NIO Inc.

And gentlemen, thank you for standing by for NEO Incorporated's second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Today's conference is being recorded. I will turn the call over to your host, Ms. Eve Tang, investor relations of the company. Please go ahead, Eve.

Good morning and good evening, everyone. welcome to new the second quarter 2021 earnings conference call the company's financial and operating results were published in the press release earlier today and are posted at the company's IR website on today's call we have Mr. William Lee founder chairman of the board and chief executive officer Mr. Stephen Fung chief financial officer Mr. Stanley Chu VP of finance and Miss Jade Wei, AVP of Capital Markets and Investor Relations.

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Before we continue, please be kindly 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. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that news 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 Neil's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Li. William, please go ahead.

Hello, everyone. Thank you for joining Neil's second quarter 2021 earnings call. In the second quarter of 2021,

New delivered 21,896 ES8, ES6, and EC6. A new quarterly record representing a strong increase of 111.9% year over year. In July, new delivered 7,931 vehicles representing a strong 124.5% growth from last year. All three models have achieved a solid performance in the premium SUV market.

According to the data published by China Passenger Car Association, in the first half of 2021, the penetration rate of battery electric vehicles has reached 8.4% in China.

News penetration in the tier one and the tier two cities in China has been growing at a much faster pace. In Shanghai, the first half of this year has witnessed over penetration in the premium SUV segment, reaching 13.7% among all ICE and electric vehicles. Our monthly order intake keeps growing, but the delivery volume will be determined by the overall capacity of a supply chain. We expect the total delivery in the third quarter to be between 23,000 and 25,000 vehicles. In terms of growth margins, We have achieved a steady performance with a vehicle gross margin and overall gross margin standing at 20.3% and 18.6% respectively. Next, I would like to share with you some recent operational highlights of the company.

In May, the first production line of ET7 to verify sample vehicles was launched. We have already started a series of rigorous control functions, performance and legal testing. We are full of confidence in ET7's future delivery. The development work of the future new generation automatic driving system NAD will proceed smoothly. We believe that NAD will completely surpass the experience of the mainstream automatic driving system in the market, leading to the development of automatic driving technology in the industry.

Since the first devaluation build of ET7 rolled off the production line in May, a series of rigorous tests of vehicle functionality, performance, and homologation have been kicked off. We're very confident with the on-time delivery of ET7 next year. Meanwhile, the development of NAD, new generation autonomous driving system, is also advancing smoothly. We believe that NAD will deliver the best experience of autonomous driving and lead the charge of autonomous driving technology development in the industry.

In 2022, we plan to deliver three new products.

based on NIO Technology Platform 2.0, including ET7. Our teams are devoting every effort to press forward the development of the new product.

At the same time, NTE's technology platform is also continuing to optimize to strengthen the market competitiveness of our existing three models. In August, we will release NIO OS 3.0, fully upgrade UI UX, and provide more new features to further optimize the existing functional experience. Through continuous OTA upgrades, Neopilot's functional experience is also gradually improving. More and more users choose and use Neopilot. In the second quarter, Neopilot's selection rate has exceeded 80%. By July, Neopilot's total range of automatic assistant driving has exceeded 200 million kilometers.

In the meantime, we are also constantly optimizing and upgrading the new technology platform 1.0 to strengthen the competitiveness of our current three models. In late August, we will release the new OS 3.0, which will roll out with a fresh new look of UI UX design, new features, and further optimization of the existing functions. Through continuous over-the-air updates, the functionality and experience of a new pallet have also been improved. As a result, more and more users have chosen and enjoyed new pallets. In the second quarter, the take rate of a new pallet exceeded 80%. As of July, new pallet has been engaged for a total of over 200 million kilometers. 产能方面,二极豆虽然受到了芯片供应波动的影响,

With the joint efforts of the team and partners, the overall production and delivery of the quarter has met expectations. Since July, the pandemic and extreme weather conditions have brought continuous challenges to the global supply chain. Recently, the epidemic in some parts of China has already affected our production. We will work together with our supply chain partners to try to reduce the wave of supply chain and the impact of the overall production and delivery of the third quarter.

In terms of production capacity, despite the semiconductors supply volatilities in the second quarter with joint efforts of the teams and other partners, the production and the delivery have met our expectations in the quarter. Since July, the COVID-19 pandemic and extreme weather events have posed a series of challenges to the global supply chain. The most recent COVID situation in certain regions in China have already affected our production. We will continue to work closely with other supply chain partners to minimize the impact on the production and the delivery in the third quarter.

to expand the sales network coverage to reach the second and third-tier cities faster. Currently, we have 36 future service centers and 171 authorization service centers in 133 cities. We will further expand more service centers to meet the needs of users who want to grow quickly. With regards to the sales and service network, we now have 25 new houses and 243 new spaces.

in 128 cities in China. We will continue to deploy over new houses and new spaces, improve operational efficiency and quality, and expand sales network coverage to quickly build over presence in the tier two and tier three cities. As of now, We have set up 36 new service centers and 171 authorized service centers in 133 cities. We will further increase the number of service centers to meet the rapidly growing user service demand.

In terms of the charging network, we have built 361 charging stations covering 103 cities. We have completed more than 3 million charging stations for our users. Up until now, we have deployed 361 swap stations in 103 cities and completed over 3 million battery swaps for our users.

in july we announced new powers of battery swap station deployment plan by 2025. we plan to increase the total number of battery swap stations to over 700 by the end of 2021 and to over 4 000 globally by the end of 2025.

On the other hand, we are also expanding over power charging and destination charging network. As of now, we have established over 238 power charging stations and installed 2,416 destination chargers in China. With the accelerated deployment of the charging and swapping network and deepening understanding of BaaS,

more and more people can truly experience and recognize the benefits of battery swapping and bus, which has attracted more users to choose battery as a service.

In terms of the international market, Norway's market entry work is going steadily. The first ES8 will be launched in the future. It is expected to arrive in Norway in mid-August. Pre-order and delivery will start in September. From September, NearApp, NearLife,

On the front of the global market, the Norway market entry has been progressing as planned. The first batch of ES8 has been shipped and they expected to arrive in Norway in mid or late August to be ready for the pre-order and delivery in September. Starting from September, new app, new life, new house, new power to charge both mobile and upgrade both service system, new service center and the delivery center will gradually become available to users in Norway.

As a user company, users have played an increasingly important role in the future community. NIO Day 2021's campaign work has officially started. After an enthusiastic user vote,

As a user enterprise, our users are playing an increasingly important role in the Neo community. The preparation for Neo Day 2021 has been kicked off with the active participation of our users. Suzhou, out of 10 candidate cities, has been voted to be the host city of this year's New Day. Our user community has also joined us in making a positive difference in the world. In July, the city of Zhengzhou and a few places in Henan Province were hit by heavy rainfalls and floods. NIL dispatched service resources nationwide to support users in Henan. provided real-time usable charging power information to both new users and the users of other EV brands, and supported the disaster response and relief work with donation and the special purpose fund of a new user trust.

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2021 is a critical year for long-term development. In the second half of the year, we will accelerate the development of new products and full-time technology, increase the investment in charging and sales service networks,

2021 is a critical year for NIO to lay a solid foundation for its long-term development. Going forward into the second half of 2021, we will accelerate the pace of a new product and full-stack technology development, enhance our charging and swapping network, as well as the sales and service network. to be fully prepared for the delivery of the three new models in 2022.

At the same time, we have also stepped up over mass market entry preparation

we will enter the mass market with a new brand. The quoting of the new brand has been assembled, marking the first step of the strategic initiative of NIO. As always, thank you for your support. With that, I will now turn the call over to Stephen to provide the financial details for the quarter. Stephen, please go ahead.

Thank you, William. I will now go over our key financial results for the second quarter of 2021. And to be mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in the second quarter were 8.45 billion RMB, or 1.31 billion US dollars, representing an increase of 127.2% year-over-year, an increase of 5.8% quarter-over-quarter. Our total revenues are made of two parts, RICO sales and other sales. RICO sales in the second quarter were 7.91 billion RMB, or 1.23 billion US dollars, accounting for 94% of total revenues in this quarter. It represented an increase of 127% year-over-year, an increase of 6.8% quarter-over-quarter. The increase in vehicle sales year-over-year was mainly attributed to higher delivery achieved from more product mix offered to our users. The increase in vehicle sales quarter-over-quarter was mainly due to higher deliveries. Other sales in the second quarter were 536.2 million RMB, or 83.1 million US dollars, representing an increase of 130.3% year-over-year and a decrease of 7% quarter-over-quarter. The increase in other sales year-over-year was in line with the incremental vehicle sales in the second quarter of 2021. the decrease in other sales quarter-by-quarter was mainly due to the less revenues derived from 100 kilowatt-hour battery upgrade service. Cost of sales in the second quarter was 6.87 billion RMB, or 1.06 billion U.S. dollars, representing an increase of 101.8% year-over-year, an increase of 6.9 percent quarter-over-quarter. The increase in cost of sales was in line with revenue growth, which was mainly driven by the increase of vehicle delivery volume in the second quarter of 2021. Gross profit in the second quarter was 1.57 billion RMB, or 0.24 billion U.S. dollars, representing an increase of from the same quarter of 2020, an increase of 1.2% from the first quarter of 2021. The increase in gross profit was mainly contributed by increased vehicle sales. Gross margin in the second quarter was 18.6%, compared with 8.4% in the same quarter of 2020, 19.5% in the first quarter of 2021. The increase of gross margin compared to the second quarter of 2020 was meaningful by the increase of vehicle margin in the second quarter of 2021. Gross margin remained relatively stable compared to the first quarter of 2021. More specifically, vehicle margin in the second quarter was 23%. compared with 9.7% in the same quarter of 2020 and 21.2% in the first quarter of 2021. The increase of vehicle margin year over year was mainly driven by the increase of vehicle volume, higher average selling price, as well as lower material cost.

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Vehicle margin remained relatively stable quarter over quarter. R&D expenses in second quarter were 883.7 million RMB or 136.9 million US dollars, representing an increase of 62.1% year over year, an increase of 28.7% quarter over quarter. The increase of iron expenses year-over-year and quarter-over-quarter was mainly attributed to incremental design and development costs for new products and technologies, as well as increased number of employees in research and development functions. SGN expenses in the second quarter were 1.5 billion RMB or 0.23 billion US dollars, representing an increase of 59.9% year-over-year, an increase of 25.1% quarter-over-quarter. The increase in SG&A expenses year-over-year was primarily due to the increased marketing activities as well as the increased number of employees in sales and service functions. The increase in SG&A expenses quarter-over-quarter was primarily due to the increased marketing and promotional activities and professional services. Last for operations, the second quarter was 733.3 million RMB or 118.2 million US dollars, representing a decrease of 34.2% year-over-year, an increase of 158% quarter-over-quarter. Share-based compensation expenses in the second quarter were 251.4 million RMB or 78.9 million US dollars, representing an increase of 455% year-over-year, an increase of 160.5% quote-for-quote. The increase in share-based compensation expenses was primarily attributed to additional options and restricted shares granted. Net loss in the second quarter was 587.2 million RMB, or 90.9 million US dollars, representing a decrease of 50.1% year-over-year, an increase of 30.2% quarter-over-quarter. Net loss, or trade-off to NIO's ordinary shareholders in the second quarter, 669.3 million RMB or 102.1 million US dollars, representing a decrease of 45.4% year-over-year and a decrease of 86.5% quarter-of-quarter in the second quarter of 2021. Basic and diluted net loss per ADS in the second quarter were both 0.42 RMB or 7 cents per ADS, including share-based compensation expenses and accretion on redeemable loan controlling interests to redemption value. Loan gap adjusted basic and diluted loss per ADS were both 0.21 RMB or 3 cents per ADS. Our balance of cash and cash equivalents. Restricted cash and short-term investment was 48.3 billion RMB, or 7.5 billion US dollars, as of June 30, 2021. And now for this outlook. As William mentioned, for the third quarter of 2021, the company expects deliveries to be between 23,000 and 25,000 vehicles. an increase of approximately 88.4% to 104.8% from the same quarter of 2020, an increase of approximately 5% to 14.2% from the second quarter of 2021. The company also expects the total revenues of the third quarter of 2021 to be between 8.91 billion RMB and 9.63 billion RMB representing an increase of approximately 96.9% to 112.8% from the same quarter of 2020, an increase of approximately 5.5% to 14% from the second quarter of 2021. This BISR look reflects the company's current and preliminary view on the BIS situation and mark condition, which is subject to change. Now, this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

Thank you so much. If you would like to ask a question, it's star and one on your telephone keypad. 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. Again, it's star and one if you wish to ask a question. And our first question comes from the line of Tim Zhao from MS. Tim, your line is now open.

Hi, William, Stephen, and Tim. Congratulations on the result, and thanks for taking my questions. Just two quick questions from me. First question is about the new models. Could you please elaborate a little more about the two new models scheduled for 2022, either the 87 regarding the timing, spec, rough price range, et cetera? As Mark previously anticipated to have just one new model next year, so I think this serves as an upside surprise. So, any colors would be highly appreciated. So, that's the first question. And my second question is, with NEOS total battery consumption likely reaching 16 or 18 gigawatt hours next year, will there be any major changes to NEOS battery sourcing strategy? Will CATO stays as a sole supplier or NIO might consider looking for a second source? And in light of such close tied up with CATO, between CATO and NIO, for both EV and the battery asset management company, can NIO diversify to other partners to hedge the risk if needed? Those are my two questions. Thank you.

Thank you, Tim. Yes, because of NT2 technology, we will first be equipped with ET7. Currently, our ET7 and NAD's research and development work are still very smooth in all aspects. But the challenge is very big. But overall, we are still confident that we can deliver as expected. But the other two new models next year will still allow me to have some difficulties. It's a little secret. We will communicate with you when it's appropriate. But from the price range, we should know that the cost of the TV has dropped a lot in the past two years. Because of the increase in the amount of our company, our cost has also dropped. So next year, there will definitely be a car will be lower than all existing cars. Next year, we will release a model that is the lowest priced model under NIO's brand. But NIO itself will not release a model that is too cheap. In fact, this year I also emphasized that we will enter the public market through a new brand. This is a situation that can be said at present.

I believe everybody knows that the new technology 2.0 is going to be first applied to ET7. The current development progress of ET7 and NAD is on track, and we are quite confident about the on-time delivery of ET7 next year, although the challenges is quite significant. For the other two products, I believe probably it's better for me to share more information at a more appropriate time. Regarding the pricing, of course, in recent years, the battery cost has declined a little bit, and as our volume goes up, our bump cost will also have some opportunity to go down. So for the next year's product, we probably will have one of the lowest pricing products under the new brand. But as I explained before, we are going to have a new brand for the mass market. So under the new brand, we're not going to have many no pricing products.

The second question is that the demand for batteries will definitely increase next year. Especially after the release of our new model, we believe that the demand for this battery will be much higher than this year. But at present, we have been discussing with CTL how to increase the supply of this battery. From the current point of view, we will still put CTL as our main cooperative partner. Our cooperation with CTL is also very good. Next year, we believe the demand for the battery capacity is going to go up significantly, especially

considering the new product lineup. We believe the battery production capacity demand is going to jump significantly compared with this year. We are having intense discussions with CTL regarding the battery capacity supply. Currently, we believe CTL is a very good and important partner for us, and we also have a very good relationship with CTL. We have very in-depth discussions regarding the battery technology as well as the battery production assurance. So we believe that this current strategy can serve the best interest of the company at the current stage of development.

Thank you. Very clear. Thank you.

Thank you so much. And your next question comes from the line of Ming Sun Li from Bofa Securities. Ming, your line is now open.

Thank you. Good morning, William, Stephen, and the team. Congrats for the good results. So I have two questions. The first question is regarding the component supply. We know you already have more larger size battery supply starting in June. but right now consider the pandemic in China and also overseas countries such as Malaysia. So what kind of impact do you expect on the production side, especially for your component supply capacity? So that's my first question. And the second question is regarding your business in overseas markets. So in your third quarter voting guidance, how many units do you expect to ship in Norway? And will you start to provide better service in the overseas market? Yeah, that's my two questions. Thank you.

Yes, indeed, the impact of the pandemic is global. Since last year, Our supply chain team and our partners have been trained on how to deal with this dynamic situation. But in the recent period, as I mentioned earlier, In fact, the recent epidemic of China's rebound has already had an impact on us. We have a joint partner of JIT, which is an internal market version of JIT, and it is right in the high-risk area of Nanjing. So now, they are actually in a state of stagnation. We see that Nanjing has become zero in the past two days. We hope to be able to So, as I mentioned earlier, the supply and delivery of our market in the third quarter is mainly affected by the supply chain. In the meantime, the recent impact of the epidemic in China is still relatively large. As for the impact of Malaysia, I think everyone in the automotive industry is very clear. The pandemic in Malaysia has caused the shutdown of some chip factories. This has a great impact on the global supply chain of cars. But this is not just our family. This is the situation of the entire industry. We have also made some response measures. At present, the impact of the pandemic in Malaysia is still controllable. Another risk point for us is that we have some imported parts from Germany. Yes.

pandemic situation is affecting the global supply chain. Last year, I believe, over supply chain partners and the new have been trained significantly to cope with this kind of challenges. In my prepared remarks, I have also mentioned over the recent COVID, the situations in certain regions in China have affected over production. specifically is a just-in-time component partner located in Nanjing's high-risk area. This partner has already suspended their production, and we have seen some good news coming out of Nanjing. It seems that the COVID cases in Nanjing has already dropped to zero, so we hope this partner can resume the production as soon as possible. The third quarter delivery volume will mainly be determined by the overall capacity of the supply chain. So there will be a lot of challenges that we need to deal with. For example, you also mentioned about the pandemic situation in Malaysia. This has also affected the semiconductor supply to the global market, not just for NIO, but also many other companies. But the pandemic situation in Malaysia, basically we believe that the impact for us is not that big and it should be under control. Another situation is the flood in Germany. Our partner is also affected in the flooding because one factory is flooded during the extreme weather event in Germany and other partners have been working with us to identify the solution. Right now, we believe that the situation is under control. So, overall speaking, the delivery volume in the third quarter will mainly be restrained by the overall capacity of the supply chain.

Overall, the overseas market, the exchange rate in Norway, we will not have too much quantity in Q3. In fact, from this year's perspective, there will not be too much increase in our overall quantity. In the Norwegian market, or to build the overall brand and service system to satisfy the users. This is still one of our most priority goals. We have been thinking about the expansion of the international market for a very long time. We also hope that the investors can be patient with us. But for now, we are fully prepared. Our early user advisory groups, called UAB, have been very helpful to us. They have given us very good reviews. So this year's volume will not increase too much, but what we value more is its long-term strategic meaning.

Regarding the delivery in Norway, we believe for this year the contribution is not going to be that significant because of our priority is to make sure we can ensure high user satisfaction in the Norway market by building of a brand, expanding of ourselves and the service and network. For the global market, we believe the more important thing is to focus on the long-term thinking and we would like to ask everyone's patience in this regard recently we have been working together with our prospective users in norway to set up a user advisory they have helped us they have helped us significantly and provided many constructive and good feedback to us so we believe this is a very good beginning for us and this is part of our long-term strategy for the global market

And me, of course, in global market, we also offer our bus-based model. Because we believe bus together with service walk can offer user a very holistic experience and combined together is a very efficient way for our users to get their cars charged at home and on the go.

According to the preliminary feedback we got from the Norway user advisory board, it seems that everyone is quite excited about the battery swapping stations and the battery as a service business model.

Thank you. Thank you.

Thank you so much. Once again, ladies and gentlemen, it's star and one if you wish to ask a question. Again, it's star and one if you wish to ask a question. Once again, ladies and gentlemen, if you wish to ask a question, it's star and one on your telephone keypad. And your next question comes from the line of Nikolai from JP Morgan. Nick, your line is now open.

Yes, thank you, William and Stephen. Great response indeed. I have two number-related questions. The first one is related to gross profit margin. Yeah, I mean, 2Q against 1Q, roughly margin was flat, but still at the vehicle level or over GP margin, it was still down roughly about one percentage point. Yeah, can you help us understand or explain a little bit more on the margin, let's say margin, It's not related to bond or input material price or other factor. I noticed the second quarter ASP is slightly down from 1Q. How should we think about 3Q? of margin related question can help us understand a bit more or extend a bit more on 2Q margin dynamic against 1Q and how should we think about that as we enter third quarter. And the second question related also related to number is look at the cash on balance sheet. altogether cash equivalent and short investment. By the end of first half, we have 48 billion renminbi cash. That's roughly about $7.5 billion, and that's a lot of cash on balance sheet. If you can help us understand what's our strategy using the cash on balance sheet in terms of CAPAS investment. I noticed JSC has new capacity expansion. And presumably, as we are launching more models in 2022, we'll need to invest in R&D, new model tooling altogether. So if you can help us understand a bit more on our capital investment in the next one year or so, that would be very useful. Thank you.

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Hi Nick, this is Stanley. Regarding your first question about the gross profit margin, There are two reasons if we break down into details. The first is average selling price decreased about 8,000 per vehicle in Q2. The main reason is more ES6 were sold in Q2 compared with Q1. Since ES6 is with a little bit lower gross profit margin and selling price. But due to our cost saving efforts in Q2, the average vehicle cost also decreased about $3,000 per vehicle. So combine the two factors together, our net gross profit margin per vehicle decreased about $5,000. Okay, that's the reason for the vehicle margin. And, you know, we announced today we announced like three new brand new products we will deliver in 2022 and we also refreshed our product plan and for the conservative perspective we like to shorten our like the depreciation amortizing periods for our existing products So that will lead to the DNA increase. So for the second half year of 2021, this impact to gross profit margin will be like 2% per vehicle. So yeah, that's the first question. And the second one is regarding the cash balance. As you mentioned, the cash balance at the end of Q2 is 48 billion RMB. As we mentioned, we will still focus on the research and development of our new product technology. And about the other usage, we will also increase our capex investments, including our new plant and new sales and marketing network infrastructure in the coming years. So it will be in line with our business plan in the next years, yeah. Okay.

Yeah, can you remind us what our capex target for the year? Do we have any number or guidance please?

Yeah, we expect the total capex in this year will be five billion RMB. including like the new plant and also the service and sales network and also PowerSwap station.

Yes, thank you very much.

Thank you so much.

Thank you, Nick. Thank you, Nick, yeah.

Thank you so much. Andy, your next question comes from the line of from Credit Suisse. Bin, your line is now open.

Okay. Thank you so much. My first one is more follow-up about our gross margin. Because you actually got that the NEO pilot has been increased quite substantially in the tax rate to 80 percent. What's the number in the first quarter, and what's the margin increase from this increasing NEO pilot ? And that is the number one question. And number two is about your long-term market share, because the peers actually One PSH announced 10 percent market share, the other one 20 percent. And what's the NEOS plan for 2025 for the market share, because we have a mass market brand. Can I assume that the mass market brand will start to sell in 2023? Because this year, three products seems to be all came from NEOS brand. And because you already accelerated the R&D, so it's not going to be 2023. That is the second one. And the second one is about your data or offline store expansion plan. If you see your peers who actually gain more strategic cooperation with the big data groups such as , I heard that some of your existing partner for Neospace seems to be buy back by Neos, which means in the long term maybe Neos don't have any third-party partners for Neospace. Is that true? What's your long-term strategy about the offline store suspension plan? Thank you.

Yeah, yeah.

So regarding the margin contribution of the new pallet, as we mentioned, the take rate of a new pallet has reached 80%. For this 80%, it includes both the selected pack and the full pack of the new pallet. So we believe the overall contribution from the new pallet is around 3% to 4%. Yeah, since new pallets,

the price of new pilots included in the selling price of vehicles. So we have like a no, like the separate gross profit margin calculation for the new pilots.

From a long-term perspective, because NAD will adopt the AD as a Service mode, from a long-term perspective, in the future, the subscription fee will be included in our other interest rates. This is from a long-term perspective. From the perspective of our long-term planning, the interest rate of NT2 vehicles should be able to improve compared to the current situation. Our overall strategy is to increase the interest rate of the entire vehicle can be a long-term plan is about 25 that does not include subsidies because we do not include the bonus income because our bonus income is put in this other profit that other profits, then we believe that it is based on the logic of a mass user we believe that the long-term performance will be better and better because of our including our AD as a service this income our battery as a service inside the battery upgrade income and our near life and some of our For the NAD, because we're going to use the AD as a service model to

provide the NAD services to our users. Long-term speaking, we believe the ADIS service contribution is going to be included in the other margin, and the long-term plan for the margin of the NT 2.0 is going to be much better than the margin of the NT 1.0. For the vehicle cost margin, we believe the target for us in the long run is 25%, excluding the carbon credits, because the carbon credits should be included in other margins. And we believe that the logic of other margin is about the install base or the install base of our users. For the long run, it will get better, considering the future possibilities and opportunities, including AD as a service, better as a service, upgrade in your life, carbon credit. So we believe, of all speaking, the overall gross margin and the vehicle gross margin will improve.

The second question is the long-term market style. It is very important for us to improve our market share. Just like our ES8 is in the medium-sized high-end SUV, our ES6 is in the high-end medium-sized SUV. We all see that the market share has been increasing. Speaking of how much we can gain in 2025, we will have very positive goals, but we will never talk about it externally. For example, we are in this high-end pure electric SUV in the Chinese market. If it's in our price range, I still want to emphasize the price range, right? If you use the 50 red light mini EV to compare our sales, I don't think this is particularly meaningful. If we look at the price range we are in, Audi, BMW, Mercedes, including Model Y, Yes, and Tesla Model S, Model X, Model Y high-end versions. If we compare them, in the high-end pure electric SUV market, we actually have more than half of the market share. I think this is a fact. So from a long-term perspective, we are still very confident in the market share for all car sales. If we look at Shanghai, In all of our high-end SUVs, including oil cars and other cars, our market share is close to 14% in the first half of this year. This is actually a relatively high number. We have achieved it in the first stage. So, overall, we are still focusing on the satisfaction of the users and the service of the users. This has always been the focus of our focus. We think that market share, of course, will have this management goal,

Regarding the long-term target of the market share, for us, of course, we pay attention to our specific market share or the penetration in the corresponding segment of our products. in the large and mid-size SUV market segment and the year six in the mid-size SUV segment. Internally, of course, we have a very aggressive market share target by 2025, but we don't actually want to disclose this target. For us, we believe our target as a company should be to build a company with the highest user satisfaction rate. So that is why our focus is on the product and the service. We believe that if we can achieve the highest user satisfaction rate with our product and our service, then it should be a natural thing for us to achieve satisfactory market share. in the China market, so I would like to talk a little bit about the battery electric SUV premium market segment. For this segment, I would like to emphasize a little bit about the pricing, because when we compare the specific sales volume of one brand or one product, I think it does not make sense to compare those kind of metrics without thinking about the specific pricing segment. For example, it does not make sense for us to compare the sales volume of Wuling Mini EV with the sales volume of NIO because we don't have the same pricing and we don't actually compete in the same segment. In our specific pricing segment, we have companies like Audi, BMW, Mercedes, and for Tesla, they also have Model S and Model X and Model Y. So in this specific pricing segment, overall market share has already exceeded 50%. So we are quite confident to further improve our market share in this specific segment. In Shanghai, as I mentioned before, in the premium SUV segment, including the ICEs and the electric vehicles, we have already reached close to 14% market penetration in the first half of this year. This is already quite high. and we have already achieved this in the Tier 1 cities, so we believe this is a very good indicator for our next step to penetrate into more markets in different cities. Because, as I mentioned, our focus is to make sure we have the best product and the services and to achieve the highest user satisfaction. So we believe as long as we stick to this vision and to this objective, it should be quite natural for us to achieve all the market share targets in the long run.

The third question is that from the second half of 2019 to the first half of last year, we have a new space plan. It was very helpful for us to quickly expand our sales network at that time. It played a very big role in the development of NIO at that stage. But we also realized that in this way, it also brought a lot of challenges to our brand and to our management. So from Q3 last year, we actually completely turned to the construction of Niospace, completely turned to our management. Then in June this year, we and our Niospace partners, more than 100 Niospace partners, we have reached a very good, consistent agreement. That is to say, we will turn these Niospace partners that they open gradually into a private company. At present, most of the partners have already completed this agreement with us, have signed this agreement with us. Yes, from the second half of 2019 to the first half of 2020, we have tried a new space partner approach.

We believe the new space partners have contributed to our expansion of the sales network and the sales volume growth. But right now, when we look at the overall brand and the management complexity, we believe it makes more sense for us to manage the new spaces by ourselves. So starting from the third quarter of 2020, we have changed this strategy. and we would like to make sure for the new spaces we can manage and build by new. So we discussed with our new space partners and reached agreements with the majority of the new space partners to transform their new spaces to the new spaces operated by new. So the majority of the new space partners have already signed the agreement with us, and for the rest of the new space partners, we will continue our cooperation with them until the termination of the contract. For all the new new spaces, these are all viewed and operated by new.

Thank you, Bin.

Thank you. By the way, can you answer the question about whether it will be 2023 for the new mass market plan business. Thank you.

If we look at the speed at which NIO is launching its products, I think everyone should know that our research and development efficiency is still very high. Our speed at launching new products is still relatively fast. Thank you.

Yeah, regarding the launch of the mass market products, of course, over R&D efficiency is quite high. And I believe this is the common standing of everyone. NIO has been able to launch a product one after another in a very fast manner. So for the mass market brand, This is part of our long-term thinking, and we believe that the efficiency and the speed of the product launch is going to be probably even faster built on top of the capabilities that we have already accumulated under the new brand. But regarding the specific timing and the launch cadence of those products under the mass market brand, we can still have time to decide based on the market conditions and the on the progress of those products. So we believe it's still too early for us to share those information for now.

Thank you. Thank you.

Thank you so much. And your next question comes from the line of Chang Liu from CICC. Chang, your line is now open.

Yeah, thank you for taking my questions. My first question is about R&D. We know that there is a fierce competition in acquiring talent people in autonomous driving development. So could you share with us NIO's advantages in acquiring them? And more in details, could you share with us our current team size of AD development and our targeted team size? Any updates on our R&D expenditure for this year? And my second question is that could you update the take rate of BaaS and the new pilot for us? Thank you.

Thank you, Liu Chang. Yes, now AD is undoubtedly a very important direction for our R&D investment. In fact, the organization structure of NEO's AD will be different from that of other companies. We have four colleagues at the AP level and VP level who directly report to us. So our AD is actually the AD of the entire company, not just an AD of a department, including hardware, operating system, algorithm, and the entire AD system. In fact, we think that AD It shouldn't be a matter of one department. If we look at it from this perspective, the team size directly related to work with AD is now about 500 people. At present, we believe that by the end of the year, it will be about 300 to 800 people. Of course, we will continue to invest in this area. Our determination to invest is very big. If you look at the history of our company, in 2016, we started to build our ADAS and AD team. We are the first company in the world to produce mobile IQ4. Our domain controller, our entire system has always been developed by our own in-house. So our foundation in this area is very good. In the past year, we have mainly been supplementing the team in the sense algorithm. At present, we believe that the competitiveness of our team is very, very strong. This is the current situation in terms of AD's development.

Thank you for your question. AD is a very important R&D initiative for us and we are quite decisive to make investment in the autonomous driving technology and organization. Other autonomous driving organization is quite different from other companies properly because we have four VPs that report directly to me personally. So as you can see that the autonomous driving is not just one department, it's actually an initiative of our company. We have teams focusing on hardware, autonomous driving systems, autonomous driving algorithm and the autonomous driving operation. So we believe that this is not just the efforts of one AD department. We will need to leverage all the capabilities that we have across the company. Right now, for our AD department, we have around 500 people. By the end of this year, we expect to have additional 300 to 800 people for the AD team. we will continue to make a decisive investment in the autonomous driving technology and the talent acquisition. Starting from 2016, we have already built over ADAS team and autonomous driving team and NIO is the first company to have a mass production of the IQ4 chipset and we have built over domain controller, the autonomous driving system in-house right from day one. So we have already accumulated many experiences and capabilities in this regard. Starting from last year, the main focus of us is to build up the capabilities in terms of the autonomous driving algorithm and the computer vision. We believe right now we have already built a very strong team.

Yes, in terms of the cost of development, I would like to communicate with you that this year, in fact, since the second quarter, our development has begun to increase. Because we have three new models to be delivered next year. Of course, you can imagine that there will be more models delivered in the future. The cycle of car development, our company is already the fastest in the industry, but it also takes about two years on average. So this year, in fact, we have kicked off a lot of new projects. So from the third quarter of this year, our development cost will significantly increase, which is related to the increase in the size of our team and the increase in the project. Our annual investment in development is generally at a scale of 500 billion RMB, and we hope to spend it as regularly as possible this year. Because if we spend it, it means that our development work will be relatively smooth. Now, more is to increase the size of the development team, and the progress of the project can be normally expanded. This year, the size of the development personnel will be about twice the size of the beginning of the year. So, in general, we are very determined to invest in the development of this aspect.

Shufang Sun.: : Regarding the are the expenses, starting from the second quarter, we have accelerated to offer research and development in the company. Shufang Sun.: : As I mentioned in 2022 we're going to deliver three new products and in 2023 and beyond the probably we're going to deliver even more products. I believe NIO is the fastest company in the industry to deliver products to the market. Averagely speaking, the R&D timeline for us is around two years, which is already the fastest in the auto industry. This year, we have already kicked off many different R&D programs. Jingyi Jessica Li, Starting from the third quarter of this year, we believe we're going to step up offer on the expenses due to the team size and the programs that we have in the r&d pipeline so previously we also mentioned that the r&d expenses in 2021. should be around 5 billion RMB and we would like to see these 5 billion RMB spent according to the plan because this shows that other RMB progress is actually on track. So the current focus of us is to build up over RMB team and make sure all the development projects is on track according to the plan and we believe Probably by the end of this year, the size of our R&D team is going to be doubled compared with the size last year.

Yes, the tick rate has exceeded 60% in July. The tick rate is still rising every month. The take rate of batteries of service in July has reached 60% and is growing month over month. Previously, I have also mentioned the take rate of NeoPallet has reached 80%.

including the selected package and the full package. So of all speaking, the check rate of the bus and the new pallet is on the rise.

Yeah, thank you. Thank you, Liu-Chan.

Thank you so much. And the next question comes from the line of Edison Yu from DB or Deutsche Bank. Edison, the line is now open.

Thank you for taking our questions. I have two follow-ups on Europe. First, it seems there's quite a bit of hiring going on in the Netherlands and a little bit in Germany. Could you maybe discuss the next phase of Europe after Norway? And then second question on Europe, it's very encouraging to see this user advisory board. Can you maybe discuss some of the things that you're doing differently in Europe relative to what's been going on in China.

Thanks. I think for Paris, I want to share some numbers with our investors. First, in Norway, our team size has already increased to 40 employees in Norway. And of course, Norway is only our first stop to go overseas, to go global. In the following years, we will also enter other European countries and also other regions. So that's why we continue to hire more people in Amsterdam.

Let me add that we have appointed a European CEO in Agito. He has been involved for a while and has started to form a team in Europe. Of course, we will enter more markets, including the German market. When we enter this market, we will mainly use our second-generation platform vehicles. In Europe, in addition to the ES8 sold in Norway, the current generation ES8, in the future, the models we sell in Europe will all be based on NT2 platform models. This is our overall strategy.

Another point is starting actually in the second quarter of this year we have appointed the CEO of New York Europe. He is already on board and he has been building up the team for New York Europe. Of course we are going to enter more markets in Europe including Germany. For most of the products we are going to deliver to Europe is going to be based on the new technology platform 2.0 except the ES8. So this is our current strategy for the European market.

Yes, in Europe, or as a user company, when we enter the market, we will support and participate is very important to us. I think from a principle point of view, we will insist. Of course, each market has a different culture, each market has a different environment for the use of vehicles. Of course, we will make some adjustments according to the local situation. But overall, we think that the concept of use and price put the user's experience in the first place, put the user's interest in the first place, to engage the user into the company's development. This method, or this principle, is actually effective in every market. We can share a data. In Norway, we have to recruit 200 members of UAB. In fact, there are about 700 to 800 registrants. So in fact, we can see So for Neil as a user enterprise,

When we enter the markets or different regions, we have always believed that the user participation and the support is a very important principle that we should uphold. Of course, for different markets, they have different cultures, different environment, different use cases. We will need to adapt to those different situations, but so we believe the user community and the user enterprise concept should apply to overall markets in the world. Because our vision is to make sure that we can put the user experience and the user interest first. This is a general principle for us. A very interesting fact that I would like to share with you is that in Norway, when we initiated the user advisory board, We thought that probably we should have around 200 people, but in the end, 700 to 800 people signed up for the user advisory board. So from this example, we can see that actually the Norwegian people are quite willing to participate in those community events because previously through the media report and other literature, they think that the Norwegian people are more cautious towards socializing with other peoples. But this example has proven this is the wrong interpretation or the wrong stereotype of the Norwegian people. And we believe that the user community concept should apply to all the people in the world.

Thank you, Edison. Thank you.

Thank you so much. And your next question comes from the line of Paul Gong from UBS. Paul, your line is now open.

Yeah, thanks, everyone. I have two questions. The first question is regarding your plan to add the three new models based on the NP2 in 2022. Given most of the new space probably cannot put six models together. Will you try to expand the average size of your new space or are you going to gradually phase out the existing first generation of the products? As just now you mentioned that you have shortened the depreciation and amortization of the first generation of your products. Does that mean it would be gradually phase out and migrate to the second generation of the platform? This is my first question. My second question is regarding the mass market brands. I understand at this moment you are still pending decision in terms of the timing and how to position itself. But can we have a little bit of color? When you think about the relationship of a new brand versus your new mass market brand, would it be more similar to, let's say, Method Spence and Smart or BMW and Media or Audi versus, say, Volkswagen brand? How do you think about the relationship of the two brands? I recall in last quarter's results, you mentioned that there is only one model in the Shanghai Auto Show, that is Wuling Hongguang Mini EV Kiwi version. Is that an indication that somehow the recent online discussions say NIO's mass market brand would also launch some tiny, small vehicles? Is it something you are bearing in mind at this moment? Thank you.

Thank you, Paul. uh, uh, This era is actually only 100 years ago. At that time, there was such a short time. The back of the car actually returns to its basic rules. So we will give the user a limited, a rich choice. I think this is a more reasonable idea. But you don't have to worry that we will have a lot of models. No. Of course, we will use some digital technology or some virtual display methods so that users can experience our car. We don't think this is a big problem, especially now that our users are ordering online, mainly through online ordering methods. We think this can handle it. But our existing NT2, NT1 platform cars, in fact, compared to other models of the same price, for example, compared to Audi and BMW, their newly launched electric cars, our Steel is very competitive. Compared to their gasoline cars, of course, they are still different generation products. Overall speaking, we understand that different companies will have different strategies regarding their product offering. We would like to offer more diversified choices to our users, but we also need to strike a balance.

because we're not going to like the traditional OEMs to launch a sea of products for the users to choose from. And we are also not going to like other companies to just offer two to three products for the users to choose. We believe that different users will have a different preference and taste regarding the body size, the body type, the design. So that is why we would like to offer limited but diversified product offerings to our users. We understand the era of Model T happened 100 years ago, and right now the time and age is quite different for us, so that is why this is our strategy. Regarding the products and the new houses and the new spaces, of course we are going to adopt the digital technologies or probably use the rotation mechanism to make sure users can still experience other products in the new houses and in new spaces. But according to the current data we have right now, it seems that the majority of users actually place their orders online. So we believe that this is not going to pose a significant issue for us. Regarding the new technology platform 1.0, we understand of a current product based on the NT 1.0 is actually quite competitive. If we compare with Audi BMW, for example, their EV products, I believe other products are still quite competitive. And when it comes to their ICE product, I think other product actually does not belong to the same generation with their ICE products. So for the new technology platform 1.0 products, we believe that they're still quite competitive and will continue to sell those products in the market. Regarding the three new products that we're going to deliver in the 2022, we believe that this is not going to affect the upgrade pace or the normal upgrade pace of the products on the new technology platform 1.0. But just now, Stanley has also mentioned that we have taken a more prudent approach to shorten the depreciation and amortization period for the new technology platform 1.0. So this also shows that in the future, we are going to upgrade our products on the NT 1.0.

Yes, this new brand, you asked a very good question. Of course, if we make a simple comparison, we are indeed more like the relationship between Audi and Volkswagen, or Lexus and Toyota. This is almost more accurate from a positioning point of view, such a comparison. Of course, our new brand will not enter such a period as Wuling and Hongguang, because they have already done very well. What we see now is that the real market shortcoming is the lack of this very competitive product in the mass market. In short, we hope to have a product that can be cheaper than Tesla,

I believe you have a very good question and you made a very good comparison. Yes, if we just take the positioning of the new brand and the new mass market brand, a simple comparison is going to be more like the relationship between Audi and Volkswagen and Lexus with Toyota. But this is more about the positioning of these two new brands. Of course, we're not going to enter the segment of Wuling Hongguang. We believe that they have already done a very good job in their specific segment. We would like to do something different and offer different products for the mass market. Basically, our thinking is that we would like to launch a product that can have competitive of pricing compared with Tesla's product, but have much better products and services. And have better products and much better services compared with Tesla.

Thank you very much. Very helpful. Thank you.

Thank you so much. And your next question comes from the line of Jeff Chung from Citi. Jeff, your line is now open.

Hey, hi. Hello, William, Stephen. Great result. And I have three questions. One is about the ET7. If this price being set above 400,000 RMB, can we say that the GDP margin should be much higher than the current level, let's say around 30% to 35% level of GDP margin, which is a potential. And secondly, it's about the export margin. So let's say if the scale reached like 2,000 to 3,000 units a month, can we say that that is a GDP margin accretive? Because we heard that exports to overseas ASP could be much higher. So could you give us a little bit of color, or do you think the export margin will be similar than the China domestic Um, yeah, that is the first area. And the second, uh, question is about the DNA. And as you just mentioned that it's going to accelerate into the second half of the year. Uh, and, and, and I just heard you, you said the, that equivalent to the cost per car to increase by about 3%, right? So, so can I clarify this a little bit and whether this would mainly reflected in the GP margin or, or the EBIT margin. And finally, it's about the R&D and SG&A. So previously, we expect this year's R&D to be about $5.2 billion, SG&A about $6 billion. So going forward into 2022, do you see that there could be still a potential that this course should be increasing faster than our revenue growth? And when do you think this course of growth will be slower than our revenue growth? Will it start from 2023 or 2024? Yeah, that's my three questions. Thank you.

Thank you, Jeff. The first question, from an overall perspective, as I mentioned earlier, we have a In terms of the goal of course marketing, we hope that the goal of the entire car is to be set up on the platform of NT2. We hope to be at such a scale, such a level. At present, our ET7 is definitely able to reach this level. Of course, we still need the car to be mass-produced to reach the real Mali level. We can only look at it in the end, but from the current point of view, we must be able to reach such a level of policy. Of course, the other one is that we will of course continue to improve the efficiency of flying vehicles. With our NAD model, we also have near life, and all of our In terms of export, our general principle is still a global price. Of course, the price of land in each place is still Thank you for your question, Jeff.

Of all speaking for the gross margin targets, previously I have also mentioned that on the new technology platform 2.0, the vehicle gross margin target should be at the level of 25%. From the current data we gathered, it seems that the EG7 should be able to reach this target. but the actual vehicle course margin of 87 will need to be validated until the mass production and the delivery of 87 to other users. So for the other products or for the products on the new technology platform 2.0 including T7, it will probably meet to the 25% vehicle course margin level and this is the of our target for us and for the other margins. Just like I explained that we have AD as a service and battery as a service upgrade and the swapping services, all this is included in the other margins. So this will also contribute to the improvement of other margins. For the export business, our current strategy is that we would like to have a global pricing, but for the specific pricing in different markets. It will vary a little bit considering the tax and the tariffs in different countries.

We accelerated our depreciation and amortization for the fixed assets for NT1 products. That will be booked in the cost per vehicle. So, gross profit margin starting from Q3 will decrease by 2%, as I mentioned in prior questions.

Okay. And also, Jeff, with regard to the expenses ratio, we believe from now on, the next 12 months is a very decisive window for us to accelerate our product development and also service and charging infrastructure deployment. However, from the second half of 2022, our economy of scale will gradually

manifest and our extent ratio will start to decline again okay thank you thank you Stephen thank you William thank you so much thank you there are no further questions now I'd like to turn the call back over to the company for closing remarks

Thank you once again for joining us today. If you have further questions, please feel free to contact and use the investor relations team through the contact information provided on our website. This concludes the conference call. You may now disconnect your line. Thank you. That does conclude our conference for today.

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