XPeng: Leading AI smart driving and ultimate cost control capabilities create a moat (3Q24 earnings call summary)

The following is a summary of XPeng's Q3 2024 earnings conference call. For the financial report interpretation, please refer to Has XPeng finally made a comeback after nearly three years?

1. Core Information Review of the Financial Report:

2. Detailed Content of the Financial Report Conference Call

2.1. Executive Statements on Core Information:

In the past two years, XPeng has undergone self-transformation, implementing comprehensive changes in strategy, product management, and organizational structure, continuously addressing various shortcomings in marketing, channels, and design.

XPeng's firm investment in AI technology is transforming into better product experiences and greater cost advantages.

I believe that in the next three years, from 2025 to 2027, the Chinese automotive industry will enter a phase of elimination, with the penetration rate of new energy vehicles in China set to rise uncontrollably to over 85%. On the other hand, the transformation driven by AI will further consolidate the entire market share. In the past, traditional automakers' vehicle R&D was based on supply chain cooperation and integration, whereas in the AI automotive field, a broad full-stack self-research capability is necessary to become a decisive factor in industry competition.

We will integrate vehicles using AI high-intensity computing as a data engine, covering various aspects of hardware and software R&D, including ADAS, cockpit, chassis, and power. This will allow for faster iteration and upgrades. Starting in 2025, XPeng will see significant changes in both autonomous driving and overall vehicle intelligence, encouraging more users to embrace safer, more comfortable, and smarter AI vehicles.

1. Business Progress

1. P7+

① XPeng launched the world's first AI-defined model, the P7+, with over 30,000 units pre-ordered on the first night.

② The standard high-level autonomous driving feature across the entire P7+ lineup is the core reason users choose the P7+. In the past, luxury was about configuration; now, more automakers are moving towards technological luxury, which is also the direction XPeng is striving for.

③ We are working with suppliers to expand the production capacity of the P7+, expecting to reach over 10,000 units in December. Currently, both the M03 and P7+ have started a dual-shift production model.

④ This marks a new starting point for the overall improvement of gross margin for XPeng's new generation models. In 2025 and 2026, all new models and significant facelifts will be equipped with the P7+ and continuously released new technologies. We expect the steady-state gross margin of the new generation models to reach double-digit levels, supporting XPeng in achieving sales targets throughout the product cycle.

2. M03

The intelligent driving version of the M03 will also enter mass production in the first half of next year after the Spring Festival, implementing the platform-based NGP solution, becoming the world's first to lower the high-level intelligent driving threshold to the 150,000 RMB level. XPeng possesses leading AI intelligent driving capabilities and extreme cost control abilities, which are difficult for competitors to replicate

3. Fourth Quarter Sales Expectations

① We will strive to exceed 30,000 units in monthly sales in November, and will enter the first quarter of 2025 with tens of thousands of orders in hand, ensuring a more robust delivery in the first quarter of next year while laying a solid foundation for significant sales growth next year.

② The expected delivery volume for the fourth quarter of 2024 is between 87,000 and 91,000 units, representing a quarter-on-quarter growth of 87% to 95.6%.

4. New Model Launches

① Starting from the P7+, our new max version models and facelifts will adopt the only domestic NGP intelligent driving solution that does not rely on high-definition maps and lidar. In the near future, XPeng will take the lead in the global automotive industry to make high-level intelligent driving a standard feature across the entire lineup, aiming to achieve L3 autonomous driving at L2 costs, promoting technological equity.

② In the next 1-5 years, the penetration rate of AI intelligence will increase rapidly at a nonlinear speed, and AI cars will replace ordinary cars.

③ By 2025, XPeng plans to launch four new vehicles, including the first super electric version of a new model, as well as several facelifts for existing models.

5. Kunpeng Super Electric System

① The Kunpeng Super Electric System has been released, with leading power technology and energy consumption, which has always been a hallmark of XPeng's pure electric brand. The next generation of super electric will use leading-edge high-voltage pure electric technology to address the pain points of ordinary range-extended users and enhance user experience.

② Based on the third-generation 800V platform, it supports 430 kilometers of pure electric range, 1,400 kilometers of comprehensive range, and 5C super fast charging, leading the transformation of next-generation range-extending technology.

③ Plans to adopt a dual-energy route, offering pure electric and super electric drive options to meet diverse global demands.

6. AI Intelligent Driving

① From the cloud to the vehicle, from software to hardware, and even to chips, everything is developed in-house, leading the next generation of full-stack self-research technology.

② Many competitors in the market are still stuck in XPeng's previous generation large model architecture. The future capabilities of intelligent driving will be in multiple areas such as cloud, data, and large computing power. The parameter volume of XPeng's cloud large model will be 80 times that of the vehicle side, representing the most advanced level of intelligent driving, with the potential to increase both the upper and lower limits of autonomous driving by several times.

③ In the upcoming Tianji 5.5 version at the end of this year, we plan to use a complete end-to-end NGP to connect all scenarios from parking space to parking space. Three years ago, XPeng was already able to connect parking spaces, but it was done under different scenarios and rules, while XPeng 5.5 will use a single software solution.

We believe that 5.5 will elevate XPeng's intelligent driving from the original first tier, where competitors are closely matched, to a truly comprehensive first place.

④ We believe that XPeng will achieve a similar L3 intelligent driving experience in the fourth quarter of 2025, expecting to take over once every hundred kilometers.

⑤ We are developing higher-level versions of vehicles, which will significantly increase the computing power at the vehicle end, making it possible for cost-effective and safe mass-produced robotaxis to become a reality.

7. Going Global

① In the third quarter, overseas sales have expanded to 30 countries and over 110 stores. The overseas sales volume in the third quarter increased by 70% quarter-on-quarter, accounting for 15% of total sales.

② By 2025, the international sales network will be expanded to over 300 stores, covering more than 90% of the global new energy vehicle market (excluding North America).

2.2 Q&A Analyst Q&A

Q: Do you expect the gap in intelligent driving technology to widen or narrow in the next three to five years? Are some leading domestic electric vehicle brands in China planning to make intelligent driving a standard feature for all mass-market models? In the future, will intelligent driving technology become a functional "standard configuration"? Additionally, how can we ensure that consumers can perceive the differences between technologies and thus choose higher-value models?

A: We have been discussing this for the past two years while developing end-to-end large model solutions. The threshold for end-to-end intelligent driving is high, requiring not only sufficient R&D funding but also more data and computing power.

Moreover, in the next three to five years, companies that can compete in this field will need to possess complete hardware and software capabilities, with full-stack self-research capabilities covering cloud computing, vehicle development, chip design, and electronic electrical architecture (EEA) development, among other comprehensive manufacturing capabilities. The breadth of full-stack self-research is increasing.

Therefore, I believe that in the coming years, the technological gap between different electric vehicle manufacturers will further widen. Additionally, ADAS (Advanced Driver Assistance Systems) capabilities can be seen as the "small brain" of the vehicle, where there may be a disparity between advertised usability and actual usability, potentially ranging from 100 times to tens of thousands of times. In the next 1-2 years, I believe this will be a substantial change in autonomous driving.

In 3-5 years, intelligent driving will further deepen the impact on customer experience, allowing leading companies to have stronger scale effects.

Furthermore, I would like to add that original autonomous driving manufacturers can use Tier 1 suppliers. However, in the future, achieving full vehicle intelligence and adapting to ADAS functions will require completely different development models and intelligent driving for the vehicle's "brain," upper body drive system, walking system, and overall architecture. Tier 1 cannot handle all-encompassing AI; if they do, they would essentially become a complete machine manufacturer. This transformation will further widen the competitive gap in the next three to four years, highlighting our unique competitive advantages.

Q: Regarding profitability. In the past few quarters, we have seen XPeng achieve continuous improvements in profit margins at both the vehicle and group levels. Looking ahead to next year, how will the company further reduce losses and achieve systematic profitability?

A: First, the financial data for this quarter shows that the Non-GAAP operating loss margin has narrowed to 15.5%, down from about 19% in the second quarter. This reflects the emergence of operational leverage and a trend of reducing operating losses, which we expect to continue. We will launch the P7+, which is a product with a higher profit margin. Additionally, scale effects are beginning to show, and vehicle profit margins are also continuously improving In terms of expenses, we also see significant opportunities for reduction. For example, in the fourth quarter, we expect R&D expenditures to remain below RMB 2 billion, which may result in total annual R&D spending being below RMB 6.5 billion, lower than our initial expectations.

Looking ahead to next year, we anticipate that various factors will combine to bring more positive impacts, including the launch of more new products and updated versions of models. We will also enter new markets, such as launching extended-range models. Based on the above, we are confident in robust growth and continued improvement in profit margins for next year. As we communicated two years ago, we expect to achieve breakeven at some point next year, possibly close to the end of next year, and this goal remains unchanged, with hopes of achieving it on schedule.

Additionally, the improvement in profit margins will also bring healthy cash flow to the company. For example, we expect to have over RMB 40 billion in cash by the end of this year, and we anticipate that healthy cash flow will continue next year, providing a solid capital foundation to support our breakeven goal.

Q: You just mentioned that the overseas operating system will have greater growth potential. What percentage of total revenue do you expect export sales to account for in 2024? Currently, due to the less developed charging infrastructure in some overseas markets compared to China, do you think this will become a potential bottleneck for electric vehicle penetration in certain countries? In the absence of adequate charging stations, do you believe that extended-range electric vehicles (EREV) will become your company's main product in overseas markets?

A: First of all, we believe that the overseas market is a field with strong growth potential for us, as the electrification process is still in its early stages compared to the Chinese market. At the same time, considering that we plan to cover most of these markets by the end of next year, we hope to seize this growth opportunity.

This year, our overseas market sales proportion has increased to about 15%. Looking ahead to next year, although domestic market growth is very significant, we expect the contribution of overseas market growth to maintain a similar proportion. Additionally, regarding battery electric vehicles (BEV) and extended-range electric vehicles (EREV), it is true that in some markets, the lack of charging infrastructure may become a potential bottleneck for BEV penetration. However, the current BEV penetration rate in these markets is still low, so there is still ample growth space for BEV models.

We remain optimistic about the growth of BEV exports and the improvement of their market penetration rate, and this trend will become more pronounced as we enter more markets. Furthermore, for markets with inadequate charging facilities, such as Latin America, Central Asia, or the Middle East, extended-range electric vehicles may be more attractive. Therefore, we are confident that both BEV and EREV products can find growth opportunities in different global markets.

Q: What is your company's current latest production capacity and what is the expected effective capacity for 2025? Do you plan to build new factories or expand existing ones to meet demand? Additionally, have you encountered any shortages of components in the supply chain recently?

A: The Guangzhou and Zhaoqing factories have started double-shift production. Each factory has an annual production capacity of about 200,000 to 300,000 vehicles under the double-shift system. Additionally, we previously mentioned that there is ample reserved land and existing factories next to the Guangzhou and Zhaoqing production bases, which can be used for rapid capacity expansion with relatively low capital investment We have developed a long-term capacity plan until 2026 to ensure that the production capacity required for the future is fully laid out. At the same time, based on our own capacity planning, we are also working closely with suppliers to promote their capacity expansion. Due to our strong push for unified platforms and multi-model parts sharing, this approach makes the capacity expansion of suppliers more efficient.

Q: In the third quarter, the gross margin expanded by 2.2 percentage points. Can you quantify the contribution of each factor? For example, how much did product structure adjustment, cost reduction, and the high base from the second quarter contribute respectively? Do you think the vehicle gross margin could reach double digits?

A: Regarding the improvement in gross margin from the third quarter to the second quarter, it is mainly driven by the following two aspects: first, we continuously reduce engineering costs through value analysis and value engineering (VAVE), and benefit from the decline in battery costs, as the entire industry is experiencing a drop in battery costs. At the same time, we were indeed affected by some P5 EOP (P5 production halt impairment) in the second quarter, and this impact has weakened in the third quarter, which also contributed to the improvement in gross margin.

Looking ahead to the fourth quarter, we mentioned that the P7+ will begin deliveries in the fourth quarter. This product integrates our latest platform and achieves the cost reduction target, which is expected to bring double-digit vehicle gross margins. As we mentioned earlier, this will further drive the improvement of vehicle gross margins from the third quarter to the fourth quarter.

With a larger delivery scale, we expect the delivery volume in the fourth quarter to reach a record high, which will also help us further reduce manufacturing costs and improve overall gross margins. Overall, the automotive gross margin will continue to improve based on the third quarter, and we expect further enhancement in the fourth quarter, leading to an overall increase in gross margin.

Q: Recently, there have been media reports that a Taiwanese foundry may not be able to provide 7-nanometer chip foundry services for Chinese chip suppliers. Will this have a potential impact on our upcoming chips?

A: Our current Turing SOC is still progressing smoothly towards mass production as planned, and we have not seen any impact on its development process.

Q: Regarding the long-term cost reduction potential of electric vehicles. From the perspectives of powertrain, ADAS hardware (including smart cockpit and autonomous driving), as well as body and interior/exterior trim, how much cost optimization potential do you think there is in the future?

A: Regarding the long-term cost optimization of electric vehicles, we are always thinking and improving solutions. Over the past year and a half, we have committed to achieving significant cost reductions, and we are now proud to deliver on that commitment.

In the next 3 to 4 years, there is still a lot of room for cost optimization. Obvious directions include supply chain optimization, economies of scale, and technology-driven cost reductions. Additionally, we can achieve further optimization through some innovative methods, such as: super integration: integrating the functions of different components to develop products that are significantly different from traditional designs; supply chain collaboration: learning from Apple's model to work with first-tier suppliers to enhance the capabilities of second-tier and third-tier suppliers, and fully utilize their logistics and other existing advantages to improve efficiency and reduce costs; material and process optimization: focusing on savings and cost control of electronic materials while enhancing manufacturing processes and technical levels We plan to share the annual cost control results at the upcoming AI Technology Day and earnings release. This includes not only economies of scale and supply chain optimization but will also rely more on technological innovation to drive down costs. We are committed to continuously striving to achieve optimal levels of cost optimization.

Q: Can you provide more details about the new model planning and sales expectations for 2025, including the release time (specific quarters), price range, and model types of the four new models? Additionally, what is the overall sales target for 2025? What are the performance expectations for the new models?

A: First of all, we are not providing annual guidance as we have in the past. However, we are confident that we can continue the growth momentum from the second half of this year into next year. In terms of growth trends, although the growth rate may be relatively moderate compared to this year, we still expect an overall pattern of low first half and high second half.

Regarding the new models, we mentioned that we will launch four new models, one of which will be an extended-range model. Additionally, we plan to upgrade several existing models. The launch of these new and upgraded models will be spread across the four quarters of next year, and we can basically expect new or upgraded models to be released each quarter.

Different segments and categories will have different sales expectations, and we are very confident that the models we launch will lead in their respective categories.

Q: First, overseas markets accounted for about 15% of total sales in the third quarter. We understand that some competitors' overseas market profit margins are typically 1.5 to 2 times that of the domestic market. Does this situation also apply to your company? Secondly, for overseas consumers, young consumers do not place as much emphasis on technology content as they do domestically. How do they understand the value of L2 and L3 autonomous driving features and make them a core requirement for their future car purchases?

A: Regarding the profit contribution from overseas markets, there are a few points to note: First, overall, our models are priced higher in overseas markets than in the domestic market. Although we have to bear additional costs such as tariffs and import fees, the overall gross margin is slightly higher than in the domestic market. Secondly, in many overseas markets, we sell wholesale through importers or dealers, and we are not responsible for retail and delivery of the models, so we earn wholesale profits rather than retail profits. These wholesale profits directly contribute to the company's revenue and differ from traditional gross margins.

Looking ahead to next year, we need to be flexible in responding to tariff changes and different regulatory requirements in new markets. Currently, the contribution of overseas markets to the company's overall profitability is positive, and this trend is expected to continue.

To address the differences in market characteristics and consumer needs, the company has adopted a differentiated strategy. Taking Europe and China as examples, the consumer group in the Chinese market is generally younger and more accepting of new energy vehicles (NEVs), while the European market is primarily composed of middle-aged and older consumers. Although there are many similarities between China and regions outside the EU, this discussion focuses on the differences in the Central European market.

Currently, European customers particularly favor the following features: smart cockpits, fast and ultra-fast charging, high-quality after-sales service, as well as commonly used advanced driver assistance systems (ADAS) features such as automatic parking, LCC (Lane Centering Control), and ACC (Adaptive Cruise Control). However, due to regulatory restrictions, the application of ADAS features in the European market may lag behind the Chinese market by about 12 months The company leverages its strong technological capabilities and software and hardware development skills to provide a high-end brand experience for global consumers by adopting the same set of solutions and flexible combinations according to the demands of different markets. This strategy has been validated by market feedback. In the future, the company will further optimize operations in various regions based on product and service quality to better meet the personalized needs of local consumers.

Q: What is the expected sustainability of the trade-in policy in 2025? Regarding the issue of customer vehicle pickup, if a customer places an order now, they will have to wait until the first quarter of next year to pick up their vehicle. What is our marketing strategy for these customers?

A: First of all, we do not have specific internal information regarding government subsidy policies, but we expect the automotive industry to remain one of the priority support areas for potential stimulus policies. Regarding customer delivery expectations, the current delivery cycle for the P7+ is 8 to 11 weeks, and most customers placing orders now do not expect to receive their vehicles before December of this year. Their expectations are reasonable. Currently, the order volume for the M03 and P7+ remains sufficient and is expected to support demand into the first quarter of next year.

Additionally, we believe that customers choose XPeng based on our unique value proposition rather than the influence of subsidies. The competitiveness of the P7+ and MONA-M03 far exceeds that of previous models, so we do not believe that the continuation or termination of subsidy policies will have a substantial impact on orders. We will continue to focus on enhancing product competitiveness while strengthening sales channels