XPeng Inc.

Hello, ladies and gentlemen. Thank you for standing by for the third quarter 2020 earnings conference call for XPeng Incorporated. At this time, all participants are in a listen-only mode. After management's remarks, there will be a question and answer session. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Charles Zhang, Managing Director of Strategy of the company. Please go ahead, Mr. Zhang.

Thank you. Hello, everyone, and welcome to the third quarter 2020 earnings conference call of Xpeng Inc. The company's financial and operating results were issued via newsletter services early today and are available online. You can also view the earnings press release by visiting the IR section of our website at ir.xpeng.com. Participants on today's call will include our co-founder, chairman, and CEO, Mr. Xiaofeng He, vice chairman and president, Dr. Brian Gu, Vice President of Finance, Mr. Denis Liu, and myself. Management will begin with prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. A webcast replay of this conference call will be available on the IR section of our website. Before we continue, please note that today's discussion will contain four looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forelooking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filing of the company as filed with U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forelooking statements except as required under the applicable law. Please also note that Xpeng's earnings press release and this conference call include the discussions of unaudited gap financial measures as well as unaudited non-gap financial measures. Xpeng's press release contains a reconciliation of the unaudited non-gap measures to the unaudited gap measures. I will now turn the call over to our co-founder, chairman, and CEO, Mr. Xiaohong He. Please go ahead. Hello, everyone. Thank you for attending the first phone call after the launch of Xpeng.

Hello, everyone. Thank you for joining Xpeng's inaugural earnings conference call today.

On August 27, 2020, Xpeng was successfully launched by Liu Jiao. It also started a new journey as a listed company. Again, on behalf of all the company employees, I would like to thank all the new old shareholders.

On August 27, 2020, Xpeng successfully lifted on the New York Stock Exchange, a significant milestone marking the start of our new journey as a public company. On behalf of all the employees and myself, I'd like to extend our sincere gratitude and appreciation to all of the long-time and new shareholders who have been supporting us.

The total supply volume has increased by 266%, reaching 8,578 units. At the same time, with the increase in the size of P7 and the increase in the size of the income, we have achieved a net profit of 4.6% in this quarter.

Today marks another milestone for Xpeng, as we reported our first quarterly results following our successful IPO. We're pleased to be speaking with you today about our strong operating and financial performance in the third quarter, in which total vehicle deliveries increased by 266% year-over-year to 8,578 units. In addition, we achieved positive growth margin of 4.6%, bolstered by significant revenue growth and mass deliveries of the P7.

Our second mass-produced自然电动轿车P7 was delivered in June of this year. The delivery size has increased rapidly. In the third quarter, we delivered 6,214 P7s, including X-Palette 2.5, or the X-Panel 3.0 automatic driving configuration reached 98%. On October 20th, the 10,000th batch of P7s landed in our China's Zhaoxing factory. The latest record of production in the form of China's Zhaoxing has been updated. This shows that Xiaopeng Motors' comprehensive strength improvement in the development, manufacturing, brand, sales and service areas.

The P7 is our smart sports sedan, which is also our second in mass production level model. Deliveries of the P7 have maintained fast growth momentum since our mass delivery began in late June. During the third quarter, we delivered 6,210 P7s, of which 98% can support X-PILOT 2.5 or X-PILOT 3.0, our advanced autonomous driving systems. It is worth noting that on October 20th, the 10,000 P7 rode off our production line in our own Zhaoqing facility. We now hold the record as the fastest emerging smart EV company to surpass the 10,000 vehicle production mark. All of these achievements demonstrate our ever stronger capabilities across the entire EV spectrum in research and development, manufacturing, branding, and sales and services.

I believe Xiaopeng Motors is the only company in China to produce all-wheel drive, self-driving, self-driving, self-driving, self-driving, self-driving, self-driving, self-driving, self-driving, self-driving, self-driving, self-driving, self-driving. This is called the full voice system. Currently, it is the first in the world. It can support continuous dialogue throughout the scene and can achieve user-friendly infrastructure. This is the key technology of our second year of self-development. At the same time, in this year's 2020, we also demonstrated a high-speed autonomous navigation system called NGP. It can achieve the ability to freely change lanes, overtake cars, and switch roads at high speed. So our goal is to make China's most powerful navigation assistant system. We plan to give our users X-PILOT 3.0 OTA in early next year. And in the first quarter of 2021, we will carry out a long-distance test of NGP on a highway that is more than 2,000 kilometers long from Guangzhou to Beijing. I believe XPeng is the only Chinese car-making company that is developing full-stack autonomous driving software and smart in-car operating system in-house.

On the second Xpeng Tech Day, which was held on October 24th this year, we showcase our first-of-its-kind all-voice in-car system, which enables continuous driver-vehicle dialogue interactions, covering a broad range of scenarios. It is one of our key proprietary technologies, developed for and applied in our second-generation X-SMART OS operation system. We also showcase our autonomous driving technology capabilities, bolstered by our in-house developed navigation guided pilot system, also known as NGP, which enables autonomous driving on highways with features including autonomous lane changes, overtaking other vehicles, and switching ramps, amongst other things. Our goal is to provide the most advanced navigation guided autonomous driving system in China. We plan to make the MGP system available to our customers via OTA earlier next year. In the first quarter of 2021, we plan to conduct an expedition for our MGP to cross over 2,000 kilometers of highway from Guangzhou to Beijing. We believe this is just the beginning of how high-level autonomous driving technology is transforming mobility in China. I firmly believe that dedication to full-stack in-house R&D is the key to enhancing our product differentiation and solidifying our core competitiveness.

In terms of production and manufacturing, after our first factory in Zhaoqing officially became the production and manufacturing base of P7 in the first half of the year, the development and construction of our second production and manufacturing base was done in the Guangzhou City Development Area in September of this year. We have received a very large amount of support from the Guangzhou City Government. In 2022, In terms of production, after our own Jiaoqing plant officially started mass production of the P7 in the first half of the year, in September, our second manufacturing base broke ground in the Guangzhou Economic Development Zone with strong support from Guangzhou government.

We expect this new XPeng Smart EV manufacturing base to start production by the end of 2022. Together with our Jiaojin manufacturing base, we have set a solid foundation for XPeng's long-term growth strategy.

In terms of the sales service network, since the end of September, XiaoFeng has reached 116 sales network points in China and 50 service network points, covering 58 cities.

In terms of sales and service network, as of September 30th, 2020, Xpeng's physical sales and service network comprises a total of 116 stores and 50 service centers covering 58 cities.

Our built-in supercharging network is also expanding steadily throughout the country. Since the end of September, Xiaopeng's supercharging station has operated 135 cities and covered 50 cities. On September 26th this year, at the Beijing Motor Show, we announced a free charging plan for Xiaofeng. By the end of September, this plan has been launched in 24 cities. I expect that by the end of this year, more than 60 cities will be able to implement free charging services. In the next few years, Xiaofeng will use a large-scale, high-efficiency national charging network as a strategic investment.

Additionally, our supercharging network continues to expand across the nation. As of September 30, 2020, XPeng-branded supercharging station has increased to 135, covering 50 cities. Furthermore, we announced an XPeng-sponsored free supercharging program at the Beijing Auto Show on September 26th. The program has been initiated in 24 cities and will be expanded to at least 60 cities by the end of the year. S-Bank will strategically invest in the nationwide deployment of the supercharging network over the next few years.

At the same time as we continue to strengthen the leading position in the private car industry in China, we are also actively exploring the development of the overseas market. In September this year, the first batch of super-long-duration battery-powered SUV G3i, which sold to Europe and Norway, has been launched. This is the first step for small and medium-sized cars to expand and explore overseas.

While continuously strengthening our leadership position in China's smart EV industry, we're also strategically developing opportunities in international markets. For example, in September, we shipped the first batch of Xpeng's G3s to Europe. The super long-range version of the G3 is our smart SUV model adapted for European markets with specifications. The shipment marked our first step to tapping international markets.

In the third quarter, we successfully completed our IPO, which had a total offering size of $1.7 billion.

Together with the $900 million raised in Series C plus financing, our fundraising totaled nearly $2.6 billion in the third quarter. With the support of substantial capital reserves, we intend to increase investments in branding, sales and service network, charging network, as well as in technology advancement and model development.

We expect that in the fourth quarter of 2020, Xiaopeng's total delivery capacity is about 10,000 units. And I believe that it will be able to maintain such a fast and fast-growing sales performance. In addition to being proud of our own research, I believe that in addition to our own research, I believe that in addition to our own research, I believe that in addition to our own research, in addition to our own research,

For the fourth quarter of 2020, we expect deliveries of our vehicles to be approximately 10,000 vehicles. Our ability to achieve remarkable performance is attributable not only to our strong in-house R&D capabilities, but also to our effective strategies in market positioning, product planning, manufacturing capabilities, and our operational roadmap.

Thank you, everyone. With that, I'll now turn the call over to our VP of Finance, Mr. Dennis Liu, to discuss our financial performance for the third quarter. Thank you, Xiaopeng.

And hello, everyone.

As noted, we deliver strong top-line performance in the first quarter, in the third quarter, and possibly a positive gross profit for the first time in our company's history. We have reached this milestone in large part due to our successful launch and mass delivery of EP7, which also carries an increased average selling price compared with our prior model. Our August IPO and the annual stock exchange, this did not only provide the funding for our long-term sustainable growth, but also further strengthened our brand and our influence in the electric vehicle industry. Now, I would like to walk you through our detailed financial results for the third quarter of 2020. Total revenues were RMB $2 billion. for the third quarter, representing an increase of 343% from RMB 450 million for the same period of 2019, and an increase of 237% from RMB 591 million for the second quarter of this year. Revenue from vehicle sales were RMB 1.9 billion for the third quarter, representing an increase of 376% from RMB 399 million for the same period of 2019, and an increase of 251% from RMB 541 million for the second quarter this year. The year-over-year and the quarter-over-quarter increases were mainly due to the acceleration of deliveries of the P7 since we began its mass delivery in late June this year. Growth margin was 4.6% for the third quarter, compared with a negative 10.1% for the same period last year, and also a negative 2.7% for the second quarter this year. Vehicle margin was 3.2% for the third quarter, compared to negative 10.8% for the same period a year ago, and negative 5.6% for the second quarter this year. The increase was primarily due to better product mix, decrease in material cost, and improvement in our manufacturing efficiency. Research and development expenses were under $635 million for the third quarter, representing an increase of 46% from RMB 435 million for the same period in 2019, and an increase of 99% from RMB 320 million for the second quarter this year. The year-over-year and quarter-over-quarter increases were mainly due to a significant amount of share-based compensation expense recognized related to the share-based awards we granted to our employees with the performance condition of an IPO. If we exclude this share-based compensation expense, number one, our research and development expense will be decreased year-over-year primarily because we incur significant amount of expense relating to the development of the P7 in the same period last year. Number two, the research and development expense will increase quarter over quarter due to increase of design and development expense relating to a new product which will be launched next year. Selling general and administrative expenses were RMB 1.2 billion for the third quarter, representing an increase of 321% from RMB 286 million for the same period last year, and an increase of 152% from RMB 477 million for the second quarter of 2020. The year-over-year and the quarter-over-quarter increase were mainly due to the share-based compensation expense recognized for the reasons mentioned above. Excluding the share-based compensation expense, the increase mainly resulted from higher marketing and promotional spending to support the aluminum vehicle sales. Loss from operations was RMB 1.7 billion for the third quarter, compared with RMB 761 million for the same period last year, and RMB 779 million for the second quarter of 2020. Excluding the share-based compensation expense, the non-GAAP adjusted loss from operations was RMB 823 million. in the third quarter compared with 761 million for the same period last year, and also compared with RMB 779 million for the second quarter this year. Net loss was RMB 1.1 billion for the third quarter compared with RMB 776 million for the same period in 2019, and RMB 146 million for the second quarter of 2020. Excluding the sale-based compensation expense and sale value change on derivative liabilities related to the redemption rate of the previous year, the non-GAAP adjusted net loss was under $865 million in the third quarter, compared with $761 million for the same period of 2019, and also compared to $770 million for the second quarter this year. Land loss treatable to ordinary shareholders of Chopin was RMB 2.0 billion for the third quarter, compared with RMB 982 million for the same period in 2019, and also compared with RMB 1.1 billion in the second quarter this year. Fair value change on derivative liabilities related to the redemption right of people's share and accretion of people's share to redemption value or non-cash events which will no longer recur after IPO. Excluding the share-based compensation expense, the fair value change on derivative liabilities related to the redemption rate of the people's share and accretion of people's share to the redemption value. The now get adjusted net loss attributable to ordinary shareholders of Xiaopeng Incorporation worth RMB 865 million for the third quarter. Compared with RMB 751 million for the same period a year ago and also compared to RMB 770 million for the second quarter this year. Basic and diluted net loss per ADS were both RMB 5.07 for the third quarter of 2020. Non-GAAP basic and diluted net loss per ADS was both RMB 2.16 for the third quarter of 2020. Each ADS represents two Class A ordinary shares. Now come to our balance sheet. At the end of September 2020, the company had cash, cash equivalents, restricted cash, and short-term investment of RMB 20 billion. compared with RMB 2.8 billion at the end of last year. The increase was primarily due to the next proceeds we received from company initial public offering in August this year and also the series C plus one financing. Now for our guidance, as Xiaopeng mentioned earlier, for the first quarter of 2020, we currently expect the delivery of vehicles will be approximately 10,000 units, representing an year-over-year increase of about 211%. We also expect the total revenue for the first quarter of 2020 will be approximately RMB 2.2 billion, representing an increase, an year-over-year increase of about 244%. The forecast reflects the company's preliminary estimates of market operating condition and customer demand, which are all subject to change. This concludes our prepared remarks. We will now open for the call to questions. Operator, please go ahead.

Thank you. At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. For the sake of clarity and order, please ask one question at a time. Management will respond and then feel free to follow up with your next question. Your first question comes from the line of Bin Wang from Credit Suisse. Your line is open.

Actually, my question is about the autonomous capability. After you launch the NGP and the memory parking in the first quarter of next year, what will be the next big step in the second half 2021 or 2022. Thank you. Okay.

The first one is that we plan to launch a memory car in the parking lot. That is to say, when you enter the area near the parking lot, you can let the car automatically show up in its parking space. This is the first part.

So thank you for your question. Actually, after launching NGP and the memory parking next year, we have several big moves that we're going to launch in the coming future. Those are based on XPILOT 3.0. The first thing is the memory parking within a parking lot, which means that when your car arrives at the parking lot, it will automatically take you to the available spots for parking.

In big cities, when there are traffic jams, we will introduce related automatic follow-up functions. In other words, when the speed is low, when there is a crowded environment, the front car can follow-up to carry out automatic driving.

Now, the second big launch will be for major cities, first tier cities and second tier cities, during the peak rush hours in the morning and in the evening. And that is called the autonomous following. So the autonomous driving technology will allow your car to follow closely to the vehicles before you to make sure that you are not behind.

After that, we will launch the NGP capabilities with China, including the recognition of the red light, including the NGP capabilities within China's city, as well as the city scene from the height. These are the capabilities that we will launch in the next part. In the future, we will launch more related functions. I think these three points are the functions that we will launch in the future.

Coming up, we also will launch an identification feature of traffic lights within Chinese city roads and also an upgrade version of the NGP functions that allows us to transfer from highway scenarios to city roads. Coming up, we also have more autonomous features that will allow us to be more advanced in terms of the autonomous driving technology in China.

I have a question about the network expansion plan. What's your number? Can you guide in the end of this year, in 2021? And what's the breakdown between the self-owned and the third party? My question is about the expansion plan of our store. We know that it is currently more than 110 stores. How many stores will be added by the end of this year? And how many stores will be added by the end of 2021? And how many stores will be added by the end of 2021? And how many stores will be added by the end of 2021?

Thank you. This is my question. Let me answer this question. At the end of this year, we expect to reach about 150 stores. So I'll take this question. By end of the year, we forecast that we'll have 150 stores covering 72 cities.

And by end of this year, we will have 68 service centers.

For the guidance for next year, we are still in the process of making the guidance.

So we'll give you updates as we have them. Thank you.

Your next question comes from the line of Ming Lee from Bank of America. Your line is open.

I would like to congratulate Mr. Shao-Pung and the leaders for their excellent performance. I have a question for you. Our sales in Guangdong are very bright. We are gradually expanding our stores and moving out of Guangdong. In terms of the expansion of our sales channels and the establishment of our brand, My question is regarding our sales store expansion strategy. in Guangdong province and also outside Guangdong province especially nowadays your store expansion is very aggressive and I also want to know what's your long-term expectation regarding your sales breakdown between tier 1 cities and low tier cities thank you

Many people will think that Xiaofeng is very popular in Guangdong. In 2020, we have already paid attention to this point, and we are in Beijing, Shanghai, and many cities in China, including cities in the first, second, and third lines. Recently, our sales outside of Guangdong have been greatly increasing.

Because Xpeng is headquartered in Guangzhou, that's why a lot of people believe that we are mainly focused on ourselves in Guangdong. However, we have recognized the situation and we are quickly expanding in other first-tier cities such as Beijing and Shanghai, and also to other tier cities, second-tier and third-tier cities. And that is part of our strategic roadmap of expansion in the future. And this year, we are doing a lot better in terms of sales performance in other provinces outside of Guangdong.

Then, in the next step, we will firmly use nature as the core of this small red brand. Through our products, through our products, through our market, we can further influence more users. This is a very important step for our next brand. On the other hand, we will be doing a lot of rapid growth in the next quarter and next year, in addition to Guangdong.

So our next step for us is to continue on improving and producing product quality, and through our marketing and sales, we'll be able to reach more, a greater extent, a higher level, higher quantity of users. Outside of Guangdong, we are quickly expanding to first-tier cities, second-tier cities, and third-tier cities through our expansion of stores numbers, service centers numbers, and our supercharging network. Those will remain part of our priorities in the coming quarter and next year.

In fact, after Xiaopeng's IPO in the capital market, we will invest more in the organization of system flow tools. I believe that these investments will see a real increase in the exchange rate and sales in the next few seasons.

And after IPO, we'll be able to reorganize our company in a systematic manner and make our procedures and steps of production more efficient. And those will be reflected in ourselves' performance in the coming quarters.

Your next question comes from the line of Jeff Chung from Citigroup. Your line is open.

Hello, leaders. Thank you for your good performance. I have three questions. I will ask the first two first. The first question is, how do we see the supply bottleneck of battery supply? How will this bottleneck be released in the next three, four, five months? This is the first question. The second question is about the growth of our power supply sales. So I got three questions. My first two questions is the battery bottleneck issue. Do we have a battery bottleneck supply issue and how do you see this improve going forward? And my second question is about the sales growth between the new store and the old store. So could you give us a breakdown in the third quarter on the total sales volume from new stores and old stores before June and after June opening? And then also, what is that ratio into October? Thank you.

Thank you. The first question is about the battery supply bottleneck. I think with the outbreak, the strong recovery of new energy vehicles and the obvious growth in the sales of European electric vehicles, plus the expansion of a large part of the battery manufacturers in China in the beginning of this year and the beginning of this year, is a relatively stable stage. So indeed, especially in the near future, I believe the battery will have a certain bottleneck.

Thank you for your question. Regarding your first question about the battery bottleneck, I think after the pandemic, the new energy vehicle industry is on the rise. Also, in the European market, we see self-recovery in terms of the whole European market. also um since last end of last year and earlier this year as a result of the pandemic a lot of the battery makers are doing their best to expand their capacity of production and so right now we are encountering a very temporary supply bottleneck in terms of battery supplies

For a period of time, Xiaopeng's production has also been restricted to a certain extent due to the supply of batteries. But we are very confident that as the control of the whole sales volume gets better and better, as the control of the sales outlook gets better and better, including our full communication with our main electronic partner, I believe that our battery supply bottleneck will soon be fully developed. So many people are worried that in the next 6 to 12 months, there will be a greater supply risk for the battery. I am relatively confident about this from the current point of view. The current battery manufacturers' preparation for the production of energy has now begun to enter the next military competition. On the contrary, I have a certain confidence in the long-term battery for a period of time. There is a stronger confidence.

And lately, we are indeed restricted in terms of production as a result of the battery supply bottleneck. However, in the future, with our active, very proactive communication with all the battery makers and our good partnership with the battery makers and with better planning coming forward in terms of production, I believe we can resolve this bottleneck in a very quick manner. And in the coming six months to 12 months, a lot of people have apprehensions about this battery supply and thinking that we are facing a risk of shortage in supply. However, I disagree with that. I'm actually very confident in the battery supply because a lot of the battery makers are now preparing very actively in their production capacity. And I believe as a result of the fierce competition amongst these battery makers, we'll be able to benefits from it in terms of supply.

So most of the sales in the third quarter are between a month and two and a half months ago. So from the data point of view, most of them are previous sales.

Regarding the second question about the breakdown on Q3 sales, actually, I would like to give you a little bit of context. All of our sales are made after our customers find, all of the vehicles are produced after the customers find the agreement or the sales contract. So basically, all of the numbers, all of the deliveries that you saw in Q3 are the result of the previous contract that we signed about a month or 2.5 months ago.

I can share a little bit of our insights. The first one is that Xiaopeng is learning to increase the speed of the brand. In the past, we thought that a branch store, from the first store to the familiar store, that is to say, there is a certain amount of sales, it takes about six months, six months or so. So now I feel that this time is really fast and short.

And from our development, actually, we observed something interesting. We used to think that it usually takes maybe six months for a new store to mature. But now we realize that it's actually much, much quicker.

Thank you.

and as we uh developed more uh cell phone for factories of production um as we solve the battery supply problems and optimization in that area we believe from q4 forward we'll be able able to achieve a even higher efficiency in our product deliveries let me add on this point on the battery uh situation uh it is not

a bottleneck in a way that, you know, we don't have, you know, sort of access to the battery capacity. It is actually when you have sudden jumping demand in the short term, you need to revise up your production. It will actually be very difficult. But at a given time, I think the capacity issue will be digested very quickly. So I just want to give you this context. It's not like we don't have access. It's just like you don't have the flexibility to really change capacity dramatically in the near term.

OK, thank you. I have one last question, which is also the most important one. How will software revenue start to go into our P&L next year? Because we know that this year, it may be put on a receivable, and then maybe it will enter the market next year. I don't know if it's such a treatment. And then another point is, if it's such a treatment, then maybe I know that 98% of our T7 delivery is with Autopilot 2.5 to 3.0. Will there be an explosive growth in software revenue in the first half of next year or in the third quarter? So my question is about the software income. So how is our accounting treatment on the software income into 2021? And how do we transfer the pent-up revenue from the software income into 2021? And then if this pent-up revenue overlaps with the new software revenue income in the first half of next year, so would that be an inflection point to see a massive increase in the revenue and net profit going forward? Thank you.

JEFF, THIS IS DENNIS. LET ME ANSWER YOUR QUESTION. YES, SO FAR WE HAVE RECEIVED SOME ORDERS, FOR EXAMPLE THE facility or equipment to support the uh autonomous driving on the 3.0 we received some orders the payment of the software but that's our kind of prepaid customer prepaid money that's not in our revenue we need to wait until we ota the functionality then we can book that into our revenue and the plan is to book blocks into the revenue starting from next year and we actually we have for example as of today we have about 40 percent of our customers they pick up the hardware and among the hardware they have about 60 to 70 percent of customers they buy the software so this will translate a significant amount of the software revenue starting from next year but i need to clarify so far we have xpiler 2.5 and 3.0 the 2.5 is free of charge we only charge the customer with the 3.0, the autonomous driving 3.0. And going forward, in our four models, we will have more modernization of the software. For example, we may upgrade to 3.5 or even 4.0, the software packaging. At that time, we probably will re-evaluate the pricing, maybe we'll increase the software revenue. But all you know, the software revenue will increase be a kind of considerable portion of our overall revenue going forward your next question comes from the line of paul gong from ebs your line is open

Thank you, everyone. I have two questions. The first question is about the interest rate. I see that in the third quarter, compared to the second quarter, the interest rate change is actually quite powerful. To what extent is the interest rate of P7 much higher than that of G3? To what extent is G3 an improvement of its own? If G3 is in the third quarter, is it still a negative on the interest rate? So my first question is regarding the gross margin. Is it right that the Q3 GP margin improvement is mainly a result of the product mix, where P7 GP margin is significantly higher than G3? Is G3 still in negative gross margin zone in the Q3? The second question is about the difference between the hardware and software of XPanel 3.0. If I remember correctly, this is sold for 30,000 yuan. Is it 10,000 yuan to cover the hardware cost of 20,000 yuan for software income? So my second question is regarding the extra pricing of XPilot 3.0. My understanding, if I recall correctly, that is priced at 30,000 RMB. How do we think about the split between the hardware cost coverage versus software revenue? And how do we foresee the hardware costs going forward thank you

Okay, let me handle the margin question. Yes, we have the quarter-over-quarter margin improvement. The major contributor is from the beta product mix, which means more P7 in the third quarter compared with the second quarter, only minimal volume. And then we have the reduction in material cost including the battery and non-battery material cost reduction. And we also have manufacturing efficiency improvement due to the scale, the economy scale. We don't disclose individual vehicle line margin, but we are seeing improvement on both models. We don't disclose individual model, but both models margin are improving. So that's the first one. And then the second one, the autopilot. So far, we charge customer with one of 20,000 for the X-Pilot 3.0. One of, if customer chooses to pay that in instruments, They will need to pay $12,000 a year for three years, then they can get the lifetime kind of service. We are seeing opportunity on the hardware because of the technology improvement and also the more volume, more scale. So both hardware and software will have the efficiency in terms of the cost. and that will further improve the margin for the subway as well as the vehicle margin going forward.

Yeah, Paul, you're right. I mean, I think our hardware, the Xpilot 3.0, has more expensive than the version that has only the Xpilot 2.5. And also the price difference covers the hardware cost as well as having some margin there as well. And we expect the cost of those hardware can continue to go down as we produce more and more of these Xpilot 3.0 equipped vehicles.

Okay, thank you.

Your next question comes from the line of Jai Lu from Bank of China. Your line is open.

Good evening, everyone. I have a question about our sales network. Because we are not the same as other peers, we use the two modes of self-made and marketing. I would like to know how we evaluate the two modes in terms of efficiency and customer experience. Thanks for taking my questions. I have a question in terms of our sales distribution. Different from other two peers, we have the sales modes of self-built and dealership. and how do we compare these two modes in terms of marketing efficiency and customer experience and could you give us the breakdown of these two modes and what's our plan in future thanks

We now have about 116 sales networks. 46 of them are from our own network, and 70 are from our joint partners. These two sales systems are very important to us. From my point of view, the more the brand is not established, the better the education and marketing value of the brand can be for its own sales network. The more mature the brand is, the stronger the knowledge of autonomous vehicles will be, the more effective the authorization of the sales team will be. In the future, we will continue to develop in the two-way network. We will choose different combinations based on different positions and different areas.

Currently, we have 116 self-stores. Amongst them, 46 are self-owned, 70 are partners with other dealerships or franchise stores. Now, in my understanding, as we begin to build a brand, it is more efficient to have your own self-owned stores so that you can educate the market and do more branding in terms of your development. And as you mature, as the brands get more and more well-known in the market, it is more efficient to have partnerships with other dealerships so that you can have a high efficiency in generating sales. And right now, we believe that both of those channels are very important in contributing to our sales. And so in the future, we are going to set up different kind of stores according to the location, according to the type of city that we are in.

Mr. Peng, may I ask one more question? I can understand it this way. In the current one-way city, we will use more self-sufficiency networks. In the next three or four lines, we will use the commercial network. As our popularity opens, we may focus more on self-sufficiency in the future, and gradually increase the proportion of commercial networks. Is my understanding correct? Let me translate it. Can I explain it by this way? That in tier one cities, in tier one cities, we will have developed more depending on our own self-build stores. And in low tier cities, we will use dealerships. And with the expansion of our brand names, we will use more in self-build stores.

As I said, the core needs to depend on the brand and the market's acceptance of autonomous vehicles and the customers' acceptance of our brand's market. In the combination of these two, I would like to say that today's first-tier, super-first-tier, or third-tier cities do not consider the self-sufficiency or the performance as a priority. They still have different choices based on different cities. So, comparatively speaking, it is not a choice based on the category,

So as I mentioned before, we have to take into consideration many different elements, for example, the brand awareness, the acceptance level of new energy vehicles, of the market and of our customers. So right now, we don't have any preference over which kind of store that we're setting up for first-year cities or to third-year cities. It all depends on specific situations.

I see. I have another question. It's about finance. I see that in the third quarter, the cost of sales has increased significantly. I would like to know if you can explain the reason for the increase. And in the future, can you give us an estimate of the cost of sales in the fourth quarter or the average of the cost of sales in the next quarter? I have noticed that the SG&A expenses in Q3 surged substantially. Could you give us some reasons about the increase in SG&A expenses and the guidance in future for SG&A? Thank you.

Okay, I use English. Yes, we have the quarter-over-quarter increase in SG&A, and the increase is primarily for the branding spending, the channel expansion, channel development. And also kind of advertisement to supporting vehicle sales. That is the primary higher spending on the SG&A. And going forward, as you are aware, we are still in the kind of in the middle, in early phase in terms of the channel development and to build more strength in our brand. to support higher volume target next year. So we foresee the marketing and sales expense will continue to maintain at this kind of level or slightly increase in the near future. We, at the same time, we will also to manage other, for example, for some spending we don't need to grow uh in that with smiling we'll definitely control that but for some spending that is to investment for future we'll continue to spend a little bit money on that area to support your future growth thank you your next question comes from the line of nick live from jp morgan your line is open

Yeah, hi. Our understanding is that the waiting time is about 4-5 weeks. This waiting time is not short. From the point of view of the meta-order strategy, how to shorten our waiting time? The second problem is that we have a new factory in Guangzhou. Okay, let me translate my question in English. The first question is the level of backlog order, and currently we have waiting time of about four to five weeks, and what's our strategy to shorten that waiting time? And the second question is really regarding the new factory in Guangdong. And what is the capacity and the capacity? Can you give us some guidance? Thanks.

So, Nick, first of all, as you probably heard during our IPO process, we don't disclose backlog information as a policy. But I think in terms of the wait time, actually it depends on the specific model you're ordering. My understanding is that four weeks to six weeks are the standard sort of delivery time these days for our P7. But we actually try very hard to shorten that delivery time because I think obviously that will improve delivery user experience, our customer satisfaction. We actually are stepping up our production as we speak. Also, at the same time, we're reducing the time lag in terms of transportation and logistics as well as delivery cycle. So I think hopefully we can actually control the delivery time to shorten that within the four weeks as we... I would like to add that we will do a short-term pre-production for the relatively hard SKU, which will greatly improve the delivery market, and we will also optimize the delivery process to a considerable extent. So I believe that in the next one to two seasons, we will be able to optimize the efficiency of this delivery quite well.

So let me just add to that. Actually, for some hot models, we're going to do a really short time or a quick pre-production of those models to increase them, to shorten the wait time. And also through our optimization of our delivery procedures of process, we believe in the coming quarters or two, we will be able to greatly shorten the wait time.

Yeah. And your question on Guangzhou plant, right now the design capacity for the second plant, we are planning to have 100K annual production. In terms of the cost of building that, we estimate this could be close to 3 billion RMB in terms of total cost, including the equipment. And obviously, as you heard from our previous announcement, that the government-supported financing package is more than enough to cover the construction and equipment cost of that plant expansion. In terms of your question on Haima relationship, our cultural manufacturing agreement with Haima will end by the end of next year. We're obviously maintaining a very frequent dialogue with Haima to how to best optimize that relationship. So if there's any decision or conclusion, we'll obviously disclose to the public.

Thank you very much.

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 us from Investor Relations through the contact information provided on our website or the TPG Investor Relations. Thank you.

This concludes today's conference call. You may now disconnect.