NIO Inc.

Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated's third quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Yves Tang from Capital Markets and Investor Relations. Please go ahead, Yves.

Good morning and good evening, everyone. Welcome to News Third 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, and Mr. Stanley Chu, Senior Vice President of Finance. 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 to date. 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 earning the price released and this conference call includes discussions of un-audited gap financial information as well as un-audited non-gap financial measures. Please refer to news press release which contains a reconciliation of the un-audited non-gap measures to comparable gap 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 NIO's third quarter 2021 earnings call. 2021 NIO's third quarter earnings call. 2021 NIO's third quarter earnings call.

In the third quarter of 2021, we delivered 24,439 ES8, ES6, and EC6, a new quarterly record representing a solid growth of 100.2% year-over-year. 从9月28日至10月15日,为进一步提升产能和为ET7等新产品导入着准备,

Based on the overall production planning from September 28 to October 15, to prepare for further capacity expansion and new products introduction, including ET7,

We implemented upgrades and restructuring of the manufacturing lines at the Hefei JEC New Advanced Manufacturing Center. Affected by the upgrades and the restructuring, we delivered 3,667 vehicles in October. The plant has resumed normal production since late October.

According to Chen Lianhui's public data, In the fourth quarter of 2021, the total delivery volume

According to the data published by China Passenger Car Association, the penetration rate of battery electric vehicles among passenger vehicles reached 17.5% in September. As the automotive industry is accelerating its transformation towards smartization and electrification, More and more users are now choosing smart EVs over ICEs. The order momentum continues to be strong, and our new orders have reached a new all-time high in October. Currently, our delivery volume is mainly constrained by supply chain volatilities. We expect the total delivery in the fourth quarter of 2021 to be between 23,500 to 25,500 vehicles. In the third quarter, the vehicle gross margin stood at 18.0%. while the overall gross margin reached 20.3%, benefited from the sales of a regulatory credit.

接下来,我跟大家交流一下公司运营方面的一些重点工作。 Next, I would like to share with you some recent operational highlights of the company.

九月,ET7首批全工艺生产线四字车正式下线, 已经完成全工艺生产的四字调测, 开始为最终量产做准备。

In September, the first batch of ET7 tooling trial builds rolled off the production line, representing that the tryout and commissioning of the overall manufacturing process had been completed.

The teams are making final preparations for the mass production of ET7. During this preparation process, we have also made various product optimizations on ET7. For example, the drag coefficient of ET7 was improved from 0.23 to 0.208. We are very confident about the final product competitiveness and the market performance of the ET7.

The software and hardware development of NAD are also pressing ahead on schedule.

The development of the other two new products, NEO Technology Platform 2.0, are also moving forward smoothly, and the delivery to users is expected to start in the second half of next year. We will share more product details at NEO Day 2021.

In September, we released the 75-degree 3-圓-TL standard battery pack, which has further increased the competitiveness of the future battery system. Through the first-ever In September, we launched the 75 kilowatt-hour standard range battery pack.

with LFP-NCM hybrid cells, which has further enhanced the competitiveness of the new battery system. Empowered by the industry-first LFP-NCM cell layout and advanced software and hardware systems of a thermal management and SOC estimation, new battery system team worked closely with our partner in overcoming the disadvantages of the LFP cells. in aspect of low temperature performance and SOC estimation. On top of that, the 75 kilowatt-hour hybrid battery pack has also achieved higher energy density and a longer drive range and a lower cost compared with the 70 kilowatt-hour NCM battery pack.

In terms of production capacity,

Besides the upgrades and the restructuring of the manufacturing lines in J.C. Neo Advanced Manufacturing Center, the second manufacturing site at Neo Park in Hefei is also under construction. After the kickoff on April 29, we completed the main structure construction on August 26 and will start the equipment installation at the end of this month. In the third quarter of 2022, we will begin production officially.

On the supply side,

Due to global COVID-19 pandemic, extreme weather events, and other factors, the overall supply chain remains challenging. Our supply chain team, R&D team, and partners have adopted a series of measures to support the record high quarterly delivery in the third quarter and will continue to secure the supply for the delivery in the fourth quarter and upcoming new products and productions.

In terms of sales and service network, We have 32 future centers and 285 future spaces, covering 132 cities in China. We will continue to enlarge and optimize the layout of future centers and future spaces, so that future brands can enter more 2, 3-line cities. Currently, we have 43 future service centers and 181 delivery service centers in 141 cities in China. We will continue to strengthen the construction of service centers, with regard to the sales and service network. We now have 32 new houses and 285 new spaces in 132 cities in China.

We'll continue to expand and optimize our new house and new space coverage to effectively penetrate into more Tier 2 and Tier 3 cities. As of now, we have 43 new service centers and 181 authorized service centers in 141 cities. We will build more service centers to ensure high-quality services to the rapidly growing user base.

In terms of the charging power network, we have built 608 charging stations covering 153 cities in China. Up until now, we have deployed 608 battery swap stations in 153 cities in China and completed over 4.74 million swaps. In addition,

we have viewed over 460 power charger stations and 3,155 destination chargers across China. As we speed up the deployment of the swapping and charging infrastructure, The superior experience and value brought forward by battery swapping technology and battery as a service have made us the go-to choice for more and more users.

On the global market, on September 30, Norway's Future Center began operation and received widespread attention from the public and the media. On that day, we started the first batch of delivery of ES8 and began to provide services to local users. ES8 obtained a five-star safety rating of Euro NCAP, Regarding the global market,

We opened our new house in Norway on September 30, which has attracted wide attention from both the public and the media. On the same day, we started to deliver Yes8 and to provide services to our users in Norway. Besides achieving Euro NCAP 5-star 60 rating, the Yes8 has also received the rave reviews on its performance and the product experience from the local users and the media. The order intake has exceeded our expectations. More importantly, among all the orders, 92% of the users have chosen bus. New product, services, and innovative business model not only have been well received in China, but also present unique value and strength in the global market. In 2022, we will further step up our efforts in entering more global markets.

Users are the foundation of the future. The diversified user community will bring more growth to the future and drive the future in a better direction. In October, the Future User Trust and the Three Gorges Ecological Protection Fund launched the Three Gorges National Park Green Ecological Cooperation Program to assist the construction of the Three Gorges National Park. In October, NIO Day 2021 also announced that it will be held in Suzhou on December 18th. The user advisory group cooperated closely with the NIO Day Committee users have always been the foundation of NEO. A diversified user community brings a greater vitality to NEO and a drive to NEO to become better. In October, NEO and the NEO Users Trust joined hands with Sanjiang Yuan

Ecology Protection Foundation to build a green ecosystem in the Sanjiangyuan National Park. With much anticipation, we have announced that New Day 2021 will be held in Suzhou on December 18 this year. New user advisors and the New Day Organizing Committee are working closely on the final preparation. Please stay tuned for the coming New Day organized together by new and older users.

In 2021, NIO has doubled down on investment in product development, capacity expansion, charging and swapping network.

as well as the sales and the service network. In 2022, we will continue to make a decisive investment to further enhance offer long-term competitiveness and to provide better products and services to users. As always, thank you for your support. With that, I will now turn the call over to Stephen to provide you the financial details for the quarter. Stephen, please go ahead.

Thank you, Vivian. I will look over our key financial results for the third quarter of 2021. And to be mindful of the length of this call, I encourage listeners to refer to our audience press release, which is posted online for additional details. Our total revenues in the third quarter were 9.81 billion RMB, or 1.52 billion US dollars, representing an increase of 116.6% year-over-year and increase of 16.1% quarter-over-quarter. Our total revenues are made of two parts, vehicle sales and other sales. Vehicle sales in the third quarter were 8.64 billion RMB, 1.34 billion US dollars, accounting for 88% of total revenues in this quarter. It represented an increase of 102.4% year-over-year, an increase of 9.2% quarter-over-quarter. The increase in vehicle sales year-over-year and quarter-over-quarter was meaning attributed to the increase of vehicle delivery volume. Other sales in third quarter were 1.1 billion RMB or 181.4 million US dollars, representing increase of 350.8% year-over-year and increase of 179% quarter-over-quarter. The increase in other sales year-over-year and quarter-over-quarter was mainly due to the sales of automotive regulatory credits and the batteries upgrade service, as well as other revenues which increased in line with incremental vehicle sales in the third quarter of 2021. Cost of sales in the third quarter was 10.81 billion RMB, or 1.21 billion US dollars, representing an increase of 98.3% year-over-year and an increase of 13.6% 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 third quarter of 2021. Gross profit in the third quarter was 1.99 billion RMB, or 0.31 billion dollars, representing an increase of 243% year-over-year an increase of 26.6% quarter over quarter. Gross margin in the third quarter was 23% compared with 29% in the same quarter of 2020 and 18.6% in the second quarter of 2021. The increase of gross margin year over year was mainly driven by the increase of vehicle margin and its sales of automotive regulatory credits. The increase of gross margin quarter-to-quarter was mainly due to the sales of automotive regulatory credits. More specifically, vehicle margin in the third quarter was 18.0%, compared with 14.5% in the same quarter of 2020 and 23% in the second quarter of 2021. The increase of vehicle margin year-over-year was mainly driven by the higher average selling price, as well as lower material costs. The decrease of vehicle margin quarter-by-quarter was mainly due to the increased financing at subsidized rates for vehicle purchases, which resulted in a deduction of vehicle revenue and increase in tuning depreciation costs. On expenses in the third quarter, were 1.19 billion RMB or 185.2 million US dollars representing an increase of 109% year-over-year and increase of 35% in quarter-over-quarter. The increase of R&D expenses year-over-year and quarter-over-quarter was mainly attributed to increased personnel costs in research and development functions as well as incremental design and development costs for new products and technologies. SG&A expenses in the third quarter were 1.82 billion RMB or 0.28 billion US dollars, representing an increase of 94.1% year over year and increase of 21.8% quarter over quarter. The increase in SG&A expenses year over year and quarter-to-quarter was primarily due to the increase of personal costs in sales and service functions and costs related to sales and service network expansion. Plus, from operation in the third quarter was 0.99 billion RMB or 153.9 million US dollars, representing an increase of 4.9% year-over-year and an increase of 29.9% quarter-of-a-quarter. Share-based compensation expenses in the third quarter were 265.6 million RMB, or 41.2 million US dollars, representing an increase of 439.8% year-over-year and increase of 5.6% quarter-of-a-quarter. The increase in share-based compensation expenses year-over-year was primarily attributed to additional options and restricted shares granted. Last, in the third quarter was 835.3 million RMB or 129.6 million US dollars, representing a decrease of 20.2% year-over-year and increase of 42.3% quarter of a quarter. Net loss attributable to NIO's ordinary shareholders in the third quarter was 2.86 billion RMB or 443.7 million US dollars representing an increase of 140.7% year over year and increase of 333.6% quarter of a quarter. In the third quarter of 2021, NIO repurchased 1.48% equity interest in NIO China from a minority strategic investor for a total consideration of 2.5 billion RMB and recorded amount of 2.02 billion RMB in accretion on redeemable non-controlling interest to redemption value. basic and diluted net loss per ADS in the third quarter were both 1.82 RMB or 28 cents per ADS. Excluding share-based compensation expenses and accretion on redeemable non-controlled interest to redemption value, long gap adjusted basic and diluted net loss per ADS were both 0.36 RMB or 6 cents per ADS. Our balance of cash and cash equivalents, restricted cash and short-term investment was 47 billion RMB or 7.3 billion US dollars as of September 30th, 2021. And now for all of this outlook. As William mentioned, for the fourth quarter of 2021, the company expects deliveries to be between 23,500 and 25,500 vehicles, representing an increase of approximately 35.4% to 46.9% from the same quarter of 2020, and a decrease of approximately 3.8% to increase of approximately 4.3% from the third quarter of 2021. The company also expects the total revenues on the fourth quarter of 2021 to be between 9.38 billion RMB and 10.11 billion RMB, representing an increase of approximately 41.2% to 52.2% from the same quarter of 2020, and a decrease of approximately 4.4% to increase of approximately 3.1% from the third quarter of 2021. The speech outlook reflects the company's current and the preliminary view on the business situation and market conditions, 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. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, press star 1 on your telephone. To cancel a request, press the pound or hash key. For the benefit of all participants on today's call, please limit yourself to two questions. You can re-enter the queue. Your first question comes from Tim Xiao of Morgan Stanley. Please ask your question.

Hi, Will and Stephen and Tim. Thanks for taking my question. It's great to see Neo manage to navigate through the component crunch and production hiccup in first app. Just two quick questions from my side. The first one, we've seen restructuring and upgrade of the production lines cause around two rounds of disruption to our delivery and production this year. Just wanted to confirm that if we've completed all the necessary restructuring for the three new models next year, or should we expect any similar disruptions sometime next year? My second question is about the details of the other sales. Could you share more information about the other sales because it has been surging quite a lot. I think a more significant revenue increase was attributable to the sales of AV credits and the battery upgrade services. Could we have the further breakdowns regarding the contribution from both items And what could be the scales of contribution into fourth quarter? Because if you look at the current fourth quarter revenue guidance, it seems that it just merely reflected the contribution from the VCO sales. So should we expect the contribution from other sales to rise further? Those are my two questions. Thank you.

Thank you, Tim. I'll answer the first question. The second question is for Stanley. We also talked about some progress in the two factories. For the first factory, at the end of September and the middle of October, we made a long-term suspension, mainly to increase production capacity and prepare for the introduction of new products. As for the follow-up, there will be some minor modifications, because the introduction period of the product still needs some time. but it won't affect our production rhythm. It won't have such a big impact this time. This is the first one. In addition, some of our new models for next year will be produced in our new factory, which is the second factory in the original area of Xinqiao. Of course, it will have a gradual process. It will not affect the production of existing products.

Tim, thank you for your question. I will answer the first one, and then Stanley is going to answer the second one. In the previous remarks, we have also talked about the progress of capacity expansion for the two plants. For the first plant, just like you mentioned, starting from the end of September to the middle of October, we have some restructuring and upgrades of the manufacturing lines to further expand the production capacity and prepare for the new product introduction. Following this upgrade, we probably will do some minor restructuring and modifications of the production lines, but we believe the following restructuring is not going to have a very significant impact on the normal production of the vehicles. Secondly, regarding the new products, some of the new products will be manufactured in the second plant. Then this means that for the second plant, we will need some time to ramp up the production for the new products, but this is not going to affect the manufacturing of the existing products.

Hi, Tina. Regarding the second question, among the other revenue, $570 million RMB was contributed by the NEV credit sales. And after deduction of this NEV credit sales, our total gross margin for other revenue decreased from minus 5.6% to 2.6%. That's because it's driven by the expansion of our sales and service network. And as mentioned by William in his explanation, the construction of our sales and service network infrastructure move earlier and faster than our sales increase, especially in this year. So we are expecting the total revenue of other service will increase, but the gross profit margin for this part will decrease a little bit in Q4. Yeah.

OK. OK, great. Sorry, just a quick follow up. Could you highlight some potential contribution from the sales of credit into fourth quarter?

Yeah. Almost majority of the ANV credit sales was realized in Q3. So in Q4, we don't expect significant revenue from this part.

Just like Stanley explained, this year is a bit different from last year. We recognized the sales of the regulatory credits much earlier compared with last year. Thank you, William.

Your next question comes from Nick Lai of JP Morgan. Please ask a question.

Thank you. Taking my question is Nick from JP Morgan. Good morning, William and Stephen. My two simple questions is number one related to margin, and the second question is related to ET7, the new exciting model. First of all, on the margin front, yeah, the vehicle margin for quarter was 18%, slightly down from 20% in 2Q. Yeah, I wonder how should we think about the margin into 4Q or first half next year? taking into account of two factors. The first factor is pricing dynamic or competition from the peers. And the second is input raw material price, especially on the battery front. That's the first question. And I think you answered part of my question earlier on the credit sales. So second question on ET7 is certainly a very exciting product. When should we expect the car to hit a showroom in the near term? and the median to longer-term after production is ramped up, how should we think about the volume and the possibility of ET7 relative to our current high-end product, ES8? ES8's current monthly run rate sales volume is roughly about 1,500, so how should we think about the profit margin and the volume for ET7? That's two simple questions. Thank you.

Okay. Hi, Nick. This is Stanley. About your first question regarding the gross profit margin. And our 75 kilowatt hours battery will start to be delivered from November. And gross profit margin will be improved a little bit compared with 70 kilowatt hours battery. But prices of our key materials like aluminum, copper and also chips are increasing. there will be pressures for our cost controlling. But we are confident to continuously improve our gross profit margin with combined efforts either from the product design or supply chain optimization. So for Q4, we're expecting the gross profit margin will keep stable. And for next year, our target is to achieve 20% gross profit margin for weak cost. And along with our launch of NT2 products, from a long-run perspective, we try to achieve a higher profit margin with about 25% for weak cost. Okay.

As Stanley just said, from the perspective of NT2, With the growth of the scale and the optimization of various aspects, the net profit target of NT2 is at 25%. This is the net profit target we set. Of course, in the early stage, it will take a process to climb. As for ET7, from our current perspective, the net profit of our finance should be very good. According to our current calculation, As Stanley mentioned, basically for the NT2 product, we expect that with the economy of skills and the volume ramp up as well as the optimizations in every aspect,

we should be able to reach 25% vehicle cost margin in the long run. At the beginning, of course, we will need some time to ramp up the production of the new products based on the new technology platform 2.0. According to our preliminary estimation internally, we believe the vehicle cost margin of the new product should be quite good. And for the ET7 delivery, We are going to start the delivery of 87 in the first quarter of next year. So it means that we will have the cars in over new houses and the new spaces around the spring festivals time. Then afterwards, we will start the delivery to the users because we have used many advanced chips and sensors on the 87. So This has put a lot of pressure on the mass production of 87, but we believe that everything is on schedule.

Thank you, Nick. Your next question comes from Minsun Li of Bank of America Securities. Please ask a question.

Thank you. Good morning, William, Stephen, and Stanley. My question is regarding your supply chain. So right now, we are hearing some of the auto companies expect the chip shortage situation will not be fully resolved by the middle of next year. So right now, I want to hear your latest view regarding your chip supply situation and also the large size battery pack supply situation. And also, right now for your consumers, if they place the orders to you, I think the waiting time is more than two months already. So how will you retain those consumers? And also, next year we expect the EV purchase subsidy to be cut further. So in this case, if the consumer place the order before the year end, but we need to deliver the car after, I think, next year. So we continue to give them similar subsidy amount. So we absorb the subsidy cut. This is my question. Thank you.

Thank you, Xie Jiaming. Yes, the chip shortage is better than the worst 3G. But overall, the challenge is still very big. But the chip shortage, the main problem is that it is difficult for us to predict which chip will suddenly have any problems. This is the challenging part. However, there are some potentials, such as illegal semiconductors in Malaysia, which are affected by the pandemic. We all know this. This may be the light of the day, but sometimes some chips may suddenly have some problems. The good thing is that we have adapted to such a situation. We can always find some solutions as much as possible. Thank you Ming for your question.

Regarding the chip shortage situation, we believe right now it's much better than the situation in Q3. But the challenge is still quite big because it's very difficult to forecast what is going to happen for the chip supply. I think everyone knows about the SCMicro's situation in Malaysia and the situation basically is improving right now. The good thing is our teams have learned to adapt to the situation and face the challenges head-on. And we have always been able to find a solution to all those challenges. On the other hand, our volume compared to the mature OEMs is still relatively small. So the challenges for us is smaller compared to the mature OEMs.

Here I would like to emphasize that because we... Many of our main domain controllers are developed by ourselves. So when we use replacement chips, for example, some chips are short, we need to find a replacement chip to verify it quickly and produce it quickly. In this regard, it has a great advantage compared to other companies. In fact, we have the ability to solve such a short circuit problem several times. In terms of battery supply, we released 75 degrees of electricity in September, but if we really put it in the car, it will take until the end of November. It also has a process of energy escalation, but we estimate that the energy escalation of 75 degrees of electricity will be able to release all the energy in the first quarter of next year. Battery is still a very big constraint for us now. I would like to specifically mention that because the many domain controllers in our vehicles

are actually developed by ourselves in-house. So if there is a shortage of certain chips in the domain controllers, our teams have the capability to quickly find the alternative and do the rapid validation and the faster production of the vehicles and the chips. So because of these capabilities, we have already resolved some chip shortage situations happened to our vehicles. For the 75 kilowatt-hour battery pack, we announced this in September, but we will gradually start the delivery of the 75 kilowatt-hour battery pack in late November. We also need some time to ramp up the production of the new battery pack. And we believe that the production is going to reach a reasonable level to the first quarter of next year. The battery is actually a very big constraint for us. CTO is our partner on the battery side. They have invested a lot to help us and to support our vehicle production, but we believe the battery is still the main constraint of all production and supply capacity.

Yes, as you mentioned, if you place the order right now,

you will need to wait for some time to get the cards delivered. But recently, we have also announced some policies regarding the subsidy reduction for the next year to keep our customers and also keep our customers during this long waiting time. For example, we will provide the new credits or new points to the users during this waiting time. And these kind of incentives have helped us In the past, for example, starting from 2018, we have already got those policies in place, and we believe that this is not going to affect the users regarding the waiting time.

So for us, even if there is a rebound, I don't think there will be any real impact. And we have always been in terms of price, we have always announced the price before the subsidy. So the rebound has an impact on us, especially because the average price of our car is relatively high. So I don't think it has any real impact on our influence, on our sales and the rhythm of a transaction.

Regarding the EV subsidy, we believe this is not going to have a significant impact on us because our average selling price is actually quite high regarding our products. So even considering the subsidy, it's not going to be a very big amount comparing to the selling price of the vehicles.

Thank you, William. Thank you, William.

Your next question comes from Bin Wang of Credit Suisse. Please ask a question.

Thank you for taking my question. I've got two ones. The first one is about the application IPO because one of the key concerns that NIO seems to be the only one still just in the U.S. Also, some of the media reports is because of the NIO user trust. Can you explain a little bit why the NIO user trust could be one of the reasons when you come back to Hong Kong 5PO. That is the first question. The second thing is about the gross margin. Actually, you mentioned one of the reasons, because auto finance, due to the margin decline. However, if you see the demand has been very good and short of supply, I'm just curious why we, in a very tight supply, we still increase the auto finance due to the falling margin. So really, you should reduce the auto finance. And also, I told Some of my friends told me that you actually may remove or reduce the auto finance in the number four quarter. Can I confirm this is the case? If it is the case, can I assume the gross margin will have increased in the number four quarter compared to number three because you don't provide auto finance anymore? And the average ASP also will increase because auto finance seems to be one of the reasons for ASP decline in the number three quarter compared to second quarter. Thank you.

This is Steven. Thank you for your question. I would like, with regard to your first question, I have two comments. First, we're open-minded. We closely monitor the market, and we make the right choice in the best interest of our shareholders. Second, we actually explore the possibilities to get listed in Hong Kong market, and we are in the doing what necessary to evaluate and communicate.

Yeah. In the supply and the configuration of our products, we do need to ensure the delivery. We need to do some things. For example, our 75-degree store will be released in September. Of course, when the user sees that the battery is better, they will have some expectations and need to wait for the battery. But in fact, the delivery of our battery and the process of climbing. We need to wait until the end of November to start paying and then there is a relatively long process of climbing. The production of the battery has to climb up. It takes a time point. How do we solve these problems? We need some means. In the middle, auto financing will be one of our means. We encourage users to use 100 degrees of battery. Something like this. Then we don't think this is a price because we don't want to do it in a way that lowers prices. But we don't think this is a long-term approach. The main thing is to solve the smoothness of our short-term supply chain. So this is some of the stages of some influence. In the long term, we will still be in the supply chain. After stabilizing, we believe that these profits will return to a normal level.

Thank you, Bing, for your question. Yes, so we will make the decision to best serve the interest of our investors and we'll be open-minded to different choices. Regarding the impact of the auto financing on the margin, if you get to know about our business operations, you will know that we will need to take some measures to balance the supply and the product configurations as well as the user demands. For example, with the 75 kilowatt-hour battery pack, We announced that it's a battery pack in September. Many users would like to wait for this 75 kilowatt of a battery pack. But just like I mentioned, we will start the delivery of this battery pack in late November. And even at that time, we was doing some time to ramp up the production of the battery pack to a reasonable level. That is why we will need to take some measures to balance this demand among the users and the product configuration as well as the battery supply. And we encourage the users to choose the 100 kilowatt battery pack in that case. We believe the right approach for us is not to reduce the price of a product or offer discounts. users on the vehicle price. So that is why we would like to take those measures to balance the demand and the supply. But this is not going to be the long-term measures we take. This is only a short-term measure for us to balance the supply and the demand situation. Once the supply gets to a reasonable level in the long run, then we believe the overall gross margin and the vehicle gross margin is going to improve.

Thank you.

Your next question comes from Edison Yu of Deutsche Bank. Please ask your question.

Hi, everyone. Thank you for taking our questions. First question is on the ET7 ADAS capabilities. Could you maybe discuss what kind of features we could expect at launch? And if you can't reveal that right now, Would you expect to do any sort of demonstrations on the road in the coming months similar to what other competitors have done? And the second question, more longer term, last year at Neo Day, you kind of teased a solid state battery or a hybrid solid state battery coming to the vehicles, I believe, at the end of next year. Is there any update on this? Is this still on track? any details you could provide there. That'd be great. Thank you.

Thank you, Edison. There are a lot of people who are doing the demonstration now, so we don't have to do too much demonstration. So we still pay attention to this mass production. When we use NT2 technology on ET7, there must be a long process in terms of the function release of NAD. Then we of course at the beginning we will hand over this to this auxiliary driver related functions, but this is definitely already using our full-time technology, including the sense, including the whole rules and controls, all of which are using our own full-time software hardware technology. Of course, we announced in the beginning of this year that we would subscribe to NAD by month. That also gives us our own This provides us with some space in terms of time for this service. We will still include the law, including this security, usability, reliability, and balance to a certain extent, then we will open this service. In general, we will not deliberately do some demo. Such a demo, as I said, now hundreds of companies will do such a demo. I don't think this is the most critical. In terms of 150-degree electricity, we and our partners are still developing according to the plan. We will provide this service in the second half of next year, in the fourth quarter. At present, we are still preparing according to this plan.

Actually, I believe a lot of people are working on the demos, so we don't actually want the teams to focus their energy on the demo. We would like to have the teams to be fully dedicated to the mass production of the technology and of a new product like the ET7. Regarding the ET7 NAD, we will need some time to gradually release those advanced features to the users. And we believe for all those features, of course, it will be based on our in-house full stack technology. Previously, I have also explained that the NAD features will be released to the users based on the subscription, like the AD as a service. So this innovative business model has offered us some flexibility in terms of how should we provide and when should we provide all those services and features to the users. We will need to strike a balance between different factors, including the regulations, the safety, and the reliability. Then after we strike the perfect balance or find a sweet spot, then we can start to provide those services to the users. I believe right now there are hundreds of companies working on those kind of demos, so we don't want to waste our energy on that. Regarding the 150 kilowatt hour battery pack, we are now working together with our partners and everything's basically on track. Previously, we mentioned that we will start the delivery of this battery pack in the fourth quarter of next year, and we believe we should be able to meet this schedule.

Thank you. Thank you, Addison.

Your next question comes from Jeff Chung of Citi. Please ask a question.

Hi, William, Stephen. I got three questions. Number one, what kind of annualized total volume production from the NT2 platform should lead to the 25% GP margin according to your guidance? Second question is, apart from the three brand new products, launching 2022, how likely are we going to launch the facelift version of the existing product, the ES8, ES6, and EC6? So how likely are we going to launch six new products next year inside of three brand new products? And finally, is the NEV credit. So could you guide us how many points we sold in the third quarter? So, and from which we can activate the ASP and be private compared with the previous quarters. Thank you, William. Thank you, Stephen.

Jeff, with regard to your first question about GP margin, our 25 GP margin for NP2 platform is based on the annual production volume of 300,000 units per year.

Yes, it's similar to what Steven said about our plan. We think the annual output will be around 300,000 units, and we will be able to reach a profit of 25 million. At present, we are still very confident in this. Of course, our current vehicles will definitely upgrade to the NT2 platform, but we will take this time seriously to manage this rhythm. uh just like stephen uh mentioned that our plan is if we can achieve a annual

production of 300,000 units, we should be able to reach 25% vehicle cost margin on the new technology platform 2.0. We're very confident to achieve this target. For the existing product, of course, we have a plan to upgrade our product to the new technology platform 2.0. And we believe that This is very important for the company, and we will need to focus on managing the schedule for the product upgrades in specific details. Internally, we have already kicked off the development work in this regard, and we have started how should we upgrade the different products to the new technology platform 2.0.

About the NUB credits. totally around 200,000 points were sold in Q3. And what I want to remind is the price volatility for EV credit is also high, along with China's EV penetration increase recently. So I hope this can help you to build the expectation for our futures in your credit revenue. Yeah.

Okay.

Yeah. The number of shares we have this year will definitely increase compared to last year. But as Stanley just said, the penetration of new electric vehicles this year is much faster than we imagined. So it will affect some supply and demand. So how much is the price next year? Now everyone has different predictions. But in general, I think it will be a little better than this year's US share price.

This year, basically, we believe the number of the credits we receive will increase. But this year, the penetration rate of the NEV has increased very rapidly. This probably is going to change the situation for next year regarding the regulatory credit sales. According to my personal estimation, I think considering all those factors, the price of the NUV credit is going to be different or probably going to be lower compared with this year's price.

Thank you.

Your next question comes from Paul Gong of UBS. Please ask a question.

Yeah, hi, thanks, guys. I have two questions. The first one is regarding the low-wage operation, and obviously it has been more than one month, and you just briefly mentioned 92% of the users chose bath, and the order has been exceeding your expectation. Can you give us more color, like how the achievement was there and what the challenge is? Obviously, it's a rich country, but the labor cost might also be much higher than in China. What can you share with us? And after Norway, what is your next destination for the overseas operation? The second question is regarding your expense spending. It seems that this quarter, the increase in SCMA has been a bit faster than expected, while at the end, the increase has been a bit slower than expected. What is the key rationale behind and the key reasons behind? In view, you have so many orders undelivered because of the supply chain disruption. Will you consider slow down a little bit of the SCMA and instead put more budget into the R&D in the following one or two quarters? To put it simply, the first question is related to Norway. The next step after Norway is where and how to plan. The other part is the cost of research and development. the distribution of sales management fees. It seems that the sales management fees have increased a little. The development fees have not increased as quickly as before. Is there any special reason behind this? And now, in a situation where there is no supply and demand, is it that sales fees do not need to increase as quickly as before? Thank you, Paul. In Norway, in general, all aspects of our work have met our expectations.

On September 30, after Norway's New York House opened, I would like to share a few details with you. In general, more than one-fourth of the users of our car will enter our car. This is a very impressive number, much higher than our efficiency in China. Of course, we will be more cautious in delivery, because we still have a lot of service processes. We need to get it through. For example, our power station just started to officially start operation two days ago. Because of the epidemic, our engineers need to help to install. A lot of things like this are much more complicated than before. And some of our sales service system, we hope to build it first, and then start to deliver more actively. We now have enough orders, and the trend of growth is also very good. The preparation work of other European countries is also actively underway. Next year, we will at least enter, including Norway, we will at least enter five European countries and start to provide our products and services. When we are in other European countries, we will directly provide our NT2 products. So the first generation of ES8, we will only sell in Norway. Other countries, we will directly provide the second generation of products.

Thank you, Paul, for your question. Regarding our operations in Norway, we believe the basic operations have meet our expectations in all aspects. After the new house opened on September 30, I would like to share with you some data After the test drive, one-fourth of the users have placed orders for our products. We believe that this is very impressive, and this shows that basically the efficiency is much higher compared with that of here in China. This is on the delivery side. On the service side, we still need a lot of work to do. Our swap stations in Norway have just started the operation because previously we need to send people over to work on the installation and on the commissioning of the swap stations. And then for the after sales, we also encountered some challenges brought forward by the COVID situation. But the order momentum is quite strong. We have done some trial delivery at the end of September and in October. And we believe the delivery in November is going to improve significantly. There's a lot of order backlog, but we would like to control our pace of delivery a little bit at the beginning because internally we set the target for ourselves, especially on the user satisfaction rate. We have a... kind of VAU is a vision action upgrade system in the company. And basically we use the VAU to set the target for ourselves. My personal VAU is to make sure we can achieve a high user satisfaction rate. Right now, according to the feedback we got from the grant in Norway, we understand that the word of mouth reputation has been quite good. And one of my friend actually sent a video to me to show that there are lots of visitors in the new house. I'm very happy to see this video and to see so many people offer a new house in Norway. We will continue to make a decisive investment on the service and other aspects, and we will do this step by step. Next year, besides Norway, we're going to enter additional five countries um in europe and for this product planning of all those european countries and basically the usa based on the new technology platform 1.0 will only be sold in norway but for the other new norway countries we're going to enter we will only sell the products based on the new technology platform 2.0 yeah

China's long-term competition strategy. We believe that China's market competition, as you all know, has a lot of new competitors. We believe that whether it is product development, including sales service network, charging network, it is now a time of investment. So in 2021, you can see the determination of our investment. In 2022, we will also invest more. I think the infrastructure, the sales service network, and the charging network are also part of the competitiveness. In the third quarter, these investments are relatively faster, so you may have seen some growth in SG&A. Of course, the number of proposals we have developed has doubled this year. We have a lot of projects, new product development and some new technology development. There is also a process of climbing. If we start from the fourth quarter, we are investing in the cost of development. You may see a faster growth. This is related to our entire model, especially the rhythm of development of new products. You can imagine that we now have many new models in the process of parallel development. These cost of development

I believe for the investment question, this is more about the long-term competitiveness or the long-term strategy of the company. In China, the competition is becoming more fierce because there have been many new entrants into the smart EV industry. We believe product development, technology development, service network infrastructure, including swapping and charging network, are part of the long-term competitiveness of the company. That is why we doubled down on our investment in all those regard in 2021. In 2022, we will continue to make a decisive investment on those aspects. We believe the infrastructure like the swapping, charging network, the service network are also part of the long-term competitiveness of the company. Maybe in the third quarter of this year, the investment on those aspects ramped up a little bit faster than expected. That is why we can see the SG&A cost increased higher than the previous expectation. But on the R&D side, we have also doubled over R&D personnel this year. And we have worked on, we have been working on many new products and the new technologies. But for all those new products and the technologies, it will need some time to ramp up all the pace. In the fourth quarter, we will be able to see some R&D expenses and the cost increase in this regard. You can imagine internally right now we have multiple new products and new projects working in parallel. Then probably at the beginning when we set up those projects, the cost is not going to be that high, and you will need some time to reflect all those R&D investments over balance sheet or P&L. At the beginning, it's relatively small, but gradually, along with the projects, this cost is going to increase. But we believe that the product and technology should be the cornerstone of the company's long-term competitiveness. And that's why we will continue to make a decisive investment on those records.

Thank you, Paul. Thank you very much. Thank you.

Your next question comes from Chang Liu of CICC. Please ask a question.

Thank you for taking my questions. My first question is regarding the capacity expansion. So could you give us the guidance on next year's sales volume, especially for the new three models and also our current three models? So can our capacity meet the need in next year? And considering the strong EV demand on our more new models in 2023, do we have a plan in constructing more new plans? My second question is regarding the upgrade of smart hardware, because we are expecting a really fast upgrade in the smart hardware in next years. So how do we keep our competitiveness of our next models and to keep our users satisfied? Also, I have a follow-up question for our globalization. So in longer term, do we have a guidance for the proportion of overseas sales account for all sales? Thank you.

Thank you, Liu Chang. You can understand that there is a factory that is producing and the production capacity has been improved. We also have a new factory in the process of construction. In the third quarter of next year, it will be put into production and will be put into operation again. Thank you. Liu Changfei, question.

Right now we have basically two plants. The first plant like I mentioned that we have upgraded the manufacturing lines to further expand the production capacity. For the new plant we are going to start the production in the third quarter of next year. So for other products and operations, we believe these two plants should be able to support our demand for the short term. If we combine these two plants together, the maximum production capacity we can support is up to 600,000 annual production capacity based on double shifts. So we believe there's a maximum production capacity should be able to satisfy offer demand in the short term.

第二个问题就是我们对现有NT1的这个用户的这种智能硬件的这样的一些升级,我们在 uh uh From this perspective, we have already considered the possibility of such upgrades when designing products. Of course, we have been continuing to upgrade software. The 3.0 system released in the third quarter of this year, Aspen 3.0, has also received good reviews from users. That also laid a good foundation for our long-term delivery, including the entry into the global market. So in general, we will continue to upgrade our current software.

For the new technology platform 1.0 smart hardware upgrades, we previously communicated with our users that we will study some plans to upgrade the hardware on the new technology platform 1.0 based on our design on the new technology platform 2.0. We plan to probably provided services starting from next year. And we will provide some more details and updates on this regard at a more suitable time. Of course, this smart hardware upgrade on the new technology platform 1.0 is not going to be the same as the same kind of experience of the new technology platform 2.0. But we believe that the digital carpet of the existing product is going to significantly improve. We have already considered all those flexibilities and the possibilities of the hardware and the software upgrades in our product design. For example, just now I mentioned about the hardware upgrades and then for the software aspect, we have been continuously upgrading our software. We launched and released our Aspen 3.0 to our users of the existing products and received great reviews and feedback from all those users. And we will continue to upgrade our software and iterate our software to make sure we can provide much better services and experiences to our users.

From a global perspective, Of course, we always hope that we are the most satisfied brand in the world. This is our most important goal. But if you look at China, China is the largest car market in the world. It is also the largest high-end car market in the world. So there is no doubt that China's market is our most important market. But when it comes to entering the global market, of course, we have long-term goals. If I look at it, it's hard for me to give a specific year, but I think in the long term, I think the market outside of China, but our sales target is 50%, which is a reasonable plan.

Regarding the previous Aspen 3.0, we also believe that this provides a solid foundation for our global market entry. And if we go back to your question about the global market entry and the target for the global market, Neil has always aspired to build a global brand. If we look at the global market, we can see that China is still the biggest auto market and the biggest premium market. So China will still be the most important market for us. But regarding offer aspiration for the global market, I cannot provide a very specific target for the global market at this moment. But I believe for the markets outside of China, in the long term, they should account for around 50% of all sales of our products.

Thank you, William.

As 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 the Nielsen Investor Relations team through the contact information provided on our website. This concludes the conference call. You may now disconnect your line. Thank you.