Earnings Call Transcript - NIO Q4 2021

Eve Tang, Host, Capital Markets and Investor Relations

Good morning and good evening everyone. Welcome to NIO's fourth quarter and full year 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 VP 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the Company with the US Securities and Exchange Commission and the Stock Exchange of Hong Kong 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 information. 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 fourth quarter and full year 2021 earnings call. In the fourth quarter of 2021, we delivered 25,034 ES8, ES6 and EC6 representing an increase of 44% year over year. 2021 was a year full of challenges for NIO and the global auto industry. By overcoming the pandemic, semiconductor shortages, supply chain volatilities and many other difficulties we have continued to lead the premium smart electric vehicle market in China with a total delivery of 91,429 new vehicles in 2021 representing a strong increase of 109.1%. In January 2022, NIO delivered 9,652 vehicles increasing by 34% year over year. In light of the Chinese New Year holiday, NIO delivered 6,131 vehicles in February 2022 representing a growth of 10% year over year. During the holiday, we adjusted the production lines to prepare for the delivery of ET7 in late March 2022. Although user demand and order momentum remain strong, production and delivery have been affected by COVID and the volatility of the supply chain production capacity. We expect total delivery in the first quarter of 2022 to be between 25,000 to 26,000 vehicles. We will start the delivery of ET7, the first product on NT2 on March 28, 2022. In early March we kicked off the test drive of ET7 nation-wide. Users who test drove ET7 have spoken highly about the product. The test drive to order conversion rate exceeds our expectations which gives us great confidence in the competitiveness of NT2. In 2021 the battery electric vehicle market maintained a faster than expected uptrend. According to China Passenger Car Association the retail penetration rate of battery electric vehicles grew from 5.9% in January to 18.6% in December last year. In Tier 1 and Tier 2 cities in China such as Shanghai, the penetration rate of battery electric vehicles witnessed a more prominent growth. In Shanghai, among the sales of all ICE and electric SUVs priced above RMB350,000, NIO enjoyed a market share of 23% with its sales ranked at the top in 2021. We believe that this EV growth trend will also gradually expand to Tier 3 and Tier 4 cities in the future. In terms of gross margin, benefitted from the increase of revenue per vehicle and the cost optimization brought forward by the 75kWh LFP NCM hybrid battery. The vehicle gross margin reached 20.9% in Q4 2021 and 20.1% for the full year 2021 respectively. Currently, the whole industry is confronted with the pressure of cost increases. We are paying close attention to the dynamics in the supply chain and are working closely with other partners to enhance efficiency in order to reduce the impact to the vehicle gross margin. On a separate note, NIO started to be listed, by way of introduction, on the Stock Exchange of Hong Kong under Stock Code 9866 from March 10, 2022. The listing in Hong Kong marks another milestone in the history of NIO and enables us to serve more investors in the future. Next, I would like to share some recent key highlights of our R&D and operations. In 2021, we started to step up our investment in R&D with the overall non-GAAP R&D expenses exceeding RMB4.1 billion in 2021. We have sped up the development of new products and increased our investments in full-stack autonomous driving and other core technologies. Investment in R&D is of critical importance for near to long-term competitiveness. Starting from this year, we will be able to see part of the fruitful results from last year's R&D investment and efforts. In 2022, we plan to deliver three new products based on NT2 with ET7 being the first. The mass production of ET7 is well on track. The product itself has led the industry in various aspects including computing power for autonomous driving. At the NIO Day on December 18, 2021, we unveiled ET5, a mid-size smart electric sedan. As a perfect combination of NIO's supercar DNA and the concept of design for AD, ET5 is equipped with NAD NIO autonomous driving and PanoCinema, a panoramic digital cockpit enabled by AR and the VR technologies. It comes as standard with 100 configurations for comfort, safety and smart technology. After the launch, ET5 has attracted a wider and more diversified user base and received more orders than our expectations. The delivery of ET5 is expected to start in September this year. Soon we will also launch ES7 our first SUV model on NT2 which is positioned as a mid-large premium five-seater SUV and is expected to start delivery from the third quarter of this year. In the coming years, we will continue to elevate both our R&D investment and efforts in core technologies especially in key capabilities such as full-stack autonomous driving and battery technologies. We believe the investment in core technologies will not only enhance our sustainable competitiveness in both of our technologies and products but also improve our gross margin and profitability in the long run and ultimately create long-term value for our shareholders. With regards to production capacity, the production line upgrade at the JAC-NIO advanced manufacturing center is in progress phase by phase. By mid-year, the production cadence across all workshops will reach 60 jobs per hour. We have largely completed the building construction of our second manufacturing facility F2 located in NeoPark. Finished the equipment installation and are now working on the calibration, F2 is planned to be put in operation in the third quarter this year with a designed production cadence of 60 jobs per hour. On March 16, the first validation view of ET5 rolled off the production line from the F2 vehicle-powered production center. On the side of the supply chain, we are still faced with challenges from chip supply volatility, raw material cost increase, COVID and the changing international situation. In the past two years and more, our teams and partners have accumulated rich experience in securing supplies for production. We will continue to work closely and do our best to safeguard production and delivery going forward. 2021 has been a year of decisive investment in charging and swapping infrastructure as well as the sales and service network. In terms of the sales and service network, we now have 46 NIO houses and 341 NIO spaces in 155 cities worldwide. In China, we have 60 new service centers and 179 authorized service centers in 146 cities. As the sales and service network expands quickly, we have been continuously optimizing the network deployment and the operational efficiency of each touchpoint while delivering high-quality services to users. In 2022, we plan to open more than 100 new sales outlets and over 50 new service centers and authorized service centers. In terms of the charging and swapping network, we have deployed 866 battery swap stations in 190 cities and completed over 7.6 million swaps in China. So far, we have 711 supercharging stations and 3786 destination chargers in China. In 2022, we will add 30 new destination charging routes to the Power Up Plan. With that, NIO will cumulatively operate over 1300 battery swap stations, 6000 power chargers and 10,000 destination chargers in China. We will further expand our power network to provide a better charging and swapping experience to users. In the global market, ES8 has formed an appreciation of users in Norway. This year, our monthly deliveries have ranked the top two among the six-seater or seven-seater passenger cars. The successful delivery and high-quality user service in Norway also helped us accumulate valuable experience in providing services in other countries and regions and gain confidence in entering more new markets. In 2022, NIO will bring its product and comprehensive services to Germany, the Netherlands, Sweden and Denmark. The team building and market entry preparation are moving forward smoothly. The mass-market brand has been progressing according to plan. We have established the core team specified at the strategic direction and the brand positioning and reached a critical research and development stage of the first batch of products. The development of NIO won't be possible without the continued support of our users. In 2021, 3756 user volunteers contributed their time and efforts in events like auto shows and NIO Day. More than 12,000 users participated in over 260 charity events to make active contributions to society. At NIO Day 2021, we announced the user partner program with which new users can share benefits with each other and build an even deeper connection among users in the community. In addition, NIO launched the Clean Parks, an ecosystem co-construction initiative. So far, we have rolled out the initiative in six national parks and natural reserves in China. We aim to contribute to ecosystem building, support the adoption of smart electric vehicles and clean energy infrastructure in the natural reserves, and establish a clean and low-carbon energy circulation to protect the authenticity and integrity of ecosystems. 2021 was a year for NIO to develop fundamental powers and make comprehensive preparations for the next stage of development. 2022 is a year for NIO to press ahead at full speed. We will deliver three new products, continue to invest in R&D and infrastructure to improve our long-term competitiveness, expand our production capacity to meet the faster-growing user demand, and serve users in more countries and regions. We will always stay true to our original aspiration of putting users' interests first, make continuous improvements, and deliver products and services beyond user expectations. As always, thank you for your support. With that, I will now turn the call over to Steven to provide you the financial details for the quarter.

Steven Feng, CFO

Thank you, William. I will now go over our key financial results for the fourth quarter and full-year of 2021. To be mindful of the length of this call, I encourage listeners to refer to our earlier press release which is posted online for additional details. Our total revenue in the fourth quarter was RMB9.9 billion, or $1.6 billion, representing an increase of 49.1% year-over-year, an increase of 1% quarter-over-quarter. Our total revenues are made of two parts: vehicle sales, and other sales, because sales in the fourth quarter were RMB9.2 billion or $1.4 billion, accounting for 93% of total revenues in this quarter. It represented an increase of 49.3% year-over-year, an increase of 6.7% quarter-over-quarter. The increase in vehicle sales year-over-year was mainly attributed to high deliveries. The increase in vehicle sales quarter-over-quarter was primarily attributed to a higher average selling price, decrease in subsidization, the use of the co-financing arrangements, and higher deliveries. Other sales in the fourth quarter were RMB0.7 billion or $107.5 million, representing an increase of 46.8% year-over-year and a decrease of 41.3% quarter-over-quarter. The increase in other sales year-over-year was mainly attributed to the increased revenues derived from sales of service and energy packages and accessories in line with incremental sales, as well as increased revenues from used car sales and auto-financing services in the fourth quarter of 2021, which were partially offset by sales of automotive regulatory credits in the fourth quarter of 2020. The decrease in other sales quarter-over-quarter was primarily attributed to the sales of automotive regulatory credits in the third quarter. Cost of sales in the fourth quarter was RMB8.2 billion or $842.8 million, representing an increase of 49.1% year-over-year, an increase of 5% quarter-over-quarter. The increase in cost of sales year-over-year was primarily driven by the increase of delivery volume in the fourth quarter of 2021. Gross profit in the fourth quarter was RMB1.7 billion or $266.7 million, representing an increase of 48.8% year-over-year and a decrease of 14.7% quarter-over-quarter. The increase in gross profit year-over-year was mainly contributed by increased vehicle sales and increased vehicle margin. The decrease of gross profit quarter-over-quarter mainly resulted from the sales of automotive regulatory credits in the third quarter of 2021 which contributed a higher profit. Gross margin in the fourth quarter of 2021 was 17.2% compared with 17.2% in the fourth quarter of 2020 and 20.3% in the third quarter of 2021. The decrease of gross margin quarter-over-quarter primarily resulted from sales of automotive luxury credit in the third quarter of 2021 which contributed a higher gross margin. More specifically, vehicle margin in the fourth quarter was 20.9% compared with 17.2% in the fourth quarter of 2020 and 18% in the third quarter of 2021. The increase of vehicle margin year-over-year was mainly driven by the higher average selling price with a higher take rate of 100-kilowatt hour battery. The increase of vehicle margin quarter-over-quarter was primarily attributed to decrease in subsidization in user vehicle financing arrangements. R&D expenses in the fourth quarter were RMB1.83 billion or $286.9 million, representing an increase of 120.5% year-over-year, an increase of 53.3% quarter-over-quarter. The increase of R&D expenses quarter-over-quarter and year-over-year was primarily attributed to the increased personnel costs in research and development functions, as well as the incremental design and development costs for new products and technologies. SG&A expenses in the fourth quarter were RMB2.36 billion or $370.1 million, representing an increase of 95.4% year-over-year, an increase of 29.2% quarter-over-quarter. The increase in SG&A expenses year-over-year and quarter-over-quarter was primarily due to the increase in personnel costs in sales and service functions, and costs related to the sales and service network expansion, as well as incremental marketing and promotion expenses including for the host of NIO Day in December of 2021. Loss from operations in the fourth quarter was RMB2.45 billion or $383.7 million, representing an increase of 162.5% year-over-year, an increase of 146.5% quarter-over-quarter. Share-based compensation expenses in the fourth quarter were RMB396.7 million or $62.3 million, representing an increase of 559% year-over-year, an increase of 49.4% quarter-over-quarter. The increase in share-based compensation expenses year-over-year and quarter-over-quarter was primarily attributed to additional options and restricted shares granted. Net loss in the fourth quarter was RMB2.14 billion or $336.4 million, representing an increase of 54.4% year-over-year, an increase of 156.6% quarter-over-quarter. Net loss attributable to NIO's ordinary shareholders in the fourth quarter was RMB2.179 billion or $342 million, representing an increase of 46.0% from the fourth quarter of 2020 and a decrease of 23.8% from the third quarter of 2021. Basic and diluted net loss per ADS in the fourth quarter were both RMB1.36 or $0.21 per ADS. Excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB1.07 or $0.16 per ADS. Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB55.4 billion or $8.7 billion as of December 31, 2021. Additionally, we achieved positive cash flow for our operating activities for the full year 2021. Now for our business outlook. As William mentioned, for the first quarter of 2022, the Company expects deliveries to be between 25,000 to 26,000 vehicles, representing an increase of approximately 24.6% to 29.6% from the same quarter of 2021. The Company also expects the total revenues of the first quarter of 2022 to be between RMB9.63 billion and RMB9.9 billion or between $1.51 billion and $1.57 billion. This would represent an increase of approximately 20.6% to 25.1% from the same 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 session.

Operator, Operator

The first question comes from the line of Tim Chau of Morgan Stanley. Please go ahead.

Tim Chau, Analyst

Hi, William, Steven, and Stanley. Congratulations on this early result and thank you for taking my questions. I have two questions. The first one concerns costs and margins. NIO is well-positioned to manage battery cost inflation without a price increase, but can you share if the increasing share of the high-margin 100-kilowatt hour and 75-kilowatt hour hybrid battery packs, or other initiatives, have sufficiently offset margins before this year? Additionally, if price increases are necessary in the future, could NIO simultaneously raise prices for consumers who purchased the batteries and for battery asset management companies, or would renegotiating contracts with the management companies take longer since it operates more like a B2B business? My second question is about the model. Currently, the ES6 and ES8 cover the SUV market well, priced between RMB350,000 and RMB600,000. With the upcoming launch of the ES7, as mentioned by William, how can we effectively differentiate the ES7 from existing SUV models to avoid dilution, and will we adjust the pricing strategy or reposition current SUV models alongside the ES7 launch? Those are my two questions. Thank you.

William Li, CEO

Thank you, Tim. Regarding the first question, actually starting from the fourth quarter of last year, we started to deliver the 75-kilowatt hour LFP and NCM hybrid battery pack to the users, which has contributed to cost optimization and benefited our vehicle gross margin growth in the fourth quarter. But I believe everyone knows that starting from the third quarter and the fourth quarter of last year, we have been seeing some raw material cost increases in the industry, and there has been lots of cost increase in upstream of the whole industry chain which means that we won't need to share the pressure across the whole industry, gradually. At this moment, we do not have any plan to increase our pricing yet. However, during the year we are going to upgrade our product competitiveness and capabilities so at that time, based on the cost of raw materials in the industry, we will evaluate our pricing strategy as well. But at this moment, we're not going to increase our price for the products. On another point, because of the sales growth, we believe this has also contributed to the amortization of the cost and benefit of our vehicle gross margin increase. However, regarding the raw material cost increase, it's not just about the battery but also other commodities like copper and aluminum. Those raw material cost increases have also affected our vehicle gross margin as well. In light of the cost increase of those raw materials I have just mentioned and other bond cost, over the full year vehicle gross margin for 2022 will still target to reach around 18% to 20%. The second question is about the ES7. This is going to be the first SUV product based on the NT2 and it's positioned as a mid-large five-seater SUV. In this specific segment, we have witnessed some user demand increase recently. For example, the BMW X5 we believe is going to start the local production very soon. For the ES7, it's going to have industry-leading battery, electro power train, and also the smart technologies as well. We believe it's going to showcase the high-performance capabilities of the product and also satisfy users demand in terms of the premiumness and luxury feeling. We also believe this is going to attract users who have very high requirements regarding the product quality and the premiumness. So, all in all, we believe the ES7 is going to contribute and going to be complementary to other current models ES8, ES6, and ET6 instead of affecting the sales of the current products. We are going to launch the ES7 in the second quarter of this year and will share the pricing information as well at that time. At this moment we can see regarding the market segment of the mid/large SUV priced above RMB400,000 has an addressable market size of over 200,000 units. This market size is also growing. That's why we're very confident with the performance of the ES7 after its launch.

Tim Chau, Analyst

Thank you.

Operator, Operator

Thank you for the questions. Next question comes from the line of Bin Wang of Credit Suisse. Please go ahead.

Bin Wang, Analyst

I actually have a question about the ET7 service because recently there was a media call. First one, EV they say that ET7 received very good order flow, about 15,000 order backlog, which indicates monthly volume could be around 5K. What's your comment about this? Second thing is about the margin, because we've seen in the fourth quarter last year that service actually had very big negative cost margin, more than 30%. What's the reason behind that and what's the outlook of this fixed margin going forward? Meanwhile, you just provided 18% to 20% margin guidance. Is this just the vehicle gross margin or actually including the service margin already? Thank you.

William Li, CEO

Regarding the first question of the ET7, of course, we cannot discuss the specific order numbers at this moment. But what I can say is that it is actually much more than the media report. For the ET7 market segment, we can see some other benchmarks. For example, the BMW 5 Series, Audi A6, and the Mercedes C-Class. ET7 has a similar pricing to the target group which sells the product as well, especially regarding the BMW 5 Series. So, for BMW 5 Series, we can see that the monthly delivery number is around 12,000 to 15,000. Of course, for the ET product, it will need some time for users to adopt and accept but if we look at the examples of the Shanghai market, right now in the premium SUV segment in Shanghai, our market share is around 23%. So, if we also mirror this to the sedan market, we believe there is a lot of room for growth and also potential for our ET7. So, at this moment we cannot see how much we're going to deliver every month, but according to the user feedback we receive right now, we're very confident with the ET7's performance in the future. No, Stanley.

Eve Tang, Host, Capital Markets and Investor Relations

William.

Stanley Qu, SVP of Finance

Regarding the ES7, previously I have also mentioned that the ES7 is positioned in the mid-large premium SUV segment. If we talk about the specific benchmark, we can refer to BMW X5. After the local production of the BMW X5 we can see that the market actually has very high expectations for BMW X5 performance. The current market buy of this segment is over 200,000 units so if we look at the comparables, we can use the BMW X5 as a reference and based on this, we're very confident in our ES7 because we believe it can actually outcompete the BMW X5.

Steven Feng, CFO

Regarding the second question, we sped up the construction of power cell stations in 2021 and added more stations to serve end users, which resulted in increased costs for other revenue streams compared to Q3. In 2022, we will continue to roll out battery charging and swapping facilities. We expect depreciation of operating expenses to rise, but we believe that the initial investment in battery swap stations will enhance our brand, user experience, and sales, providing long-term value to the Company. Thus, experiencing a short-term loss from power cell stations is a strategic choice. Over time, the total vehicle deliveries will grow, and service efficiency will improve. We anticipate that margins from power, maintenance, and repair services, along with other services, will gradually get better. Additional revenue and margins generated from innovative business models like Battery as a Service, NIO Life, and other services will continue to rise.

Bin Wang, Analyst

Okay.

Steven Feng, CFO

The gross profit margin target, 18% to 20% for 2022 is for vehicle, not the overall gross margin. Thank you.

Operator, Operator

Thank you for the questions. Next question comes from the line of Ming Hsun Lee of Bank of America. Please go ahead.

Ming Hsun Lee, Analyst

My question is about the capacity of lidar hybrid batteries and the chip, particularly in light of the announced chip shortage that may lead to price increases. I also want to know if the chip will limit your vehicle deliveries this year.

William Li, CEO

Regarding production capacity, I previously mentioned that by mid-year, our first factory, the JAC-NIO Manufacturing Centre, will achieve a production rate of about 60 units per hour across various workshops. The designed capacity for Factory 2 is also set at approximately 60 units per hour. However, since Factory 2 is new, it will take some time to gradually increase production. If we maintain that 60 units per hour rate for 4,000 hours annually, the total annual production capacity would be 240,000 units. If we extend working hours to 5,000 per year, this could increase annual capacity to around 300,000 units. We anticipate significant improvements in vehicle production capacity in the fourth quarter, which will facilitate our next production phase. As for the battery production capacity challenges, we have been collaborating with our partner, CATL, since last year to expand production lines for battery cells. Based on the current plan, we expect the battery capacity to meet our needs this year, though rising battery costs pose another concern. We face a larger challenge with chip shortages, as our vehicles rely on over 1,000 chips, with about 10% possibly experiencing supply issues at times. We began to see chip price increases in 2021, impacting our vehicle gross margin. We have adjusted our gross margin targets to account for these chip cost increases. Our main issue with chips is supply. For high-end chips from Nvidia and Qualcomm, we have established long-term strategic partnerships, ensuring adequate supply for production. However, we may encounter periodic challenges with more common chips from suppliers like TI and Infinium, affecting production. To mitigate these risks, we may explore alternativas for chip replacements or build strategic inventories. Overall, we expect to see significant improvements in vehicle and battery production capacity in the second half of the year, particularly by the fourth quarter, despite ongoing supply chain volatility, especially concerning semiconductors.

Ming Hsun Lee, Analyst

Thank you.

Operator, Operator

Thank you for the questions. Our next question comes from the line of Jeff Chung of Citi. Please go ahead.

Jeff Chung, Analyst

I have three questions. First, should we anticipate a potential MSRP increase in the near term to counterbalance possible rises in battery and aluminum costs? If so, how would that be implemented, and if not, what are the reasons? The second question concerns the visibility of sales volume for the existing EC6 product in the upcoming months. Are we confident in maintaining sales of 10,000 units a month, and could you provide more details on the ramp-up pace of the ET7 in the second quarter? Lastly, regarding the lithium spot price in China, do you believe it has already reached its peak due to recent government actions? Thank you.

William Li, CEO

For the current ES8, ES6, and EC6, we are utilizing the NIO Technology Platform 1.0, developed in 2018. This chip's efficiency may be affected when running complex software. Therefore, starting this year, we plan to upgrade the smart hardware of our existing products and provide after-sales upgrade services to users. We will launch this program at an appropriate time. We believe that we do not need to adjust our pricing for the existing ES8, ES6, and EC6 at this moment. However, as we upgrade the smart hardware and introduce new models, we may reevaluate our pricing strategy in light of increased supply chain costs. Regarding the performance of our current products and whether we can still reach 10,000 units per month, our order momentum in March leads us to believe we can meet our expectations. User demand is strong, and when comparing our current AD6 and EC6 with other electric and internal combustion engine products, we see several competitive advantages, which supports a solid demand momentum. For the ET7 product ramp-up, because the ET7 is going to be manufactured in the first factory we called F1 and they're going to share the production line with the current product ES8, ES6 and EC6, at the same time we will also introduce some new manufacturing technologies and techniques in the production of ET7. So that's why, starting from last year, we started to adjust the production lines in the F1 to support the new product's production. In the meantime, I have also mentioned about the ES7 which is going to start delivery in the third quarter of this year. This product is also going to be manufactured in the F1. So, the situation in F1 is quite complicated as you can see because we need to make sure we have sufficient production capacities to support the current ES8, ES6 and EC6 but at the same time, we also need to produce the ET7 and also prepare for the ES7's production. So that's why we believe the ramp-up progress of the ET7 is probably going to be a little bit slower compared to that of the ET5. So, it seems ET5 is going to be manufactured in a separate new plant called F2. So, we believe that probably around the third quarter of this year, we should be able to reach a normal production cadence for the ET7. Regarding the lithium carbonate cost increase, we have done very in-depth research regarding the overall industry chain especially the upstream. We believe the cost increase or the price hikes is mainly due to the opportunistic price hikes and there is no specific big gaps in terms of the demand and the supply of the lithium carbonate materials. Of course, right now, we can see some Chinese authorities like MIIT have already started to set up some mechanisms to manage the situation. At the same time, we also like to urge the companies in the upstream of the industry chain that they should think more from the long-term benefit of the overall development of the whole industry instead of manipulate or take the opportunity of the cost increases to increase their price.

Operator, Operator

Thank you for the questions. Next question comes from the line of Nick Lai of J.P. Morgan. Please go ahead.

Nick Lai, Analyst

Thank you for taking my question. I have two inquiries. First, regarding margin and second, concerning export business. William has already discussed the GP margin, so I would like to focus on the OP margin. Last year, we recognize that the increase in R&D spending was largely due to the rise in revenue. Moving into 2022, how should we approach SG&A and R&D expenses either in dollar amounts or as a percentage of revenue? Is it reasonable to expect that the RMB percentage of revenue will decrease significantly while SG&A will align closely with top-line sales? The second question pertains to ASPOR. While it may not represent a large segment of total auto sales, given the recent dynamics in Europe and stronger revenue performance in dollar or euro terms, do you have any updates on the ASPOR situation? Thank you.

William Li, CEO

Regarding the OP margin, last year in terms of the Company's strategy, we would like to make sure that the gross profit can cover the SG&A cost, and we believe through the efficiency improvement and execution we have followed through this strategy in 2021. In the coming years, we will continue to make decisive investments in terms of the R&D and the infrastructure. Of course, our strategy will stay the same; that is, we would like to make sure we can use the gross profit to cover the SG&A costs. If we look at the EU market, of course last year, because that was the first year for us to enter the global market, meant that last year we needed to make some advance investment, and we believe this year the efficiency is much higher than last year. In terms of the R&D front, we are going to step up our R&D investments. This year we believe the R&D investment is going to be more than doubling that of 2021 because we are going to invest in some long-term core technologies and some fundamental technologies as well as new products for 2023 as well as some product adaptation for the global market. By the year-end of 2022 our R&D headcount is going to reach around 9,000 and we believe this is going to be a big increase compared with our current R&D team size. This is the overall plan for the 2022. In terms of the overall strategic direction for the Company, our target is that we can achieve breakeven for a single quarter in the fourth quarter of 2023, and we can achieve breakeven or reach profitability in 2024 for the full year.

Steven Feng, CFO

The second question is about our global business, right? No, actually right now every month we deliver about 108 in Norway, so that boosts our confidence a lot, as it proves our product's competitiveness and also our business model. However, since we will kick off our SUV in Europe in the second half of this year, so the contribution of the European market to sales volume won't be very significant in this year. But from now on, NIO continues to develop and improve its product portfolio and service network, establish local user communities, and pursue a high user satisfaction. With that we believe that market share and sales volume in Europe will come along naturally.

Operator, Operator

Allow me to take the next questions from Fei Fang of Goldman Sachs. Please go ahead.

Fei Fang, Analyst

Let me just quickly translate for myself. Can management talk a little bit about the utilization metrics of your infrastructure, battery swap stations, and Supercharger stations, how often people use it, what's the unit economics, or what's the difference between top cities versus lower-tier cities? Thank you.

William Li, CEO

Previously, we have also mentioned that cumulatively we have completed over 7.6 million swaps, and it means that the current status for the swap station is that every day we can complete around 30,000 swaps. For some areas with more users of course we will be able to accommodate over 1000 swaps for one power swap station in one day, but highways probably in one day the power swap station is going to accommodate around 10 to 20 swaps per power swap station. Because we have deployed the power swap station network in advance, probably one or two years in advance, because of the design target of the power swap station network is that the ratio between the power swapper to the user should be around 1 to 1000. But if we look at our parent power network, especially for the power swap network, we have over-deployed some power swap stations at this moment to make sure we have a much better experience for the users.

Operator, Operator

Certainly. Next question comes from the line of Edison Yu of Deutsche Bank. Please go ahead.

Edison Yu, Analyst

Thank you for addressing our questions. First, could you provide insight into the rollout schedule for features in autonomous driving? What types of features do you anticipate the LiDAR will facilitate, and when can we expect these to be available in the vehicles? Secondly, regarding the broader NIO ecosystem, there are reports about your work on a smartphone. How should we understand developments beyond the car? I know that VR could play a significant role. Any details you can share would be appreciated. Thank you.

William Li, CEO

Thank you for your question. Of course, with the timing of the delivery of the ET7 we are going to start to provide the enhanced ADMS features first to the users. But on top of that, we have already queued up the full stack of autonomous driving capabilities from the perception to the controlling strategy. We target to start providing the AD as a service probably in the fourth quarter of this year with our NAD technology. Of course, we have always been actively exploring the possible connections and the synergies between the vehicle and smartphones and other mobile terminals because we believe there are lots of synergies between these two products in terms of the fundamental technologies, the supply chain and the software. At the launch of the ET5 at the NIO Day, we have also introduced some AR and VR technologies as well and we believe there should be lots of room for innovation and we can also think about some innovative applications in the vehicles.

Operator, Operator

Thank you for the questions. Next question will come from the line of Xue Deng from CICC. Please go ahead.

Xue Deng, Analyst

So my next question is, what's the CapEx budget in 2022 and will you please introduce the detail about the main directions and the exact amount of money? Thank you.

Steven Feng, CFO

Thank you, Deng Xue. As William mentioned, our gross profit margin can already cover our SG&A expenses, and this is also our target for 2022. Therefore, we intend to primarily utilize our cash on hand for R&D activities, as well as for capital expenditures related to new product developments and production facilities, service network expansion, and the necessary charging and working infrastructures. Additionally, as previously discussed, we aim to increase our swap stations to 1,300 by the end of 2022. We will also open 100 new houses and spaces, and establish 60 new service centers, which includes 50 new service centers in 2022. Furthermore, we plan to construct NeoPark in Hefei this year. Overall, the total expenditure will likely see a significant increase compared to 2021. Thank you.

Operator, Operator

Thank you for the questions. The next question comes from the line of Paul Gong from UBS. Please go ahead.

Paul Gong, Analyst

Yes, hi, thanks for taking my question. Glad I still have a chance to ask how you went at this late moment. Let me just limit my question to one. I want to know more about your thoughts about the mass market brands. Obviously, you have to compromise some of the features that NIO has for more attractive pricing points or some cost comparisons. So, the amount of the features for the new offering including say the exterior, the interior, the advanced driving features, the acceleration, the driving range, the battery swap stations, as well as let's say the digital experience and also the service. So, what do you think is the things that you are waiting to compromise on your mass market brands that would be reserved exclusively for the NIO brands and you're not expecting from the mass market brands? Just this question. Thank you.

William Li, CEO

Thank you for your question. Of course, if we want to increase our volume and expand our user base, different companies will have very different strategies. For example, some peers like Tesla, they have adopted very different strategies compared with ours. For Tesla, they basically differentiated the Model 3 and Model Y from the Model X and Model S with a very big price gap. So, by doing this they entered the mass market with the Model 3 and Model Y. So far, this has been quite successful, but at the same time we have also seen some downside. For example, the sales of the Model X and Model Y have decreased significantly despite the product cycle. So, we believe there are some underlying fundamental rules of the auto industry. That is, there is a limited bandwidth of a specific brand. It's very difficult to imagine a single brand can actually support the pricing range from RMB100,000 to RMB1 million. It's not feasible and I believe this is against common sense. So, for NIO right now, we target the market segment that is around $50,000 to $100,000 and if we want to reach down to the mainstream market, that is priced around $30,000 to $50,000. We believe this is a much bigger market and there is a reasonable market size for us to grow and we can also achieve reasonable growth margin. We also need to take some lessons learnt from the Model 3 and Model Y. We understand of course, for this mass market, we will also need to rethink the fundamental architecture of our product and also need to think about using different kind of materials and also different manufacturing technologies for our products. In terms of the mass market, we believe a more sensible approach is to use a new brand to enter this new market segment. We believe this is a better strategy for us. We can also see some successful examples in the market with this strategy. For example, Audi and Volkswagen and the Lexus and Toyota. We believe this can also be a strategy for us to disrupt the market as well. Of course, for the mass market brands, the prerequisite for this is to make sure we can achieve high efficiency and also achieve reasonable vehicle gross margin.

Operator, Operator

Thank you for the questions. Now, I would like to turn the call back over to the Company for closing remarks.

Eve Tang, Host, Capital Markets and 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 line. Thank you.