technology Platform 2.0.
Steven Feng, CFO
Yes. About the EV credits, around 200,000 points were sold in Q3. What I want to remind is that the price volatility for EV credit is also high, along with China’s EV penetration increase recently. I hope this helps you build expectations for our future NIO credit revenue.
William Li, CEO
This year, we believe the number of credits we receive will increase. However, the penetration rate of electric vehicles has risen rapidly. This is likely to change the situation for next year regarding regulatory credit sales. Based on my estimation and all those factors, the price of the EV credit is expected to be different or possibly lower compared to this year’s price.
Operator, Operator
Your next question comes from Paul Gong of UBS. Please ask your question.
Paul Gong, Analyst
Yes, hi. Thanks guys. I have two questions. The first one is regarding Norway operation and obviously, it has been more than one month. You just briefly mentioned that 92% of the users chose us, and the order has been exceeding your expectations. Can you provide more color on how the achievement was? What challenges did you face there? Obviously, it’s a rich country, but the labor cost might also be higher than in China. What can you share with us? After Norway, what is your next destination for overseas operation? The second question is regarding your expense spending. It seems that for this quarter, the increase in SG&A has been a bit faster than expected, while the R&D increase has been a little bit slower than you expected. What is the key rationale behind it and key reasons behind? Again, you have so many orders and deliveries because of supply chain disruption, can we see the slowdown a little bit of the SG&A and instead put more budget into R&D in the following one or two quarters?
William Li, CEO
Thank you for your question. Regarding our operations in Norway, we believe the basic operations have met expectations in all aspects. After the NIO House opened on September 30, I would like to share some data. After the test drive, one-fourth of the users placed orders for our products. We believe this is very impressive and shows that efficiency is much higher compared to here in China. This is on the delivery side. On the services side, we do need to do a lot of work; our swap stations in Norway have just started operations because we previously needed to send people over to work on the installation and commissioning of the swap stations. For after-sales, we also encountered some challenges brought by the COVID situation. But the order momentum is quite strong. We have conducted some trial deliveries at the end of September and in October, and we believe the delivery in November is going to improve significantly. There is a lot of order backlog, but we would like to control our pace of delivery a little bit because internally we set a target for ourselves, especially regarding user satisfaction rates. We use a kind of Vision Action Upgrade designed in the company to set targets for ourselves. My personal goal is to ensure we achieve high user satisfaction rates. According to feedback from the ground in Norway, we understand that our reputation has been good. One of my friends even sent me a video showing many visitors at our NIO House in Norway, and I am happy to see so many people there. We will continue to make a decisive investment in service and other aspects and will do this step-by-step. Next year, besides Norway, we plan to enter an additional five countries in Europe. For the product planning of all these European countries, based on our technology platform 1.0, the ES8 will only be sold in Norway. For the other new countries we plan to enter, we will only sell products based on the technology platform 2.0. Regarding the investment question, this relates to our long-term competitiveness or the company’s long-term strategy. In China, the competition is becoming more fierce because many new entrants are joining the smart EV industry. We believe product development, technology improvement, and sales and service network infrastructure, including the swapping and charging network, are part of our long-term competitiveness. This is why we doubled down on investments in all those areas in 2021. In 2022, we will continue to make decisive investments in these aspects. We believe infrastructure like the swapping charging network and sales and service network are also part of our long-term competitiveness. Perhaps in the third quarter of this year, investments in those aspects ramped up faster than expected, leading to higher than anticipated SG&A costs. On the R&D side, we have also doubled our R&D personnel this year, and we have been working on many new products and technologies. However, for other new products and technologies, it will take some time to ramp up the pace. In Q4, we will see some R&D expenses and cost increases in this regard. Currently, we have multiple new products and new projects working in parallel. At the beginning, when we set up these projects, costs might not have been substantial, and it will take time to see all those R&D investments reflected on our balance sheet or P&L. Initially, the costs are relatively small but will gradually increase as the project progresses. However, we believe that product and technology should be the cornerstone of our long-term competitiveness, and that’s why we will continue to make decisive investments in these areas.
Chang Liu, Analyst
Yes. Thank you for taking my questions. My first question is regarding capacity expansion. Could you give us guidance on next year’s sales volume, especially for the new three models and also our current three models? So can our capacity meet the needs next year? Considering strong EV demand for our new, more numerous models in 2023, do we have plans to construct more new plants? My second question is regarding the upgrade of smart hardware, as we expect a rapid upgrade in smart hardware over the coming years. How do we maintain our competitiveness for our next models and keep our users satisfied? Finally, for globalization, do we have long-term guidance for the proportion of overseas sales accounting for overall sales? Thank you.
William Li, CEO
Thank you for your questions. Currently, we have two plants. The first plant has been upgraded to increase production capacity, and we expect to start production at the new plant in the third quarter of next year. We believe these two plants will meet our demand in the short term, with a combined maximum production capacity of 600,000 units annually based on double shifts. This capacity should suffice for our needs in the near future. Regarding the NIO Technology Platform 1.0 smart hardware upgrades, we have previously informed our users that we will assess plans for these upgrades based on our design. For the NIO Technology Platform 2.0, we plan to offer services starting next year, with more details and updates to follow. While the upgrades on the NIO Technology Platform 1.0 will not match the experience of the 2.0 version, we believe the digital capabilities of our existing products will improve significantly. We have factored in all possibilities for hardware and software upgrades in our product design. For instance, we have implemented hardware upgrades alongside continuous software enhancements. We launched Aspen 3.0 for our existing users, receiving positive feedback. We will keep upgrading our software to ensure we deliver better services and experiences. We also believe Aspen 3.0 lays a strong foundation for our entry into global markets. In assessing global markets, China remains the largest auto and premium market, making it our top priority. However, I cannot share specific targets for our global aspirations at this time, though I anticipate that international markets could represent about 50% of our total sales in the long term.
Operator, Operator
As there are no further questions, I would like to turn the call back over to the company for closing remarks.
Eve Tang, Head 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.