Continuing to increase investment in sales network and personnel (NIO-SW 3Q conference call minutes)
Market Share: In the third quarter, NIO-SW ranked first in the Chinese pure electric vehicle market segment with an average transaction price of over 300,000 yuan, with a market share of over 45%.
Research and Development: NIO Day released the SkyOS operating system and the self-developed Yang Jian laser radar chip.
Intelligent Driving: On November 15th, the Power Swap Pilot for Highway test version was released in China. Currently, 29 power swap stations on highways support this feature. PSP seamlessly integrates NOP+ and Power Swap, providing new users with an end-to-end automated, intelligent experience for highway driving and battery swapping.
NIO-SW has launched NOP+ for urban transportation, providing users with a point-to-point intelligent driving experience. Starting from November, the enhanced navigation assistance driving experience NOP PLUS has been opened to early adopters in multiple major cities. The coverage of urban routes and the number of cities reached are rapidly increasing, far exceeding the goals set on Technology Innovation Day.
Sales and Service Network: NIO has 468 NIO Houses and NIO Spaces in 152 cities, as well as 314 service centers and 62 delivery centers in 217 cities.
Charging and Swapping Network: NIO has deployed a total of 2,226 swapping stations worldwide, with over 9,400 supercharging piles and 11,000 destination charging piles. The number of third-party charging piles connected globally has exceeded 1.46 million.
Swapping Cooperation: NIO-SW has cooperated with Changan Automobile and Geely Holding in swapping. In the future, NIO-SW will work with more industry partners in the formulation of swappable battery standards, swapping network, swapping vehicle development, and battery asset management, providing comprehensive, rechargeable, swappable, and upgradable solutions.
Adjustments: We have streamlined and adjusted our key objectives, priorities, and action plans, focusing more on efficient execution and enhancing systemic capabilities, while ensuring long-term investment in core technologies. With strong sales and service capabilities, we will respond to intense market competition and ensure that our three major brands and nine core products are launched on time.
Q&A
Q1. What is the financial impact of the swapping cooperation? Will swapping be separated and operated independently, and listed as an independent third-party operator?
Recently, we announced the swapping cooperation agreements with Changan and Geely. Regarding swapping, we view it in a similar way to cloud services or cloud infrastructure, both of which require and rely on network effects and have a considerable investment cycle. After five years of verification and internal service, we believe that we are ready to provide such a network and service to the industry, and it is now time to open up the network to the industry.
Swapping has many benefits, such as faster charging and better user experience. Especially in China, many users living in urban environments, residential areas, or apartments do not have home charging piles. In fact, over 50% of our users cannot install charging piles at home, making swapping more important and convenient.This is why companies are very proactive when we start opening up the second brand battery design standards to everyone. Two companies have already announced signing contracts, and others are still in negotiations.
Believe that in the long run, battery swapping is a business model that can be sustained and has good profitability. However, the investment in battery swapping stations does require CAPEX investment, and various forms of cooperation are adopted, such as partner construction or purchasing NIO-SW's battery swapping stations and handing them over to NIO-SW for operation. There are already dozens of battery swapping stations using this model (third-party ownership of battery swapping stations).
As for Nio Power, the charging business is basically breaking even. Currently, 80% of the electricity is used by users of brands other than NIO-SW.
The possibility of spinning off Neopower for financing cannot be ruled out.
Q2. Does NIO-SW's acquisition of production facilities from JAC Motors mean that NIO-SW has obtained a production license? How do you view the unit manufacturing cost in the fourth quarter and beyond as NIO-SW transitions from a light asset business model to a heavy asset business model?
During this acquisition period, the manufacturing agreement between NIO-SW and JAC Motors is still in effect. Any changes after the acquisition will be disclosed in a timely manner.
If we manufacture completely on our own, the manufacturing cost will decrease by 10%.
Q3. Can you provide more details about the organizational adjustments?
Investments that cannot improve financial performance within three years will be reduced or postponed. For example, battery self-production does not show an improvement in gross margin within three years, but we will continue to develop battery packs and outsource production to reduce costs.
There are three priorities: 1. Investment in core key technologies, such as the flagship model released on NIO DAY, to maintain a technological advantage; 2. Sales and service network: increasing sales personnel and sales outlets, as sales capacity takes time to become sales; 3. Launching 9 core products for the three brands.
In Shanghai in October this year, sales of over 300,000 units exceeded BMW/Mercedes-Benz. The market share in Jiangsu and Zhejiang provinces is also increasing rapidly. However, in more fourth- and fifth-tier cities, there is still a long way to go, and there is a huge gap in sales compared to Mercedes-Benz and BMW. We will continue to expand our sales and service network. The sales proportion in Jiangsu/Zhejiang/Shanghai exceeds 50% of the national total.
Q4. How to balance sales volume and profitability? Maintain a 15% gross margin for the whole vehicle in the fourth quarter? Maintain a target gross margin of 20% next year?
Entering the fourth quarter, the price war has become more intense, with Mercedes-Benz/BMW reducing prices by more than 30% for some electric vehicle models.
We will continue to maintain price stability, continuously improve gross margin, and increase sales volume through improved sales capacity. We will not lower gross margin by reducing prices to increase sales volume, as this is not healthy in the long run.
The target gross margin for the fourth quarter will continue to be maintained at 15%, and the gross margin for next year will be increased to 15%-18%, with a long-term goal of exceeding 20%.
Q5. Cash balance has further increased this quarter, excluding strategic investments and convertible bonds, there is an additional 1 billion yuan. Can you further explain?With the increase in new product deliveries in the third quarter, we have achieved positive operating cash flow. Looking ahead, if our sales continue to grow, we are confident in achieving a healthy operating cash flow.
Q6. What is the financial impact of layoffs?
We have reduced 10% of our positions and completed the adjustment in November. However, there will be almost no financial impact in the fourth quarter because we need to pay additional compensation to the employees who leave the company (approximately RMB 200 million).
But next year, while implementing layoffs, we have also postponed or canceled certain projects. Therefore, the total impact by 2024 will be a cost savings of approximately RMB 2 billion.
Q7. Will the sub-brand Alps share charging/swapping stations with NIO-SW? Are you considering sharing sales channels with NIO-SW?
The first model of our second brand has already started verification, and we have confidence in its competitiveness. Before official delivery, we will continue to optimize and improve it.
As for the NIO-SW swapping network, it is divided into dedicated network (only open to NIO-SW) and shared network (open to NIO/ALPS/third parties). Third-party access to charging has already been opened. Sales will not share stores, but service center networks will be shared.
Q8. Will there be a redesign of existing models in 2024, with the adoption of 800V? What are the guidelines for the construction of swapping stations?
There will be minor redesigns, but no major changes. The models have just been released recently, and we want to maintain stability in quality and the supply chain.
The swapping stations will be built as a shared network, and the specific number will be determined based on demand forecasts.
Q9. In Q2, it was mentioned that the number of sales personnel would be increased. What is the progress so far?
Currently, there are 5,700 sales consultants, with over 3,000 of them joining within the past few months. It takes time to develop sales capabilities, and the first month and a half is dedicated to training before they start selling. Those who have been with us for more than 6 months have shown good sales performance. We will continue to improve our assessment and training mechanisms.
Q10. R&D expenses decreased by approximately RMB 300 million QoQ this quarter due to local government subsidies. What is the expected quarterly R&D expenditure in the future?
The Non-GAAP R&D investment will remain between RMB 3 billion and RMB 3.5 billion per quarter to ensure timely launch of new products. There may be fluctuations between different quarters.
Q11. Progress on the implementation of urban NOA (Navigate on Autopilot) function? The goal is to accumulate 60,000 kilometers of urban driving by the end of this year and reach 400,000 kilometers by 2Q next year.
The urban NOP PLUS, based on general and AI capabilities, has formed a closed-loop data system. The progress has exceeded expectations, and we are on track to surpass the target of 60,000 kilometers by the end of the year. We have the capability to invite pioneer users to participate in testing in 100 cities gradually.
We consider urban assisted driving as a serious service and will ensure user safety and experience before implementation. Our overall data closed-loop capability is strong and surpasses our competitors.NT2.0 comes standard with ORIN chips and high-performance sensors, enabling fast data closed-loop capability for future iterations.
Q12. How is the overseas market operating? What are the sales scale core regions, targets, and plans for next year?
Currently, NIO has opened 6 NIO HOUSEs, 8 NIO-SW Spaces, 2 multi-functional service centers, 54 authorized service centers, and around 30 battery swap stations in 5 European countries. In the early stage of the European business, our focus is on ensuring user service experience rather than prioritizing sales volume. This state will continue for about a year until we ensure production capacity and then accelerate network construction.
Q13. The previous target was to sell 20,000 vehicles per month, but the actual sales are below the target. With the addition of the new sales team, how do you view the operating rate in 2024?
In the high-end pure electric vehicle market with a market share of over 300,000 units, NIO's market share in Q3 remained above 40% and stable.
In the high-end user segment, it is indeed challenging to shift from traditional fuel vehicles to electric vehicles due to psychological factors. We need to be patient. In the Yangtze River Delta region, including Shanghai, Jiangsu, and Zhejiang, NIO's sales have already surpassed those of BMW and Mercedes-Benz. There are over 700 battery swap stations in these three provinces, which demonstrates how infrastructure drives sales. Currently, we have built over 2,000 charging piles in China, with over 700 of them located on highways. However, there is still room for improvement in terms of infrastructure coverage, which is a limiting factor for market users. By 2024, we believe the transition in the high-end market will accelerate. We have also seen other companies launching pure electric products, which will expedite the transition to pure electric vehicles. In terms of infrastructure construction, we will further build battery swap stations to promote the penetration rate of pure electric vehicle users.
Q14. Do the vehicles need to be designed specifically to use the battery swap stations? What is the proportion of vehicles that require design changes during the production process?
We provide open access to battery specifications and battery pack designs. Collaborating companies will develop vehicle models based on the battery pack and make modifications to the chassis and vehicles. This process requires a certain period of time, but the development costs are not high.
