Xpeng Inc. Q1 FY2022 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for the First Quarter 2022 Earnings Conference Call for XPeng Inc. At this time, all participants are in a listen-only mode. After the management’s remarks, there will be a question-and-answer session. Today’s conference call is being recorded I will now turn the call over to your host, Mr. Alex Xie, Head of Investor Relations of the Company. Please go ahead, Alex.

Thank you. Hello, everyone, and welcome to XPeng's first quarter 2022 earnings conference call. Our financial and operating results were issued via newswire services earlier today and available online. You can also view the earnings press release by visiting the IR section of our website at ir.xiaopeng.com. Participants on today's call from our management will include Co-Founder, Chairman and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Finance, Mr. Dennis Lu; Vice President of Corporate Finance and Investment, Mr. Charles Zhang; and myself. Management will begin with prepared remarks, and the call will conclude with a Q&A session. A webcast replay of this conference call will be available on the IR section of our website. Before we continue, please note 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 results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the Company as filed with the U.S. Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements except as required under the applicable law. Please also note that XPeng's earnings press release and this conference call include the disclosure of unaudited financial measures as well as unaudited non-GAAP financial measures. XPeng's earnings press release contains a reconciliation of the unaudited non-GAAP financial measures to the unaudited that measures. I will now turn the call over to our Co-Founder, Chairman and CEO, Mr. He Xiaopeng. Please go ahead.

Hi, everyone. In the first quarter of 2022, XPeng delivered 34,561 vehicles, representing 159% year-over-year growth. We continue to rank number one among emerging EV makers in China as measured by vehicle insurance registration volume. Notably, our monthly deliveries once again exceeded 15,000 units in March, demonstrating a return to the same robust level as the peak season last year despite the impact of COVID-19. Heading into 2022, our products and technologies' competitive edge as well as our brand awareness continue to improve. The demand for our products was strong. In March, our monthly volume of new orders reached a new high. Meanwhile, our order backlog also hit historically high levels. From March 21, we raised the price across our models by RMB 10,000 to RMB 20,000 to cover the cost increase of batteries, raw materials, and chips. Following the price increase, consumer demand for the mid- to high-end BEV segment has remained resilient. We expect our new orders in May, excluding some cities impacted by COVID-19, will return to the levels before the rise in price. According to data released on Chinese passenger vehicle insurance registrations, the BEV penetration rate in March reached over 24%, in particular, exceeding 30% in Shenzhen and Shanghai. While the industry has changed under the current impact of COVID-19-related restrictions and raw material price surges, the long-term trend of increasing BEV adoption and the strong growth trajectory will continue. I believe our relentless efforts to advance our product's competitiveness, technological advancement, intelligent capabilities, and quality, in addition to the ever-growing brand awareness, position us well as we work to gain market share in the mid- to high-end BEV market segment and pursue our strong growth strategy. Now turning to supply chain management. Given the COVID-19 resurgence, starting in early April, COVID-19 infections spiked in certain cities, and the related lockdown policies have led to serious challenges in the auto supply chain. Based on our earlier judgment of the supply chain risk in 2022, we have stepped up our preparation for our supply chain and built inventory for some key components. During this challenging period, we heightened our focus on strengthening our core capabilities. We worked to reinforce our supply chain system and R&D capability, advancing our core competencies to better position our company amid the ongoing challenges of industry-wide auto part shortages and cost inflation. For example, we have established partnerships with a number of industry-leading battery suppliers since 2021 in order to diversify our battery supply, which we are on track to accomplish in the second quarter of 2022. This will help reduce the risk of supply location and supplier concentration, serving to directly boost our future delivery efficiency, including from the second quarter of 2022 onward, and the burn cost optimization in the long run. The chip supply challenge may persist longer. In terms of our chip-related supply chain management, we have started to gradually develop our in-house R&D capabilities for our powerful embedded systems hardware and underlying software platform since 2015, and we expect to deploy such platform on a broader scale across our new models from this year. Our pursuit of developing such technologies in-house enables us to quickly address the chip supply shortage and enhance verification, integration, and implementation of alternative chips much more efficiently. It also provides a highly flexible infrastructure technology platform for us to tackle the semiconductor chip shortage challenges and strengthen our cost control capability. XPeng's manufacturing is mainly based in Guangdong, thanks to the successful containment of the resurgent COVID-19 outbreaks in the Guangzhou province and government support from central and local authorities; supply chain in key areas is gradually recovering. We have resumed double chip production at our Guangzhou plant since mid-May and are making every endeavor to accelerate vehicle delivery to better serve our customers. I would also like to highlight that our long-term investment in smart EV technology supports our ability to build customer trust and loyalty as well as distinctive smart technology brand equity. Our highly NGP mileage penetration rate in the first quarter was nearly 70%. And by the end of the first quarter, our highway NGP had assisted our customers in driving more than 24 million kilometers. These achievements will allow us to pave the way to make our next-generation full scenario advanced driver-assistance system available to a broader customer base. In February, we OTA released our rider-enabled valet parking assist function that offers automated parking across different floors in multistory parking lots, marking the industry's first mass-produced solution ever. In the near future, we plan to OTA release the industry's first mass-produced LIDAR-enabled adaptive cruise control and lane centering control function. It is built on augmented perception capabilities by adopting camera and LIDAR fusion, which enables better detection of drivable areas and surrounding traffic participants, making optimal decisions to ensure a safer and more comfortable driving experience. In mid-May, we successfully completed testing of the latest engineering version of our City NGP in Guangzhou, navigating through very complex driving scenarios across a broader area of downtown Guangzhou. Our City NGP demonstrated a smooth driving experience with high safety standards. We will continue to improve the customer experience of our City NGP through iterative software updates. As soon as we obtain the related approval for high-definition maps of city roads, we plan to launch the City NGP and progressively roll out to more cities. Once the City NGP is capable of handling NCN driving scenarios, we believe there will be a fundamental change in customers' driving experience, bringing it to a man-machine co-pilot stage. Leveraging our proprietary technologies of highway NGP, VPA-L, LCC.L and CDM DP, along with our unique closed loop of data capabilities, I'm confident that our next-generation advanced driving assistance system from G9 will be superior to solutions offered by our peers regarding safety, performance, cost, and generalization. Our vision is to make the advanced driving system available to a much broader customer base while ultimately transitioning to full autonomous driving. We will not simply stack smart hardware components; rather, we are resolved to develop a robust full scenario autonomous driving system with strong performance and a high level of safety at affordable costs, thereby creating greater value for our customers and our company. With our in-house developed full-stack software and core hardware at an advanced level, our next step is to deeply integrate ADAS, smart cockpit, smart chassis, next-generation electronic and electric architecture, and powertrain systems, lifting comprehensive capabilities of our future smart EV products while allowing us to provide a brand-new smart product experience at lower costs. On May 9, we made our XPILOT software a standard configuration on mid- and high-end versions of our existing EV models. This will allow us to accelerate the penetration of XPILOT software, strengthen our capabilities to provide innovative functions through cross-domain integration, and make our XPILOT more affordable through economies of scale. With the upcoming mass adoption of our XPILOT as well as our advancement towards Level 4 autonomous driving technology in 2026, we believe more business models to monetize new software and new ecosystems will emerge. Moving on to our product pipeline. Given the fact that the COVID situation is well contained in the Guangzhou province, where our headquarters is located, the R&D of all new models is progressing well. In March, the P7 became the first BEV model among emerging Chinese EV makers to reach the benchmark production volume of 100,000 units. Meanwhile, its monthly delivery exceeded 9,000 units. The G9 is our flagship SUV model. We plan to officially launch G9 in the third quarter, followed by mass deliveries in the fourth quarter. The G9 is powered by an industry-leading 800-volt high-voltage powertrain platform, next-generation driver-assistance platform, and electronic and electric architecture. We hope the G9 will become a benchmark model in its segment, both in comfort and luxury, in addition to its industry-leading technologies. We also expect G9 to be a blockbuster model in the medium- to large-sized smart electric SUV market. In 2023, we plan to introduce two new models. One is based on our new B class platform, and the other is built on our new C Class platform. We expect these two new models to feature several industry-first technological innovations in addition to their superior designs. In combination with the existing models, our product portfolio will strengthen our presence and leadership in each sub-segment of the RMB 150,000 to RMB 400,000 price range. In addition, the development of our flying vehicle is well on track with XPeng Aero HT, a portfolio company in our ecosystem. According to its latest product design, the two-seat flying vehicle's core is a car that mainly drives on the road, while users may conduct safe flights with vertical takeoff and landing when road conditions are open and appropriate. It will deliver a brand-new mobility experience for our customers from 2026 or in the near future, in suburban areas of cities where people can actually experiment with a new combination of mobility experiences. We'll focus on the platform-based architecture and apply modular design and next-gen manufacturing processes when defining our new models to allow more models to share the same powertrain platform, ADAS, electronic and electric architecture, etc. I believe drawing on the success of the P7, we will be able to achieve structural gross margin improvement from the G9 and subsequent new models to be unveiled. Our medium- and long-term goal is to increase our company-level gross margin to above 25%. Now on the supercharging network front, XPeng's self-operated charging stations featuring wide geographic coverage and a better user experience have already become one of XPeng's core competitive advantages. As of April 30, 2022, the number of XPeng self-operated charging stations increased to 954, including 774 self-operated supercharging stations and 180 destination charging stations. With the mass delivery of the G9, we will deploy next-generation 480-kilowatt supercharging piles in the fourth quarter to provide a superior charging experience, enabling a 200-kilometer range after a five-minute charge. Frankly, the macro environment this year has brought challenges, but it is clear that these challenges do not change the long-term growth trends in the smart EV market as the BEV penetration rate continues to rise, independent domestic EV brands are gaining consumers' mind share and making their foray in the mid- to high-end market segments. Smart technology and innovation are here to stay, accelerating the pace of the disruption of those incumbents and presenting an opportunity for industry leaders armed with competitive edges to shine. Leveraging our leading-edge R&D technology and strong optimization and execution capabilities, XPeng is well poised to capitalize on the opportunities to reshape the market, cementing our leadership position with growing market share. For the rest of the second quarter, we'll continue to work hard to overcome the negative impact of the ongoing COVID-19 outbreaks and the supply chain pressures. For the second quarter of 2022, deliveries of vehicles are expected to be between 31,000 and 34,000, and the total revenues in the second quarter are expected to be between RMB 6.8 billion and RMB 7.5 billion. Thank you, everyone. With that, I'll now turn the call over to our VP of Finance, Mr. Dennis Lu to discuss our financial performance for the first quarter of 2022.

Thank you, Mr. He, and hello, everyone. Now I would like to provide a brief overview of our financial results for the first quarter of 2022. I will reference RMB only in my discussion today unless otherwise stated. Our total revenues were RMB 7.5 billion for the first quarter of 2022, an increase of 153% year-over-year and a decrease of 13% quarter-over-quarter. Revenues from vehicle sales were RMB 7 billion for the first quarter of 2022, an increase of 149% year-over-year and a decrease of 14.5% from the last quarter. The year-over-year increase was mainly attributable to higher vehicle deliveries, especially for the P7 and P5, while the quarter-over-quarter decrease was associated with fewer vehicle deliveries affected by seasonal factors relating to the Chinese New Year holiday. Gross margin was 12.2% for the first quarter of 2022 compared with 11.2% for the same period of 2021 and 12% for the last quarter. Repo margin reached 10.4% for the first quarter of 2022 compared with 10.1% for the same period of 2021 and 10.9% for the last quarter. The quarter-over-quarter decrease was primarily attributable to an increase in raw material costs. R&D expenses were RMB 1.2 billion for the first quarter of 2022, an increase of 128% year-over-year and a decrease of 15.9% quarter-over-quarter. The year-over-year increase was mainly due to the increase in employee compensation as a result of expanded research and development staff and high expenses relating to the development of new vehicle models to support future growth. The quarter-over-quarter decrease was mainly explained by less design and development expenses, which were affected by seasonal factors relating to the Chinese New Year holiday. SG&A expenses were RMB 1.6 billion for the first quarter of 2022, an increase of 128% year-over-year and a decrease of 18.5% quarter-over-quarter. The year-over-year increase was mainly due to higher marketing, promotional, and advertising expenses to support vehicle sales, and the expansion of our sales network and associated personnel costs and commissions paid to the franchise store sales. The quarter-over-quarter decrease was mainly associated with the seasonal factors I mentioned. As a result of the foregoing, loss from operations was RMB 1.9 billion for the first quarter of 2022 compared with RMB 0.1 billion for the same period of 2021 and RMB 2.4 billion for the last quarter. Net loss was RMB 1.7 billion for the first quarter compared with RMB 0.8 billion for the same period a year ago and RMB 1.3 billion for the last quarter. As of March 31, 2022, our company had cash and cash equivalents, restricted cash, short-term deposits, short-term investments, and long-term deposits totaling RMB 41.7 billion. To be mindful of the length of the earnings call, I encourage listeners to refer to our earnings press release for more details on our first quarter financial results. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Your first question comes from Tim Hsiao from Morgan Stanley.

So I've got two questions. So the first question, just want to quickly follow up on the expense previous spec change. The Company now makes standard features for on P5 and P7 models, which will surely enhance the user experience and the adoption rate. But could you share a little bit about the Company's new software strategy and the plan? We plan to restart charging users with XPILOT software in the future with AP from like XPILOT point zero. And is that going to be a bit challenging to resume the fee collection if most of the peers have followed us to launch a free software ecosystem business model? And my second question is about the margin trajectory. Could you please update when the contribution from the orders with new prices will kick in? I recall management mentioned it might be late June, but I'm not sure if there are any further changes regarding recent supply chain disruption. As battery costs would likely be climbing in the second quarter. Do you have enough low-cost inventory for components and batteries to compete with the low-price orders delivered in both April and May? Or can we leverage our more diversified battery supply chain? So those are my two questions.

So thank you. Very good question. Currently speaking, in terms of our pricing on top of our ADAS technology as well as our software, I believe that among all the emerging EV makers in China, we are doing the best in terms of our penetration rate, adoption rate, as well as the final results. However, we did notice a trend in the market, which is that if you separate the charging for the software as well as the hardware from the active of the customers, it is actually better to do a combined or a bulk charging package that combines the usage or the adoption of the hardware together with the software rather than doing it separately. So if we can do this kind of integrated pricing model for both the software and the hardware, it would be actually very beneficial for our future upgrade of the software in terms of the adoption of the ADAS technologies, the upgrading of the smart cockpit, smart chassis, as well as the overall software performance together, combined with the hardware performance. Right now, we are in the mid-level of ADAS technology application. And in the future, I believe that when we are able to really move towards a higher level of ADAS technology application, which we internally call the man-machine co-driving experience, we believe that at that point in time, we should be able to do a lot more OTA upgrades of our software with this kind of integrated pricing model that combines both the hardware and software so that we can further enhance the overall experience for our products and user satisfaction, as well as be very beneficial for the overall company gross margin as well. So, we believe this kind of integrated pricing model for both the hardware and software together will be more beneficial and sustainable for the long run. In the future, we expect that more monetization opportunities based on software usage or adoption will emerge as we continue to accumulate more data and user experiences based on the launch of our software and hardware together. For example, different kinds of monetization that can be based on the time spent or the usage time spent with our software or based on the mileage that our consumers or customers use on our products or services. Overall, speaking, we believe that this kind of integrated pricing model will actually be more beneficial and sustainable in the long run that allows us to further optimize our user experience.

Tim, this is Brian. Let me just add a couple of comments. First of all, we have been witnessing various software monetization schemes implemented by different companies in China. So far, it is quite clear that the separate charging and subscription-based models have not been very prevalent in the China market. In some ways, I think that has limited the broader penetration of the utilization of these technologies. We believe that at this stage of the market, our core focus is to make sure that we provide an optimal service package that can be widely used that increases penetration and coverage and witnessing the stickiness of our technology is probably the first priority before we actually implement various different monetization strategies. So, that's why I think we are adopting the current standardized charging model. But I think in the long run, when we actually see advanced main technology, more broader utilization and also stickiness and dependence on this technology, I'm sure we'll be able to have much more robust monetization variations that we can use for the Chinese market. And I'll hand over to Dennis for the second question.

Tim, this is Dennis. Yes, in the previous earnings call, we mentioned we will be able to deliver most of the new price orders probably sometime in June, maybe in the second half of June. Because of the COVID impact, especially in the Shanghai area, now we are looking to deliver the low price protected orders until June. So most of the new price orders will be delivered probably starting very late June and some starting in July. That's the present assessment of the delivery.

Thank you. Your next question comes from Nick Lai from JPMorgan.

My two simple questions. First is on monthly production. Measuring guiding second quarter production of 31,000 to 34,000 units, that translates into roughly about 11,000 to 12,500 units per month. Does that mean potentially we have production loss somewhere about 25% the rest of 2Q? And is it possible that this production loss can be recovered in the third quarter and the latest update on chip supply? And the second question is really on battery supply pricing mechanisms with the supplier? Thank you.

Nick, it's Brian. Let me answer your first question. First of all, you're correct. Our quarterly guidance for the delivery for this quarter reflects a bottleneck in the supply chain, which has been impacted in April and May and likely in June as well. So, this is actually a number that reflects that we cannot obviously have the full output, even with the factory running at full capacity. It's still limited by the supply chain constraints. We envision that if the supply chain resumes to normal conditions, we'll be able to catch up with the volume in the third quarter because we have sufficient capacity to ramp up production at a time. So I think we're confident that as soon as the impact in the Shanghai area and some other areas resume to normalcy, we'll be able to produce enough output to accelerate delivery and meet the customer demand, which we're seeing is very robust.

Let me address the question about chip visibility. If there were to be a resurgence of COVID in China right now, it would likely restrict all new EV makers in the country due to limited chip capacity. Based on our latest estimates, each of our units requires an average of 5,000 chips, and some parts of the car need a significant number of chips, often in dozens. While the capacity from major chip suppliers is stable, the main issue arises from the smaller and cheaper chips, which have very limited capacity. Visibility regarding chip supplies in China is also quite restricted. In April, the situation looked more promising regarding chip supply and capacity. However, moving forward, it remains limited, and its impact on our capacity is expected to persist. Since 2020, we have been aware of the chip supply crisis. We initially thought it might improve by the end of 2022, but our latest insights suggest that the crisis could continue into 2023 or even longer. One potential solution is signing long-term contracts with our chip suppliers. Additionally, we need to develop a strong technical team capable of designing flexible embedded architecture, allowing us to adapt to chip supply shortages. For instance, we should adjust to shortfalls in certain components by modifying our platform as necessary. Although in April we had decent visibility into the chip situation, we currently have only a week’s forecast regarding our chip supplies and their effect on our capacity. Overall, the current situation remains quite challenging. All right. Let me address the second half of your question with regards to capacity and pricing of battery supplies. Now, in 2021, our battery supply was greatly restrained that resulted in many issues in terms of our deliveries as well as our overall capacity of production. Starting from 2020 and also from this year and all the way to the first half of 2023, we expect the battery supply situation to become better. From the last quarter of last year, all the way to the first month of 2022, we began to notice increased battery supply mainly due to the increase in raw materials for making new energy batteries; there were many price increases in lithium materials. We noticed this price increase in China; however, it was not so much in overseas markets. We believe that the pricing of lithium, the raw material, overall remained the same as the first half of 2021. Because of the current COVID resurgence and the price increase in lithium materials, the overall situation remains very tough. But the industry is not just for ourselves. The situation is expected to see adjustments and the pricing of batteries will continue to decrease slightly from the second quarter of this year onward. For the second half of 2022, we should start to see some adjustments or optimizations of our battery supply because we are able to adopt multiple suppliers of batteries, which will be beneficial in resolving some of the issues that arose from the previous quarters. Starting from Q2, we believe that we will begin to see a lot of progress in this regard. In the midterm, the battery pricing will continue to decrease from the current high level. But probably they won't reduce to the low level we saw in previous years; however, we are confident that expanding our supercharging technology as well as our SIC charging materials adoption, together with some optimization in our technology investments to reduce wind resistance, improve overall weight of our products, and enhance the efficiency of utilizing the batteries, as well as our multiple battery suppliers, can benefit us in the long run, enabling us to continue to serve our customers well with enough production of our products as we head into the second half of this year. We believe that from the second half of 2022 onward, we should be able to continue to boost ourselves and new products benefiting from the factors that I just mentioned.

Thank you. Your next question comes from Bin Wang from Credit Suisse.

My question is about the margin outlook in the second quarter or the second half of this year because we see different factors. Is this margin the higher-priced products can only kick in, in the third quarter as second quarter may see some decline compared to first quarter in the gross margin? And the second part, you recently changed the software pricing. What's the impact of low gross margin in the second quarter and third quarter? That's the number one question. Inventories about new products. As you mentioned, there will be large size products in 2023. What will the pricing range be? Can the margin be above the 20% gross margin because you are guiding our target of a 25% margin in 2025 or midterm?

Wang Bin, this is Dennis. Let me address your first question. Yes, you're right. Because of the COVID impact, our second quarter volume was impacted compared with our original projection. So, our second quarter gross margin will be impacted as well. We will further investigate the impact and also take some action to recover the margin in the second quarter. Going into the third quarter, yes, we will deliver new price orders. Therefore, our margin in the third quarter will rebound and improve. However, we expect further margin improvement in the fourth quarter when we have new model deliveries to the market. So, our margin in the second quarter will be slightly impacted by the new price orders, and then the third quarter will improve, with the first quarter seeing further improvement. That's our present projection.

Yes. To answer your second question, Bin, the products that we plan to introduce next year, which will include a product coming from a C Class platform, will be priced at a premium to the current portfolio of products that we have, including the G9. So you can expect it to be close to or even exceeding the RMB 400,000 price range. For such a product, we certainly hope it will have a high gross margin. Therefore, a 20% gross margin will be a crucial benchmark for our product design. We expect that assuming a 20% or above product margin is reasonable.

Also internally, our expectation for these two new products is that their capability or overall performance combined will be actually more superior than two P7s combined.

Right now, we're not giving guidance, given the lack of visibility on material prices as well as the overall environment. But we remain hopeful that the rebound will be pretty robust from second quarter levels.

Thank you. Your next question comes from Jeff Chung from Citi Bank.

Okay. I have three questions. One is due to the backlog rolling from the first quarter. How much volume sold in the second quarter will be valued at MSRP price hike? This is number one. Number two is the newly generated order backlog since the 1st of May. Could you tell us the trend on the newly generated order backlog? And the final question is about the first quarter vehicle margins. Could you break down the vehicle margins without the software? Also, separately, could you tell us the first quarter software margin? For an apple-to-apple comparison, if we strip off the raw material price hike, what would the first quarter vehicle margin have been?

So Jeff, this is Brian. Let me answer your second question first, which is the new order trend, and then I'll leave the number question to Dennis. First of all, as we said in our CEO presentation that we actually saw the new order recovery in May in areas that are not affected by COVID lockdown, and some cities are already near the pre-price increase levels, which is a very encouraging sign because we see that demand is genuine. It's rebounding nicely. It took us probably a little bit over a month to build up that demand pool. In the month of April, we saw slow demand recovery. But in May, the order level is actually quite robust. I think with the increasing relaxation of COVID measures in large markets that we target, which are important to us, we see the overall order momentum will be quite strong. Then I'll hand over to Dennis on the other two.

Yes. Jeff, let me address your first question. We don't provide very precise numbers regarding new price order deliveries or old price order deliveries. However, in April, the majority of deliveries were old price protected. Also, in May and June, the majority would be old price, especially for the P7. Major P7 deliveries would be price protected because the backlog needs some time to fulfill those orders. Regarding your third question, yes, the first quarter, the reason we maintained the same gross margin level as in quarter four last year was due to two key factors. First, we had a product mix improvement. Our P7 product line mix in the first quarter was about 56%; in quarter four last year, it was about 50%. So that's a mix improvement. The second factor was the variable marketing rationalization. We technically reduced our variable marketing spending to increase the overall margin. However, we are impacted by two key factors: the new energy vehicle reduction, which is about 20% in the subsidy level compared with 2021, and the increase in battery costs. I cannot provide a detailed number, but that has been a significant offset to our mix improvement and variable marketing reduction. So all in all, we were able to maintain the quarter four margin level for the moment.

Thank you. Your next question comes from Ming Lee from Bank of America.

So regarding your autonomous driving software. In the future, will the sales of the software be included in the car price, or will you still consider charging the consumer on a one-off or a monthly installment basis? And also, because this time you give the software a standard configuration, but at the same time, you also tend to offer some free charging while providing panel subsidies for installing charging piles. So is it a margin-impacting event for your business? And second question, regarding the supercharging technology, is the 180-kilowatt hour charging pile and also 800 voltage battery, the ultimate battery technology and charging technology? Or in the future, do you expect even further advanced charging technology?

Let me address your first question. Yes, when we build those software into the vehicle together with the price, at the same time, we get the supercharging, free supercharging, and the kind of destination charge, the home charger, including the installation, and we also adjust the price a little bit to cover some of the costs. So overall, the margin impact would be neutral. More importantly, with more customers using the software, we will be able to increase scale and dilute the same kind of R&D expenses. So overall, that's a good strategy for us. In terms of the next product, G9, and also future products, we haven't really decided yet or it is subject to further internal discussions whether we will continue such practice. We will have another arrangement that is subject to our internal discussion. When we introduce a product, we will also mention that.

All right. Let me address the second question of yours. This year, we have made plans to launch the 480-kilowatt charging facility by the fourth quarter. Originally, before heading into 2022, we had planned to actually launch two kinds of charging facilitation: one is 260 kilowatt, the other is 480. But after evaluating the macro environment this year, we made the final decision to launch 480 kilowatts by Q4 this year, allowing for charging within five minutes that provides up to 200 kilometers of driving experience. However, if you charge for 10 to 15 minutes, it can provide even a longer driving range, but we haven't released the final testing results yet, that's why we are not releasing those numbers. For the upcoming year, we believe that, with our building of the 480-kilowatt supercharging facility, along with our 70-kilowatt destination charging, we should be able to deploy a powerful charging network that will cover a wider geographical area in China. In the coming year, we believe we are welcoming a new era of automation, optimization, and electrification. In terms of the improvement of electrification, we believe, as our technology continues to develop in reducing wind resistance while enhancing the efficiency of the electric system, optimizing the powertrain as well as our battery and improving the supercharging infrastructure, we will enter a stage where we actually have a higher charging efficiency compared to traditional gas stations for ICE vehicles. This means consumers will see a great enhancement in using every single dollar for charging their electric vehicles with less power consumption. By the second half of 2023, we expect a revolutionary development for optimization technology in our industry, enhancing user experience and safety. By that time, we should be able to integrate the installation of our latest technology in hardware and software, combining the two for optimal standards in the user experience.

Thank you. Your next question comes from Jing Chang from CICC.

I have some follow-up questions regarding the Company's adjustment to charging and software activation charges. First, I'd like to understand the pricing strategy for new models after integrating software and hardware. We've observed price differences in various versions of our current model, using the P5 as an example. The prices for the P and E versions are RMB 32,000 and RMB 18,000 higher than the T version, which does not account for the increase in hardware costs. For our new models, such as the G9, will the integration of software in the pricing strategy reduce the price difference between the various versions? My second question pertains to this year; supply has significantly increased with over 250,000 new vehicles. Many of these emphasize their new electrification technologies, such as C2C and C2. We've also heard that more technology will be utilized in our new models like the G9 and next year's model. In the short term, especially this year and the first half of next year, are you concerned that competing products could significantly affect our sales of the P5 and P7?

About the first question of yours, yes, in the future upcoming models of ours, including P9 and other new models, we plan to enhance the price gap between different configurations. For example, for higher-end products or higher-end configurations, the price will be higher because they embed or incorporate many ADAS functions, as well as the high or advanced software. However, on the other side of the coin, for lower configuration products, we are actually able to lower pricing because we will use better BOM cost optimization, adopting less advanced hardware for those kinds of low configurations, which can greatly benefit individual consumers as well as for us as a company. In May, after the adjustment of our pricing, which includes both software and hardware, we saw a spike in orders for mid- to higher-end configurations for P5. That gives us a lot of confidence for the future because, with this new pricing strategy, we should be able to further strengthen our overall capability in optimizing the user experience, driving experience, and gross margin as we adopt more high-level ADAS technologies into our future products. Regarding P7 or P5, ever since the launch of City NGP on P5, we've been able to recognize our leadership position for this model in the market because if our peers develop similar products with the same performance configuration in the coming years, the pricing of their products will be much higher than ours for P5. We will release more information regarding our automation and smart designs for upcoming products and the current product portfolio in the future when we have them ready. Reviewing the sales performance of P7 when we first launched it in July back in 2020 and the growth from March 2021 when we launched the highway NGP, we were able to see remarkable growth in total sales and order number for this model due to the adoption of NGP. For Q1 this year, we achieved historically high levels of 9,000 units of monthly sales for this particular product. Overall, we are very confident about our judgment of the positioning of these products in the market in terms of quality, market share, and the future enhancements through OTA, which will strengthen our leadership position. Operator, we are ready to conclude this call.

Thank you. This concludes the Q&A session. I would now like to turn the call back over to management for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact XPeng's Investor Relations through the contact information provided on our website.

Thank you. And this concludes today's conference call. You may now disconnect your lines.