NIO Inc.

Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated's fourth quarter and full year 2021 earnings conference call. At this time, all participants are in the listen-only mode. Today's conference call is being recorded. I'll 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 of fourth quarter and full year 2021 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted at the company's IR website. On today's call, we have Mr. William Lee, founder, chairman of the board, and the chief executive officer, Mr. Stephen Fung, chief financial officer, and Mr. Stanley Chu, senior VP 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 today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission and the Stock Exchange of Hong Kong Limited. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that new earning press release and this conference call include discussions of unordered GAAP financial information as well as un-audited non-GAAP financial information. Please refer to news press release which contains a reconciliation of the un-audited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Lee. William, please go ahead.

Hello everyone, thank you for joining NIO's fourth quarter and full year 2021 earnings call. 2021年第四季度,未来总共交付了25,034辆ES8,ES6和EC6,同比增长44%。

In the fourth quarter of 2021, we delivered 25,034 ES8, ES6, and EC6, representing an increase of 44% year-over-year. For the future and global automotive industry, 2021 is a year full of challenges.

We have overcome the pressure of the pandemic, the shortage of chips, and the fluctuation of supply chains. We delivered 91,429 new cars throughout the year, 2021 was a year full of challenges for NIO and the global auto industry. By overcoming the pandemic, semiconductor shortages, supply chain volatilities and many other difficulties,

We have continued to lead the premium smart electric vehicle market in China with a total delivery of 91,429 new vehicles in 2021, representing a strong increase of 109.1%.

In January 2022, there will be 9,652 new vehicles delivered in the future, with a growth of 34% compared to the previous year. Due to the impact of the lockdown, In January 2022, NIO delivered 9,652 vehicles, increasing by 34% year-over-year.

In light of the Chinese New Year holiday, NIO delivered 6,131 vehicles in February 2022, representing a growth of 10% year-over-year. During the holiday, we adjusted the production lines to prepare for the delivery of ET7 in late March 2022.

Although demand and customer orders are strong, factory and delivery work Although the user demand and order momentum remain strong, the production and delivery have been affected by the COVID and the volatility of the supply chain production capacity.

We expect the total delivery in the first quarter of 2022 to be between 25,000 to 26,000 vehicles. On March 28, NT2's first model ET7, the second-generation technology platform, will start delivery.

In early March, ET7's national four-car event has started. Participation of four users has been highly recognized by ET7. The four-car order transfer rate exceeds our expectations. We will start the delivery of ET7, the first product on NT2, on March 28, 2022.

In early March, we kicked off the test drive of ET7 nationwide. Users who test drove ET7 have spoken highly about the product. The test drive to order conversion rate exceeds our expectations, which gives us great confidence towards the competitiveness of NT2.

In 2021, the growth rate of China's pure electric car market exceeded market expectations. According to the data of the Convention, the penetration rate of pure electric cars in 2021 rose from 5.9% in January to 18.6% in December. In 2021,

the battery electric vehicle market maintained a faster-than-expected uptrend. According to China Passenger Car Association, the retail penetration rate of battery electric vehicles grew from 5.9% in January to 18.6% in December last year. In Tier 1 and Tier 2 cities in China, such as Shanghai, the penetration rate of battery electric vehicles witnessed a more prominent growth In Shanghai, among the sales of all ICE and electric SUVs priced above RMB 350,000 RMB, NIO enjoined a market share of 23% with its sales ranked at the top in 2021. We believe that this EV growth trend will also gradually expand to Tier 3 and Tier 4 cities in the future.

In terms of horsepower, it is due to the increase in single-car sales revenue and the cost optimization brought by the 75-degree three-cylinder iron bag. In the fourth quarter of 2021, the future total horsepower ratio will reach 20.9%. In the whole year of 2021, the future total horsepower ratio will reach 20.1%. Currently, the industry is under pressure from the rising cost. We will pay close attention to the changes in the supply chain and improve efficiency with our partners.

In terms of a growth margin, benefited from the increase of revenue per vehicle and the cost optimization brought forward by the 75 kWh LP-NZM hybrid battery. The vehicle growth margin reached 20.9% in Q4 2021 and 20.1% 2022 March 10th

On a separate note, NIO started to be listed by way of introduction on the stock exchange of Hong Kong under the stock code

from March 10, 2022. The listing in Hong Kong marks another milestone in the history of NIO and enables us to serve more investors in the future.

Next, I would like to share some recent key highlights of our R&D and operations. In 2021, we started to step up our investment in R&D with the overall non-GAAP R&D expenses exceeding

4.1 billion RMB in 2021. We have sped up the development of new products and increased our investment in full-stack autonomous driving and other core technologies.

研发投入对未来的长远见证力至关重要。 2022年,我们就能看到去年加大研发投入的部分成果。 2022年,我们计划交付基于NT2的三款全新车型 ETT is the first one. Currently, mass production is going smoothly. Autonomous driving algorithm and many other aspects have led to the development trend of the industry.

Investment in R&D is of critical importance for new long-term competitiveness. Starting from this year, we will be able to see part of the fruitful results from last year's R&D investment and efforts. In 2022, we plan to deliver three new products based on NT2, with ET7 being the first. The mass production of ET7 is well on track. The product itself has led the industry in various aspects, including computing power for autonomous driving.

在2021年12月18日的NIO Day上, 我们发布了中型智能电动轿跑ET5, eT5 perfectly integrates the concept of future ultra-safety genes and autonomous driving with the future autonomous driving system NAD. It has the future panoramic digital cockpit panel cinema that uses AR and VR technology, with over 100 comfortable, safe and intelligent configurations. eT5 has received the attention of more diversified user groups, and the order performance exceeds our expectations. eT5 is expected to open in September this year.

At the NIO Day on December 18, 2021, we unveiled ET5, a mid-size smart electric sedan. As a perfect combination of NIO's supercar DNA and the concept of design for AV, ET5 is equipped with NAD, NIO Autonomous Driving, and Panoramic Digital Carpet enabled by AR and VR technologies. It comes as standard with 100 configurations for comfort, safety, and smart technologies. After its launch, ET5 has attracted a wider and more diversified user base and received more orders than our expectations. The delivery of ET5 is expected to start in September this year.

We would like to release the first SUV car ES7 based on NT2 in the near future. Zoom will also launch ES7, our first SUV model on NT2, which is positioned as a mid-large premium five-seater SUV and expected to start delivery from the third quarter of this year. In the next few years, we will continue to increase the development and investment of key technologies, especially in the key areas related to power and battery. We believe that the development and investment of core technologies can not only strengthen the continuous competitiveness of our technology and products, but also improve the level of labor and profitability, creating long-term value for shareholders.

In the coming years, we will continue to elevate over R&D investment and efforts in core technologies, especially in key capabilities such as the full-stack autonomous driving and battery technologies. We believe that the investment in core technologies will not only enhance our sustainable competitiveness in both our technologies and products, but also improve our growth margin and profitability in the long run, and ultimately create a long-term value for our shareholders.

With regards to production capacity,

the production line upgrade at the JEC New Advanced Manufacturing Center is in progress, phase by phase. By mid-year, the production cadence across all workshops will reach 60 jobs per hour.

We have largely completed the building construction of our second manufacturing facility, F2, located in New Park.

finished the equipment installation and are now working on the calibration. F2 is planned to be put in operation in the third quarter this year with a designed production cadence of 60 drops per hour. On March 16, the first validation build of ET5 rolled off the production line from the F2 vehicle pallet production center.

At the supply chain, we are facing a new supply wave. On the side of a supply chain, we are still faced with the challenges from cheap supply, volatility, raw material cost increase,

COVID and the changing international situation. In the past two years and more, our teams and partners have accumulated rich experience in securing supplies for production. We will continue to work closely and try our best to safeguard the production and delivery going forward.

2021 is a year of active investment in the infrastructure construction and sales service network.

2021 had been a year of decisive investments in charging and swapping infrastructure, as well as the sales and service network. In terms of the sales and the service network, we now have 46 new houses and 341 new spaces in 165 cities worldwide. In China, we have 60 new service centers and 179 authorized service centers in 146 cities.

As the sales and service network expands quickly,

We have been continuously optimizing the network deployment and the operational efficiency of each touchpoint while delivering high-quality services to users. In 2022, we plan to open more than 100 new sales outlets and over 50 new service centers and authorized service centers.

In terms of the charging and charging network, we have built 866 charging stations In terms of the charging and swapping network, we have deployed 866 battery swap stations in 190 cities,

and completed over 7.6 million swaps in China. So far, we have 711 supercharging stations and 3,786 destination chargers in China. In 2022, in the future, we will add 30 power-up plan destination charging lines.

The Chinese market will build more than 1,300 power stations, 6,000 superchargers, In 2022, we will add 30 new destination charging routes to the PowerApps plan. With that, NIO will accumulatively operate over 1,300 battery swap stations.

6,000 power chargers and 10,000 destination chargers in China. We will further expand our power network to provide a better charging and swapping experience to users.

在全球市场方面,我们看到ES8赢得了挪威用户的喜爱。 今年以来,越交付量稳居挪威六座和七座乘用车市场的前两位。 挪威市场成功地交付和高质量的用户服务,

In the global market, ESA has formed the appreciation of users in Norway. This year, our monthly deliveries have ranked top two among the six-seater or seven-seater passenger cars. The successful delivery and high-quality user service in Norway also help us accumulate valuable experience in providing services in other countries and regions, and gain confidence in entering more new markets.

In 2022, the future products and system services will be launched in Germany, the Netherlands, Sweden, and Denmark. Currently, the preparation work of team building and relevant markets is in progress.

In 2022, NIO will bring its products and comprehensive services to Germany, the Netherlands, Sweden, and Denmark. The team building and market entry preparation are moving forward smoothly.

We are facing a smooth progress in the business work of new brands in the general market. The core team has been built and completed, and the strategic direction and development plan are clear. The first batch of products has entered the critical development stage.

The mass market brand has been progressing according to plan. We have established the core team, specified the strategic direction and the brand positioning, and reached a critical research and development stage of the first batch of products.

未来的发展离不开用户一如既往的支持。 2021年共有3,756位用户志愿者投入到车展、Neo Day等活动中。 The development of Neo won't be possible without the continued support of our users. In 2021, 3,756 user volunteers contributed their time and efforts in events like auto shows and Neo Day,

More than 12,000 users participated in over 260 charity events to make active contributions to society. At Neo Day 2021, we announced the user partner program with which new users can share benefits with each other and build an even deeper connection among users in the community.

同时,2021年未来发起了CleanParks生态共建计划。 目前,我们已经在六个国家公园和自然保护区落地项目 独立生态共建,支持自然使用智能电动汽车。

In addition, NIO launched the Clean Parks, an ecosystem co-construction initiative. So far, we have rolled out the initiative in six national parks and natural reserves in China. We aim to contribute to ecosystem building, support the adoption of smart electric vehicles and clean energy infrastructure in the natural reserves, and establish a clean and low-carbon energy circulation to protect the authenticity and integrity of ecosystems.

2021 is the year of the beginning of renewable energy. We are preparing for the next stage of development. 2022 will be a year of full acceleration in the future. We will deliver three new models. We will continue to invest in long-term competitiveness, develop and base facilities, and build more production capacity to meet the needs of users who are growing rapidly, and serve more users from countries and regions. We will insist on the original intention of starting from the interests of users, and continue to make progress to bring products and services that surpass expectations for users.

2021 was a year for NIO to develop fundamental powers and make comprehensive appropriations for the next stage of development. 2022 is a year for NIO to press ahead at full speed. We will deliver three new products, continue to invest in R&D and infrastructure to improve our long-term competitiveness, expand our production capacity to meet the faster-growing user demand, and serve users in more countries and regions. We will always stay true to our original aspiration of putting users' interests first, make continuous improvements, and deliver products and services beyond user expectations.

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 fourth quarter and full year of 2021. And to be mindful of the length of this call, I encourage listeners to refer to our earliest press release, which is posted online for additional details. Our total revenue in the fourth quarter was 9.9 billion RMB, or 1.6 billion US dollars, representing an increase of 49.1% year-over-year and an increase of 1% quarter-to-quarter. Our total revenues are made up of two parts, vehicle sales and other sales. Vehicle sales in the fourth quarter were 9.2 billion RMB, or 1.4 billion US dollars, accounting for 93% of total revenues in this quarter. It represented an increase of 49.3% year-over-year, an increase of 6.7% quarter-over-quarter. The increase in vehicle sales year-over-year was mainly attributed to high deliveries. The increase in vehicle sales quarter-over-quarter was mainly attributed to a higher average selling price, decrease in subsidization in user vehicle financing arrangements, and higher deliveries. Other sales in the fourth quarter were 0.7 billion RMB, or $107.5 million, representing an increase of 46.8% year-over-year and a decrease of 41.3% quarter-to-quarter. The increase in other sales year over year was mainly attributed to the increased revenues derived from the sales of service and energy packages and accessories in line with the incremental vehicle sales, as well as increased revenues from used car sales and auto financing services in the fourth quarter of 2021, which was partially offset by the sales of automotive regulatory credits in the fourth quarter of 2020. The decrease in other sales quarter per quarter was mainly attributed to the sales of automotive regulatory credits in the third quarter. Cost of sales in the fourth quarter was 8.2 billion RMB, or 842.8 million US dollars, representing an increase of 49.1% year-over-year, an increase of 5.0% quarter-over-quarter. The increase in cost of sale year-over-year was mainly driven by the increase of delivery volume in the fourth quarter of 2021. Gross profit in the fourth quarter was 1.70 billion RMB, or 266.7 million US dollars. representing an increase of 48.8% year-over-year and a decrease of 14.7% quarter-over-quarter. The increase in gross profit year-over-year was mainly contributed by increased vehicle sales and increased vehicle margin. The decrease of gross profit quarter-over-quarter was mainly resulted from the sales of automotive electric credits in the third quarter of 2021, which contributed a higher profit. Gross margin in the fourth quarter of 2021 was 17.2% compared with 17.2% in the fourth quarter of 2020 and 20.3% in the third quarter of 2021. The decrease of gross margin cost of quarter was mainly resulted from sales of automotive electric credits in the third quarter of 2021, which contributed a higher gross margin. More specifically, vehicle margin in the fourth quarter was 50.9% compared with 17.2% in the fourth quarter of 2020 and 18.0% in the third quarter of 2021. The increase of vehicle margin year-over-year was mainly driven by the higher average selling price with higher rate of 100 kilowatt-hour battery. The increase of vehicle margin quarter of a quarter was mainly attributed to decrease in subsidization in user vehicle financing arrangements. Hiring expenses in the fourth quarter were 1.83 billion RMB or 286.9 million US dollars. with an increase of 125% year-over-year and an increase of 53.3% quarter-of-quarter. The increase of our extensive quarter-of-quarter and year-over-year was mainly attributed to the increased personal costs in research and development functions, as well as the incremental design and development costs for new products and technologies. SG&A expenses in the fourth quarter were 2.36 billion RMB or 370.1 million US dollars, representing an increase of 95.4% year-over-year and an increase of 29.2% quarter of quarter. The increase in SG&A expenses year-over-year and the quarter of quarter was primarily due to the increase in personal costs in sales and service functions and costs related to the sales and service network expansion, as well as incremental marketing and promotional expenses, including for the host of NEO Day in December 2021. Loss from operations in the fourth quarter was 2.45 billion RMB, or $300 billion. 83.7 million US dollars, representing increase of 162.5% year-over-year and increase of 146.5% quarter-over-quarter. Share-based compensation expenses in the fourth quarter were 396.7 million RMB or 62.3 million US dollars, representing increase of 59% year-over-year, an increase of 49.4% quarter-of-quarter. The increase in share-based compensation expenses year-over-year and quarter-of-quarter was primarily attributed to additional options and restricted shares granted. Net loss in the fourth quarter was 2.14 billion RMB, or $336.4 million, representing an increase of 54.4% year-over-year, an increase of 156.6% quarter-of-quarter. At last, attributable to NIO's owner-shareholders in the fourth quarter was 1.4 line billion RMB of $228.7 million, representing a decrease of 48.4% year-over-year, an increase of 25.6% quarter-over-quarter. Basic and diluted debt loss per ADS in the fourth quarter were both 1.36 RMB or 21 cents per ADS, excluding share-based compensation expenses and a question of redeemable non-controlling interest to redemption value. Non-GAAP adjusted basic and diluted debt loss per ADS were both 1.07 RMB or 16 cents per ADS. Our balance of cash and cash equivalents. Restricted cash and short-term investment was 55.4 billion RMB or 8.7 billion US dollars as of December 31st, 2021. Additionally, we achieved positive cash flow for operating activities for the full year 2021. And now for our best outlook. As William mentioned, For the first quarter of 2022, the company expects deliveries to be between 25,000 to 26,000 vehicles, representing an increase of approximately 24.6% to 29.6% from the same quarter of 2021. The company also expects the total revenues of the first quarter of 2022 to be between 9.63 and 9.99 billion RMB, or between 1.51 and 1.57 billion US dollars. This would represent an increase of approximately 26% to 25.1% from the same quarter of 2021. This specific outlook reflects the company's current and 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. Once again, as a reminder, if you'd like to ask questions, please press star 1 and wait for a name to be announced. For the benefit of all participants on today's call, please limit yourself to two questions. And if you have additional questions, you may re-enter the queue. First question comes from the line of Tim Hsiao of Morgan Stanley. Please go ahead.

Hi, William Stephen Stanley. Congratulations on the solid result and thanks for taking my questions. Basically I have two questions. The first question is about cost and margin. Because we know that NIO is better positioned to cope with the battery cost inflation even without price hike. But may I know if the rising mix of the high margin 100 kWh, 75 kWh hybrid battery pack or other initiatives could have sufficiently offset the margin pressure this year? And separately, if any, or only if, we need to raise the prices one day, could NIO increase the price to the consumers who bought the batteries and also the battery asset management companies simultaneously? or it would take longer to renegotiate the terms and contract with the battery management company. It's more like a to-be business. So that's the first question. And second question is about the model. Currently, I think ES6 and ES8 have comprehensively covered the SUV market with pricing range from $350,000 to $600,000. Since we will soon launch ES7, as William just mentioned, how could we effectively differentiate ES7 from incumbent SUV models without a ball and dilution? And are we going to adjust the pricing strategy or reposition current SUV models along with the launch of ES7? So those are the two questions from my side. Thank you.

好的,谢谢Tim。 第一个问题就是,确实去年四季度的话,因为我们 We started using 75 degrees of three-point steel. The three-point steel battery is cheaper than the 70 degrees three-point battery that we originally used. So this is very helpful for us to improve the strength of the 4G system. Of course, as you all know, especially from Q3 and Q4 last year to this year, the cost of the raw materials on the battery It has grown a lot. Of course, the entire industry chain has to deal with the rising pressure. Currently, we haven't raised the price yet. This year, we will have some annual projects including product upgrades. Based on the time, we will see if we can At that time, based on the market price, the price of raw materials, let's take a look at our price policy and strategy. At present, we have no idea about the price of our products. Of course, as you all know, after our sales have increased, the cost of distribution has definitely decreased a lot. Originally, it was true that it could increase our profit, Thank you, Ting. Regarding the first question,

Actually, starting from the fourth quarter of last year, we started to deliver the 75 kilowatt hour LP and NCM hybrid battery pack to the users, which has contributed to the cost optimization and benefited over vehicle growth margin growth in the fourth quarter. But I believe everyone knows that starting from the third quarter and the fourth quarter of last year, we have been seeing some raw material cost increase in the industry. And there has been lots of cost increase in the upstream of the whole industry chain, which means that we won't need to share the pressure across the whole industry gradually. At this moment, we do not have any plan to increase overpricing yet. Because during the year, we're going to upgrade our product's competitiveness and capabilities. So at that time, probably based on the cost of the raw materials in the industry, we will re-evaluate our pricing strategy as well. But at this moment, we're not going to increase our price for the products. On another point, because of the sales growth, We believe that this has also contributed to the amortization of the cost and benefited of a vehicle gross margin increase. But regarding the raw material cost increase, it's not just about the battery, but also other commodities like the copper and aluminum. Those raw material cost increase have also affected all the vehicle gross margin as well.

Let me add that our annual cost In light of the cost increase of those raw materials I've just mentioned

over a full year vehicle growth margin for 2022 will still target to reach around 18% to 20%. 第二个问题,ES7。 ES7是基于我们第二代技术平台NT2的一款大五座的SUV。 中大型的大五座SUV的市场呢,

We can see that the demand for the Western market is growing very fast. For example, BMW's X5 will be released in China soon. We should mention that ES7 is one of the leading 3D technologies. It emphasizes high performance and luxury. We believe that it can attract This is some of the users who require higher performance and quality of this product. We don't think it will have any impact on the current 866 SUV sales. I think it should be an increase

The second question is about the GS7. This is going to be the first SUV product based on the NT2 and is positioned as a mid-large five-seater SUV. In this specific segment, we have witnessed some user demand increase recently. For example, the BMW X5 we believe is going to start the local production very soon. For the ES7, it's going to have industry-leading battery, electric powertrain, and also the smart technologies as well. And we believe it's going to showcase the high-performance capabilities of the product and also satisfy users' demand in terms of the premiumness and the luxury feeling and We also believe that this is going to attract the users who will have a very high requirement regarding the product quality and the premiumness. So all in all, we believe that ES7 is going to contribute and going to be complementary to other current ES8, ES6, and ES6 instead of affecting the sales of the current products.

We are currently working on the development I would like to add that we are currently planning to release the ES7 in the second quarter. Of course, you will know the pricing by then. The price of the medium-sized five-seat SUV with a price of more than 400,000 yuan is currently more than 200,000 yuan, and it is still growing. So we are very confident in the segment market.

We're going to launch the ES7 in the second quarter of this year, and we'll share the pricing information as well at that time. At this moment, we can see that regarding the market segment of the mid-large SUV priced above 400,000 RMB, it actually has an addressable market size of... over 200,000 units. And this market size is also growing. That's why we're very confident with the performance of the ESO 7 update launch.

Thank you. Thank you for the questions. Next question comes from the line of Bin Wang of Credit Suisse. Please go ahead.

Hello, everyone. I have two questions. The first one is a recent media report. The first one is that our ETC has reached 15,000 orders, and the sales volume of each month has reached 5,000 units. Can you explain how many units can the ETC sell? The same ES7, how much will our monthly sales target reach? You just mentioned the X5. Previously, our ETC also reached 5 units. I want to ask if we can use the same comparison We, for example, say a month four thousand five thousand is not a reasonable explanation. This is the first question. The second question I want to ask is that our service seems to have suffered a lot in the fourth quarter. More than thirty percent of the profit and loss. What is the trend of this profit and loss? Is it in 2022 and 2023? It will be such a profit and loss. And we just talked about a profit and loss of 18 to 20. Does this include the profit and loss of service or just the profit and loss of this car? I translate it in English. I actually have a question about the 87 sales, because recently there was a media call. First one, EV, they said that the 87 received very good order flow, about 15,000 order backlog, which indicate monthly volume could be around 5K. So what's your comment about this? And second thing is about the margin, because within the number four quarter last year, the service actually had very big negative cost margin, more than 30%. and what's the reason behind that, and what's the outlook of this service margin going forward? Meanwhile, you just provided 18 to 20% margin guidance. Is this just a vehicle gross margin, or actually including the service margin already? Thank you.

Thank you. Thank you, Wang Bin. I'll answer the first question, and Stanley will answer the second question. As you all know, we haven't announced the estimated volume of the product for a long time. But what I can say is that our estimated volume There must be a lot of media rumors. If we look at ET7, it has the same price as the oil car. For example, BMW, Mercedes E-Class, Audi A6. In terms of price, they are directly competing. The target user group is also very similar, especially BMW 5G. So if we look at these three cars, they basically have 12,000 to 15,000 cars in the Chinese market every month. Of course, we know that electric cars still need a process for users to accept. If we compare the share of SUVs in the Shanghai market, 23% of the share, we can still see that there is a very good space for imagination in the car industry. Whether it's from products or from all aspects, the competitiveness is very strong. So it's hard for us to say how much a month is. But from the current point of view, we are very confident in getting a significant share in this market. From the perspective of the current user feedback.

Regarding the first question of the ET7, of course, we cannot disclose the specific order number at this moment. But what I can say is that it's actually much more than the media report. And for the ET7 market segment, we can see some other benchmarks. For example, the BMW 5 Series, Audi A6, and Mercedes C-Class. EP7 has similar pricing and target group with those products as well, especially regarding the BMW 5 Series. So for BMW 5 Series, we can see that the monthly delivery number is around 12,000 to 15,000. Of course, for the EV product, it will need some time for the users to adopt and accept. But if we look at the examples of the Shanghai market, Right now in the premium SUV segment in Shanghai, our market share is around 23%. So if we also mirror this to the sedan market, we believe that there is a lot of room for growth and also potential for over EG7. So at this moment, we cannot see how much we're going to deliver every month. But according to the user feedback we receive right now, we're very confident with the EG7's performance in the future.

Yes.

Yes. Yes.

How to say this now we remember to talk about the ESP of this it is located in the fifth seat of such a high-end SUV market When he and this is now the main target, then it is still the X-Five of BMW. If we look at it, then the X-Five is in the market. After it was produced, everyone expected it to be relatively high. Regarding the ES7,

Previously, I have also mentioned that the S7 is positioned in the mid-large premium SUV segment. And if we talk about the specific benchmark, we can refer to BMW X5. After the local production of the BMW X5, we can see that the market actually has very high expectations for BMW X5's performance. The current market size of this segment over 200,000 units. So if we look at the comparables, we can use the BMW X5 as a reference. And based on this, we're very confident with our Yeses 7 because we believe they can actually outcompete the BMW X5. OK.

For the second question, for service loss, We accelerated the construction of power substation in 2021. And more power substation started to provide service to end users, which lead to the cost increase of other revenue, other business compared with Q3. And in 2022, we will continue to deploy the batteries charging and absorbing facilities. The anticipated depreciation and operating expenses will keep rising. But we believe the upfront deployment of battery swap stations can contribute to our branding, user experience, and also sales, and with the long-term value to the company. So bearing a short-term loss of power substation constitutes a strategic decision of the company. And in the long run, the cumulative vehicle deliveries going up and the improvement of service efficiency. We expect that the negative margins resulting from power, maintenance, and repair service and other services will gradually improve. And other revenues and margins contributed by innovative business models like bus, new life, and also AD as a service will keep growing. Okay. And the gross profit margin target 18 to 20% for 2022 is for vehicle, not the overall gross margin. Yeah. Thank you.

Thank you for the questions. Next question comes from the line of Mingxuan Li of Bank of America. Please go ahead.

Thank you, Guan Yicheng. I have two simple questions. The first question is about the production capacity. As William mentioned earlier, the production capacity of two factories is JPH. But I would like to know, because all the new cars this year have this light. And I would also like to know about the battery production capacity, especially the hybrid production capacity, and the current expansion progress. And the last part is about the chip. Because yesterday, My question is regarding the capacity in LiDAR hybrid battery. and also the chip, especially SDN yesterday just also announced the chip shortage will cause the price hike. So I also want to know whether the NVIDIA O-ring chip will constrain your vehicle delivery this year. Thank you, Manager Chen.

Okay, thank you, Min. As for the production capacity issue, we also talked about our first factory, which was at the end of the year. that can reach 60 JPH. And then the second factory, according to the 60 JPH plan, it has a climbing process. That is to say, if 60 JPH, if it is double work, this 4000 hours, then it is 240,000 taels, 20,000 taels a month. If it is a little more overtime, 5000 hours, then of course it is 300,000 taels. So this is indeed From the point of view of production capacity, from the point of view of policy production capacity, in the second half of this year and later, in Q4 of this year, we should have a fundamental improvement. It must be a very good guarantee for the production of the next stage. As for the battery, there is indeed such a bottleneck in production capacity. Since last year, and CTR, according to our requirements, to increase production line. In terms of the battery this year, I think it should be able to match our entire demand. The battery should be fine this year, but the price increase is another matter, but the demand should still be satisfied. Newly built is the biggest challenge, because we We use more than 1,000 chips for each car. 10% of the chips face the problem of tight supply from time to time. It does have some impact to a large extent. Of course, the price of chips is rising. Last year, we bought some chips in the online market. Last year, we already had some because the price of the chip has gone up. This year, we have already considered the price of the chip. So the price of the chip is still OK. The main problem is the uncertainty of supply. High-end chips, such as Orin, because Orin is the world's first mass-produced chip, including Qualcomm's Biowoo. Because of these chips, we have long-term strategic cooperation with these partners. Overall, we are doing well. The main problem now is some basic chips, such as TI, or Inferin, or some cheap chips. Now these chips are missing some, we can't produce this car. So these chips, we will of course use some alternative ways to do it, including the fresh goods market, we will also go and buy some. Without a doubt, this will definitely make the situation a little more complicated. So this year, overall, to the fourth quarter, to the second half of the year, the production capacity of the whole car and the second car should be OK. So regarding the production capacity, previously I have also mentioned that by the middle of this year, our first factory

that is the JAC Neo Manufacturing Center is going to reach a production cadence across the different workshops that is around 60 drops per hour. And the design production capacity of the Factory 2 is also going to be around 60 drops per hour. But of course, for the Factory 2, because this is a new factory, then we will need some time to ramp up the production gradually. So if we think about the 60 jobs per hour, it means that if we work with 4,000 hours every year, then the annual production capacity is going to be 240,000 units, and for every month is around 20,000 units. If we work overtime a little bit to 5,000 hours, hours per year, then it means that the annual production capacity is going to reach around 300,000 units. So this is about the vehicle production capacity. We believe in the fourth quarter of this year, we will see some fundamental improvements regarding the vehicle production capacity, which is going to support over a next step of production. For the battery production capacity bottleneck, Yes, previously we have also mentioned about this, and starting from last year, we have been working together with our partners, ATL, to add additional production lines for the battery cells, and we believe, according to the current plan in 2022, the battery production capacity should be able to meet our demand. Of course, the cost increase of the battery is another matter. Actually, I believe that the chip shortage is a bigger challenge for us because in our vehicle, we have over 1,000 chips. And among those 1,000 chips, we have probably around 10% of the chips that may face the supply shortages or challenges from time to time. So for us, starting from 2021, we started to see some cheap cost increase, and this has affected our vehicle growth margin in 2021. Based on this experience in 2021, we have already taken into consideration the cheap cost increase. in terms of setting of a target for the vehicle gross margin. We believe that the main challenge regarding the chip is more about the supply, but regarding those high-end chips like the NVIDIA or Ring chips and the Qualcomm H155, we have a long-term and direct strategic cooperation with NVIDIA and Qualcomm, so we believe we should be able to have sufficient supplies for our production. But for those common chips or the cheaper chips, like from TI and Infineon, we may face some challenges from time to time, and this is going to affect our production. Of course, we have some other ways to mitigate those challenges. For example, we can find some other chips to replace those chips, or we can probably scan the market to build up our strategic inventory. to avoid those risks. We believe, overall speaking, in the second half of this year or around the fourth quarter of this year, we should be able to see some fundamental improvement in terms of our vehicle production capacity and the battery production capacity. But we may still face some challenges in terms of the supply chain volatility, especially the semiconductors.

Thank you. Thank you for the questions. Our next question comes from the line of Jeff Chung of Citi. Please go ahead.

Hi, Mr. Lee. I'm Jeff. There are two questions. The first is, will we consider adding prices to our MSRP products to lower the price of batteries or aluminum? If so, how do we add them? If not, why not? This is the first question. The second question is about the existing 866 product. Do you think it can maintain about 10,000 units per month in April, May, and June? And there is also the climb of ET7, which means that it will start to pay off at the end of March. What kind of rhythm do you think this climb will be in April, May, and June? And finally, I would like to ask a question about the spot price of carbon dioxide in China. 你认为是不是应该现在就到顶了? 因为好像中国政府已经开始干预了, 会释放更多的供应。 有些整车厂跟我们说的,就想听听您的意见。 I've got three questions. So number one is, should we consider any MSRP hike in the near term to offset potential battery and aluminum cost hike? If yes, how? And if no, why not? The second question is about the existing A66 products' sales volume visibility over the next few months. Any confidence we can maintain 10,000 units a month, as well as could you give us more color on the ET7 ramp-up pace in the second quarter? Last but not least is the lithium spot price in China. Do you think it has already peaked due to the recent government interventions? Thank you.

All right, thank you, Jeff. The first question is, when we look at our current ES8, ES6, and EC6 chips, they are still the same as the 18th-century NT1 chips. Today, some complex software, its efficiency will indeed have some challenges. Therefore, we have a plan this year, so we are now doing some smart hardware for 866. At the same time, we will also provide this kind of backup upgrade service to existing users. So this is already in our plan. Then we will do this, we will do this in the right time. So considering some of these situations, we don't think it's necessary to adjust the price of our existing products. Of course, we will combine the upgrade of our smart hardware, which is an annual model of our existing 866 product, and we will make a suitable price adjustment. We still have some time to see the changes in the cost of this material and this kind of battery. uh uh

For the current ES8, ES6, and ES6, of course, if we look at the digital corporate chipset, this is actually based on the new technology platform 1.0, which was developed in 2018. So for this chip, the efficiency may be impaired. if we run some complicated software. So that's why starting from this year or within this year, we're going to upgrade to the smart hardware of our existing products. And we are also going to provide the after sales upgrade services for the users regarding the smart hardware upgrades. We're going to launch this program in an appropriate time. For the existing ES8, ES6, and the EC6, we believe we do not need to adjust the pricing at this moment. But, of course, based on the smart hardware upgrade of the existing products, and also we are going to launch some model year products, then at that time, we believe probably we can re-evaluate our pricing strategy based on the cost increase in the supply chain. You have also asked about the performance of our current product, whether it should be able to still maintain the 10,000 units per month. According to our order momentum in March, we believe that this can meet our expectation, and we believe that the user demand is not a problem for us. Because if we compare our current ES80, ES6, and ES6 with other ED products and ICE products in the market, we believe we still have a lot of competitive advantages. So the overall demand momentum stays quite strong.

The second question is the speed of ED7 climbing. ED7 is the first factory to produce ES8, ES6, and ES6. It has also introduced some new technologies. Last year, we have been continuously modifying the production line, so that it can support the production of 1-7-7. When we were in the first factory, we also said that we would produce ES7. For ES7, our current plan is to increase it by three levels. So everyone should know that in our first factory, there is a slightly complicated situation. There are three existing models. We have to ensure its production capacity. We also have the production of the new ET7. We also have to prepare for the mass production of the ES7. So it needs to be more complicated. So from this perspective, the process of ET7 production will be slower than the general ET5 production. We hope to be able to So the EDT7 production ramp up.

Because the ET7 is going to be manufactured in the first factory, we call it F1, and it's going to share the production line with the current products, yes, ADS6 and EC6. At the same time, we will also introduce some new manufacturing technologies and the techniques in the production of the ET7. So that's why starting from last year, we started to adjust the production lines in the F1 to support the new product production. In the meantime, I have also mentioned about the ES7, which is going to start the delivery in the third quarter of this year. This product is also going to be manufactured in the F1. So the situation in F1 is quite complicated, as you can see. because we need to make sure we have sufficient production capacities to support the current ES8, ES6, and ES6. But at the same time, we also need to produce the ET7 and also prepare for the production of the ES7. So that's why we believe the ramp-up of progress of the ET7 is probably going to be a little bit slower compared with that of the ET5. I think ET5 is going to be manufactured in a separate new plant called F2. So we believe that probably around the third quarter of this year, we should be able to reach a normal production cadence for the ET7. The third question is...

Our view on the coal mine is that the price of the coal mine has been very exaggerated since this year. We generally believe that we have conducted very detailed research on the material of the oil, from the production of oil to the various stages. We generally believe that the price of the coal mine is still relatively there will be more investment. In terms of demand and supply, there is not much of a gap. We have also seen some of the management departments in China, such as the Ministry of Industry, Industry and Trade coordinate some of these price mechanisms. We are also calling on some of the oil companies, including some of the manufacturers of carbon monoxide, If they can start from the long-term interests of the entire industry, then I still hope that they can not make this kind of investment to create this price increase. This is definitely not a good thing for the entire industry. So in general, we don't think it's a real capacity and supply problem. We think there are more investment factors in it.

Regarding the lithium carbonate cost increase, we have done very in-depth research regarding the overall industry chain, especially the upstream. We believe the cost increase or the price hike is mainly due to the opportunistic price hikes, and there's no specific big gaps in terms of the demand and the supply of the lithium carbonate materials. Of course, right now we can see some Chinese authorities like MIT have already started to set up some mechanisms to manage the situation. At the same time, we also like to urge the companies in the upstream of the industry chain that they should think more from the long-term benefit of all development of the whole industry instead of manipulate or take the opportunity of the cost increase to increase their price.

Thank you for the questions. Next question comes from the line of Nick Lai of JP Morgan. Please go ahead.

Yes, thank you for taking my question. I mean, two simple questions. First, on margin and second, on export business coming up. Yeah, William and Nathan talked about the GP margin already. Let me switch focus to the OP margin. Yeah, last year, we understand the R&D stands as SGMA increased a lot. I mean, largely due to the top line increase. As we move into 2022, how should we think about SGMA and R&D stands in terms of either dollar term or percentage to revenue? Is it fair to say R&D, should drop meaningfully while SGMA should move more or less in tandem with the top-line sales. And the second question is regarding ASPR. I understand it's probably not a big portion of our total sales, but considering the latest dynamic in Europe and advising stronger renminbi against either dollar or euro, any update on ASPR's round? Thanks.

Okay, thank you, Nick. The first question is about the operation margin. Let me give you a general idea. In general, last year, the strategy we implemented for public finance was to cover our sales and management costs. This is our overall strategy for last year. Of course, we did a good job. We lost a lot, mainly because of our long-term investment in R&D. Let's look at the next few years. This year is still a very important year for R&D. We still have a big strategy this year. we will be able to cover our SG&A. But considering our European business, compared to last year, because we have early investment in Europe, in general, compared to last year, in fact, our investment efficiency is higher. But this year, we will make a bigger investment. This year and the whole year, our investment in R&D will exceed that of last year. This is because there is a lot of long-term R&D, including R&D for the new models that will be launched next year, as well as the adaptation of such models that will enter the global market. So R&D investment will increase a lot. By the end of this year, we expect the development will reach a scale of 9,000 people, which is a relatively large increase compared to now. There is no doubt that we will not compromise on the investment of the development. This is the overall situation this year. If we look at it from a bigger perspective, Regarding the

OP margin. Last year, in terms of the company's strategy, we would like to make sure that the growth profit can cover the SG&A cost. And we believe that through the efficiency improvement and execution, we have followed through this strategy in 2021. In the coming years, we will continue to make decisive investments in terms of the R&D and the infrastructure. Of course, our strategy will stay the same. That is, we would like to make sure we can use the gross profit to cover the SG&A cost. If we look at the EU market, of course, last year, because that was the first year for us to enter the global market, then it means that last year we need to make some advanced investment. We believe that this year the efficiency is much higher than last year. But in terms of the R&D front, we are going to step up over R&D investment. This year, we believe the R&D investment is going to be more than doubling than that of 2021 because we are going to invest in some long-term core technologies and some fundamental technologies as well as new products for 2023 as well as some product adaptation for the global market. By the year end of 2022, our R&D headcount is going to reach around 9,000. And we believe that this is going to be a big increase compared with our current R&D team size. So this is the overall plan for 2022. In terms of the overall strategic direction for the company, our target is that we can achieve a break-even for a single quarter in the fourth quarter of 2023, and we can achieve break-even or reach profitability in 2024 for the full year.

Can I go to you? Can I go to you first?

Okay, so the second question is about our global business, right? You know, actually, right now, every month, we deliver about 108 in Norway. So that boosts our confidence a lot, improves our product competitiveness, and also our business model. But however, since we will kick off our SUD in Europe in the second half of this year, So the contribution of the European market to sales volume won't be very significant in this year. But in the long run, we will continue to develop and improve its product portfolio and service network, establish local user communities, and pursue a high user satisfaction. With that, we believe that market share and sales volume in Europe will come along naturally.

Thank you for the questions. I'll now take the next questions. Please continue. Allow me to take the next questions from Fei Fang of Goldman Sachs. Please go ahead.

Thank you, Mr. Guan, for the opportunity to ask questions. I'd like to ask Mr. Guan to talk about the use of the infrastructure, for example, the power station, the supermarket, Let me just quickly translate for myself.

Can you imagine talking a little bit about the utilization metrics of your infrastructure, battery swap stations, supercharging stations, how often people use it, what's the unit economics, what's the difference between top cities versus lower tier cities? Thank you.

There are some areas where the number of users is relatively dense, so there will definitely be more. There are more than 100 orders before the new year. Of course, there are some high-speed or normal high-speed orders. There are a little less in this area. One day is about 120 orders.

So it's about this level. So, as I said, our Huanquanzhan is a layout that was carried out about one to two years in advance. So we

Previously, I have also mentioned that accumulatively, we have completed over 7.6 million swaps, and it means that the current status for the swap station is that every day we can complete around 30,000 swaps. For some areas with more users, of course, we will be able to accommodate over 1,000 swaps for one power swap station in one day. But on highways, probably in one day, the power swap station is going to accommodate around 10 to 20 swaps per power swap station. Because we have deployed the power swap station network in advance, probably one or two years in advance. Because the design target of the power swap station network is that the ratio between the power swap to the user should be around 1 to 1,000. But if we look at the current power network, especially for the power swap network, we have over-deployed some power swap stations at this moment to make sure we have a much better experience for the users.

Okay, good. Thank you, Fangfei.

Next question. Certainly.

Next question comes from the line of Edison Yu of Deutsche Bank. Please go ahead.

Thank you for taking our questions.

First one, can you give us some sense of the feature rollout cadence of neo-autonomous driving? What kind of features do you think the LiDAR will enable, and when can we expect those to arrive on the car? And then the second question is, about the NEO ecosystem, more broadly speaking. There are reports that you're working on a smartphone. How do we think about what's going on beyond the car? I know there's VR could be a big part. Any thoughts there would be appreciated. Thank you.

好的,谢谢。 我们现在的话,ET7交付的时候, 我们这种交付, First, of course, is to open up the functions of these auxiliary drives. So this full-time technology, from sensing to the whole, all the technology is developed by our own team. So this is the first stage. Of course, we hope to open this NAD's subscription service within this year. In this year's Q4, we can open this subscription service for a part of the users in some areas. This is our current plan.

Thank you for your question. Of course, at the time of the delivery of the ET7, we are going to start to provide the enhanced aid features first to the users. But on top of that, we have already built up the full stack autonomous driving capabilities from the perception to the controlling strategy. So we targeted to start providing the AD as a service probably in the fourth quarter of this year with our NAD technology.

Of course, we will actively explore the possibility of interconnection between the car and the mobile center, because we know that from the perspective of a underlying technology, in terms of intelligentization, including the supply chain, including a lot of software, there is actually a lot of communication with Microsoft. Of course, we have always been actively

explore the possible connections and synergies between the vehicle and smartphones and other mobile terminals. Because we believe that there are lots of synergies between these two products in terms of the fundamental technologies, the supply chain and the software. At the launch of the ETS5 at the new day, we have also introduced some AR and VR technologies as well, and we believe that there should be a lot of room for innovation, and we can also think about some innovative applications in the vehicles.

Thank you for the questions. Next question will come from the line of Xue Deng from CICC. Please go ahead.

Next question is, what's the CapEx budget in 2022? And will you please introduce the detail about the demand direction and the exact amount of money?

Thank you.

Thank you. Yes, as mentioned by William, our gross profit margin already can cover our SG&E expense. And this is also our target for 2022. So our cash on hand will mainly be used to for our R&D activities and also capital expenditures for our new product development and production facilities, sales service network and expansion and also the charging and swapping infrastructures. And overall, also as mentioned in our previous explanations, we will increase our power swap stations to 1,300 stations by the end of 2022. And we will further open 100 new houses and new spaces and 50 new service centers in 2022. And we will further construct our a new park located in Hefei in 2022. So the total expenditure I think is over, could be a big increase compared with 2021. Yeah, thank you.

Thank you for the question. The next question comes from the line of Paul Gong from UBS. Please go ahead.

Yeah, hi. Thanks for taking my question. I'm glad I still have chance to ask, even at this late moment. Yeah, let me just limit my question to one. I want to know more about your thought about the mass market brands. Obviously, you have to compromise some of the features that today NIO has for more attractive pricing points or some cost-compatibility. So among all the features today NIO are offering, including, say, the exterior, the interior, the autonomous driving features, the acceleration, the driving range, the battery swap station, as well as, let's say, the diesel experience and also the surface. So what do you think is the things that you are willing to compromise on your mass market brands that would be reserved exclusively for the new brands and you are not expecting from the mass market brands? Just this question. Thank you.

Okay, thank you, Tao. Yes, indeed, How can we increase the quantity of our products? Each company has its own strategy. Tesla is using Model 3 and Model Y and its early models, such as Model S and Model X, to enter the market in this way. So this strategy is very successful in terms of sales. But we also see the other side, which is if we compare the sales with the previous one, it has dropped a lot. Even excluding the reason for the price drop, it has also dropped a lot.

and we are in a mainstream, a premium market. So our price is mainly 5 to 10 million US dollars.

We can see that in the period of 3 to 5 million US dollars, there is still a very large market share, and at the same time, there is a reasonable margin of error.

like Tesla, Tesla Model 3, Model Y, and so on.

In order to achieve this, you need to define the product, create a very basic framework, including the use of materials, including production, in order to carry out a comprehensive, a fundamental efficiency direction of production.

So, if we think it's natural to look at it, we are going to use a new plan to enter the mainstream mass market between $3 to $5 million.

We think this is a better strategy. In this way, we can see that Porsche, Audi, Volkswagen, Lexus, and Toyota

This is a very successful way to support the market. This is one of our strategies. The premise is to design a product that is efficient and has enough profit. This is the premise. We will not sacrifice profit to invest in the massive market.

Thank you for your question. Of course, if we want to increase our volume and expand our user base, different companies will have very different strategies. For example, some peers like Tesla, they have adopted very different strategies compared with ours. For Tesla, they basically differentiated the Model 3 and Model Y from the Model X and the Model S with a very big price gap. So by doing this, they entered the mass market with the Model 3 and Model Y. So far, this has been quite successful. But at the same time, we have also seen some downside. For example, the sales of the Model X and the Model Y have decreased significantly. significantly despite the product cycle. So we believe there are some underlying fundamental rules of the auto industry. That is, there is a limited bandwidth of a specific brand. It's very difficult to imagine a single brand can actually support the pricing range from from 100,000 RMB to 1 million RMB. It's not feasible, and I believe that this is against the common sense. So for NIO right now, we target the market segment that is around 50,000 to 100,000 US dollars. And if we want to reach down to the mainstream market that is priced around 30,000 to 50,000 U.S. dollars. We believe that this is a much bigger market, and there's a reasonable market size for us to grow, and we can also achieve reasonable growth margin. We also need to take some lessons learned from the Model 3 and Model Y. We understand, of course, for this mass market, we will also need to rethink the fundamental architecture of our product and also need to think about using different kinds of materials and also different manufacturing technologies for our product. Because in terms of the mass market brand, of course, this will need to be efficiency-driven. And for this specific market segment, the price from $30,000 to $50,000 U.S. dollars We believe a more sensible approach for us is to use a new brand to enter this new market segment. And we believe that this is a better strategy for us. We can also see some successful examples in the market with this strategy. For example, Audi and Volkswagen and the Lexus and the Toyota. We believe this can also be a strategy for us to disrupt the market as well. But of course, for the mass market brands, the prerequisite for us is to make sure we can achieve high efficiency and also achieve a reasonable vehicle gross margin.

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