Xiaopeng's 2023: Reform, Cost Reduction, and New Product Launches (Minutes of the Q4 2022 Conference Call)

$ Xiaopeng Motors.US On March 17, 2023, before the US stock market opened, the Hong Kong stock market released its fourth-quarter financial report for 2022 (as of December 2023):

I. Core data review vs market expectations

1. Revenue: Quarterly revenue of 5.14 billion yuan, YoY-40%, lower than market expectations (5.686 billion yuan).

2. Gross profit margin: Quarterly gross profit margin of 8.7%, YoY-3.3pct, slightly lower than market expectations (11.8%).

3. Q1 guidance:

(1) Revenue is expected to be between 4-4.2 billion yuan;

(2) Delivery volume: 18,000-19,000 vehicles.

For more detailed financial information, please refer to Changqiao Dolphin's review "Xiaopeng Motors: Target of criticism, can it come to the brink of survival?".

Conference call additional information:

1) Cash reserve situation: Xiaopeng Motors-W.HK had 38.1 billion yuan as of the end of December 2022;

2) Management team situation: Wang Fengying joins as CEO; since February of this year, Xiaopeng's design, R&D, production, supply chain, organizational management, and process teams all report directly to me (CEO He Xiaopeng);

3) Pattern of new energy vehicles: There are many opportunities to significantly reduce the price of new energy vehicles, including our internal marketing costs and R&D costs that do not create customer value, as well as our bom costs for the entire hardware and software (where we can currently see larger cost reductions mainly with packs and battery cells);

4) High-end new energy vehicles: Pure electric vehicles priced above 300,000 yuan are facing tremendous challenges;

5) Marketing expenses: Will decrease this year, with a focus on marketing efficiency.

Full text of conference call

Management statement-He Xiaopeng

Overall statement: In 2022, Xiaopeng Motors delivered more than 120,000 vehicles, ranking tenth in China's new energy vehicle market and a YoY growth of 23%. Looking back at the macro economy of 2022, the industry competition in new energy vehicles brought a lot of challenges, and our performance also faced pressure. But from another perspective, fortunately, these pressures also helped us to see the industry's challenges earlier than most companies and the problems we saw internally. I am pleased that we took rapid action at the end of last year, started to analyze and explore earlier, and began to solve these problems this year. At the end of last year, we took decisive action to review and adjust our strategy, pushing forward comprehensive optimization of our organizational structure, and improving our shortcomings to strengthen our overall capabilities. We chose to self-overturn and engage in true innovation and entrepreneurship on a higher dimension and platform.I believe that Xiaopeng Motors is about to reach a turning point, because we have identified our goals, strengths, and weaknesses. Not only are we confident in restoring our sales growth and market share, but we are also now more focused on improving our fundamentals, including organization, routine, marketing, and cost efficiency. We have the support of society in the long run, and I believe we will lay a solid foundation for Xiaopeng to truly become a leading enterprise in the intelligent automobile industry nationwide and even globally.

Our strategic adjustment has just begun not long ago, but it has already shown significant results in the first quarter. I am confident in the continued solid expansion of the adjustment results in the coming quarters and achieving greater breakthroughs.

Firstly, we have made adjustments and upgrades to the management team starting from the top. Wang Fengying, a new president with over 30 years of experience in the automotive industry, has joined us. Fengying will be fully responsible for Xiaopeng's product planning, sales, brand, marketing, and overall product matrix system. Fengying has profound industry experience, market insight, and strong execution abilities, which will help Xiaopeng's products better capture customer needs and significantly improve our abilities and efficiency in brand, marketing, sales, and service.

We have also adjusted the management structure to make it flatter and more cohesive. Starting from February this year, all of Xiaopeng's design, research and development, production, supply chain, organizational management, and process system teams directly report to me (CEO He Xiaopeng). I believe that in the next few months, our overall planning ability, decision-making efficiency, and execution efficiency will have significant improvements. These adjustments have effectively activated our execution and combat capabilities. I believe that for quite a long time, I personally will continue to focus on how to achieve multiple times the efficiency and customer value with the same number of personnel through management innovation and technological innovation, as well as how to significantly reduce the cost of the entire chain.

In terms of product planning and design, we will focus more on innovation around perceived customer value and differentiation. We will adjust our configuration combinations in subsequent vehicle models (including new models and facelifted models) and unify the modular design and intelligent consistency design of the entire vehicle. In terms of interior and exterior styling design, because Xiaopeng's users do not have extremely high demands, I am currently directly managing the design team and simultaneously creating three front-end design teams for competition. I believe that we will continue to make significant improvements in the design of interior and exterior styling space.

Meanwhile, we have set NPS (Net Promoter Score) as one of the KPIs for multiple business departments. We are responsible for collecting feedback every month, and NPS assessment will drive us to focus on customer-centric product planning, design, research and development, and customer service. I believe that you will see significant progress in our new products, OTA, and services when we go public in the future.

In terms of brand marketing, we will build around the core differentiator of full autonomous driving to improve user recognition, expand our market boundaries, and deeply promote our current focus on third-fourth-tier markets.Current Status of the Company: We have completed the initial integration of the brand and market teams, and realigned our overall strategy to help us improve the quality, efficiency, and flexibility of our marketing efforts, while significantly reducing marketing costs over the next few months. We have restructured our sales network to a flatter management system, and are strengthening network layout, improving frontline sales training, and enhancing overall combat effectiveness. These initiatives provide an excellent foundation for small-scale electric carmaker, Xiaopeng Motors, to achieve success.

Latest Developments of Our Models: On March 10th, our main model, the P7's upgraded version, the P7i, was officially launched and began delivery in the same month. I'm thrilled to share that after the launch of the P7i, our dealership and test drive numbers reached their highest levels in several months. Our customers appreciate the P7i's advantageous features such as its intelligence, aesthetics, and driving control compared to competing models. Despite the current general weakness of new orders in the overall market, we have shown a significant upward trend lately. February's new orders showed a 100% increase from January, and our new orders in March have increased significantly mom with the strong performance of the P7i in the order book. This is the first victory we've won after the comprehensive transformation and has significantly boosted morale internally.

Our second heavyweight new model, G6, will debut at the Shanghai Auto Show, and will be officially launched and begin delivery in the second quarter of this year. The G6 not only has the latest electric and intelligent technology in the 200,000-300,000 price range for new energy SUVs, it also has significant advantages in space endurance, styling, and interior compared to our competitors. We believe the G6 will become a top-selling model in the market and will achieve 2-3 times the monthly sales target of the P7 after mass production starts.

In the second half of this year, we will also launch a brand new pure electric 7-seater MPV that will meet the needs of families who seek more space, power and intelligent sharing solutions.

Recently, artificial intelligence applications such as ChatGPT4.0 have given billions of users a glimpse of the immense potential of generative AI models. This has made me very excited. It signifies that in the future, similar general intelligence capabilities of machine brains will enter a new stage of development, and they can be deployed locally. This will bring new interpretations and efficiency improvements to the development of autonomous driving, and enable faster progress from L4 to L5 automated driving. We look forward to coupling GPT-related technologies with various aspects of Xiaopeng Motors' business, bringing revolutionary breakthroughs to our users' experience and enhancing the company's operational efficiency.

Autonomous Driving: Starting from late March, our XNGP will accelerate its deployment in multiple cities including Guangzhou, Shenzhen, and Shanghai. Through the OTA of city NGP (Intelligent Navigation Assistance Driving), Xiaopeng Motors has pioneered the mass production of a BEV time sequence network XNET based on Transformer technology in China.The development of deep learning algorithms has made a milestone in 16 years.

In the second half of this year, XNGP, a deep learning algorithm based on XNET, will no longer rely on high-precision maps, which can achieve coverage of roads in dozens of cities nationwide. Based on our current test results, the new version of XNGP is clearly better than the similar technology of our friendly competitor in the US. I believe that Xiaopeng's self-driving technology and user experience will also reach a turning point.

Not only in intelligent technology and user psychology, we are far ahead of our peers. We are about to promote our technology and commercialization to enter an explosive period due to a cross-border inflection point. On the basis of ensuring high safety, we will make rapid progress in the three core directions of automatic driving: coverage scenarios, customer experience, and software and hardware costs.

From the perspective of automatic driving coverage scenarios, we have entered the city scenarios of high-frequency rigid demands from high-speed scenarios, and we are about to further open up the full range of scenarios, which means point-to-point scenarios including community roads and non-public roads. And we will promote it to multiple cities nationwide from the current three cities in the third quarter of this year. In terms of customer experience, we have realized the important psychological barrier for the first time in the test last year, which is to make customers use self-driving with peace of mind, that is, to let the machine help us with driving, and we only need to supervise it. Through several OTA updates from the end of last year to now, we believe that the XNGP OTA in the future can increase the machine driving age by 1 year every year, which means that in the next 2 to 3 years, we will achieve the driving experience of an experienced driver with about 3 years of driving experience, and the number of takeovers in 100 kilometers in the city will be reduced to 1 time or lower.

In addition, regarding costs, we plan to achieve a significant reduction in the Boom cost of XNGP next year, including the boom cost of software and hardware, and transform from the current bundled sales of software and hardware to graded sales of software and hardware, making the highest level of full self-driving become Xiaopeng's standard configuration and enabling more users to use the latest full self-driving capability.

I believe that Xiaopeng will comprehensively break through the above three directions, create huge value for our users, establish our technological barriers, and bring long-term, sustainable large-scale growth and contribution to our gross profit.

Regarding cost strategy: The next five years will be the golden five years of full self-driving. Xiaopeng's current significant advantages in automatic driving technology will enable Xiaopeng to gain advantages in the golden five years of full self-driving, and Xiaopeng is expected to gain the first market share in the new five years.

In the face of fierce industry competition and internal competition, I believe that in addition to continuing to achieve leading points, besides automatic driving, aesthetic design, and significantly improving conventional marketing efficiency and organizational capabilities, a very important point is that a company must have super strong cost control capabilities, so this will also be Xiaopeng’s core capability to win competition next. We will promote our cost reduction strategy through platform modularization and a large number of technological innovations in these two directions.From this year, Xiaopeng's pure electric platform, electronic and electrical architecture, power system, and intelligent assisted driving software and hardware will all enter the stage of harmonization and truly systematic production of vehicles. This will enable us to provide users with better experiences and higher quality products at a faster speed and lower cost, which will effectively make it easier for our suppliers and partners to obtain creativity.

**In the past, Xiaopeng's technical research and development capabilities were mainly reflected in performance and function. In the future, our research and development capabilities will be more reflected in the maintenance of function and performance while significantly reducing costs and make it a standard feature. We have already formulated a very clear roadmap for implementation, through multiple means such as technological innovation and fuel consumption, to achieve more than 50% reduction in the cost of self-driving boom from this year to next year, and reduce the power and hardware system cost of the entire vehicle by about 25%. I am pleased that our design, research and development, supply chain, and manufacturing teams are currently working together, and we are confident that through innovation, we will achieve very good cost control in the near future, which will also greatly enhance our product competitiveness.

From the perspective of cash flow, our cash in hand at the end of last year exceeded RMB 38.1 billion yuan. In the past few years, including this year, we will complete investment in two major production bases. We have also built three strong supporting vehicle platforms, which can support our future production capacity, output, and vehicle platform launch. I believe this will also greatly reduce our capital expenditure, and our research and development direction will further focus on the most in line with the long-term trend of the route, and make users perceptible and achieve consistency as a standard feature, which can have a huge difference in scale cost. We will continue to improve the efficiency of the entire process, for example, in the current sales system, we optimize store layout to improve electric efficiency. I believe that the cost optimization measures that are currently being implemented and being implemented will continue to be significantly reflected in the future, especially from the second half of the year.

Delivery guidance: We expect that in the first quarter of 2023, our total delivery quantity will be approximately 18,000-19,000 vehicles, with expected revenue of approximately RMB 4-4.2 billion.

Q&A

Q1: How do you view the current competition pattern in the new energy market? Is it possible to adopt a diversified/more aggressive pricing strategy based on changes in the competitive pattern to maintain an advantage?

A1: Extremely aggressive price wars in the past one to two years are inevitable. Faced with the huge challenges of new energy vehicles, gasoline vehicles will definitely fight back - the production capacity of power batteries will be excessive, and upstream raw material prices will fall significantly. In such an environment, many new energy companies will adopt more aggressive actions that prioritize market size.

Xiaopeng's current strategy is to do a good job of scale, and to achieve this, I believe that in addition to strengthening our advantages in automatic driving and design, the most important thing is the previously mentioned cost. In fact, Xiaopeng's technological innovation in the past was mainly for function and performance.We are shifting our focus from the 250,000-300,000 price range to the 200,000, 250,000, and 300,000 ranges, where we see many opportunities for substantial price reductions, including internal marketing costs, R&D costs that do not create customer value, and the boom cost of the entire hardware and software.

Therefore, the most important thing for Xiaopeng Motors in the future is how to achieve the forefront of the scaling of autonomous driving intelligent vehicles, even to be the first. At the same time, we will certainly be more aggressive in occupying higher market positions in the constant redesign and new models, as well as related pricing, which is our overall strategy.

Xiaopeng Motors recognized in last year's overall strategic adjustment that without the basic Hardware and software scale, it is impossible to survive in China - this is the foundation for survival, so we believe that in the next 5 or even 10 years, only by using technological innovation and strictly controlling costs to achieve the first scale in the market can we truly survive.

Q2: Could you share some details about this year's channel marketing strategy, including channel sinking strategy and whether there will be some adjustments to the mixed mode of direct sales and dealerships?

A2: There are several clear points regarding this year's channel strategy.

First, we will continue to move forward firmly with our own operations and authorized operations, and I believe that the proportion of authorized operations will increase relatively over time.

Second, we will definitely flatten the management of our channels and improve the overall profitability and operating efficiency of the channel by providing better training and service, which is a very important point for us this year.

Third, our channel will definitely transition from being a channel that is solely sales oriented to having more 4S functions.

These points are our channel strategies for this year that we have already decided and are pushing forward, but we are still discussing the new thinking for the next step, but we will gradually share it with everyone. One thing to note is that we do not believe that a large number of small channels can be a good way to increase sales of our vehicles; we hope to have high-quality channels, which will be more valuable to us.

Regarding the system of third- and fourth-tier channels, we will mainly rely on our partners to record them, and we will also consider more models that are more suitable for sales in third- and fourth-tier channels in our product planning, including redesign models to be launched later, which is something we are planning.

Q3: Could you reveal what the biggest criticism of Xiaopeng Motors by the new CEO, Fengying, is, as well as the solution?

A3: Fengying has two criticisms of the company, with one directed towards me personally. She believes that we have not done well enough in planning and marketing, and sees many problems. Therefore, she is actively addressing both planning and marketing and it is not a matter of which one she will address first.Q4: How to think about the application of GPT-related technology to intelligent cars? What value can it create, and what costs and expenses need to be considered for new technologies?

A4: GPT will have value for Xiaopeng in the short, medium, and long term. If we talk about the long-term value, one of them is that when we achieve a high level of autonomy, or even at the initial stage of autonomous driving, we will find that the car as a mode of transportation can only go so far. However, if we want to make it smarter, we will find that it cannot solve many problems that were previously solved by the driver. Therefore, by deploying GPT locally and connecting it to the cloud, I believe we can achieve true L4 or even L5 autonomy, and I think this is a huge driver of this speed.

As for how to implement and pay for GPT in the automotive industry, I think GPT should currently be focused more on software services, education, or document editing industries where its effects can be quickly felt. However, because the combination of hardware and software is different from that of pure software and the internet, we are more willing to see how GPT can be implemented in other software-related technological industries. After that, we may see several variants of the GPT system appearing in China, and then we will choose the path that Xiaopeng should take.

As for costs, many of our partners are discussing this with us, but currently, the impact of costs for us is still minimal.

Q5: Regarding cost reduction, how does the company plan to achieve the 25% reduction in the cost of electric vehicles?

A5: A 25% reduction in costs does not mean that Xiaopeng is very powerful, it means that cost control in the past was not good enough.

Taking the integrated stamping you mentioned earlier as an example, it will be launched on the G6 this year.

We have seen a new methodology on the pack of the entire vehicle that can significantly reduce the cost of the pack by about 40%-50%.

We are also working on the platform design of the entire battery cell, and I believe that after the platform design of the battery cell and the growth of the overall long-term battery technology, there is considerable room for a significant reduction in the cost of the original battery cell.

In fact, cost reduction is a significant combination of the overall vehicle, power, configuration, and scale. We have seen a clear roadmap and expect to achieve a significant reduction in costs in the second half of this year, the first half of next year, and within this year.

Q6: Regarding G9, does the company have plans to make adjustments in response to weak sales? Will sales remain in line with previous guidance?

A6: In the context of the overall environment, pure electric vehicles above 300,000 yuan are facing significant challenges. However, I still have great confidence in the actions that will be taken for G9 in the future, including some of our configurations that are currently being ramped up, so they will soon begin to be delivered. In addition, XNGP will start to achieve good results with G9 and the new P7i.As G9 has begun to be delivered in significant quantities, we've been seeing a growing number of positive reviews. I believe that after the release of the P7i and G6, there will be a significant increase in foot traffic to our stores, which will benefit G9. In March, we were thrilled to see that G9's sales had climbed somewhat since February, particularly in a few of our key cities. Therefore, I believe we're still on track to meet our overall goal for this year, despite the challenges we face.

Q7: What's your take on this year's marketing budget?

A7: While the saying "there are no products that can't be sold, only prices that can't be reduced" was true before 2015, I think its accuracy is decreasing over time. I can say that this year, Xiaopeng's marketing budget will definitely decrease significantly compared to the past, which is something we're now very clear on. Nevertheless, we've started to re-strategize this year, and we believe that compared with past years, there will be a significant decrease in spending on marketing throughout Q1 and Q2-Q4. We've set ourselves an aggressive target internally, while also making sure we maintain sales efficiency, which is our current focus.

Q8: Can you give us an update on battery pricing deals and negotiations with battery suppliers?

A8: When battery prices surged dramatically in January of last year, it was a very positive development for hybrid cars, but it posed a significant challenge for all-electric vehicles. However, I believe that battery prices will accelerate their decline starting this year. Looking at the effect of the price war instigated by the leading companies in the battery market, I think this is a more favorable development for the entire industry, and it will enhance the competitiveness of electric vehicles compared to hybrid and gasoline-powered cars.

Based on our communications with our partners, we're very confident that our prices will decrease more significantly than the industry's, which is what we're seeing at the moment. More recently, we've been adjusting a range of systems internally, including electric drives, batteries, and packs. We've noticed that there's a lot of potential to make progress in this area, including through battery standardization, partial lithium iron phosphate conversion in ternary batteries, and improving the cost-effectiveness of our driving range. We believe we have significant room for growth here, and we'll likely see results within a year's time.

Q9: Can you reveal the selling points of G6 that will support better sales expectations than P7/P7i?

A9: I'm sorry, but I can't provide details about our unreleased products here. However, we'll be showcasing G6 for the first time at the Shanghai Auto Show in mid-late April. I can discuss several things briefly.One of the major improvements of the G6 is its significantly enhanced range, which is due to our advanced integrated stamping process, as well as our CIB technology, thermal management, and wind resistance capabilities. The actual range of this vehicle will exceed our expectations.

The other standout feature of this vehicle is its much larger interior space compared to our competitors. When sitting in the back seat, you will find that the space is more than adequate and the design of the interior is very smart, which is in line with the signature features of Xiaopeng vehicles. So, as I mentioned earlier, we have significant differences in the range and interior space of this vehicle.

Q10: Regarding the batteries themselves, what percentage of orders are for the ultra-fast charging batteries? Will there be any changes in the battery technology roadmap in the future?

A10: Starting from the G9, all of our new and major redesigned vehicles are equipped with 800V fast charging and silicon carbide technology, and we will continue to deploy ultra-fast charging with determination. The 800V fast charging not only enables faster charging for ultra-fast charging, but also significantly faster charging speed than other vehicles at existing charging stations.

As for the future modularization of battery cells, we are currently working on related planning, but it has not been officially announced yet. However, we still reserve the feasibility of using different packaging solutions for different vehicle models, including the feasibility of using large cylindrical cells.

Dolphin's in-depth research and tracking points on Xiaopeng include:

Financial Report Season

March 17, 2023, Financial Report Review "Xiaopeng Auto: The Target of Criticism, Can It Survive Adversity?"

November 30, 2022, Conference Call,"What Did Xiaopeng Say during the Conference Call That Caused a 50% Increase Overnight?"

November 30, 2022, Financial Report Review, "Can Xiaopeng Remodel Its Structure Despite Poor Performance?"

August 24, 2022, Conference Call, "G9 and B-Class 'Model Y', or Xiaopeng's Last Effort (22Q2 Conference Call)"

August 23, 2022, Financial Report Review, "Xiaopeng is Still Far from Being Profitable"On May 24, 2022, phone conference: "Xiaopeng: Q3 is the quarter where the pricing result will show and the gross profit margin will significantly rebound (conference minutes)" was held.

On May 23, 2022, financial report evaluation: "Sales champion, loss king, does the market still buy Xiaopeng's story?"

On March 29, 2022, phone conference: "Rapid channel sinking opened up the ceiling for Xiaopeng's car delivery volume (Q4 2021 conference minutes)"

On March 28, 2022, financial report evaluation: "Selling more and losing more, is Xiaopeng a joke or a star?"

On November 23, 2021, phone conference: "Xiaopeng: Exploring the Robotaxi business, advancing intelligence? (Conference minutes)"

On November 23, 2021, financial report evaluation: "Rookie of the year in pre-orders, how far is Xiaopeng from being the 'Chinese version of Tesla'?"

On August 26, 2021, phone conference: "Xiaopeng car: Roll up sleeves and work harder"

On August 26, 2021, financial report evaluation: "Xiaopeng car: Healthy financial report, full of 'smart' heart"

On May 14, 2021, phone conference: "Xiaopeng car Q1 2021 performance phone conference minutes"

On May 13, 2021, financial report evaluation: "Xiaopeng car: Tesla's problems versus Xiaopeng's better than expected performance, who do you choose?"On March 9, 2021, telephone meeting: "Xiaopeng Auto's Q4 Conference Call, not less exciting than the financial report?".

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On April 14, 2021, "Xiaopeng P5 new car debut conference".This article's risk disclosure and statement: Dolphin Research's Disclaimer and General Disclosure