NIO Inc.

Ladies and gentlemen, thank you for standing by for NEO Incorporated's third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Eve Tang from Capital Markets. Please go ahead, Eve. Good morning and good evening, everyone.

Welcome to News Third Quarter 2022 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 Fong, Chief Financial Officer, Mr. Stanley True, 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 today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission, the Stock Exchange of Hong Kong Limited, and the Singapore Exchange Securities Trading Limited. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that news earnings press release and this conference call include discussions of unaudited gap financial information as well as unaudited non-gap financial measures. Please refer to news press release which contains a reconciliation of the unaudited non-gap measures to comparable gap 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 third quarter 2022 earnings conference call. In the third quarter 2022, NIO delivered a total of

31,607 smart electric vehicles, up 29.3% year over year, setting a new quarterly high.

Based on our latest technology platform, NT2.0,

we have launched and delivered three new products, which has improved the competitiveness of our product lineup in all aspects and enabled NIO to enter more premium segments, catalyzing continuous demand growth.

In October, we overcome multiple challenges such as production and supply chain fluctuations, In October, overcoming the production and supply chain volatility, we delivered 10,059 vehicles,

representing a 174.3% increase year-over-year. We will continue to collaborate closely with our supply chain partners to stabilize component supply and further accelerate the vehicle production and delivery. We expect the total number of deliveries in the fourth quarter of 2022 to be between 43,000 to 48,000.

Next, I would like to share some recent highlights of our R&D and operations.

In September, as the show cars of the ET5, a smart electric midsize sedan began to be on display in our stores. Store traffic reached a record high and order intake witnessed a strong growth momentum. On September 30, we officially kicked off the delivery of ET5 and the preliminary user satisfaction rate exceeded our expectations.

In the past few months, Over the past couple of months, Banyan, the digital system of NT2, has iterated and upgraded multiple times with continuous user experience improvement. We have strong confidence in the market competitiveness of the new models based on the NT2 platform. With respect to the sales and service network, we now have 399 new houses and new spaces in 149 cities and

80 service centers and delivery centers in 163 cities.

In terms of the charging and swapping network, NIO has installed a total of 1,210 power swap stations and provided 14 million battery swaps for users. NIO has installed

2,055 charging stations with 5,765 power chargers and 6,077 destination chargers in place. In the meantime, our power map has connected to over 590,000 third-party chargers in China and more than 380,000 chargers in Europe.

Since we entered the Norwegian market last September, our products and services have been well received by local users, and the user community has been growing rapidly, which has laid a solid foundation for and boosted our competency in entering more markets in Europe. On October 7, this year, we held New Berlin 2022, where we comprehensively introduced our products and services to users in Europe, marking our official market entry in Germany, the Netherlands,

Denmark, and Sweden.

NEO Berlin has gained high attention from European users and the automotive industry. We are now organizing large-scale test drives and kick-off user delivery in Europe.

On November 9, 2022,

Yesterday, NIO ET7 won the 2022 Golden Steering Wheel Award granted by the prestigious German magazine Autofield.

As ET7 was voted the best car in the median and upper class category, both of our products and innovative technology have been highly recognized by the users, industry experts, and professional media in Europe.

For better service to European users, we are in Berlin, Frankfurt, Rotterdam, Copenhagen, Stockholm, and other 10 major European cities to build future centers and future spaces, and plan to build 20 hotels in Europe by the end of 2022.

To better serve user communities in Europe, we plan to open new houses and new spaces in 10 major European cities, such as Berlin, Frankfurt, Rotterdam, Copenhagen, and Stockholm. We also plan to install 20 power swap stations in Europe by the year end and another 100 by the end of 2023 so that more users can experience the new chargeable, swappable, and upgradable power system in Europe.

In addition,

We have established an R&D center in Berlin for localized development and deployment of digital corporates and ADAPs to continuously improve the intelligent digital experience of local users.

On September 27th,

NIL announced the collaboration with the Danish Society for Natural Conservation and the Danish Nature Foundation on the Clean Parks Initiative. NIL hopes to actively engage with the local communities, share their responsibilities, and jointly make contributions to a more sustainable future.

In September, NIL published its first ESG report, On September 30, upholding NIO's original aspiration of Blue Sky Coming, NIO released the first NIO Environment, Social and Governance Report 2021, where NIO shared its ESG management practices and performance in 2021. In 2022, we will further invest and deploy in product core technology, charging and sales service networks, and other aspects, and set a solid foundation for long-term competition in the global market. Although the change in the external environment has brought huge challenges to our operations, we believe that the company is capable of focusing on product and technology innovation, while improving service capabilities, further optimizing the cost structure, improving operating efficiency, and providing products and services that are more than expected for global users.

In 2022, NIO has further advanced in product core technologies, charging and swapping network, as well as a sales and service network, which has laid a solid foundation for us to compete in the global market for the long run. In spite of the operation challenges brought forward by the changing micro environment, we believe that NIO is fully capable of staying focused on product and the technology innovations, as well as service capability improvement. while further optimizing the cost structure and improving operational efficiency to introduce more beyond experience products and services to users worldwide.

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 third quarter 2022. Over to you, Stephen.

Thank you, William. I will now go over our key... For the third quarter of 2022, and to be mindful of the length of school, as a reference to RMB only in my discussion today, I encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in the third quarter worth 13.0 billion RMB, representing an increase of 32.6% year over year and 26.3% quarter over quarter. Our total revenues are made up of two parts, legal sales and other sales. Legal sales in the third quarter were 11.9 billion RMB, representing an increase of 38.2% year over year and 24.7% quarter-over-quarter. The increase in vehicle sales year-over-year and quarter-over-quarter was mainly attributed to higher deliveries as a result of more diversified product mix offered to our users. And the sales in third quarter were 1.1 billion RMB, representing a decrease of 8.5% year-over-year and increase of 48.2% quarter-over-quarter. The decrease in other sales year-over-year was mainly due to the decreased revenue derived from sales of automotive regulatory credits, offset by the increase in other revenues in line with the incremental vehicle sales. The increase in other sales quarter-over-quarter was mainly attributed to the increased revenue derived from sales of automotive regulatory credits and increase in other revenues in line with incremental vehicle sales. Gross margin in the third quarter of 2022 was 13.3%, compared with 23.3% in the third quarter of 2021 and 13.4% in the second quarter of 2022. The decrease of gross margin over the year was mainly attributed to, first, the decreased revenue derived from sales of automotive luxury credits with high sales margin, second, the decrease of vehicle margin, and third, the reduction of the sales margin resulting from expanding investment in power and service network. The increase of gross margin quarter to quarter was mainly attributed to sales of automotive factory credits with high sales margin. More specifically, vehicle margin in the third quarter was 16.4%, compared with 18.0% in the third quarter of 2021 and 16.7% in the second quarter of 2022. The decrease of vehicle margin year-over-year but mainly attributed to the increased battery cost per unit, which was partially offset by decrease in subsidization in user vehicle financing arrangements. Vehicle margin remained stable quarter of a quarter. Earned expenses in third quarter were 2.9 billion RMB, representing an increase of 146.8% year-over-year and 37% quarter-to-quarter. The increase in R&D expenses year-over-year and quarter-to-quarter was mainly attributed to the increased personal costs in research and development functions, as well as incremental design and development costs for new products and technologies. XGN expenses in third quarter were 2.7 billion RMB, representing an increase of 48.6% year-over-year and 18.8% quarter-of-quarter. The increase in SG&A expenses year-over-year and quarter-of-quarter was primarily due to, first, the increase in personal costs related to sales and the general corporate functions. Second, increased expenses related to the company's sales and service network expansion Third, increase in marketing and promotional activities to promote our vehicle in China and Europe. Last, for operation in the third quarter, 3.9 billion RMB, representing an increase of 290.2% year-over-year and 36.0% quarter-to-quarter. other losses in the third quarter of 2022 was 495.6 million RMB, representing an increase of 528.2 million RMB from other income of 32.6 million RMB in the third quarter of 2021, an increase of 305.6 million RMB on the second quarter of 2022. The increase of other losses over the third quarter of 2021 and second quarter of 2022 was mainly due to loss from the devaluation of our overseas RMB-related assets as a result of the depreciation of RMB against US dollars in the third quarter of 2022. That loss In the third quarter, about 4.1 billion RMB, with an increase of 392.1% year-over-year, and 49.1% quarter-over-quarter. Net loss attributable to NIO's annual shareholders in the third quarter, about 4.1 billion RMB, with an increase of 44.9% year-over-year, and 50.9% quarter-to-quarter. Our balance of cash and cash equivalents, district cash, short-term investment, and long-term deposits were 51.4 billion RMB as of September 30, 2022. Now, this concludes our prepared remarks. I will now turn the call over to the operator to proceed with our Q&A session.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. For the benefit of all participants in today's call, please limit yourselves to two questions, and if you have additional questions, you can reenter the queue. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ming Sun Li with Bank of America. Please go ahead.

Hello, William, Stephen, and future managers. I have two questions. The first question is about supply chain. I would also like to ask William to update us on the situation of the supply of spare parts and chips, which were more tense before. Let's assume that there is no impact of the epidemic in Hefei in the first quarter. In a normal month or a quarter, how many cars can be supplied by the manufacturer of spare parts? Let me translate this question. Previously, your capacity is kept by component supply, especially the welding part as well as the chips. So could you also update your latest capacity, component capacity, if there is no COVID control impact? Thank you.

Thank you, Min. Indeed, in October, our entire exchange rate and our own production and our own forecast is really a few thousand less. In October, there are several factors of influence. This has some influence on our recovery price, but the recovery price should have been solved in November. Then the second one is that we actually use our new EDS factory for our ET5. This is a new factory on the edge of our F2. The automation of this factory, EDS factory, is very high. We can support the entire factory with about 30 workers. But the climb in this has really affected a lot. It probably affected about 2,000 to 3,000 of our output. Then there is another one. Of course, the epidemic has really affected some This probably affects the production capacity of more than a week. So if these factors are added up, we will have a lot less production in October. Of course, for November, we have already restored production. We will add a production line to EDS next week, and it will climb up to the end of the month. Thank you, Ming, for your question.

Yes, regarding the production in October, there has been some impact due to several reasons, and the impact is around several thousand. One factor is because of the subframe, just like you mentioned, but we expect that this will be resolved in November. And then the second reason is the new EDS for ETS5. We actually have a new EDS plant next to our Factory 2, and the automation level of the new EDS plant is very high. We only need to have around 30,000 people to support the overall operation of these new EDS plants. Due to the ramp-up volatilities of the EDS, overproduction is affected by around 2,000 to 3,000. And the third reason is the COVID-19 situation. I believe that this has impacted the production for around one week. So, overall speaking, all those factors have affected the production in October, but we have resumed normal production now, and we expect to have a new production line for the new EDS next week, and probably by the end of this month, this new EDS line will be ready, and we can ramp up the production. We have already solved and I believe that probably in December, the ET5 production will not be an issue. And as of now, I don't believe that there is any production issue for the ET7 and the ES7.

Thank you, William. The second question is, what is the impact of the US semiconductor chip restrictions on the company and the industry? Because you can now sell A800 chips to China, is there a difference The US semi-band, how will this impact the development for the industry and also NIO? Besides, NVIDIA currently can sell 800 chips to China. If compared to A100, how do you see the impact to the progress of our autonomous driving training.

Thank you. Because the chip of WIDA is mainly designed for our zero-end AI training chip. Currently, we have enough A100 chips in our hands to fully meet the needs of our long-term A1 training. Thank you for your question. Regarding the CHIP Act,

I believe that this many affect the chip used for cloud training. Right now, I believe that we have sufficient chips like the A100 to satisfy the need for the AD training in the long run. But at the same time, we're also exploring different opportunities, for example, where considering working together with some cloud service providers, and we are also evaluating some long-term solutions to support the iteration of our AD solutions. As of now, I don't actually see any impact on overall operations. Thank you, Min.

And next question comes from Paul Gong with UBS. Please go ahead.

Thank you, William. I have two questions. The first question is, you just mentioned that the consumer satisfaction of this ET5 is more than expected, but you didn't say that such an order is more than expected. I would like to hear what you think about the order situation of this ET5. So my first question is regarding the E85 order. Just now you mentioned that the satisfaction level has beat your expectation, but you didn't mention how the orders intake has been. How do you see the orders intake since the launch and especially after the late October, after Tesla launched another wave of price cuts? Do you see any impact from there? This is my first question.

Thank you, Paul. Indeed, this ET5 order, because now everyone is concerned about when it will be delivered, so indeed, this ET5 order is not a problem for us at present. Of course, we are still focusing on the production of this climb and this, including everyone knows that ET5 steel, that is, all of our new cars are in the early stages of steel delivery, we are very concerned about its mass climb process. So this is why we have to emphasize it. But the entire demand of ET5 is undoubtedly very strong. This is the same as what we expected. Of course, we must expect more and better. But from another perspective, we don't want users to wait too long. Tesla's price drop should be said to us because it has always been a price drop. So this is not so new to us. So we didn't see any special changes in our demand.

Thank you, Paul, for your question. Of course, I understand regarding the E25 orders, the more important thing for us is right now to find a way to deliver the E25 to users and shorten the waiting time for the users. So generally speaking, order is not an issue for us regarding E25. Regarding the ramp-up of E85, because this is still at a relatively early stage, so we would like to pay more attention to the quality improvement and make sure we can stabilize the quality of the E85. The demand for E85 is very strong, as we expected. Of course, if the order can be even stronger, the stronger the better. But at the same time, we don't want the users to wait for a really long time. If we come back to Tesla, Tesla often cut its prices, so we don't actually think this affects the users' demands regarding new products. If we look at the specific products, like the Model 3, there's a big press gap compared with other products. And if we compare the Model Y with other ES6, we don't actually believe we're competing in the same segment. So if we look at the pricing of our product and the positioning of our product, strictly speaking, we're not competing with Tesla in the same segment.

Next question. I would like to ask, this is a stage. At this moment, there will be the listing of new products and the opening of a new European market. Is it a short-term situation or is it a structural or even a trend-based further increase? Is there a general So my second question is regarding the expenses, including both R&D and S&A. It seems to be climbing up a lot Q&Q this quarter. Is it just temporary because you have new products and trying to explore the new market in Europe, or is it more like structural? And if so, what is your expectation for its trend going forward?

Hi, Paul. This is Stanley. The increase of SQ in Q3 compared with Q2 is because our sales and service network in China and also in Europe, since we entered more country market in Europe this third quarter, and also some marketing and promotion activities, more marketing and promotion activities in Q3 compared with Q2. From the long term, I think also you can check this result from Q3. SGA's percentage of sales revenue will continue to be optimized along with the improvement of our operation efficiency. I think in 2023 and also the coming years, you will see a stable trend for further improvement of this ratio. Thank you, Paul.

In terms of R&D, I would like to add that we have seen a lot of growth in R&D costs in Q3. We are still in the R&D phase, especially with our new brands, including batteries, chips, and other R&D investments, including personnel, testing, Regarding the R&D expenses, yes, we do see some increase in the third quarter compared with the second quarter.

This is mainly because of our new product development cadence as well as other initiatives like the battery chipsets and the test and the validations when we enter new markets as well as the employee cost and the EGD cost. This is actually part of our plan, and we don't think that there is any other additional R&D expenses that is out of the planning of the company.

But in terms of the development cost, basically, our entire development layout and our work is basically stable. We should say that the strength of the development investment in almost every quarter

Regarding the R&D operations, I believe right now we have entered a relative stable phase regarding the R&D development work as well as the operations. So for us, we believe when it comes to the R&D expenses including the human resources cost, it will stay at a relatively stable level. For example, probably every quarter it should be around 3 billion RMB. Of course, at the same time, we will continue to improve the system efficiency of our RMB efforts, but for some time, for now, I believe it will stay at this level to make sure we can have more products and technology innovations to provide better experience for the users.

So what is roughly the ratio of Europe account for this quarter's SG&A?

Oh, yeah. Yeah. Hi Paul. You know, Europe is now at quite initial stage. So currently the overall expense is not a big percentage of the overall SG&A. Yeah. Now the sales and marketing team for our Europe business is about 500 headcount. So yeah, that's basically the information for our Europe business.

Okay, thank you very much.

Our next question comes from Tim Seale with Morgan Stanley. Please go ahead.

Hello, everyone. Thank you very much for answering my question. Congratulations to E2 for receiving very good market feedback. I have two questions. The first question is to follow up on the overall production delivery part. As I mentioned earlier, it is a guidance for the fourth quarter. In fact, it implies that in November and December, there will be a delivery level of about 17,000 to 19,000. William mentioned that the speed of our current reproduction is very good. Can you share with us, at the end of the year, What is the level of the production of two factories? What is the expected speed of the production of one unit next year? In addition, are you worried that the production bottleneck will become a structural problem for a long time? Because it seems that the overall domestic situation is still relatively strict. In addition, there are more players in the market and more models. So my first question is about the production and delivery. So I think based on the fourth quarter guidance, basically the average delivery in November, December could be around 17,000 to 19,000. So what would be the peak monthly output NIO can reach by end of this year? and how would the trajectory look like into first half next year? With the supply chain bottleneck, the kind of structure issue given the unchanged COVID policy and more new model, new players, and likely longer time for suppliers to expand their capacity to improve their production yield. Thank you, Tim. Thank you, Tim.

Generally speaking, I think from our point of view, In terms of the prevention and control of the epidemic, there are some short-term pressure fluctuations. This is really hard for us to predict. Please understand that it is very difficult for us to predict this. But from the perspective of supply chain and our own whole car production, we should say that the whole chain should be able to support our entire delivery target next year. The production of the whole car is no longer a problem. There will be some problems with the supply chain. For example, some of our 12-parts of the entire delivery volume will be subject to some constraints of the chip of our power semiconductor. Its maximum amount, such as the amount of the chip of our carbon fiber, it has a certain There is a limit to the total quantity, but we think that from next year, these should be all right. So from the perspective of supply chain and production, from a general ability, if we don't consider the impact of the epidemic, I don't think it will be our bottleneck.

Of all speaking, it's quite difficult for us to make an estimation regarding the impact of the COVID control and prevention measures on the operation of the company. But if we talk about the supply chain and the vehicle production, I believe that the vehicle production capability should be able to meet the delivery target we set for next year. And if we speak of the supply chain, We do see some challenges. For example, in December, we will face some constraints regarding the supply of the silicon carbines. But if we look at 2023, I believe that the supply chain and the production capacity have the capability to meet the demand and the target we set up for ourselves.

From the perspective of next year's overall production, I think it will be a very For 2023, I believe for the vehicle production, we will have a relatively sufficient production capacity to meet the demand.

And if we can achieve a 150,000 production capacity on one shift, I believe the production of the vehicle will be carried out in a very smooth manner.

Okay. I have a second question for Mr. Guan. In the past period of time, I have observed that it seems that the product life cycle of the domestic smart electric vehicles The fuel car ratio seems to be shrinking rather than stretching. If we consider the large amount of research and investment and the cost of manufacturing in the early stage, I would like to hear from you how you see the stability of our so-called smart electric vehicles in the medium to long term, whether the market was originally expected that the stability would be between 20% and 25%. Is this too optimistic? Or how do we look at the long-term profitability? So my second question is about the profitability because based on our own observation, we noticed the life cycle with smart EV in China is actually getting shorter rather than longer than traditional cars. So considering the very sizable R&D and manufacturing investment, what would be the more reasonable terminal growth or operating margins? And should we, we should look for, especially I think the competition is getting more intense. Thank you.

Thank you. In this regard, the characteristics of each company may be different. For example, from NIO's point of view, if you look at it, all the software and hardware of a car are on the same platform. For example, all the cars in our NT2 are the same. All the cars in our NT1 are the same. Also, our battery packs are all Unified Pack. Our power system is actually a very limited combination. We are only in terms of this kind of shape and shape. In terms of this stall, we have some differences to meet the needs of different users. So in general, we think we have such a research efficiency is still very, very high. Of course, I don't think this is a big problem. If you look at it from NIO's point of view, even considering that the battery has increased so much this year, although we have raised some prices throughout the year, we have not raised so much. We can still maintain or still have an OK price margin. In fact, we used to have a price margin of more than 20. If we assume that the battery If it can fall back to a normal, rational price, then we don't think that 20% to 25% is a problem. Of course, in the long term, with the integration of hammer and hammer, our investment in battery chips, we feel that we still have room to improve the efficiency. So from the point of view of our overall long-term strategy, we think that the efficiency between 25% to 30% We can see it. It's not something we can't see. But the massive market will have a bigger challenge. In fact, if we look at the massive market, if we add all the companies together, I guess the overall profit might be negative. The overall profit is negative. That's my general opinion. Of course, because of the battery, Thank you for your question.

Regarding the smart electrical vehicles, I believe we have a much faster iteration cycle compared with the traditional vehicles. And we believe that the iteration cycle should be around three years. And this is how we're iterating over smart technologies in NIO. Of course, different companies have different strategies and the different iteration cycles. But in NIO, if we look at other technology platforms and we believe with one technology platform so we actually have the same kind of hardware and software for all the vehicles based on this technology platform. So for example, previously we have explained we have the new technology 1.0 and the new technology 2.0. for all the products based on NeoTechnology 1.0. They have the same kind of software and hardware when it comes to the smart technologies, and that's the same for NeoTechnology 2.0. At the same time, we also have the unified battery pack, and we also share a lot of commonalities when it comes to the vehicle platforms. Previously, we mentioned we would like to offer different kind of top hats to meet the diversified demands and take for different users. So if we think about the technology platforms and of a vehicle platform strategy, I think the 20 to 25% vehicle cost margin is not a very big challenge for us. But if we look at the 2022 specifically, the cost of the battery skyrocketed. So, of course, at the same time, we have increased the price of our products. And even against this backdrop, we have, I believe, achieved a relatively reasonable vehicle gross margin. Previously, we have also achieved a 20% vehicle gross margin in the past. In the past, we didn't have the battery cost increases, so this is a relatively reasonable vehicle cost margin for other products. In the future, if the battery cost can come down to a reasonable level, I think it's possible for us to regain the 20 to 25% of vehicle cost margin with other products. In addition to that, with all the vehicle technology vertical integration, including the battery, the chipset, I believe we will have more room to improve for the vehicle cost margin, and it's possible for us to achieve a 25 to 30 percent of vehicle cost margin. If we look at the mass market, I believe the challenge is much bigger, because if we combine all the companies in the mass market right now, I think the overall cost margin is actually negative. Of course, BYD is an exception because they have the vertical integration of the batteries and other technologies. So if we do not have the vertical integration capabilities in the mass market, it will be quite challenging to survive in the mass market. But if we have these capabilities in place, I think it's possible for us to also achieve 20 to 25% with other mass market products.

Thank you, Kim.

Thank you.

Our next question comes from Bing Long with Credit Suisse. Please go ahead.

My question, first one is about your guidance. It actually has been guided through things, number one. the 85 will be higher volume than PNW 3 series. And then two guidance is that you will break even in the number four quarter next year. And then the three guidance is that this year you have an 18 to 20% cost margin for the vehicle. Did you maintain this guidance for this? Thank you.

Thank you, Wang Bin. In general, we still maintain this direction. In terms of the next four seasons of breakeven, from our current perspective, we think that the core business of NIO is that we have no problem with the next four seasons of breakeven. We still maintain such a plan. Of course, as you all know, we are developing two new brands. We also have batteries, chips, Thank you.

Thank you, Bing, for the question. Of all speaking, that's still the direction we're aiming for. For the core business of NEO, we are still aiming to achieve break-even in the third quarter of 2023, and this is still our plan. At the same time, we're also working on different strategic new business. For example, we have two new brands, and the battery chipset and the smartphone business at the same time. So if we look at 2023, the investment for those strategic new businesses is going to be around 3 to 4 billion RMB. It means that probably around 1 billion RMB every quarter. If we take all those strategic new business aside, we are still very confident to achieve a break even for new core business in the fourth quarter of 2023.

But the second question, the ET5 is better than the BMW 3. I think we are still very confident. Of course, this is not a guide. This is our other co-founder. He is in a market marketing activity. But I think from my point of view, I think we have such an opportunity.

So for the second question regarding ET5, you mentioned previously that one of our co-founders mentioned that the ET5 volume is going to exceed the volume of the BMW 3 series in an event. And of course, this is not a guidance for us, but because I believe the T5 is much, much better than the MW3 series, so we're very confident to achieve this target.

The third one is the net profit. If we talk about this year, there are indeed challenges. We mainly have to do with the price of the battery. As you all know, the price of carbon dioxide in recent years has remained high, and it has It has increased a lot. It was about 400,000 when it was the lowest. Now it is at a level of about 600,000. Because our battery price is linked to this. This really affects us. It also affects our Q4 about a few points of profit. This is really out of our control. We can't say that the price will rise again. So we will have some pressure. But to maintain the stability of the profit, we can do this. Relatively speaking, I think the price is not a supply and demand problem. I don't think any electric vehicle company in China can't afford batteries. You may not have heard of it. Because you can't buy batteries, it affects the delivery. There is no such thing. So I don't think it's a supply and demand problem. So let's take a look. I don't think the price should go down. But when is the right time? It's hard for us to predict. But it has a great impact on us. As you know, each battery pack has more batteries. On average, it's about 80 degrees, almost 90 degrees. So if the price of carbon dioxide is still so high, it will really affect our net profit. We can give you a prediction. That is, a price of 100,000 yuan per year is almost two points to our net profit. Carbon dioxide. Carbon dioxide is almost two points to our net profit. So if it goes down from 600,000 to 400,000, then we have a net profit of only four points. But if it can go down to a reasonable level of more than 100,000 yuan, For the vehicle cost margin in 2022, I believe there are still many challenges for us, especially when it comes to the lithium carbonate cost. Right now, the lithium carbonate cost still stays at a very high level.

Previously it has dropped to around 400,000 RMB and now it is going back or actually reached a new high that is around 600,000 RMB. This has significantly affected the battery cost and so for us this is actually out of our control and it's very difficult for us to predict. I believe we can still remain a relatively stable vehicle cost margin in the fourth quarter compared with the third quarter. For the lithium carbonate cost, I would like to probably share some insights. I don't think the price or the cost of the lithium carbonate is due to the supply situation. Because right now, if you look at the car companies in China, I don't think there's any car companies that cannot deliver their products because of the battery shortage. So, of course, in the future, we believe the lithium carbonate cost will go down, but we cannot predict when. This has a relatively big impact on us because for all the products, we have a relatively high demand battery capacity. Averagely speaking, for each of our vehicles, the battery is around the 80 to 90 kilowatt hours. So if the lithium carbonate cost stays at a very high level, this is going to have a big impact on the vehicle cost margin. For us, maybe I can give you some numbers which will probably help you to understand the situation. If we think about 100,000 RMB cost for the lithium carbonate, this is actually affecting our vehicle cost margin by around 2.02%. And if we can see the lithium carbonate cost drops from 600,000 to 400,000, then this is going to improve our vehicle cost margin by around 4%. So if the lithium carbonate cost can drop to even lower, probably around 100,000 RMB, which is a reasonable price for the lithium carbonate, then it means that our vehicle gross margin can improve by probably around 8%. So this is the reality we are facing.

Okay, thank you. I have another question. The last question is, we saw that ET5 seems to be going to be delivered in March. It seems to be a copy of our future Model 3. My question is, which model will our future Model Y be? Because there are reports from the media that we will release an ET5 version of the front-end version or a wagon version. Do you think this model will appear in the future in December? Let me translate it. Actually, we just went to some dealer check, and at 85, they will press order today. You actually can only get a car in February or March. It's probably a better selling product to expand your Model 3. So my question is about what's your Model Y? We from MediaLatina and Leo may launch a product called 85 Wagon, and we think it's going to be showcased in the upcoming Leo Day in December this year. Thank you.

Thank you, Huang Bin. In the first half of next year, we will launch five models, so there will always be one model that belongs to Model Y. But what I mean is that we still have to look at the total quantity. In fact, our overall strategy is that we pay more attention to the total quantity on the entire platform. If we look at it from the perspective of NIO's strategy, in a premium market, We believe that using a more efficient way to meet the individual needs of users is our overall philosophy. So if you imagine the first half of next year, we will have eight models. So we believe that it can meet the needs of users in the range of 300,000 to 500,000. In addition to MPV, we do not have MPV. to meet the needs of this user. We think this is our overall strategy. I hope you can look at it from this perspective. But I believe that the amount added can still meet our expectations. We don't expect a certain car to reach the level of tens of thousands of units per month. In China, it can reach tens of thousands of units per car. This is not our strategy. If we have more than 10,000 units per month,

So for the product lineup in the first quarter of next year, in the first half of next year, we're going to have five new products. And I believe probably one of them is going to be like the Model Y to Tesla, like you mentioned. But for us, we focus more on the overall volume of all the product lineups. We are in the premium market segment, so our philosophy is to satisfy the diversified user demand with high efficiency. In the price range from $300,000 to $500,000, we will provide different products to satisfy the diversified user demand and the taste. So I believe with our product lineup we should be able to achieve a good of all delivery volume that can meet our expectations. I don't actually expect that one product can sell over 100,000. units in China. For example, for EG5, if it can sell probably over 30,000 units per month, it's going to be a very common streetcar, and I don't think this is good for the EG5 or for NIO.

Massive market, different story. For the mass market, this is a different story.

We just had a meeting today with the mass market team, and for us, we believe the mass market product can sell probably over 50,000 units per month.

For one model.

For one model, because this is different market segment and different target user group.

Thank you, Wangbin. Thank you.

Our next question comes from Jeff Chang with Citi. Please go ahead.

Hello, William. I'm Jeff from Huaxi. I want to ask a short question. It's about our goal for the fourth quarter. If we look at the minimum 43,000, and this climb is linear, it means that there is an increase of 37 points per month. That is to say, the peak value in December is about 18,800. I would like to ask, first of all, do you think it is a linear climb or maybe more weight will be placed in December? Maybe in December, it will break through 20,000. This is the first question. The second question is, whether December is 18,000 or 20,000 or whatever, do you think ET5 My first question is about the sales volume growth into November and December. So in order to meet our median quarterly target, 43,000 units, and if the month-on-month improvement to be linear around 37%, we should be reaching around 19,000 units monthly run rate by December. So from which, could you break down the volume of ET5? And the second question is, if this ramp-up pace is going to be non-linear with most of the weights happening concentrated in December, so could you tell us what kind of elements will be determined our run rate overshoot in December, but not in November. Thank you.

Thank you, Jack. In November, there is still a process of escalation from the perspective of ET5, including EDS, including itself. There is also a very natural escalation process. In December, we think it can basically, in addition to the influence of the chip, I think it should be more than the amount you just said. So in general, of course, December will definitely be more productive than November. I think we still hope that December can break through the goal of 20,000 units a month. This is our general idea.

Thank you, Jeff, for your question. In November, we will still need some time to ramp up the production, including ET5, considering the factors I just mentioned, like the EDS. In December, except the silicon carbide I just mentioned, I believe we will have more production compared with the production of November. Of course, in December, we hope that we can still achieve over 20,000 production run rate.

Thank you. No more questions. Thank you. Thank you.

The next question comes from Nick Lai with JP Morgan. Please go ahead.

Good evening. Thank you, William, Stephen, and Mr. Guan. I have two simple questions. Incrementally It will increase by about $3 billion. If we look at 2023 and 2024, the capital of the whole year will be cash-bound. and the change in the DILTA of this year will increase or decrease, which part? So we see that the cash on hand is enough to support the operation in the next few years. So we can talk about the cash from this year and the DILTA of this year. If the CB is about to expire, we can also consider this. This is the first question. The second question is still related to the chip issue. I mentioned earlier that Let me check my two simple questions. Really, the first question is about the cash flow and the cap as a patient as we move into 2023 and 2024 and also take into account of incremental investment cap as well as potential RCP. The second question, again, is on the AI and chips price strategy. And we can just talk about the potential alternative solution. We have enough stock of NVIDIA A100 chip, and we're also looking for cloud solution. That's related to our algorithm, but what about the chip that's being used in the car? Thank you.

Hi, Nick. This is Danny. As introduced by William and myself, we will further improve our SGA operating efficiency. And furthermore, our R&D expense will keep stable compared with, relatively stable compared with 2022. So operating cash flow-wise, I think we are quite optimistic to achieving a positive working, like operating cash flow in future years. So our cash burn mainly depends on the capital investment. Now we are planning our next year's budget. And from that, generally, I think the total scale of CapEx in next year will not increase so significantly compared with this year. But you know, we are planning more like sales and service network, and also we are planning more production and also supply chain capacity. So at this moment, I won't give you the clear guidance. And we are also confident that our cash on hand can supply our ongoing operation till breakeven is finally achieved. Thank you.

Yes, so in general, we know that there are many uncertainties in the market now. In general, we believe that with our current cash reserves, plus some reasonable support from banks, we should be able to have enough confidence to go to the company Of all speaking, we understand there are still many uncertainties in the market, but I believe with our current cash reserve and also the bank facilities, we should be able to support the company's operation until we break even.

So we don't think this is going to be a huge challenge for the company.

As for the chip issue, we have already talked about the A100 training chip, the cloud-based training chip. As for the car-based chip, I can also briefly talk about the progress. When we were the first in the world to launch the Alwin chip from Inuita, it was six months earlier than our peers. We have a very close partnership with Inuita. On the other hand, we have been actively developing our AD chips since last year. Currently, we have a team of 500 members on this project. The progress is still very smooth. In fact, everyone should be very clear that the relationship between the AD chip and the algorithm is very high. Regarding the chipset, previously we have already addressed the AI training chipset that is the NVIDIA

and now I'd like to probably elaborate more on the onboard chipset. We are the first company in the world to launch our product that is equipped with NVIDIA or Ring, which is actually six months earlier than other companies. We also have a very close collaboration with NVIDIA, But at the same time, last year we have already kicked off the R&D of over AD chipsets. Right now we have around 500 people working on the AD chipset. I believe it is commonly acknowledged that AD chipset is closely coupled with the AD algorithm. if we can use the AD algorithm to define the design of the AD chipset, the overall efficiency can be significantly improved, which can also contribute to other glucose margin. The overall progress of the AD chipset R&D is on track, and we have seen some positive achievement from the team.

My next question comes from Jane Chang with CICC. Please go ahead.

I would like to ask a few questions. The first question is about the production climb. Due to the complicated external environment, there are a lot of difficulties in the production climb. If we look at it in the long term, will we consider moving from the current production mode to self-sustaining production? I don't know if there will be any difficulties in the future if we want to get the production quality. And if this mode of transformation will have certain advantages for our new cars and the cost of manufacturing. This is the first question. The second question is about the investment and boundary of development and CapEx. The current financial situation is not very good. Considering the competitive environment in China in the next few years, when it comes to investment in R&D and capital investment, we need to consider more conservative strategies. We also need to consider whether we can make more flexible adjustments in terms of our organization and price. So my first question is about in a current external environment, everyone encountered a lot of difficulties in production. So in the longer term, will we consider switching from OEM mode to self-built production? Are there any difficulties in obtaining qualification and will it optimize our new product, the ramp-up speed or manufacturing cost? And my second question is regarding to R&D investment and capex about the boundary of our in-house R&D. As we can see that in the third quarter RMD extends further extends to 2.8 billion RMB. So consider the current capital market environment and the much more intense competition in Chinese EV market in a few years. Will we adopt a more conservative strategy for RMD and capex? So under what circumstances we will adjust our current strategy? and whether our organization is flexible enough to adjust. And the last question is about just mentioned NPV models. So what do we think of the NPV market? Will we launch the new product pipeline in this segment in the future? That's all my three questions.

Thank you. The first question is that we, the F2 factory, are cooperating with JEC. Our current cooperation is quite good. At present, we don't think that the production of the whole car is not our bottleneck in the short term. So we mentioned earlier that we already have a capacity of 300,000 units per shift. Two factories have 150,000 units per shift. Imagine if it were a double shift, you could double it. So in the short term, we think that in the short term, within a period of time, it can support the production of our entire company. We do have some problems in terms of supply chain. Of course, this is not the problem of our company. The entire industry has such pressure and fluctuation problems. Of course, with our entire output, more and more. In this regard, we should also have some anti-risk capabilities. The second question is, of course, we will have our own boundary, that is, the entire level of cash, the cash that we take with us, the investment of research and development. As we mentioned earlier, we will basically have an investment of about 30 billion per quarter, which will include all our research and development investment. Of course, in the case of CapEx, we will also For the Factory 2, we are still working together with the JAC. I believe our joint manufacturing cooperation has been quite positive.

Regarding the vehicle production, I believe the vehicle production capacity can support the company's delivery target in the short term. Previously, I've already mentioned that for one plant, we should be able to achieve 150,000 units under one shift. And if we combine the two plants together, the factory one and factory two, then it means that under one shift, we should be able to achieve a production capacity of 300,000 units. If we double this two shifts, then the production capacity can also be doubled. When it comes to the supply chain, of course, there are some volatilities for the whole industry, not just for NIO. But as we ramp up our production capacity and delivery, I believe we have the capability to mitigate the risk of the supply chain. For the second question regarding the boundaries of our investment, previously I have already mentioned that we do have a sufficient cash reserve to support the company's operations. And when it comes to the overall investment for R&D, every quarter we expect to have to invest around 300,000 R&D for 300,000 actually for three Three billion, sorry. Every quarter we expected to invest around three billion RMB for R&D efforts. So this includes all the R&D initiatives we have explained previously. For the CapEx, we've well improved the efficiency on the CapEx investment, and we do have a very strict management regarding the finance and the investment of the company.

Okay, with regard to the MPV market, our strategy is very simple. In the short term, we have no plan to launch an MPV model. Of course, long term, we'll keep monitoring this market. I've also noticed that, recently, this market is very hot. From the supply side, several Chinese brands have launched their high-end MPV models. But from the demand side, at least right now, the MPV segment still remains a niche market. That's why we would like to keep more clean and then decide what to do in the next several years.

Our next question comes from with HSBC. Please go ahead.

Thank you, Manager Chen. Thank you for sharing. I have two things I'd like to follow up on. We've just talked about interest rates and smart value. I'd like to ask about the space for interest rates to increase next year. This is mainly due to the increase in the scale. We can see that MIX has increased a lot. If EP5 sells more at the MIX angle, it may go down a bit. In the break-even of Q4 next year, our Manager Chen's assumption How much do you think it is? Is it 600,000? Or do we need to do some normalization next year? And the second question is about smart driving. What is the time table for us to push the ability of the city scene? When can smart driving become a support for us to help sell cars? I got two questions. First is to follow up on the margin side. So next year's gross profit margin improvement, will that be mainly coming from the increasing economic scale? Could we have some quantification over there? Because we see from the mix side with more 85 in the mix could be coming down a little bit. And also we talked about a Q4 breakeven. Does that based on the current lithium price assumption or in our Q4 breakeven assumption, that basically making normalizing of the lithium price. And the second part is to ask, what's the city pilot on the autonomous driving side? What's our timeline to push for city pilot? And when do we expect our autonomous driving capability to improve from a hub selling vehicle item to support materially on the margin side?

Thank you, Yuchen. At present, the price of carbon dioxide is not as expected. There is a significant decline in Q4 this year. As I said before, I don't think this is a This is a supply problem. In fact, there are no companies that can't afford to buy batteries. They can all afford to buy batteries. Of course, we have seen that in the past, there have been some new products like this. We ourselves think that next year, if the amount of carbon dioxide produced by coal is not the same as the amount of carbon dioxide produced by coal, we think it should fall back to a range of 300,000 to 400,000. Thank you, Yuchen, for your question. As of now, of course, the lithium carbonate cost is not going down as we expected in the fourth quarter.

But like I explained previously, I don't believe that this is a supply issue because if we look at the market right now, all the car companies can actually get sufficient supply of the batteries. For us, regarding the lithium resources, we have seen some lithium resources enter the market in the past year, in the past, and we expect probably next year the cost of the lithium cabinet is going to be around 300,000 to 400,000 RMB. When it comes to the budget planning of the company, of course, we would like it to be more conservative, so our assumption is around 400,000 RMB. This is basically our judgment regarding the lithium cabinet cost probably for the next year.

AD, as a service, needs some time to improve its efficiency. But some of it is due to the development, some of it is due to the development of functions. But there are also some legal aspects that need to be further matured. We have recently seen that the Ministry of Public Security and the Ministry of Public Security have just launched some four points. This is of course a relatively positive signal. For the autonomous driving, I believe we still need some time to

see the contributions of autonomous driving to the vehicle gross margin and the overall gross margin. There are several factors. The part is because of the feature and function development and the part is because of the legislation. Recently, we do see some positive progress on the legislation front. For example, MIT has launched some pilot programs for the autonomous driving, and we believe it will still need probably one to two years to get mature when it comes to autonomous driving technologies and also the legislations. So in the short term, we expect probably there will not be any significant contributions from the autonomous driving to the vehicle cost margin and the overall cost margin.

Thank you.

Thank you.

Our next question comes from Shin Chi Yin with CIDIC Securities. Please go ahead.

Hello, everyone. Thank you for answering my question. I have two small questions. The first question I would like to ask is about 3G storage. We see that the storage of 3G storage is 67 billion This number is the highest in the past few seasons, and then compared to the second season, it is basically three times. So I want to ask if this means that there are about 10,000 cars like this in our asset end compared to the second season. This is the first question. My second question is to ask about ET5. This car is indeed very popular recently, but we also recently saw some So my first question is about inventory. So the inventory is around 6.7 billion RMB on quarter three. It is nearly doubled compared with quarter two. So does this number imply around 10,000 more inventory cards on your balance sheet? My second question is about 85. It was really hot on the September, but recently we see some negative comments and news on the social media because of its poor performance on energy efficiency. So I was wondering, what's your next move to deal with the consumer's concerns? Thank you for taking that question.

Hi, Xingchi. This is Stanley. For the inventory increase in Q3, I think mainly two reasons. One is about our increase of inventory cards in Q3. Our production was impacted by our rear subframe in Q3, so we increased the production of ES8, ES6, and EC6 in Q3. Secondly, it's because of the increase of the component inventory to secure the production in the coming months, we stored more key materials like chips and also other raw materials in Q3. So all those factors lead to the increase of our inventory stock.

Yes, the second question is that because of 1T5, in fact, it has a greater impact on the power consumption of different tires. If you go to our 1T5, you choose different tires, you can see that there is a lot of difference. Some users may not really care about this. If you go to choose the performance tires, it is true that it is still very different from the low rolling type tires. It provides a wide range of choice of people. In general, the performance of ET5 is quite good. If you choose the basic group of people, the long-term line of people, indeed, we also remind our users that if you are more performance-oriented, you need to enjoy ET5's acceleration within 4 seconds, and so on. You really enjoy the value of this, this, this, the value of this control, and this, I'll be finding the second question.

Yes, for the ET5, different tires may have a different impact and a different performance when it comes to the power consumption. If the users choose a performance tire, then the power consumption will be higher. But if the user chooses the long-range tire or the low-resistance tire, then the power consumption performance is going to be much better. So we would also like to remind all the users if you really enjoy driving and handling and you would like to experience the acceleration of EG5 within four seconds, then of course you can go with the performance tire. But if you care more about the drive range, then it's better for you to go with the long range tire which will have much better performance when it comes to the range.

I think there are no further questions at this time. 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 news 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.

The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.