Xpeng Inc. Q3 FY2023 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for the Third Quarter 2023 Earnings Conference Call for XPeng Inc. At this time, all participants are in listen-only mode. After 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 third quarter 2023 earnings conference call. Our financial and operating results were issued via Newswire services earlier today and are available online. You can also view the earnings press release by visiting the IR section of our website at ir.xpeng.com. Participants on today's call from our management team will include our Co-founder, Chairman and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Corporate Finance and Investment, Mr. Charles Zhang; Vice President of Finance and Accounting, Mr. James Wu, 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 US Private Security Legislation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from 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 US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable laws. Please also note that XPeng's earnings press release and this conference call include a disclosure of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures. XPeng's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to our Co-founder, Chairman, and CEO, Mr. He Xiaopeng. Please go ahead.

Hello everyone, today I'm pleased to report to our shareholders and customers that after three quarters of transformation and effort, we have entered into the initial phase of a virtuous cycle, driving improvements in sales, brand image, team morale, and free cash flow. Delivering such a turnaround in the smart car manufacturing industry is extremely challenging, and I want to thank you for your support and patience throughout this journey. Moving forward, we are confident in achieving rapid sales growth and substantial improvement in gross margin in the fourth quarter, as well as gaining considerable market share in 2024, aiming for a high growth target that exceeds the industry average. China's new energy vehicle industry has shown resilience and growth amid intensifying competition throughout 2023, creating significant opportunities to reshape the landscape. The competition around electrification and smartification is accelerating the replacement of internal combustion engine cars with new energy vehicles. Additionally, AI is transforming the technical structure of smart electric vehicles and changing automakers’ business models. There are no shortcuts to advanced driver-assistance systems technology. The only way to assess whether mass production and the inflection point of this technology have been achieved is through nationwide coverage that ensures low costs, high safety levels, and excellent customer experiences across different models. During our Tech Day on October 24, we began public testing of XNGP in the first batch of 20 cities where high-definition maps are not available, with plans to expand coverage to 50 cities by year-end. Our technology and AI will empower our customers to utilize ADAS anywhere they drive across the country. XPeng has led the way in ADAS technology and customer adoption. I firmly believe that demand for ADAS will surge in the coming five years, with XPeng emerging as the preferred smart EV brand. Next year, we will consolidate and integrate our full-stack in-house R&D capabilities across various systems, including next-generation electric architecture, unified ADAS domains, smart cockpits, voice assistants, new large language models, and advanced chassis and powertrains. This will allow us to rapidly deploy multiple models for the global market and integrate vehicles across different platforms, enhancing our engineering capabilities to support a variety of products globally and strengthening our edge in smart technologies. In addition to our focus on ADAS and smart EV technologies, we have made significant changes to our corporate strategies, organizational structure, senior management team, and product and technology roadmap over the past three quarters. Implementing such extensive changes simultaneously could have posed risks to near-term results, but the trust and efforts of the entire XPeng team ensured that these changes did not harm our short-term performance; on the contrary, they enabled us to deliver better-than-expected outcomes. For Q3 of 2023, our vehicle deliveries surpassed 40,000, marking a 72% increase quarter-over-quarter, and we achieved positive free cash flow with over RMB1 billion in cash inflow. We are optimistic about achieving a new record for vehicle deliveries in Q4, targeting over 60,000 units. The G6 electric SUV has emerged as the top-selling vehicle in the RMB250,000 price range during its first quarter on the market, with over 8,700 units delivered in October. This early success validates XPeng’s capability to establish a new benchmark model in the market segment, thanks to our distinct technologies and effective marketing strategies. In September, we launched the 2024 edition XPENG G9, achieving a higher gross margin than the original model due to advancements in technology and engineering. In October, we delivered over 4,000 units of the G9, making it one of the best-selling electric SUVs in the RMB300,000 price segment. We set a record with over 20,000 vehicle deliveries in October, securing the top position among EV startups for battery electric vehicle sales volume once again. We are excited to announce the upcoming showcase of our flagship MPV, the XPeng X9, at the Guangzhou Auto Show, with presales beginning on November 17th. The X9 is a seven-seater pure electric smart MPV built on the SEPA 2.0 architecture, distinguished by its superior space, design, and efficiency, merging the benefits of an MPV and SUV. Additionally, the X9 features rear-wheel steering as a standard option, allowing a turning radius similar to the P7. With XNGP, our leading technology that does not rely on high-definition maps, maneuvering an MPV has become easier and more agile. These technical features are unique to our MPV models currently available on the market. The X9 will begin deliveries in January 2024, and we believe it will become the best-seller in the large electric MPV segment. In 2024, we plan to introduce highly competitive new models based on the SEPA 2.0 architecture and launch a new EV brand targeting the RMB150,000 price range. Partnering with DiDi, China's leading mobility technology platform, we expect this new brand to significantly boost our sales growth and expand market share in the A Class EV segment. Our team is on track to develop MONA, the inaugural model for this brand, with a launch expected in Q3 of 2024. We see MONA as the beginning of an exciting journey, and we are dedicated to pushing technological boundaries while maintaining cost efficiency. This will enable us to launch smart EV models featuring autonomous driving technology at competitive price points between RMB150,000 and RMB200,000, providing a competitive advantage in the market and reaching a broader audience. Our President, Ms. Wang Fengying, is leading a significant overhaul of our sales network, enhancing efficiency, flexibility, and faster expansion into more Tier 3 and Tier 4 cities. We closed nearly 100 underperforming stores in the first three quarters and initiated the Jupiter Project to recruit capable franchisee partners. We secured investment for over 100 new stores within two months and partnered with top-tier dealer groups specializing in luxury vehicles. As we approach the fourth quarter, we are accelerating the opening of new stores and expanding our sales network, aiming for 500 stores by the end of this year or early next year. These upgrades, rapid expansions, and marketing innovations will significantly drive our sales growth in 2024 and beyond. In late September, I visited Volkswagen Group's headquarters in Wolfsburg, where we had in-depth discussions with Mr. Blume and Volkswagen's senior management regarding our comprehensive strategic partnership, helping define our long-term cooperation in technology. We also explored deeper opportunities for strategic collaboration in the international market. Currently, we are jointly developing models based on the G9 platform, with this project progressing well. Our supply chain collaboration is also advancing effectively, and we expect meaningful cost reductions in the supply chain within the next year. To enhance cost control, we are adopting best practices from leading OEMs in the industry. Our progress in reducing costs throughout design, R&D, manufacturing, and marketing has instilled confidence that we can achieve a 25% cost reduction by the end of 2024 or even exceed this target, significantly increasing our gross profit margin next year. Regarding cash flow, we had approximately RMB36.5 billion in cash at the end of Q3 2023 and generated over RMB1 billion in positive free cash flow during the same period. With our new products and technology-driven cost reductions, we anticipate substantial improvements in gross margin, leading to stronger positive free cash flow in Q4. This is a significant milestone on our path to achieving profitability at scale in the long term. Looking ahead, we are projecting total vehicle deliveries in the fourth quarter of 2023 to range from 59,500 to 63,500 units, indicating a quarter-over-quarter growth of 48.7% to 58.7%. We expect revenue between RMB12.7 billion and RMB13.6 billion during this timeframe. We are dedicated to implementing transformations primarily in our organization and marketing strategy, which we believe will yield better results in 2024 and beyond. This will facilitate our accelerated growth and expansion from the fourth quarter of 2024. Our goal is to capitalize on global opportunities arising from our leadership in smart EV technologies, enhance organizational efficiency, and secure a dominant market position. Ultimately, we aim to establish XPeng as the leading smart EV company by 2030. Thank you, everyone. I will now turn the call over to our VP of Finance, Mr. James Wu, to discuss our financial performance for Q3 of 2023.

Thank you, Xiaopeng. Now, I'd like to provide a brief overview of our financial results for the third quarter of 2023. I'll reference RMB only in my discussion today, unless otherwise stated. Our total revenues were RMB8.53 billion for the third quarter of 2023, an increase of 25% year-over-year and an increase of 68.5% quarter-over-quarter. Revenues from vehicle sales were RMB7.84 billion for the third quarter of 2023, representing an increase of 25.7% year-over-year and an increase of 77.3% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly attributable to the accelerating sales growth of the G6 in the third quarter of 2023. Gross margin was negative 2.7% for the third quarter of 2023 compared with 13.5% for the same period of 2022 and negative 3.9% for the second quarter of 2023. Excluding the negative impact attributable to the G3i and the production as we described in the prior quarter, the gross margin would have been breakeven for this quarter. Vehicle margin was negative 6.1% for the third quarter of 2023 compared with 11.6% for the same period of 2022, and negative 8.6% for the second quarter of 2023. The year-over-year decrease was explained by: first, the inventory write-downs amounting to RMB0.23 billion related to the Model G3i as we finished the rest of the production in its life cycle with a negative impact of 2.9 percentage points on vehicle margin; and secondly, increased sales promotions and the expiry of new energy vehicle subsidies. The quarter-over-quarter increase was primarily attributable to the improvement in our product mix and battery cost reduction. R&D expenses were RMB1.31 billion for the third quarter of 2023, representing a decrease of 12.9% year-over-year and a decrease of 4.5% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases were mainly in line with the development timing and progress of new vehicle programs. SG&A expenses were RMB1.69 billion for the third quarter of 2023, representing an increase of 4% year-over-year and an increase of 9.6% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were primarily attributable to the higher commissions paid to our franchise stores. As a result of the foregoing, loss from operations was RMB3.16 billion for the third quarter of 2023 compared with RMB2.18 billion for the same period of 2022 and RMB3.09 billion for the second quarter of 2023. Fair value loss on derivative liability was RMB0.97 billion for the third quarter of 2023. On July 26, 2023, our company entered into an agreement with the Volkswagen Group to issue up to 4.99% of our company's ordinary shares for a fixed purchase price of $15 per ADS. Until the transaction closes, fluctuations in the fair value of the forward share purchase agreement were measured through profit or loss, resulting in a non-cash loss of RMB0.97 billion for this quarter. Net loss was RMB3.9 billion for the third quarter of 2023 compared with RMB2.38 billion for the same period of 2022 and RMB2.8 billion for the second quarter of 2023. Non-GAAP net loss, which excludes share-based compensation expenses and fair value loss on derivative liability was RMB2.79 billion for the third quarter of 2023 compared with RMB2.22 billion for the same period of 2022 and RMB2.67 billion for the second quarter of 2023. As of September 30, 2023, our company had cash and cash equivalents, restricted cash, short-term investments, and time deposits totaling RMB36.48 billion. The positive free cash flow in Q3, as Xiaopeng mentioned earlier, was the main driver for our higher quarter-over-quarter cash balance. To be mindful of the length of our earnings call, I would encourage listeners to refer to our earnings press release for more details on our third quarter financial results. This concludes our prepared remarks. We'll now open the line to questions. Operator, please go ahead.

Thank you. Your first question comes from Tim Hsiao with Morgan Stanley. Please proceed.

So my first question is about the competition. We have observed that more tech companies like Huawei and Xiaomi are challenging traditional car manufacturers. These tech companies have the advantage of a cross-division ecosystem and channels that are quite difficult for carmakers to replicate. How do you plan to expand your backing against these tech players in the upcoming quarters? That's my first question. Thank you.

Thank you for your question. This is Xiaopeng. It's a very good question but not an easy one. I'd like to start by discussing my past entrepreneurial experience. I began with an international Internet company and then invested in XPeng. This has been a topic of reflection for many years in my career. For instance, during my time in the Internet mobile sector, we encountered significant competition, and there were various strategies to navigate that landscape. One approach was to focus on acquiring traffic, which can help address various ecosystem shortcomings or deficiencies. However, relying solely on traffic can be problematic, as some sources have audiences that do not easily transfer across platforms. For example, the audience from traditional TV may differ greatly from those who depend heavily on mobile devices, leading to failures. Today, we see intense competition from companies across diverse sectors looking to enter new markets using their unique capabilities. This includes players from real estate, smartphones, and other technology sectors. When we evaluate ourselves against these competitors, we really need to focus on our internal strengths. Our strengths lie in our technology, AI capabilities, manufacturing skills, and supply chain. What sets us apart is our ability to leverage what we already possess and grow through partnerships. We have committed to expanding our ecosystem through investments in various mobility formats, robotics technology, and flying cars. Additionally, we've partnered with Volkswagen in numerous areas such as supply chain technology, global sales and marketing, and after-sales services. In August, we announced a partnership with DiDi, a leading mobility tech platform, to enhance our market share in the A Class vehicle segment and build a foundation for future expansion in robotaxis. These examples showcase how we are addressing our ecosystem challenges. By merging capabilities through partnerships, we aim to bolster our competencies, building on our strong foundation in technology and manufacturing as a car maker. Thank you.

My second question is about pricing power. As mentioned earlier in the call, the company's target is to reduce production costs by 25% in 2024 through optimizing design efficiency. However, without improving pricing power, the benefits from cost savings may be offset by ongoing price undercutting, especially since many car manufacturers are now outsourcing their pricing strategies and passively responding to competitors like BYD. How does XPeng plan to enhance its pricing power alongside the cost reductions in 2024? That's my second question. Thank you.

Thank you for your question. I agree that pricing power is very important. Long term, we aspire to be like Apple in the automotive industry, which has strong bargaining and pricing power. As a car manufacturer, we recognize several key factors that influence our pricing power. One factor is scale, and another is our ability to control costs, along with our branding and differentiation. The scale of our sales impacts our costs and vice versa. Currently, we are working on enhancing our capabilities and brand. It's essential for us to build our brand image and create customer value through improved differentiation. Our President, Ms. Wang Fengying, strongly supports both internal and systematic innovation. As we move into 2024 and 2025, we will remain committed to increasing our sales volume, controlling costs, building our brand, and enhancing our differentiation to achieve greater pricing power. Thank you.

Thank you very much for sharing all the great insight. Thank you.

Your next question comes from Ming Hsun Lee with Bank of America. Please go ahead.

So after Ms. Wang joined XPeng, the reform of channel sales stores is ongoing. Do you have any metrics to evaluate your progress on this channel reform? Additionally, do we have any targets regarding long-term direct sales and the percentage of dealerships?

Thank you for your question. I would like to give you some background on our President, Ms. Wang. She has a strong history in controlling costs, developing channels, and leading innovative changes at Great Wall, a traditional OEM. In her initial months with us, she observed our existing structure, which included a hybrid model of cell phone stores and franchisee locations, with centralized pricing control across all channels. As we move into Q3, we've established a strategy for channel innovation and reform to adapt to the upcoming shifts expected in 2025 and 2026. We anticipate launching a greater variety of models in 2025 and are considering future market competition, the market environment, and our expansion plans, which will include not just Tier 1 and Tier 2 cities, but also Tier 3 and Tier 4 areas. In the mid to long term, we plan to open at least five new franchised stores that will handle both sales and services. Additionally, we aim to establish at least 1,000 service centers nationwide to enhance customer service. In Q4, we intend to open 100 new stores to further broaden our sales network. By the end of 2023, we expect to reach a total of 500 stores across various formats. While it will take time for the new stores to develop their capabilities, we anticipate that significant growth in deliveries and sales will be evident in Q1 and Q2 of next year, particularly in lower-tier cities where we plan to expand our presence. Regarding pricing control, we will maintain rigorous oversight and evaluate store performance across various metrics, including NPS. We are committed to providing our stores with the necessary tools and maintaining strict control over service quality. We recognize the need to enhance store performance efficiencies and see considerable potential for improvement. By 2024, we expect a significant increase in store efficiencies. Thank you.

My second question is about the export business. In October, you shipped several thousand cars to international markets. In the future, will you consider opening more directly operated stores, or will you depend more on local distributors? Regarding your current product lineup, do you plan to export all models or just select a few for international markets? Lastly, do you have any plans for the Southeast Asian market?

Hey, Ming, it's Brian. Let me address your question. Regarding the international expansion, you're correct that we currently employ sort of hybrid model in the Nordic countries. We have direct-owned stores, as well as our partnership and agents. But going forward, we're probably going to opt to use a more collaborative partnership model using either agents or distributors for specific markets. So that's probably going to be likely— the mix will shift towards a more partnership-oriented model. And in terms of products for international markets, you saw that we currently have G9 and P7i currently selling in Europe already. We will be launching G6 as a global product next year. So I would say it's only the subset of products that we will design and prove for international use, not all our products. So the products I mentioned are the ones that we currently decided for global markets. And also we have plans for right-hand driving models next year as well. For example, by the end of next year, we plan to roll out our first right-hand driving model, likely to be based on the G6 model. So with that, we'll be able to tackle the Southeast Asia market. So that will definitely be in our sight, and we'll be also looking at other right-hand driving model markets as well.

Yes. Thank you, Brian. I don't have any questions. Thank you.

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

Thank you for your time. My first question is about our sales volume. According to our guidance for fourth quarter sales volume, it looks like November and December will remain flat compared to October. Can you explain the reason for this? Are we being conservative, or have we observed specific trends in the industry? My second question is about gross margin. Management noted that excluding the impairment loss of G3, the vehicle gross margin was breakeven in the third quarter of 2023. The last time we delivered over 40,000 vehicles was in the fourth quarter of 2021, when the vehicle gross margin was 10.9%. I'm curious about what causes the difference in gross margin now. Additionally, management mentioned expectations for a significant enhancement in gross margin next year. We recognize that cost reduction is on track, potentially ahead of schedule, but how much of a price decline are we incorporating into this gross margin expectation? This year, for the first three quarters, the average selling price has decreased by 6% year-over-year. How much competition are we considering for next year regarding gross margin guidance? Thank you.

So Tina, let me— this is Brian. Let me first answer your first question. The guidance of 60,000 this quarter, I think, reflects our confidence in the progress we've made in the recent months. We think it's actually a very important milestone for us to reach on average 20,000 per month. So this is, I think, is a very, I would say, important milestone for us. And also by giving this guidance, we also are considering the competition as well as the macroeconomic backdrop that we're facing in Q4. We are very confident with the guidance because, obviously, the backlog we have already, as well as the momentum we're seeing in our order intake. But I think this is also reflective of the market at the moment, and we hope that this is a realistic target for us. And I'll hand over to James for the gross margin comments.

Yes, Tina. From a gross margin perspective, first of all, as we talked about earlier, even if we compare on a year-over-year basis, the reduction in margin came from, as you mentioned, the G3 EOP impact that we have booked in this quarter. And this will be the final impact from the G3 EOP perspective. And secondly, going into 2023, the new energy vehicle subsidy has been removed from the market and that, obviously, has an impact on our margin as well. You did mention our ASP has reduced over time. I believe that's overall market dynamic as well, because we are—we've been trying to improve the product competitiveness for our product throughout this journey. In the meantime, as Xiaopeng mentioned, we do expect our gross margin to improve meaningfully in Q4, particularly our vehicle margin will become positive, we believe, in the fourth quarter. And one proving factor as we improve our product mix is that, as we launch the new G9 2024, we see the gross profit margin is actually higher than our older version of G9. This is a great proving point for us to continue to drive the profitability of our products. I hope hopefully that answers your question.

I have a quick follow-up. Regarding the cost reduction and technology improvement, which models can benefit from these cost reductions? Thank you.

All of the models we have will benefit from the cost reduction driven by technology advancements. However, among our top-selling models, we will focus more on increasing the cost reduction. Thank you.

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

My first question is about the positioning of the MONA brand. I understand that its pricing is generally lower than our main brands, but not by much. How will we differentiate the brand positioning between the two? Will MONA also be available at our current stores for sale?

Thank you. We will provide more information about MONA next year, specifically in 2024. We will discuss its branding, positioning, distribution channels, and after-sales services. Currently, we are actively preparing for MONA's launch next year. One thing I can confirm is that there will be distinct channels for selling MONA, separate from our existing XPeng lineup.

So my second question is about your earlier comments. You mentioned discussions with Volkswagen concerning global markets. How do you view the business model between Stellantis and the motor that brings Chinese products, leveraging global OEMs and their reach in the global market? Will this enhance your globalization in terms of market reach?

Hey Paul, this is Charles here. I'll address the question. I think first of all, our joint development on the model based on the G9 platform has been going on really efficiently. And I think we're going to achieve a milestone very soon. And I think the international market collaboration is one of the strategic initiatives we are exploring with our partner Volkswagen. And I think that we are—I think Volkswagen has global manufacturing footprint and also the supply chain capabilities. I think there's a lot of areas we can learn from our partner and also leverage each other's strength in the international market. We wouldn't comment on other companies' collaboration model. Thank you.

Your next question comes from Ping Hui Wu with CITIC Securities. Please go ahead.

My first question is about selling cars in lower tier markets. How do we assess demand in those cities and leverage our strengths there? My second question is regarding research and development for 2024. Will the total R&D budget increase next year, and how will this funding be allocated? Thank you.

Let me address your first question. Regarding our product lineup, we plan to meet the demands of lower-tier cities by offering MONA and other new products. At this moment, we cannot disclose too many specifics, but I can share that we aim to provide high-quality ADAS technology and capabilities to the lower-tier market, including Tier 2 to Tier 4 cities. We will also make autonomous driving capabilities standard in our future lineups for these cities, along with reforming our distribution channels for the lower-tier market. Thank you. As for your second question about R&D expenses, over the past three quarters, we have thoroughly considered this and have made significant progress since the beginning of the year in reducing our R&D costs. For instance, during our organizational restructuring, the first step we took was to cut R&D expenses. We have also promoted a module-based design approach that enables us to integrate everything within the same architecture, SEPA 2.0. Additionally, we have encouraged our suppliers to include their R&D expenses in the BOM to lower our overall R&D costs. Lastly, we equipped our R&D team with more systematic tools for better integration and compatibility of different components to further reduce expenses. As we move into 2024, we will enhance several capabilities. The first is our overall design capabilities for our models and products. We will also bolster our craftsmanship, which is vital for manufacturing. We will continue to improve the intelligence of our products and will focus on R&D improvements for the international market to enhance our globalization efforts. Furthermore, we will allocate R&D resources to support our long-term development and strategy. Therefore, in absolute terms, our R&D expenses in 2024 will definitely be higher than this year.

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

Okay. I have just one question regarding autonomous driving, which we believe will emerge as a key sector next year. How do we expect the adoption of autonomous driving to transform the industry landscape? Will we see significant changes in the next one to two years, or will it take longer? Additionally, we have noticed that many traditional OEMs are opting to collaborate with other companies in their autonomous driving efforts. In contrast, could you share some details about the advantages of our in-house research?

Thank you for your question. This is Xiaopeng. I believe the next five years will mark a period of significant advancement in the adoption and development of ADAS technology. It will resemble the rapid growth we observed in new energy vehicle penetration between 2018 and 2022. I recall that in 2020, there was a substantial increase in the market penetration rate of new energy vehicles. Right now, regarding ADAS technology adoption, we are still in an early stage regarding technology readiness and overall industry preparation. We are definitely noticing an increasing number of younger customers who are open to trying this new technology and experience. Going forward, we are very optimistic about the improvement in adoption rates. Firstly, we are thrilled to see more industry participants helping to educate a broader audience, cultivating the market for this exciting era of ADAS adoption. Regarding our strengths in having full-stack in-house R&D capability, I can provide many examples. One key advantage is our ability to localize technology development. Another important factor is our control over production costs. While we are seeing a growing customer base eager to embrace this technology, they also expect safety and affordability. Thus, having full-stack development capability enables us to manage costs effectively. Additionally, this capability allows us to adopt emerging and cutting-edge technologies in a timely manner. For instance, this past year has seen the rise of large language model applications, and our full-stack R&D capability enables us to implement these technologies comprehensively, which many of our peers are struggling to achieve. I would also like to point out that we are increasingly integrating AI technology with our manufacturing and R&D capabilities. To embrace this integration effectively, we require next-gen EE architecture, a unified ADAS domain, smart cockpit features, and a voice assistant. Achieving this integration necessitates coordination between hardware, software, and AI. We are proud of our ability to fulfill these requirements, thanks to our full-stack R&D capability.

We need to integrate advanced technology in car manufacturing and R&D, including next-gen EE architecture, unified ADAS domain, smart cockpit, and voice assistant, to better align with AI technology. This requires significant integration of hardware, software, and AI. We take pride in our ability to achieve this due to our comprehensive R&D capabilities.

And the last question is coming from Nick Lai with JPMorgan. Please go ahead.

I would like to briefly revisit a question from the second quarter results call, where management mentioned that the vehicle margin for the fourth quarter is likely to be positive. Is that still the case? We're also launching the new A segment sedan under the MONA brand with a price point of about RMB150,000. This new product will feature advanced ADAS technology. How do we manage the competition in the low-end segment alongside this more advanced technology? Thank you.

Hey, thanks, Nick. This is James. So I'll answer your questions one by one. First of all, to reconfirm, we do believe our fourth quarter vehicle margin will turn positive to confirm your question. And this is bolstered by better mix of products in Q4 compared to Q3. And, as I mentioned earlier, we did see some level of battery cost reduction that came through towards the end of Q3. So for Q4, we'll see a full quarter of battery cost reduction coming through, empowering the lithium prices stable over time. Going into 2024, we do expect our gross margin to be meaningfully improved versus 2023 on a full-year basis. And this is also bolstered by our continued cost reduction to achieve our 25% or even more cost reduction targets, as Xiaopeng mentioned earlier. We will have better product mix next year as we launch, for example, X9, which will be the highest gross margin product at this point in our portfolio. And obviously, the new products coming from our SEPA 2.0 platform next year will have better margin as well. And lastly, to your question on MONA. You're correct, it is targeting A segment. But we do see that MONA has a very good cost control and planning process, very competitive from a cost perspective, first of all. And second of all, MONA will help us achieve great scale, which will benefit the entire company from a scale perspective as we've seen our cost allocation and therefore improve our margin. And lastly, we do expect more controlled associated sales expense related to the MONA sales because of the scale. So it should not be a drag from a bottom-line perspective, in terms of profitability. Thank you.

Okay. Thanks.

Was there a follow-up question?

No, that’s clear. Thank you. It's clear.

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

Thank you 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 or the Piacente Financial Communications.

This concludes today's conference call. You may now disconnect your line. Thank you.