2/25/2022

speaker
Operator

Hello, ladies and gentlemen. Thank you for standing by for Lee Otto's fourth quarter and full year 2021 earnings conference call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I'll now turn the call over to your host, Janet Zhang, Investor Relations Director of Lee Otto. Please go ahead, Janet.

speaker
Lee Otto 's

Thank you, Amber. Good evening and good morning, everyone. Welcome to Li Auto's fourth quarter and full year 2021 earnings conference call. The company's financial and operating results were published in the press release earlier today and were posted on the company's IR website. On today's call, we have our president, Mr. Kevin Yanan Shen, and our CFO, Mr. Johnny Tia Li, to begin with prepared remarks. Our founder and CEO, Mr. Xiang Li, will join for the Q&A discussion. Before I continue, please be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission and announcements published on the website of the Hong Kong Stock Exchange and the company. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Lee Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Lee Auto's press release interim results announcement and the fourth quarter and full year 2021 results announcement, which contain a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our president. Please go ahead, Kevin.

speaker
Li Auto 's

Thank you, Janet. Hello, everyone, and thank you for joining our call today. 2021 was a pivotal year for new energy vehicle sales in China. During this year, China's auto industry witnessed a notable substitution of EVs for ICE, internal combustion engine vehicles. evidenced by NEV's rapid growth in contrast to the sluggish sales trend of ICE vehicles. This led to growing penetration of NEVs in overall passenger vehicle sales. According to China Passenger Car Association, in 2021, the retail sales of new energy passenger vehicles increased by 169 percent year-over-year to nearly 3 million while ICE vehicle retail sales decreased by 5.6 percent. The penetration rate for retail sales of new energy passenger vehicles rose substantially to 20.8 percent in the fourth quarter of 2021 versus 12.6 percent and 5.8 percent for the first nine months of 2021 and the full year of 2020. With mobility transformation trend pointing to increase the smart electric vehicle use, we are proud to forge ahead as a pioneer. As an industry leader, we are ready to serve more families with continuing product and technological innovations. We achieved deliveries of 35,221 units in the fourth quarter of 2021. up 143.5% year-over-year, driving total revenue to RMB $10.6 billion, or $1.7 billion, growing 156.1% year-over-year. The robust fourth quarter performance took our full-year deliveries to 90,491, up 177.4% year-over-year, and the total revenues to RMB 27 billion, or 4.1 billion U.S. dollar, up 185.6% year-over-year. Liwan was the first domestic-branded premium model priced above RMB 300,000 in China to achieve the 10,000 monthly deliveries. In January 2022, we have delivered over 10,000 Liwans Third consecutive month, achieving a new record. We believe this is another milestone for D1 to qualify as a blockbuster model and will be a benchmark for all our future models. We are excited to see D1 awaken the premium passenger vehicle market in China, targeting family users, and emerge as one of the best choices. We attribute our vehicle's success to our outstanding product definition capabilities. The extended-range six-seater SUV has gone from being questioned to mainstream, while our full-screen, full-vehicle interactive voice system has set a new industry benchmark. This further proves our users' recognition of V1's pioneering energy replenishment solution of adopting battery power for urban commuting and the reach heart with range extender during long distance traveling, and highlights our users' endorsement of the brand new in-vehicle driving and riding experience V1 offers in this autonomous era. Our product definition capability are built on the shared vision in our organization and foundation of comprehensive capability including technological strengths, profound consumer insights, and systematic execution. And we are confident we can apply this to our future models and continue to provide our users with solutions beyond what they have demanded. We aim to grow our model lineup significantly in the coming years while advancing our R&D efforts as product provides the competitiveness mode for business and the technology for the mode for product. While production and delivery improved, as most of our chip supply chain partners resume normal operations, challenges to the overall NED supply chain will likely become long-lasting, affecting chips, batteries, and potential other auto parts given the accelerating development of the smart electric vehicle industry. Going forward, together with our supply chain partners, we will continue to work on multiple measures such as advanced planning and diversify the supply chain to mitigate supply chain risk. In light of the ongoing industry-wide semiconductor shortage, we expect the total deliveries in the first quarter of 2022 to be between 30,000 to 32,000 vehicles. Turning to the financial side, we maintained strong performance with a robust and steady gross margin of 22.4% in the fourth quarter, growing 4.9% year-over-year. This was driven by our strong vehicle sales performance and consistently effective cost management measurements. Even as we accelerated the pace of R&D spending to 11.6% of revenue and grew our sales network by adding 53 retail stores in the first quarter, we achieved the profitability as well as a record-breaking RMB 3.8 billion operating cash flow, which is a significant reflection of our operating excellence. In 2021, we significantly expanded our direct sales and servicing network, almost quadrupling our number of retail stores to 206 in 102 cities, from 52 in 41 cities as of the end of 2020. By the end of January, we had 220 retail stores in 105 cities. as well as 276 servicing centers, and we auto-authorize the body and paint shops operating in 204 cities. We aim to provide our users with more convenient, efficient, and pleasant purchasing and user experience by strengthening our online operations, as well as continually adding physical touch points close to our users. We plan to further enlarge our footprint and target reaching 400 retail stores by the end of this year to meet the growing market demand for NEV nationwide, supported by consumers' rising NEV adoption and our upcoming new model launches in 2022 and onward. Moving to our product optimization and R&D efforts, in December, 2021, we released the OTA 3.0 update to all our Li1 users, further enhancing the in-car experience for both drivers and passengers. This upgrade includes the navigation on ADAS and the automatic emergency braking, AEB, features, making us the third automotive OEM globally to develop its own full-stack As of January 31st, 2021, we have provided NOA to more than 70,000 family users. And during the Spring Festival holiday, we accumulated over 2 million kilometers of NOA mileage with an ADAS-equipped user base at the leading scale in China. We will continue to increase the R&D of ADAS-related technology and we believe we are well-positioned to push the boundaries of assisted driving technologies. The upgraded AEB with vision perception algorithm enables Liwan to identify roadworks and highway traffic accident sites and prompt users in advance to avoid major accidents. Liwan was awarded 2021 Car of the Year by DCAR, Zhongche Di, a renowned auto information platform in China due to its outstanding AEB performance exhibited in the DCAR AEB test, known as the most strict vehicle test in China by automotive professionals. During the test, Li-1 was the only assessed model in the final round capable of accurately identifying crossing vehicles and two-wheelers. This further reflects our full-stack self-development capabilities. The OTA 3.0 update also includes an upgraded version of the V1's smart in-car voice assistant, ,, which now recognizes and executes more voice instructions for in-car entertainment, navigation, and the vehicle setting. We will continue to conduct R&D to develop safer car with smarter product features that can be helpful for all members of the family, young and old, as we remain steadfast in our commitment to creating homes on the move that bring happiness to the entire family. We are also happy to share that we have been added to the Hang Seng Tech Index under the index newly added category of autonomous technology. The inclusion will take effect on March 7th this year. We have also been included in the Hansen Composite Large Cap Index since August 2021. As a technology leader in smart mobility, our addition to the Hansen Tech Index endorses the strength of our full-stack self-developed ADAS and smart cabin technologies, as well as recognizes our capability to create value for our investors. We look forward to bringing more families our V1 premium experience that offers safer, simpler driving with all the amenities and technology people want in a premium vehicle. In the second quarter of 2022, we will unveil our next mass-produced vehicle model, a full-size premium extended range electric SUVs. Deliveries of this model will start in the third quarter of this year. In 2023, we plan to launch two BEV models that support ultra-fast charging. By then, our ultra-high voltage charging solution will be readily available to our users, effectively shortening the charging time and addressing mileage anxiety. As we remain committed to developing new models autonomous driving, smart cockpit, and others. Our R&D extends for 2021, tripled year-over-year, to R&D 3.3 billion, or $515.7 million, accounting for 12.2% of the revenue. We will continue to expedite our R&D progress with the support of our extending R&D team which is comprised of more than 3,400 personnel as of the end of 2021, representing 139.8% year-over-year growth. We target to maintain our R&D investment at the level of 10% of revenue and above going forward. Turning to our production capacity, we are expanding our capacity at the Changzhou factory and constructing our Beijing manufacturing base. Once the expansion and construction are completed, the design production capacity at these two manufacturing sites will reach 500,000 units annually in 2023, and around 750,000 with double shifts. Meanwhile, we are excited to share that in December, In 2021, we entered into a strategic cooperation framework with the Chongqing municipal government for establishing our new manufacturing base. We will make relevant disclosure of the Chongqing manufacturing base when appropriate. They enhance the production capacity together with our enriched product line-up. will position us well to capture an increasing share of the booming EV market, laying a solid foundation for our strong growth in the years to come. With the launch of our second major vehicle just around the corner and continuous strength in order for our L1, we expect 2022 will be another pivotal year of growth for the auto. Our pioneering spirit tells us to keep pushing the boundary of what is possible, and that's what we are doing. The market is ripe for advancement, and we are in the right place at the right time with the right strategy, the right skill set, the right business model, and the right vehicle to drive us to the next destination. In 2022, we expect the NEV market to see its greatest number of drivers yet, and we are all ready for it. I will turn this call over to our CFO, Mr. Pei Li, to review our financial performance in the fourth quarter.

speaker
Janet

Thank you, Kevin. Hello, everyone. I will now walk you through some of our financial results for the fourth quarter of 2021. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings price release for further details. Total revenues in the first quarter of 2021 were RMB 10.62 billion or 1.67 billion U.S. dollars, representing an increase of 156.1% from RMB 4.15 billion in the first quarter of 2020 and an increase of 36.6% from RMB $7.78 billion in the third quarter of 2021. This included RMB $10.38 billion or $1.63 billion from vehicle sales, which increased 155.7% year-over-year. and 40.5% quarter-over-quarter. The increase over the fourth quarter of 2020 and the third quarter of 2021 was mainly due to the increase of vehicle deliveries in the fourth quarter. Revenues from other sales and services were RMB $244.7 million or $38.4 million in the fourth quarter of 2021. representing an increase of 174.5% year-over-year and a decrease of 37.1% quarter-over-quarter. The year-over-year increase in revenue from other sales and services was mainly attributable to increased sales of charging stores, accessories, and services in line with higher accumulated vehicle sales The decrease in revenue from other sales and services over the third quarter of 2021 was due to the sales of automotive regulatory credits in the third quarter, which didn't recur in the fourth quarter. Cost of sales in the fourth quarter of 2021 was RMB 8.24 billion, or 1.2%. to $9 billion, representing an increase of 140.8% year-over-year and an increase of 38.2% quarter-over-quarter. Cross-profit in the fourth quarter of 2021 was RMB 2.38 billion, or $373.5 million, growing 228.5 percent compared with the fourth quarter of 2020 and 31.3 percent compared with the third quarter of 2021. Vehicle margin in the fourth quarter of 2021 was 22.3 percent compared with 17.1 percent in the fourth quarter of 2020. and 21.1% in the third quarter of 2021. The increase in vehicle margin over the fourth quarter of 2020 was primarily driven by higher average selling price attributable to the increase of vehicle deliveries of our 2021 Li-1 since its release in May. Our gross margin in the fourth quarter of 2021 was 22.4%, compared with 17.5% in the fourth quarter of 2020, and 23.3% in the third quarter of 2021. Operating expenses in the fourth quarter of 2021 were RMB 2.6 billion, or $300 billion. 69.7 million U.S. dollars representing an increase of 193.2% year-over-year and an increase of 23.4% quarter-over-quarter. Research and development expenses in the fourth quarter of 2021 were RMB 1.23 billion or 193 million U.S. dollars representing an increase of 228.7% year-over-year and an increase of 38.4% quarter-over-quarter. The increase in research and development expenses over the first quarter of 2022 and the third quarter of 2021 was primarily driven by increased employee compensation as a result of growing number of research and development staff, as well as increased cost associated with new product developments. Selling general and administrative expenses in the fourth quarter of 2021 were RMB 1.13 billion or 176.7 million U.S. dollars. representing an increase of 162.2% year-over-year and an increase of 10.2% quarter-over-quarter. The increase over the first quarter of 2020 was primarily driven by increased employee compensation as a result of a growing number of staff. as well as increased marketing and promotion activities, and the rental expenses associated with the expansion of the company's distribution network. Income from operations in the fourth quarter of 2021 was RMB $24.1 million, or $3.8 million, compared with RMB $78 million, 0.9 million loss from operations in the fourth quarter of 2020 and RMB 97.8 million loss from operations in the third quarter of 2021. Net income in the fourth quarter of 2021 was RMB 295.5 million or 46.4 million US dollars. compared with RMB 107.5 million net income in the fourth quarter of 2020, and RMB 21.5 million net loss in the third quarter of 2021. And now, turning to our balance sheet and cash flow. Our cash and cash equivalents, restricted cash, time deposits, and short-term investments totally A total RMB $50.16 billion or $7.87 billion as of December 31, 2021. Operating cash flow in the first quarter of 2021 was RMB $3.84 billion or $602.1 million. Free cash flow was RMB $1.8 $62 billion or $253.5 million in the first quarter of 2021. As of December 31st, 2021, we had a total of 11,901 employees. For more of our 2021 full-year financial results, please refer to our earnings release for further detail. And now for our business outlook. For the first quarter of 2022, the company expects the delivery to be between 30,000 and 32,000 vehicles, representing an increase of 138.5% to 154.4%, from the first quarter of 2021. The company also expects the first quarter total revenues to be between RMB 8.84 billion and RMB 9.43 billion, or US dollar 1.39 billion and the US dollar 1.48 billion, representing an increase of 147.2% to 163.7% from the first quarter of 2021. This business outlook reflects the company's current and preliminary view on its business situation and market condition, including the ongoing industry-wide semiconductor shortage, which has all subjects to change. I will now turn the call over to the operator to start our Q&A session. Thank you.

speaker
Operator

Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and lights for your name to be announced. If you wish to withdraw your request, please press the pound or hash key. For the benefit of all participants on today's call, please limit yourself to two questions. And if you have additional questions, you can re-enter the queue. If you're going to ask the questions in Chinese, please follow with English translation. So once again, a style one for questions. Our first question comes from the line of Fei Fan from Goldman Sachs. Please ask your question.

speaker
spk02

Fei Fan Great, thanks. Let me ask my questions in Chinese first, and I'll translate into English. Thank you for the opportunity to ask this question. First of all, congratulations to the company for its excellent performance. I have two questions here. First of all, we are very looking forward to this product of X01. Kevin and Mr. Tie just talked about the new rhythm of this company, one this year and two next year. So I would like to ask, in the past, we have seen the industry of Chinese new energy vehicles. Different companies have their own product cycle. We have seen successful new products and unsuccessful new products. Some products are out of stock. Some products have brought this company into a new stage, a new階梯. Looking back, I want to understand the management team's thoughts on the product cycle of this industry for a while. I see other companies' products. What are the conditions for a successful product cycle? This is the first question. Let me just quickly translate into English. The Chinese new energy vehicle industry had various product launches in the past 12 months. Some were successful. Some didn't really quite work out. So what have you learned from the industry? And what do you think are the critical factors for products to succeed? The second question is on manufacturing capacity and store openings. With 750,000 units production capacity by the end of 2023, 400 stores by the end of this year, these are ambitious targets. These are large numbers from where you are right now. So does it mean that you are ready to scale up new products after unveiling those in the rest of the year. Thank you.

speaker
Fei Fan Great

Okay, I'll answer the first question. In the past few years, there have been a lot of new products. I'm a product manager myself. I think products have a very formal logic. It's applicable to any company, including any family. Okay. I think the first important thing is that we have to understand the needs of the users. This includes the user group that we have, the needs on the surface, the needs behind it, and the needs that they don't know about. How can we see it more comprehensively and produce a suitable product? The second is the price that they are willing to buy. So this is the user level. One is what kind of needs I have, and the other is how much I want to spend. I think we can draw it out in a circle. On the other hand, what the enterprise needs to do is to make the most of the product we produce with this circle. This includes five comprehensive capabilities. The first is product strength, including size, space, and performance. This is the first most important indicator. The second most important indicator is the safety of the product. The third most important indicator is the quality of the product. The fourth is the price of the product. The fifth one, which has been clearly seen in the industry in the past few years, is the supply capability of the product. Basically, it is the comprehensive performance of these five indicators, along with the positioning needs of our users, as well as the needs for price. The bigger the shadow area of these two together, the bigger the sales of this product. First of all, this is Li Xiang. I'm translating for Li Xiang. I would like to answer this question as a product manager myself. In fact, in the industry, there's very established product logic.

speaker
Li Xiang

We start with the users. The users care about two things. First of all is their own needs. And there are three levels of needs, starting with the first level, which is their superficial needs. And then going down further, there's the hidden needs. And eventually, there are needs that the users don't even know themselves. So first of all, we need to understand these needs very well. And the second point is the price point that they're willing to buy our product at. And with these things, we can basically draw a circle. And as the product manager, Our goal is to build products that will overlap as much as possible with this circle of user needs. And the product really focuses on five different things. The first one is product performance. We need to deliver a product that performs well on many different levels. And secondly is safety and security. Third is quality. Fourth is price. And fifth is supply. Especially in an industry that's been growing so rapidly, supply is especially important as has been seen in the industry in the past few years. So overall, if we can build a product that can balance these five factors and match with the circle of user needs, then the bigger the overlap, the greater the sales. And on the contrary, if the overlap is very small, no matter what the vision is, from the company's standpoint, sales will always suffer. So we believe a good product performance is never a coincidence. It's based on very established and solid product capabilities of the company. Thank you.

speaker
Li Auto 's

This is Kevin. Let me take the second question about our preparation for the coming years. Actually, we have a very strong confidence in our new product that we're going to launch in this year and next year. Therefore, we are very aggressive in terms of getting our capacity prepared. Right now, from the sales side, as mentioned, we have 400 stores planned by the end of this year. We'll have more next year. Also, not only stores, but also human resources of the sales force, we are also preparing. From the capacity perspective, actually, not only our own capacity. We are working with our supply chain partners to add in capacity in their factories also. As we should all know that the IC supply is constrained, so therefore, we already started to secure upstream IC resources by giving advanced planning to our supply chain partners. Thank you.

speaker
Operator

Thank you for your question. Our next question comes from from Morgan Stanley. Please ask your question.

speaker
spk09

Congratulations to the company for achieving a bright future in the fourth quarter. Thank you, Mr. Guan, for your question. I have two questions. I will ask Mr. Guan and Mr. Guan in Chinese. The first question is that we are currently seeing a lot of new business owners in the car industry. In addition to the car industry, they are trying to build a multi-factor Internet ecosystem through some of the products of flying cars. We saw through the reports that some of the car dealers are focusing on urban and public transportation. I'd like to ask the management team how to expand the smart electric car ecosystem in the next step. How will it extend the application of space intelligence or multi-spectrum? This is the first question. The second question is, as mentioned in the briefing, the cost of manufacturing this year may still be significantly improved. In addition to the increase in battery prices, most products and materials are not rising. So just two quick questions. The first question is about our ecosystem strategy. We noticed several startups here start or plan to expand the operations scope into non-vehicle business, for example, like smartphone manufacturing. We're flying vehicles in order to broaden and enhance the user ecosystem of the smart EV. So from VO2's perspective, how should we think about the company's next step of ecosystem development? And my second question is about the cost management. We expect the general inflation or price hikes of the batteries and other key materials to continue this year. So how should we gauge the potential impact? Any quantitative information we can take as a reference when we assess the potential impact. Thank you.

speaker
Fei Fan Great

Okay, let me answer the first question. I think the advantage of ideal vehicles is that they are very focused. In the field of electric vehicles, we have just completed the first phase. In fact, there are still a lot of things that we haven't done yet. Whether it's from product to application to technology to system, we have so much work that we haven't done yet. It's worth it for us to do it for the next five to ten years. So we will continue to work hard in the field of smart electric vehicles to make the products, the applications, the technology, and the systems very transparent. I hope that in ten years, I will see if I can achieve a standard similar to Apple. I think this is the ideal car in the field of smart electric vehicles. In the field of smart electric vehicles, we want a strategic strategy and core that is really deep and step by step. On the other hand, I think the car is a space. In fact, in this space, it's not that we go into other work spaces. I think we can do a lot of things. We can put some of the experiences that may not be good in many spaces, some technology, some applications, and some capabilities. We can control it in the car. Then the product level is higher. In such a space, it can be used for our users, for our family users.

speaker
Li Xiang

As the founder of the company, we have been focused from day one on the smart electric vehicle market. And we believe that we've just finished our zero to one stage, and there's still way too many things for us to focus on than to expand into other sectors. So there are many things that we can do on the product, application, technology, and system levels that I believe will take the next five to ten years for us to complete, and we will be very focused on this market going forward for at least the next ten years. And we believe that in ten years we can reach the level where Apple is in smartphones and smart devices. So that's our overall strategy. And then speaking about space, the in-car space, there's so many things to do. We're not talking about expanding into other types of space because we believe that even for the space in-car, there's still many things to do. One of the opportunities is the experience is, for activities where the experience is still not as perfect in other space, we believe there's an opportunity to move them into cars and because of our integration capabilities and because we can fully control many of the hardware and software, we can provide much better experience than they are the way it is elsewhere, including content and hardware. These are all big opportunities to tackle that we will continue to focus on in the foreseeable future.

speaker
Li Auto 's

Tim, this is Kevin. Let me take the second question about the cost challenge. In fact, when we plan for this year's financial budget, actually we already took into consideration of the potential cost increase, especially as we should all know that the battery is going to, the cost will increase. Yeah, on the other hand, but actually with the volume substantially increased this year, also will achieve more economy of scale, so therefore, Overall, although we have many challenges, but we are still targeted to achieve a higher gross margin than last year.

speaker
Operator

Thank you. Our next question comes from Bin Wang from Credit Suisse. Please ask your question.

speaker
Bin Wang

Thank you, leader. I have a few quick questions. The first question is, you just mentioned that on March 7th, we will enter the Hengsheng technology index. Can we say that we can enter the Hengsheng感通 index? This is the first small question. The second small question is, we have some income of 200 million in 2021. Will there be more in 2022? Because we actually have more than 100 growth. I want to ask about the price of the New Year's gift and this help. Finally, can we talk about the reason for the departure of CTO today? I actually got several small questions. Number one is about, you just mentioned in the March 7th, you actually got eligible for the Hansen Technology Index. That means you could be eligible for the Shenzhen Hong Kong Stock Connect to get a Southpaw money. That's number one. And number two is about the NB credit. You're actually booking around 200 million revenue for the NB credit in 2021. So can you guess what's the roughly amount in the 22 um because you got almost more than 100 percent growth in the 21 um that is the what's the help for the margin and uh profit and last one is today you got an announcement that the cto is leaving can you explain what's the reason behind the cto living thank you uh yeah and this is uh john uh uh thank you uh 1b and uh first of all for the connect

speaker
Janet

According to the latest price raised by Hongsheng Index, we have been included in the large cap index and also to be included in the Connect, we need to meet relevant requirements on market cap and transaction volume. And we expect to be included in the Connect index. in middle March after we are listed for six months and plus 20 transaction days. Yeah, it will be around that time. And for the NEV credit for 2021, we have over about two to three times of our NEV scores comparing with last year. that we got from the sales volume. But as everyone may aware, the per score price will be lower than last year. So we are still negotiating with the potential buyer of those EV scores. Hopefully that will come out around the third quarter. Just like last year, yeah. And for the CTO's question, I think we can just refer to the press release.

speaker
Hongsheng Index

Thank you. Thank you.

speaker
Operator

Thank you. Our next question comes from the line of Mingxin Li from Bank of America, please ask your question.

speaker
Hongsheng Index

Bank of America, please ask your question. But in the past year, the delivery of ideal vehicles has been relatively good for the same industry. For example, last week, Dr. Shuzhou was suspended from work. At present, does it cause any problems for our company's production and supply chain? I also want to understand how the management system looks at the industry tension this year. How can we do better than other industries to ensure that our production is not interrupted or unable to be delivered? This is the first question. The second question is also about the product industry. Last year, OTA, NOA, has given some new functions, including AEB, etc. I have two questions. The first question is how do you see the supply chain management and also the chip supply situation in 2022? And the second question, you just OTA the NOA last year, and what do you think, what is the most important function for next step for you to offer to your customers to enhance the user experience? Thank you very much.

speaker
Li Auto 's

Hi, Lee. This is Kevin. Let me take the first question. In fact, we are also impacted by the supply this month and also last month. Not only the IC shortage from ST, but also the COVID-19 hit Suzhou. So going forward, in the coming months, actually, we see the situation will getting improved, but still, supply will be very tight. So we'll continue to do what we have been doing. First, qualify more supplies. Second, give advanced planning to our supply chain partners. Third, basically to increase our own production flexibility so that whenever the supply is available, we can very quickly turn it into a final product to deliver to our customer. Yeah. Second question.

speaker
Fei Fan Great

I'd like to answer the second question. Since we launched NVA in 2021, we have delivered a complete product to our users at the end of last year. NVA wants users to have a very good experience, including the compatibility with high-resolution maps. There is still a lot of work to be done. We will continue to enhance this experience. But for us, the most important thing is that whether it is NOA or A1B, we hope to improve the safety of a car and the entire use journey. This is our most important indicator. It is also a very important reason for us to do our own research. We hope that in 2021, we can make the whole life cycle of the car can reduce 80% compared to traditional cars. This is a very important goal for us. For this reason, we make this feature a standard for every car. We are working hard to keep up with this goal. This is the platform we are using, the low-frequency shock absorber. Next, the X01 will be delivered. Whether it is from the ability of the sensor This car and then this computing computing ability and then including the safety of the car and then this ability and then this will have a and then a completely different degree of improvement Yes, I think we're on top of that and then we're going to get the whole safety performance and then get to a higher level of a level and then let the user, whether it's in the context of a scene or in the context of a self-driving and then in

speaker
Li Xiang

Since we started delivering NOA feature on our 2021 model year lead one, we completed the full feature release on the model by the end of last year. And our goal has always been to deliver good experience for the customers. And there's actually large amounts of work for us to deliver this good experience, including adapting HDMAP and continue to fine-tune. So we'll continue this work to continue to make improvements in safety. And our goal is to increase safety standards across the entire driving experience, not just when the car is in NOA mode, which is the reason why we started to develop many of the technologies in-house. And our ultimate goal is to increase safety by decreasing accidents by 80% across the entire life cycle of our vehicles, which is why we make the feature standard and continue to iterate the feature over time. So the above is about the current solution on our V1, which runs on two Horizon J3 chips. And speaking of X01, which will be launched this year, there will be significant improvements not only in sensors but also in computing power and safety redundancies. It will bring the safety of the entire vehicle over the life cycle to a whole new level, and it will make the drivers and their families safe not only when the car is in NOA mode but also when the driver is driving themselves.

speaker
Operator

Great. Thank you. Our next question comes from Paul Gong from UBS. Please ask your question.

speaker
Paul Gong

Thank you, Manager Chen. There are two questions. The first question is about the difference in the future from a strategic point of view. In the current situation, some new series focus on brand and service, while others focus on software and automation. We have taken a relatively realistic and high-performance path. But if we look at a year later, everyone will go to high-level autonomous driving, will go to laser radar, will go to high-performance platforms, will also do pure electric, and then from the coverage of the price segment, there will be a bigger overlap. At that time, one of the main points of our competition should be in what place? Is it about more innovation or about efficiency priority? So two questions. The first one is regarding the future differentiation. Right now, the several EV startups all have these unique needs. How do you think, going forward, when everyone is working on the autonomous driving, everyone is going to use LiDAR, everyone is going to produce BEV as well, so what would be the key competitiveness by then? Is it further innovation? Is it revolution of the technology? Or is it more focused on the efficiency of the operation? The second question is regarding the globalization. We have observed that some peers have already expanded to European markets. How do you think of the globalization, both in the near-term plan as well as in the long run?

speaker
Fei Fan Great

Let me answer the first question. Then, by the end of 2021, I believe that the ideal car has completed its verification from 0 to 1. This verification from 0 to 1 proves that we can be a ceiling of the industry in the family market. For example, we have achieved the first place in the sales of the major SUVs. I think in the first stage, if the visibility is reflected outward, I think on the one hand, it is the ability of our face-to-face products to be reflected. Then I think another hidden ability is the efficiency of the whole company. Yes, and behind this efficiency, we have done a lot of research and development support. and the support of software system development, I think it is a test of our industry in the past six years. Whether it is our sales at this level or the cost of sales and management of this enterprise, we can see our advantages in this regard. I think in the next few years, we will be an ideal car, and then we will complete a stage from 1 to 10. We have also set out the goals for everyone to know in 2025. At this stage, the most important thing for us is still to play our advantage. And then continue to do well, and then a group of family users like this. But it has to be more detailed, and it has to be distributed to each section, from 200,000 to 500,000. And then in such a family user, we have to cover more products. So that such a good product can be obtained by more families. I think this is the first point. And then the second point, we will still insist on our high efficiency. Yes, just like us. In fact, our research and investment today is no different from others. And then the same high level of opening and closing is also very fast. But we can still guarantee that the company will have a very good business situation. Yes, I think this is one of our advantages. There is no need to reduce this advantage. But I think from one to ten, in addition to continuing to play your own advantage, I think there is also a very important point is to make up for some of your past shortcomings. And we recognize these shortcomings ourselves. In fact, then from In the beginning of last year, we developed the all-in-one smart driving system. Our Yuying also established its own very powerful AI team. In all aspects, our entire next pre-computer, and the next generation of electronic electronics, all took on this very strong, and built a very good self-developed team. So, on the one hand, we will make up for our technical capabilities. On the other hand, I think we will because of the growth of the entire market, and there will be more investment in supply and manufacturing. Back to what I said earlier, I think all companies will work on intelligence, and the value of intelligence, including the value of intelligence. I don't think there is any trick to this. Because all smart-related software will actually show three very obvious characteristics. The first characteristic is that you don't feel anything when you buy it. The second characteristic is that if it performs very badly, and it will destroy the product. The third one is that if the product is particularly outstanding, it will make users lose interest in it. I think this is the biggest difference between smart products and past hardware. In this respect, I think there are three competencies in a comprehensive competition. The first one is product capability. You have to know what users want, then you can make products that exceed the needs of users. I think this is the first one. I think the second one is the construction of software and AI capabilities. This is very important. In fact, it depends on whether a team can do business well or not, mainly on its talent. No matter what kind of story this company tells, you can take a look at it. It doesn't have the ability to recruit the best software talent, the best AI talent to its team. Do people like this want to work in such a company? I think this is the second part. Then the third part is a longer term. In my opinion, it is actually a system power. To be more precise, it is the ability to build a operating system. I think these three will form the whole of the future, whether it is the smart cockpit or the smart driving, and the final product experience, user experience, and long-term user connection and purchase attraction. This is the core positioning of ideal cars and the hard work we should do.

speaker
Li Xiang

By the end of 2021, we've pretty much validated ourselves and finished the completely zero to one stage as a company. We've been focusing on, we've been validating ourselves in the family buyers market and pretty much established the industry ceiling as the number one seller in the medium to large size SUV market. And our key recipe for this success is our focus on the family market. our efficiency, our R&D capabilities, and our software R&D capabilities. This is validated through sales while having a very low SG&A expense level. And in the next couple years, we'll be completing our 1 to 10 stage, as many of you are well aware of 20 to 25 goals in volume and margins. And so, to reach this goal, we will continue to play to our strengths, which is two things. One is we will We understand the family market very well, and we will expand our product line across the $200,000 to $500,000 price range by providing our product to more families in more segmented markets. The second one is our efficiency and R&D capabilities. As you can see, our R&D and new store opening pace has been on par with many of our competitors, but in the meantime, we're still delivering very healthy and profitable financial results. In the meantime, which we admit, we have many weaknesses, which is what we will be working on over the next few years. First of all is R&D. We actually have already made many improvements. We brought in our autonomous driving and voice recognition in-house by building a very strong, talented team. In the meantime, we've established our R&D capabilities in zonal controllers, e-architecture, all of these are brought in-house today. So we believe that we will continue to build these R&D capabilities in the technical area. In the meantime, the other weakness has been supply or area we want to work on is supply. Given the growth in the market, we'll be working on supply as well as manufacturing capabilities. And finally, on the topic of intelligent technologies, we believe that there's no shortcut in the market. One thing we've observed with intelligent technology is that it has three characteristics. First of all, users have no particular feeling of the technology when they buy the product. And secondly, if the experience is bad after they buy the product, they will very easily give up the product and lose all their confidence. And thirdly, if the product is actually good, they will very quickly find out that they cannot live without the product. So to make sure that we can deliver competitive products in the intelligent technology area, We will focus on three capabilities, which we believe the company is very well establishing. First of all is the product capability. It's very important to understand the user needs and continue to deliver products that will exceed their needs. And second one is software and AI capabilities, which ultimately is the competition on talents, the bench of talents. We believe that most successful companies are the ones that can attract the best talents, are the ones where the best talents will like, what we'll most prefer to work in. And the third one is safe system capabilities, and more specifically, it's the ability to develop operating systems. And we believe with these three capabilities, we will be able to maintain our core competency in both autonomous driving and intelligent cockpit. Thank you.

speaker
Li Auto 's

Paul, let me take the second question about the globalization. So basically, for our long-term strategy, we believe we'll ultimately compete in the global market. That's for sure. And for the very near future, very near term, we want to focus on the China market for now. And as I mentioned several times, We already have a dedicated team for the globalization strategy. They are doing three things. First, to identify the potential market for our product. Second, to analyze what will be the right product mix for this product. And third, how to develop a business model so that we can achieve meaningful market share when we enter this market. So right now, this team, dedicated team, is still developing the overall strategy.

speaker
Operator

Thank you, Paul. Thank you. Our next question comes from Yingbo Xu from Citix. Please ask your question.

speaker
Paul

Okay, thank you, Manager Chen. My two questions are about the product. The first question is, In fact, the penetration rate of new and old cars is now more than 20%, which means that many consumers are getting to know more and more about electric cars and smart cars. My first question is whether such a change in penetration rate will have an impact on the future product form. A small problem is that we still have an X01 product launch this year, and we will consider it at a higher price range. One is about... we see the penetration rate of BEV goes higher than similar like 20%. And that means more consumers understand more about electronic vehicles or smart vehicles. So what kind of change would that take for the users? And also we know that, could you please give us more color about X01? And the second question is about the, the BEV product that will be launched next year. We think that from EREV to BEV is a huge change. Could you please give us some description or explanation of this new product? Thank you.

speaker
Fei Fan Great

Hello, Yingbo. Let me answer. I think the first question is that after the market share is high, users are getting more and more familiar with the product. Yes, I think this is actually a very good thing for us. But in fact, the method of making products has not changed. Because it still involves three levels. The first one is the obvious demand that users will express. I think this is one aspect. And then I think the second one is that users will actually have some hidden needs. It doesn't express it, but when you observe its actual use, it always needs it in various scenarios. And then it has its own pain points. I think the third one is to create And then a lot of them actually don't know, but after he uses it, he will find that this is what I want. I think it's actually a combination of these three aspects, and then for users to carry out rational, emotional, and then various levels of observation, analysis, and then some verification. In fact, we can only push out products that exceed the needs of users. So in terms of X01, on the one hand, we can actually meet the needs of users who are not satisfied with the features offered by Ideal One, including many users who want to upgrade to Ideal One. On the other hand, we will create some new needs that are not provided by all electric vehicles on the market today. And we believe that users may not be able to express it in their mouths, but after using it, they will say, wow, this is what I want. I think this is also one of the core concepts of our product creation. Yes, I don't think there will be any changes. But we admit that the needs of the users are changing. We will follow the needs of the users. We will also produce products that are obviously beyond the needs of the users. We will introduce more new products to the industry. I think this is the ability of the new generation of D1 products under the Zengcheng platform. I think on the other hand, in terms of pure electricity, we are actually doing high-pressure pure electricity. So its core actually consists of three elements. The first component is a 4C battery, and a battery with a higher charging capacity. We conducted a very in-depth joint research with the supplier, and we invested a large number of researchers. Because such a battery will be related to our entire system, including the charging, including the software control, and then the heat management. So, because there is no large-scale company that has produced 4C, so we have to go deep into the battery and the core to do a very in-depth research. This is the first part. The second part is the entire 850V system, and we are also based on our own research. including the electric motor, the whole three-in-one, and such electric motors, including more of the three-in-one electric motors that can be provided. In the past, the functions that electric vehicles could not provide, such as helping to reduce and reduce the pressure, such as helping the battery to be heated, all of these have to be developed very deeply in order to be realized. I think this is the second part, which is the part of the electric pressure platform of 850 V. You may have seen some of the work we can do in this area in the news. I think the third level is the 400,000-watt charging table and the charging station that we operate ourselves. We hope that the whole experience will achieve a very good wall. It is very convenient for our users to use it. And then from this battery group to the entire platform to the charging station Then such a closed loop can be opened And then you can put 4C and then 4C and 850 wireless platforms With this 10-minute 400-kilometer experience Can actually then provide to our consumers Then I think this is what we are doing next And then on the one hand, we are doing it And then on the other hand, next year, we can really And then a complete product and service experience And then to the user

speaker
Li Xiang

First of all, on the first question, as we reach higher penetrations in the new energy vehicle market, this is actually good news for the company. The same product methodology will continue to apply. And as I said earlier, as we observe our users, there are three levels of demands. The first level are the explicit demands. The second level are the implicit demands, many of which are their pain points. And the third level are demands that they don't even know exist. The way we observe these demands is that we analyze and observe the users on rational and emotional levels and understand what they want and build products that will exceed their needs. And talking about the EXO-1, our core theme has been to two things. One thing is to upgrade things that users really wanted on the one and wanted to add to their lead one product. And secondly, delivering on new demands that are not yet met in the market today. These are things that users do not even realize that they want, but the moment that they see their products, they'll realize this is what I actually wanted. So the methodology will continue to remain the way it is, although the user needs are changing, and we will continue to follow that very closely. So these are some comments on the next new vehicle on our range-extended vehicle platform. Next, I'll make a few comments on the electric vehicle market, electric vehicle product. So the electric vehicle will focus on three different things. First of all is a 4C charging capability. And this most important component will be the battery. We've actually spent a lot of efforts to co-develop the battery with our key supplier. because the entire architecture and cells and charging capability, heat management system will all be different. So we've done extensive work in this area to ensure that the mass production of this battery will be successful. The second component of our high voltage platform is the 850 volt EV platform, which includes many different things ranging from electric motors integrated integrating DC-DC of rising voltage, lowering voltage, heat management, battery management system. All these things have never been provided before as a company. And the third thing is a 400 kilowatt charging station and charging poles. We've done a lot of work to develop these charging poles to ensure that we can provide seamless experience for our user, which connects the battery, the vehicle platform and the charging station. With these products, we'll be able to charge the cars in 10 minutes and deliver 400 kilometers of range.

speaker
Operator

Great. Thank you. Our next question comes from Zhong Xiao from Barclays. Please ask your question.

speaker
Zhong Xiao

Thank you, Manager Chen, for answering my question. I agree with what Mr. Li said about the customer's needs. Henry Ford said that if you ask a customer what they need, they will tell you that they need a faster code. We can see that the company is focused on the product. My question is mainly about the customer group. Mr. Li mentioned that we are very focused on family users. We now have a plan Thank you management for taking my questions. My question is really about strategic positioning and product positioning. The management talked about the focus on having the best product for the family use. Is the family sort of use case still the focus, remain the focus for the new products, including the BEV products? If it is, would that be enough for the sort of longer-term sustainable growth and strategic positioning for the company? Thank you. Thank you.

speaker
Fei Fan Great

I'll answer it later. I think we will continue to focus on this market. Because we only have a small price range in this market, and then a verification is carried out. In 2016, when we were doing product definition and product planning, in fact, this market, the market of over 200,000 household users per year, was about 2 million units per year. In the past year, this market was close to 6 million units. By 2025, we think it will be more than 10 million. So this is a very healthy market, and we can make more good experiences for users, and maintain a relatively healthy and profitable market. The growth rate is fast, and it can invest more in us, and we can also obtain a healthier profit. We think this is actually a very good market. So we will continue to insist on doing this market. We talked about so much. In fact, I think we only have a small spoon in the market today. Because in the family business market of more than 200,000, we only have a market share of more than two points. Because we look at the whole car industry, not just the electric car and EV. So I think there are still a lot of work to be done next. We ourselves hope that in this market, not to eat more than two points, but to eat more than 25 points. This is our core goal. And then I think when we do it to this extent, our company has completed such a critical stage from 1 to 10.

speaker
Li Xiang

So the answer is yes, we'll continue to focus on this market because we've pretty much only validated ourselves at one particular price point in this market. But if you look at the entire market, when we defined the Me1 product in 2016, the market size was only about 2 million units annually. And last year, the market has grown to 6 million, and we expect that by 2025, the market size will reach 10 million units per year. So this is a very healthy market. for three reasons. One is it has very big growth, as we talked about earlier. And second one is that there's enough BOM or bill of materials in the market for us to deliver good experience for the users. And thirdly, it can still deliver very healthy gross margin for us as a company. So we believe this is a very attractive market that we'll continue to focus on. So far, we've only really taken a very small scoop from the market, accounting for about 2 percent market share in the market. Here we're talking about all passenger vehicle market, not just NEV, because we believe V1 not only competes with new energy vehicles, but we have the potential to replace all existing passenger vehicles above 200,000 RMB price point. So there's still much work to do, and our goal is to eventually reach at least 20 percent of the market which is the time by which we will have finished our 1 to 10 stake as a company.

speaker
Operator

Great. Thank you. So as we reach the end of our conference call, I'd like to turn the call back to the company for closing remarks. Ms. Janet Zhang, please go ahead.

speaker
Lee Otto 's

Thank you once again for joining with us today. If you have any further questions, please feel free to contact the auto investor relations team Then that's all for today. Hope you have a great weekend.

speaker
Operator

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q4LI 2021

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