XPeng Inc.

Hello, ladies and gentlemen. Thank you for standing by for the second quarter 2023 earnings conference call for XPing, Inc. At this time, all participants are in 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. Alex Yeh, head of investor relations for the company. Please go ahead, Alex.

Thank you. Hello, everyone, and welcome to XPeng's second quarter 2023 earnings conference call. Our financial and operating results were issued by our NewsWire services earlier today and available online. You can also view the earnings press release by visiting the IR section of our website at ir.xiaopeng.com. Participants on today's call from our management will include co-founder, chairman, and CEO, Mr. He Xiaopeng, vice chairman and president, Dr. Brian Gu, Vice President of Corporate Finance and Investment, Mr. Charles Zhang, Vice President of Finance and Accounting, Mr. James Wu, and myself. Management will begin with prepared remarks and the call will conclude with a Q&A session. 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 forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Four looking 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 included the relevant public filings of the company as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that EXPON's earnings press release and this conference call include the disclosure of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. EXPON's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to our co-founder, chairman, and CEO, Mr. He Xiaopeng. Please go ahead.

In such a short period of time, we will face great risks and challenges. But I am very happy to tell you that from now on, the internal and external effects of these changes have exceeded expectations. And we can already see that we are officially bringing the formula into the initial cycle. Among them, G6 has become a pure battery type with a total power of 200,000 to 300,000. for us to bring a strong movement of sales growth. And we are leading in the industry, the electric platform of full-time self-employment, and the commercialization of intelligent technology represented by XNGP, have all achieved a cross-sectional breakthrough. We have established a long-term strategic partnership with the German public group. We will carry out comprehensive cooperation and long-term supply on the platform technology of pure electricity and intelligent technology. In choosing the pivot point of the self-reliance value, it also came faster than our plan. The first month of G6's max order was over 70%, far beyond our initial expectations. In the middle of the transformation from the company to the customer center, our NPS customer satisfaction and OTA satisfaction indicators have made great improvements in the first half of this year, reaching the most advanced standards in the industry. Hi, everyone.

During the first half of this year, given the intensified competition and rapidly evolving environment, I led a set of reforms across business strategy, organizational structure, product, and marketing to tackle huge risks and challenges and forge significant comprehensive transformation within a short time frame. Today, I'm pleased to report that these transformational adjustments have generated better-than-expected results internally and externally. and propelled XPeng into the initial phase of a virtuous cycle. The G6 has become the dominant BEV model in the 200,000 to 300,000 RMB price market segment, turbocharging our sales growth momentum. We've created meaningful breakthroughs in commercializing our industry-leading, full-stack, self-developed EV platform and intelligent technologies. We have formed a long-term strategic partnership with Volkswagen. As part of our partnership, we'll embark on broad-based collaborations to develop EV platforms and intelligent software technology, creating long-term value for both companies. Moreover, an inflection point in user acceptance for ADAS is emerging faster and stronger than we expected. We saw orders for the G6 Max version accounted for 70% of total G6 orders in the first month of its official launch, far exceeding our estimate. Our NPS and OTA satisfaction scores improved continuously in the first half of the year, reaching an industry-leading level as we prioritize customer-centric transformation. In addition, the changes at XPeng have boosted team morale, owner engagement, and the confidence of suppliers and other external partners. This provides a strong foundation for advancing organizational adjustments, cost-saving initiatives, efficiency improvement, and new product launches.

This month marks the ninth anniversary of our inception. Over the past nine years,

we have been steadfastly committed to advancing technological innovation. That commitment has never wavered. We plan to advance full-stack technology innovation in core areas to make leading-edge smart EV products accessible to a broader range of customer cohorts across the globe. As we grow to a larger scale, we'll build a sustainable business model underpinned by full-stack capabilities across hardware, software, commercial operations, and partnerships for empowerment. 在最近的这次变革中间,我始终告诉我自己跟团队,我们如果想做到第一,要想赢得这次长期的竞争,我们一定要允许在短期内可以穿越短期的财务上的表现或者销售上的表现,要追求更长期的内部跟外部的基础能力,也就是内功的变化和发展。

我觉得特别开心的是最近我们练好内功的初步价值 在团队在主持里面已经开始体现了 所以我们上半年的交付量实际连续六个月 七个月在环比增长 并且势头我们看到还是会非常快速的持续向上 那么这些增长的动力包括了 在三月份上市的新品种PTI获得了消费者的积极认可 As we move forward with this recent transformation,

I continuously remind myself and the team that in order to succeed in this growing competition in the long run, we must consistently look beyond short-term financial performance as we tirelessly evolve and advance our underlying capabilities. That said, I'm glad that our efforts to elevate our underlying capabilities across the board have begun to bear fruit. Our vehicle deliveries have grown sequentially for six months straight and continue to grow. Specifically, the P7i, our new product launched in March 2023, has been gaining great consumer traction, with its monthly deliveries surpassing 3,000 units for two consecutive months since June, overcoming supply chain challenges. As we enter the second half of this year, we believe we'll further ramp up the capacity and product competitiveness of the P7i model lineup to drive its continued sales momentum.

More importantly, at the end of June, we officially launched our first strategic strategy based on the FUYAO architecture, and quickly became a phenomenon-level packaging product. Based on the platform-based cost reduction route and a large-scale priority pricing strategy based on the FUYAO architecture, we will introduce 800 FUTA and GUI high-pressure platforms, as well as advanced technologies such as full-scale intelligent service providers, for the first time in the price range of the mainstream consumer group of 200,000 to 300,000 yuan.

More importantly, our first strategic model built on SEPA 2.0, the G6, made its market debut at the end of June and has quickly become a phenomenal bestseller in the segment. Guided by our SEPA 2.0-enabled platform-based cost efficiency, And a pricing strategy that prioritizes scale expansion, XPeng G6 has emerged as the industry pioneer in introducing the most advanced technologies such as 800-volt SIC platform and full scenario ADAS, which is accessible to mainstream consumers of 200,000 to 300,000 RMB price market segments. Furthermore, the G6 has become more popular across a wide range of consumers, including those in both higher and lower price segments.

这是我想特别感谢正在等待G6提侧的各位朋友们。 我们正在和供应商一起全力提升G6, 特别是Max版本的产能。 我们预计在今年的9月份, G6的特性的交付量将会显著也提升, 并且带动整个小红月交付突破1.5万以上。 In the fourth quarter, we will continue to improve the performance of G6, and enlarge the first batch of G6 users. The goal is to hit G6, which is over 10,000 units per month. Following the rise of G6 and the introduction of more advanced models, we will hit the company's goal of over 20,000 units per month in the fourth quarter. I believe that the success of G6 is now just the beginning. We will see more of the explosion model on the floating structure.

Today, I want to extend my deep gratitude to those owners who are patiently awaiting delivery of their XPeng G6. We're making every endeavor with our supplier partners to ramp up our production output for the G6, especially for the Max version. We currently estimate that G6 delivery volume in September will grow significantly, fueling our monthly deliveries to reach over 15,000 units in total. In the upcoming fourth quarter, we'll continue to accelerate G6 production throughput to capture the increasing market popularity that has followed its first batch of deliveries, with a goal to deliver more than 10,000 G6 monthly. With G6 ramp-up and enriched configurations for other on-sale models, we'll strive for a peak monthly delivery of 20,000 in the fourth quarter. I believe the success of the G6 is just the beginning. Moving forward, we plan to introduce an even wider range of SEPA 2.0-enabled top-selling models.

In July, we officially announced the establishment of a long-term strategic partnership with the G6. I believe this is not just Xiaofeng, but also a milestone for the entire Chinese automotive industry. We are highly in line with the technology beliefs of Dazhong Group and the long-term vision of autonomous electric vehicles. I believe that our advantages are very complementary. Strategic cooperation will allow the leading autonomous electric vehicle technology in the small and medium-sized automobile industry to combine with Dazhong Group's world-class design, engineering, and supply chain capabilities. Starting with two B-class pure electric models, we will bring the best technology, products, and experiences to customers. At the same time,

我们将会通过全球汽车行业首创的软硬件全站技术合作的商业模式为股东创造更大的价值。 In July, we announced our long-term strategic partnership with the Volkswagen Group. I believe that forming this partnership marks a milestone not only in XPeng's business journey, but also in China's automaking development. XPeng and the Volkswagen Group are highly compatible in our underlying technological beliefs and long-term vision for the evolution of smart EVs, and we each hold compelling and complementary industry advantages. Combining XPeng's industry-leading smart EV technologies with Volkswagen's world-class design, engineering, and supply chain capabilities, our collaboration will begin with two B-class BEV models, to bring best-in-class technologies, top-notch products, and a superior experience to our customers. Volkswagen Group will also make a long-term strategic equity investment in Xpeng for a total consideration of approximately $700 million. We'll continually deepen our cooperation with the Volkswagen Group and build stronger synergies in the next-generation EV platforms, software technologies, and supply chain capabilities. sharing economies of scale i'm excited about this strategic partnership which underscores the wagon's confidence in and recognition of our in-house self-developed core technologies and groundbreaking capabilities our corporation creates the globe auto industry's first collaborative business model that integrates software and hardware full-stack technology and we're moving to capitalize on this opportunity to generate immense value for our shareholders.

展望未来技术的发展趋势, 我认为在全球范围内, 过去的软件定义汽车的时代将会成为历史。 AI定义汽车的时代会现在才刚刚开始, 而小鹏会是这一浪潮最主要的推动者, 我相信会是很大的受益的。 那么下面一步, I will set up a company-level smart development, planning, and operation team. I will personally lead this large smart team to plan the autonomous driving, autonomous cockpit, the entire electrical and electrical structure, and many more smart innovation technologies. I expect AI to speed up the development of the current car technology system. The energy supply and AI price will rebuild the user's habit of driving.

As technology trends continue to evolve, I'm convinced that globally, the era of software-defined cars will conclude and we'll venture into a new era of AI-powered vehicles. XPeng will be among the most active advocates of this evolution. where we expect to reap substantial benefits. As we progress, I will establish an enterprise-level team taking charge of autonomous technology R&D, roadmap planning, and operations. I'll personally lead this macro intelligent tech team, unifying the development planning for ADAS, smart cabin, electrical and electronic architecture functions, as well as the evolution of several innovative initiatives. We're ready for AI to disrupt the existing automotive technology system as human machine co-pilot and AI power autonomous driving get our steam and reshape our driving habits. I look forward to presenting our latest achievement and R&D roadmap in intelligent technologies at our 2023 Tech Day on October 24th.

Our AI-assisted software, XMGP, will continue to make major breakthroughs in experience and coverage in the second half of this year. We will further advance the process of user recognition and use, and open the gap between us and our followers. At present, we are very fast in developing XMGP without relying on high-end technology. This week, a large number of media friends have tested our engineering version in several cities in Beijing. So, media friends, if you don't rely on any technology experience, In our next OTA in October, we will not only promote XNGPY for the first time in the first batch of cities, we will also bring more surprises to our users. We are confident that at the end of this year, we will open XNGPY in about 50 cities and not rely on high-resolution maps. At the same time, Over the second half of this year, we plan to make additional major breakthroughs in experience and coverage with our XNGP ADAS to further drive customer acceptance.

and the adoption process, widening the technology gap with our peers. The development of our XMGP that does not rely on high precision maps is speeding up, and we just completed a number of professional media test drives with XMGP prototype versions across many districts in Beijing this week. The media who participated gave overwhelmingly positive reviews on the XNGP assisted driving because it did not rely on high-definition maps or prior knowledge of the roads. For our next OTA software update slated for October, we will roll out the XNGP independent of HD maps in the first batch of cities along with other new features that we have yet to announce but are sure to delight XPeng owners. We're confident that we'll make non-HTMAP-reliant XMGP available to customers across approximately 50 cities by the end of this year. Through technology innovations, our work will also entail cutting XMGP's bond costs by about 50% by 2024, ensuring our models has the most advanced autonomous driving hardware as standard configuration. We're simultaneously exploring flexible pricing models for our software subscription business. 當前我正在跟我們的總裁王鳳英一起對標全球跟中國車企裡面最優秀的成本控制水平。

is one of the core goals of multiple teams, such as product, development, manufacturing, supply chain, and marketing. There are many low-cost projects under development. I would like to reiterate that up to now, we are confident that by the end of 2024, the goal of reducing the overall cost by 25% can be achieved, and that it will exceed this goal in multiple single areas. These low-cost measures will greatly increase the competitiveness of the product, Our risk rate has been significantly improved in 2024. Interestingly, two years ago, I once mentioned a point of view. At that time, I said that because of the cost, there is no car that can launch a fully automatic driver with competitive performance at the level of 150,000. But with our historical and technological innovation and the all-terrain chassis, my point of view has changed. Because I have clearly seen the clear path and time table. This makes us very confident that at the mainstream level of 150,000,

I am closely working with our president, Ms. Wang Fengying, to achieve the highest cost control level among carmakers in the world and China and prioritize cost savings as one of the core goals for various business units, including product design, R&D, manufacturing, supply chain, and marketing. With several cost-saving initiatives going well, I have great confidence in achieving the goal of reducing overall costs by 25% by the end of 2024, with even better results in some other subdivisions. These cost-saving initiatives will strengthen our product competitiveness and substantially drive gross margin improvement in 2024. Interestingly, two years ago, I expressed my view that considering cost effectiveness, no auto company could offer competitive autonomous cars to consumers at 150,000 RMB level. But as we implement technology innovation and full cycle cost reduction, I have changed my mind and formulated a clear plan to make autonomous cars affordable for the largest market segment in China. the 150,000 RMB price range. This will greatly promote the accessibility of intelligent autonomous driving.

in terms of sales, marketing, and service capabilities.

Under the leadership of our president, Wang Fengying, we have continuously improved customer satisfaction and cross-team collaboration. Looking ahead into the second half of the year, we'll accelerate our business model transformation across our domestic and international sales channels. To that end, our efforts will include optimizing our sales network drastically and partnering with more top dealers. These initiatives will spur our expansion and help us gain market share across Tier 2 and lower tier cities.

Regarding cash flow,

Our cash on hand at the end of the second quarter of 2023 amounted to 33.7 billion RMB. With vehicle deliveries back on track for sequential quarter growth, we significantly narrowed our cash outflow from operations to around 1 billion RMB. Over the second half of 2023, with accelerating sales growth from the G6 and other new products, we expect our growth margin to rebound gradually, and will continue to improve our operating efficiency. As a result, we expect our overall cash flow from operations to turn positive for the second half of the year.

那么经过过去几个季度的自我的涅槃跟变革, 小鹏汽车从今年三季度开始, 会进入销量、品牌、市器以及现金流的初步的正循环。 我们会在AI改变汽车的浪潮中间持续快速的进步。 在明年、在后年,我相信会进入更快速以及更全面的正循环。 Now, moving to our guidance.

We expect our total vehicle deliveries to be between 39,000 and 41,000 units in the third quarter of 2023, representing 68.1% to 76.7% quarter-over-quarter growth and revenue to be between 8.5 billion RMB and 9 billion RMB. Thanks to the proactive adjustment we made over the last several quarters, Moving into the third quarter this year, we have seen our sales, branding, team morale, and cash flow started to form a positive loop at XPeng. As the power of AI reshapes the automaking industry, we expect our virtuous cycle to accelerate and cover more areas over the next two years.

谢谢大家,下面欢迎新加入我们的财务VP James Wu为大家介绍 我们2023年第二季度财务状况,那么James在加入小鹏之前分别在通用期的美国和中国总部,以及在上期通用50担任全面的财务管理工作。 他在经营跟财务管理方面有相当丰富的经验,以及有很好的国际事业。 我相信在James担任下,小鹏的财务跟经营会做得更好。

Thank you, everyone. With that, I'll now turn the call over to our new VP of Finance, Mr. James Wu, to discuss our financial performance for the second quarter of 2023. By way of introduction, before joining XPang, James held executive finance roles at both General Motors' U.S. and China headquarters and at SAIC's General Motors Wuling Auto. We look forward to tapping into his extensive experience in finance and operations management and his valuable insight into international business practices. James' skill set is ideally suited to lead our finance and operations team, and we look forward to his contributions as we embark on our next level of success.

Thank you, Xiaopeng. And hello, everyone. Before I start, I'd like to say that I'm really happy to join Xiaopeng in this exciting time and look forward to our future interactions. Now I would like to provide a brief overview of our financial results for the second quarter of 2023. I'll reference RMB only in my discussion today, unless otherwise stated. Our total revenues were $5.06 billion for the second quarter of 2023, a decrease of 31.9% year-over-year, and an increase of 25.5% quarter-over-quarter. Revenues from vehicle sales were $4.42 billion for the second quarter of 2023, representing a decrease of 36.2% from the same period of 2022 and an increase of 25.9% from the first quarter of 2023. The year-over-year decrease was mainly attributable to lower vehicle deliveries and discontinuation of new energy vehicle subsidy, while the quarter-over-quarter increase was mainly due to higher vehicle deliveries of the P7i. Gross margin was negative 3.9% for the second quarter of 2023, compared with 10.9% for the same period of 2022, and 1.7% for the first quarter of 2023. Vehicle margin was negative 8.6% for the second quarter of 2023, compared with 9.1% for the same period of 2022, and negative 2.5% for the first quarter of 2023. The year-over-year and quarter-over-quarter decreases were explained by, first, the inventory write-downs and losses on inventory purchase commitments amounting to $0.2 billion related to the Model G3i as management lowered its forecasted sales due to stronger-than-expected market demands for newly launched vehicle models, with a negative impact of 4.5 percentage points on vehicle margin. increased sales promotions, and the expiry of new energy vehicle subsidies mentioned above. R&D expenses were $1.37 billion for the second quarter of 2023, representing an increase of 8.1% year-over-year and an increase of 5.5% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly due to higher expenses related to the development of new vehicle models as we expand our product portfolio to support future growth. SG&A expenses were $1.54 billion for the second quarter of 2023, representing a decrease of 7.3% year-over-year and increase of 11.3% quarter-over-quarter. The year-over-year decrease was primarily attributable to the reduction of commissions paid to franchise stores and lower marketing and advertising expenses. The quarter-over-quarter increase was mainly resulting from higher marketing and advertising expenses to support new product launches. As a result of the foregoing, loss from operations was $3.09 billion for the second quarter of 2023, compared with $2.09 billion for the same period of 2022, and $2.59 billion for the first quarter of 2023. Net loss was $2.8 billion for the second quarter of 2023, compared with $2.7 billion for the same period of 2022, and $2.34 billion for the first quarter of 2023. As of June 30, 2023, our company had cash and cash equivalents, restricted cash, short-term investments, and time deposits in total of $33.74 billion. To be mindful of the length of our earnings call, I would encourage listeners to refer to our earnings press release for more details on our second quarter financial results. This concludes our prepared remarks. We'll now open the call to questions. Operator, please go ahead.

Yes, thank you. If you wish to ask a question, please press the star key followed by the number one on your telephone keypad. To cancel your request, please press star then two. 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, and management will respond. Then feel free to follow up with your next question. And the first question comes from Tim Hsiao with Morgan Stanley.

Hello, Mr. Manager. Thank you very much for answering my question. I have two questions. The first question is about the improvement of the payment. Because we saw that the three-level guidance the average is about 14,000 to 15,000. So Lin Bujian's supply has improved. But because of the longer waiting period, in the past period, it seems to have affected the acquisition of G6's subsequent new orders. So first of all, we are expecting Lin Bujian's supply problem to be completely resolved. In addition, after the resolution, if we have any countermeasures, we can restore the growth power of G6 orders. As Mr. Xiaofeng just mentioned, 10,000 G6, can we expect this to be a stable level in the future? So my first question is about the improvement of the component supply. Because I expect the third quarter volume guidance suggests a continuous improvement of the component supply. However, The longer waiting time has adversely affected the new order momentum of G6 lately. So just want to know that when do we expect the bottleneck could be fully removed, and how could we boost the order momentum of G6? And could we expect the $10,000 per month is more like the steady or stable monthly run rate? And will experts consider to add or replace with a new supplier for the upcoming model to avoid such bottlenecks from relapsing? Thank you.

Yes, thank you. We believe that G6 is now between 200,000 and 300,000. Our price range is very competitive. So the order level is currently very strong. The current main challenge is that the MAX version is not fully prepared for some of the smart components. We can see that in August, September, and October, we have been climbing fast every month. Our goal is to reach 10,000 in a quarter of a month. At the same time, the most important thing is that in the entire production and supply planning and in our internal plan, we are trying to analyze how to reach 10,000 in a quarter of a month, or even a higher level of preparation. We can see that after Xiaopeng launched in Fuyang, In terms of power, in terms of the whole car, in terms of the intelligence, the balance has been pushed out. On the one hand, there is a drop, but on the other hand, a very good situation is that our factory, our supply chain preparation will be easier in the future. We will have a lot of supply chains and capabilities in many models. This will lead to us in the future on the core supply chain. Thank you for your question. First of all, we are very confident of GE6's future sales

and it's definitely going to be very competitive. And right now, looking at G6 among the 200,000 to 300,000 RMB price range, definitely it is one of the top players, and definitely we expect the orders to continue to go up. However, right now, the biggest challenge that we face is the max version because we are lacking in the supply of some of the core intelligent parts. But we are seeing the ramp-up of the supply of the parts since August, Going into September and October, we expect the same ramp up momentum to continue as well. Definitely going into Q4, we expect to achieve at least 10,000 monthly deliveries for G6. Right now, we have done actually a lot of adjustment and revolutions to avoid such shortage issues in the future for example with the launch of our separate 2.0 platform not only can we reduce the overall production cost of our future models but we can also reduce the reliance independence of our supply chain as well so in the future our supply chain will be much more which will be much easier to manage and it will be much more straightforward as well in the future we will have much more models and that are built on SEPA 2.0, which means that we can have better management and control over the supply of our core parts. And because of the SEPA 2.0, we also can actually have a lot of parts that are mutually compatible on the platform that can support the development of a lot of our future models. So overall speaking, given what we observe from G6 so far, and thanks to the development of our technology, we believe that our supply chain constraint is getting resolved. Thank you.

Thank you, Mr. Xiaobong. My second question is about the recent price competition. I would like to ask Mr. Guan, what do you think about the restart of the same-year price war and the impact of the new car price on the entire new car price after the release of the new car in the future? We are currently in the process of making relative adjustments to the price and sales strategy of the following models, including the G9i and X9. So my second question is about the pricing competition. So I just want to learn more about the management's view on the potential impact on the new wave of the price war, along with the competitors like Tesla's upcoming new model launches in September. Does X need to get more aggressive with its pricing or promotion strategies for current G6 or upcoming models? If so, how should we think about the impact of equal margin in third quarter and thereafter? Could we effectively pass through the cost criteria to our supply chain? So that's my second question. Thank you.

Hey, Tim. It's Brian. Let me address your question. First of all, the recent price movements of our competitors have not really impacted our sales, especially the growth trend of G6, because when we actually established our pricing for G6, we anticipated competitive pressure. I think the resulting momentum is actually intact. But before I address the pricing as well as gross margin sort of trends, I want to underscore that our strategy right now is to make sure that we regain growth and scale. I think that's the foremost strategic priority for us this year. As you can see that we have actually successfully gained the growth momentum. We actually now are forecasting returning to our historical high in terms of revenue, quarterly revenue rates, that actually will help us in the long run to gain a scale economy as well efficiency. Another priority that we actually also as a company we want to achieve for the second half this year is to gain very strong cash flow. As you heard earlier that we actually anticipate with the growth of our deliveries, our cash flow for the second half on the operational level will be positive. So I think that's also important for us to build momentum into improving economy. So on the gross margin trend, I'll hand over to James to give you some sort of trend estimate. But I think that's something that clearly we cannot give guidance at the moment, but I think can give you some trends to analyze.

Yeah. So I just wanted to add, as Brian mentioned, our focus is very clear in terms of gaining volume and scale, which obviously will help improve our gross margin as well, as we've seen our manufacturing cost As mentioned in the earlier script, we've got some EOP impact from the G3I in Q2. I just want to note that we still have some level of production scheduled for G3I in the third quarter. So there will be another portion coming through in the third quarter. And as we increase volume in Q3 and into Q4, we expect our gross margin to improve over time. And as we sell better mixed products in the second half, we do expect our gross margin to become positive in the fourth quarter of this year. And lastly, I just want to echo that Brian mentioned from a cash flow standpoint, as we increase volume in the second half, we've already seen some pretty big improvement in the second quarter in terms of cash flow. And into the second half, we are pretty confident that we will be achieving positive operating cash flow and have a really healthy cash balance towards the end of the year. Thank you.

Thank you very much, Brian and James, for the detailed sharing. Thank you.

Thank you. And the next question, Konstantina Howard with Goldman Sachs.

Thank you for your time. I have two questions. The first is that we mentioned that the market will start to go down in the second half of this year and next year. There will be a lot of reforms at the channel end. Because it will go down to the working market, I want to ask if we should adjust the channel and sales cost of the second half of this year and next year accordingly. This is the first question. Thanks, management, for taking my question. The first one is in terms of the distribution network building. As management mentioned, there will be a lot of changes and optimization as well as deepening into the lower tier cities into the second half of this year as well as next year. So should we expect a higher level of sales and marketing expenses accordingly in the second half? of this year as well as 2024. Thank you.

Tina, this is Brian. I think you're right. We're actually making changes to our sales channel and strategy. We actually are envisioning more partners to be our store investors and sales agents. And that effect I think will lead to a better penetration of lower tier cities as well as I think optimize the sales performance because we actually simultaneously will weed out weaker performers on the sort of stores both in terms of direct owned as well as our current channels. Interestingly actually this actually we envision will lead to a more efficiency gain and lower sales marketing cost for our operations. because we think right now the optimal efficiency has not been achieved with our current model, and also we actually have not partnered with enough high-quality and efficient operators. So with renewed focus on partnership and also higher standards setting for our sales partners, I think it will lead to high efficiency. Thus, actually, we envision more efficient and lower sales marketing ratios.

So my second question is regarding the operating level break-even point. since management mentioned that the growth margin will start turning positive into Q4 this year. Just wondering, because we're still continuing to invest in R&D continuously, so what would be the expected operating profit break-even point? Thanks.

Yeah, thanks, Tina. I think for guidance on overall company break-even, as well as more cash flow forecast, we're actually maintaining our current view that by 2024, we will achieve quarterly free cash flow positive. So that's something we're confident next year we can actually hit. And then for the overall breakeven year, we still maintain, sometimes in 2025, we'll achieve breakeven for the whole company.

Okay, thank you.

Thank you. And the next question comes from Paul Gong with UBS.

Thank you for answering my question. My first question is about ADAS without high-resolution maps. Can you share some details with us? I can understand that its cover can be wider. And then the cost is how to compare it with a high-resolution map. And then realize this. So my first question is regarding the autonomous driving without HD map. I can understand it could offer more coverage of the applications in terms of cities. How does the cost compare with the previous version with HD map? And to achieve that, what are the key challenges we have to overcome?

Hello, I'm a kid. This is a technical question. I'll try to answer it briefly. You can think that in a high-resolution map environment, when XM7P drives, it will be guided by the high-resolution map. For example, when you need to cut a line, because you need to prepare for a right turn, And in an XMGP without a high-altitude map, it will look at the lines on the ground, for example, what is the curve line, what is the straight line, when there is a turning arrow to the right, etc. Then at this time, it is like a person going to a strange area, he is observing the road surface to drive. At this time, he may drive because, for example, I want to turn right, but sorry, there is no curve line now, it is all straight line, you must drive. So this is one of the disadvantages of no high-end maps. However, there are many advantages of no high-end maps. For example, first, you don't need to prepare a map because it is an ordinary navigation map. In theory, there are places where mobile navigation can be done. Second, it doesn't need policy approval because it is safe. Third, it doesn't need to buy a map. Fourth, it doesn't need to maintain the map because Many times, when we are repairing roads, the road section on the ground will be changed. But in the normal navigation map, this happens at any time. So its whole reliability and flexibility will have a great advantage. So what it mainly needs to challenge is that it needs to have an eye like a human. to observe the surrounding environment, location, including text, including patterns, including cars around, in seconds or tens of seconds, to make a decision. So this challenge is different from a situation where you can think of it as a blind eye, but there is a sky net guiding you. It's different. It's a bit technical, I'm sorry. Okay.

Thank you for your question. This is slightly technical. I'll try to provide a simple and straightforward answer. When we are equipped with high-definition maps, it's very easy for ex-NGP to be guided because you will know when to expect to change lanes before turning left or right. However, without the high-definition maps, things will get much trickier because the ex-NGP system will have to judge by, on its own, where to change or... or what kind of situations will change beforehand. For example, it will need to be equipped with the hardware sufficient for it to actually identify dotted lines on the road or solid lines on the road or signs and characters that says that this is a left turn corner or right turn signal. This is just like when a person visit a new environment, you will need some time to get acquainted there is always possibility for mistakes. However, there are a lot of pros that come from this non-HD mapped reliant XNGP. First of all, you don't need high definition maps, which means that you can go wherever you want as long as you have, for example, the conditions and the hardware that comes with XNGP. And basically, theoretically speaking, as long as your phone can guide you there, our XNGP without the map reliance can also guide you there. And the second benefit is that you don't need to jump through hoops to get policy approval because of its high safety. And the third benefit is that you don't have to spend extra bucks to purchase the high-definition maps. And also, another big benefit is that you actually lower a lot of the maintenance cost because it is by default of the ex-NGP to actually recognize any sort of road conditions. For example, there might always be construction going on on the roads that might not be indicated in high-definition maps, and you need to be able to adapt to that kind of changes. Now, obviously, what you mentioned in your questions are the major challenges Basically, it comes down to the capability to actually identify environmental elements, including words and characters, signs and signals, pictures, and basically all of the traffic items, all of the vehicles and other kinds of road participants that are surrounding you. And you have to actually make decisions based on that ahead of time. And basically, that is my simple answer. I hope that helps. Thank you.

Okay, thank you. Our understanding is that the cost limitation of the garlic chip is relatively obvious. 那我们的一个降本的一个原理是要用更好的一个算法来降低对于算力的一个要求呢? 还是就是我们还是用类似的一个大算力的芯片? So my following second question is still regarding the autonomous driving. In this case, without HD map, does it mean it needs to observe more environments and calculate more, think more, so that it requires even more calculation power on the chips? And regarding the cost down of autonomous driving hardware heading towards 2024, you mentioned you are going to cut the cost by 50%. Does that mean you are going to use smarter software to reduce the requirement of the calculation power, or should we maintain the calculation power, even bigger calculation power?

Okay. The higher the ability requirement for multi-mode sense integration and reasoning, the greater the requirement for algorithmic integration. But on the other hand, I want to say that in the past, in the algorithm of only 30 TOPs with XARIA, we have actually achieved high-quality CNGP in the program. So, in the algorithm of 512 TOPs today, we are very We are confident that we can do a very good job in this field. In this year's 2020, I will share with you some of the methods and capabilities of our software. I would like to share with you that the most important point is that we absolutely rely on technological innovation and innovation in management methods to achieve large-scale software development. For example, in terms of algorithm, from the perspective of the entire battery, Thank you.

Thank you for your question. Definitely, when we need to adopt multi-model perception fusion and use higher-level algorithms, definitely it will require more computing power. However, we were already very successful with our CNGP, even using 30-tops computing power. And nowadays, we actually have 512-tops computing power. So definitely, we believe that we are very sufficient. And actually, you can expect to hear more about our ways to reduce costs while building up our intelligent driving power on our tech day this year on October 24th. And one of the key things I'm going to talk about is how we can drive down our production costs using technological innovation and management innovation as well on an operational level. For example, in terms of computing power, we are actually right now thinking about how to utilize the electronic and also electric technology architecture to drive down our, to improve our efficiency by using maybe one PCBA and also two SOC to do everything together. This is just an example, and you can expect to actually hear more on our Tech Day. Thank you.

Thank you very much. Quite helpful. Thank you.

Thank you. And the next question comes from Ben Wong of Credit Suisse.

Hello, I have a question. I want to know what new products we will have in 2024. Just now, the leader talked about a car with a price of 150,000 yuan. Can this car be compared to the G65 SUV? Okay, I only got one question. It's about a 2024 new product. You just mentioned that you are producing one self-driving car in the pricing range, around 150,000 RMB. Is it going to be a product slightly lower than the G6, for example, called G5? Thank you.

Hey, Bain. This is Brian. We have a plan for two new models launched next year, but a specific site will not be providing this at this moment, obviously. But we envision those will be large volume drivers for growth as well, likely to be launched in the second half.

Thank you. Thank you. And the next question comes from Jinqi Yin with CITIC Securities.

Hello, everyone. I have two questions. The first question is about the MPV that will be released in the second half of the year. Mr. Peng mentioned this car before. I would like to know if this car has a specific release date and if you can share more information about this car, such as price, size, range, and its driving capability. This is the first question. The second question is about our strategic cooperation. So my number one question is about our guidance on the product pipeline on the second class. So when will be the exact release date of the MPV And could you provide more information on the MTV in details? For example, the price, the size, and the cruising ranges, et cetera. And my number two question is about the strategic collaboration. So apart from Volkswagen, is or will there be any other OEMs that are looking forward to have collaborations with Xiaopeng? And what is our attitude for the potential collaboration opportunities in the future? Thank you.

Okay, thank you. Let me answer the first question. The first 7-seater of Xiaopeng is currently going very smoothly. Our original plan will be released in the fourth quarter of this year, but I believe it will be in the latter half of the fourth quarter. So I don't think there will be a lot of supply this year, but there will be a lot of supply next year. At the same time, in this car field, we have seen that we will prepare the entire supply chain in advance. The job is to do it well. This time, our requirement is that the delivery will be able to break through such an expectation. I can't tell you too much about the specific situation of this car. I can briefly introduce the first floating structure. So in intelligent, in the overall system of the whole car, it is the same system logic as G6. This is the first one. The second one is that the space is very large. Our core is the internal space. The requirement is that it should be the largest in the market or the largest in the industry at this price point. Secondly, it is a very good price control. So in this system, today I can only briefly talk about this. When we finally release it, we will give you more detailed information. Thank you.

Let me take the first question. First of all, the development of our upcoming seventh year has been going really well, so we expect to follow our original plan, which is to rebuild the car in late Q4. We don't expect to deliver it in a mass scale by the end of the year, but starting from next year, we expect to have mass deliveries. And we definitely will prepare the supply chain well enough for this car, learning from previous experience. With regards to the details about the car, unfortunately, I'm not able to give you too much information. However, several things I can talk about here. First of all, it's supported by the SEPA 2.0 platform, which means that in terms of its intelligence and also the whole car integration, it is of the same logic as G6. And the second benefit of this car or selling point is its spaciousness. It is huge, especially its inner space. I would say that we expect it to be the biggest in terms of its inner space. of the same vehicles and models of the same price point. And another big advantage to it is its handling and drivability. It offers top-notch driving experience. That's all I can say for now. Thank you.

Hi, Xinxuan. This is Charles here. I'll address your second question. So first of all, our strategy partnership with Volkswagen Group is a long-term and a win-win partnership. We have highly complementary strength to bring to this partnership. And our collaboration on the GNI is only a start. And we see there are other opportunities that we can collaborate in the future. And we believe that we actually created the first of its kind, like a collaboration business model on the full stack platform and the software technologies. So I think that in terms of the collaboration with potentially with other parties, I think that we remain open-minded. But also in the meantime, we will be very selective. We will look into the strategic value and also commercial value that can bring to us and also bring to our partners.

Thank you. And the next question comes from Niuquan Ding with HSBC. Okay.

The first question is to ask when the management would think would be the iPhone 4 moment for the times driving. It looks like the big data would exhaust it the corner case eventually, but to truly achieve hands-off and eyes-off and minds-off, does that require regulatory support, or the technology just naturally matures to no engagement per million miles?

This whole range refers to China, for example, 95% or more of the road sections, the environment, including the community, the underground garage in the community, can be used. I think the second impact factor is its cost. The third impact factor is its overall capability. This capability includes, first of all, safety. Second, as you just mentioned, experience. The experience is divided into two parts. I think two parts are more important. The first part is the problem you just mentioned. Can we do it? For example, 10,000 kilometers, take care of it once to several times. At present, we can do it at high speed, but it is still far from being done in the city. So in the next two to three years, we hope to be able to do it, for example, 1000 kilometers, take care of it once or take care of it 0.1 times. This is a very comfortable number. So I believe there is another problem with the experience, which is whether it can be more efficient than most standard drivers. Thank you for this.

All right, thank you for that question. It's a bit tricky. I'll try to answer it to the best of my capability. My short answer is that 2025 or 2026 will be the iPhone 4 moment for autonomous driving. Now, there are several influencing factors to it. The first one is the full area coverage. When I mention full area, I'm actually referring to covering 95% of China roads, including not just highways, but also urban areas. and also within the different neighborhoods and also parking garage etc and the second factor is the cost of produce of manufacturing and also producing such high level of intelligence and the third factor is its overall capability and that is actually twofold the first one is the safety profile and the other is the overall driving experience as you mentioned the takeover rate definitely matters So we expect to actually have, for example, in the coming two to three years, which a level of having zero to one or one takeovers within 1,000 miles, 1,000 kilometers. And maybe on the highway, we have already achieved that, which is to have one takeover per 10,000 kilometers. Another thing is another big part to the driving experience is actually whether or not it can actually beat a human driver in terms of its smartness and also its driving efficiency. Now, personally speaking, I expect to reach that point of iPhone 4 moment in 2025 because thanks to the rapid development of LRM, we believe that it's actually bringing up the schedule. Otherwise, it could be 2026. Thank you. 谢谢管理层。 我的第二个问题是还想请教一下新车。 虽然刚才Brian有说这个可能没有把它讲得特别detail, 但我们还是想从定位上跟管理层探讨一下。 之前有说过我们的这个新车的定位是

Thank you. My second question is about the new product cycle, although we understand there could be limited that can be shared on the detailed side. But the comment did talk about the pricing spectrum to be arching between $150K to $350K. So we see the midsize, the G6, targeting $200K to $250K, and the compact size may be covering the below. So do we consider to revive or refresh the G9 model for the potential $250K to $350K pricing point and how do we position within the pricing spectrum we want to target. Any color will be useful. Thank you.

From the beginning, my child and I have a lot of new models and modern models. I think this is the first one. Then we will rely on the unified architecture, which includes the levels from 150,000 to 350,000. Because in the entire child's system, we can see 15 to 20, 20 to 25, 25 to 30, 30 to 35, which are different. We can share that we are now in a large platform to make these different-level cars. We are now very happy that our efficiency Thank you.

Thank you for the question. Actually, this is a topic that we have discussed internally multiple times. And unfortunately, I cannot give you all the information. However, what we can say is that we expect that by the second half of 2024, Xpeng is going to launch multiple new models as well as multiple Facebook versions of previous models based on the same platform. And it will be between 150,000 to 350,000 RMBs. And that is because we actually have, from our previous experience, identified multiple market needs or demands or user demands for different price range and different models. They could be individual use or for smaller families and big families. And between 250,000 to 300,000 RMB level, definitely the space is very crowded and it's very, very competitive. And there are different use or different demands. It could be individual customers, smaller or bigger families. However, we are very glad to report that with our current big platform strategy using our SEPA 2.0 platform with our modular design, we can actually produce new models meeting different demands in the market in a very high efficient manner using very low cost as well. So definitely a lot to look forward to in the future. Thank you.

Thank you. And the next question comes from Mingxuan Li with Bank of America.

Thank you, Mr. Guan. I have two questions here. The first question is about the interest rate of this quarter. I noticed that the interest rate of the second quarter has dropped a little compared to that of the first quarter. In addition to the drop in the G9 ratio, there may also be a discount of some vehicles. So my question is related to your second quarter gross margin. So besides a certain discount and also sales contribution from G9 is lower than first quarter, is there any other reason why your gross margin declined QOQ in the second quarter? Is there any non-cash item? Thank you. This is my first question.

Thank you. This is James. I'll answer this question. So you're right. In Q2, as mentioned earlier, There's a portion of the G3I EOP impact that we have booked in Q2. And I just want to emphasize that a majority of the impact is non-cash because that's because of the acceleration of the un-amortized toolings that we have booked because of the decision. Excluding the EOP impact, we still have a slight lower gross margin versus Q1. That is mostly because of the increased promotional spend on some of the older models that we have. That is partially offset by lower battery costs that we've seen in the second quarter. And to your question, we have seen a pretty healthy improved cash flow in Q2, and we will continue to see that in the second half. Other than the profitability impact, a big impact will come from the working capital impact, because as we increase volume, we will improve our collections from a delivery perspective, and we will clear our payables in a stacked basis. So as we increase volume, we will have considerable working capital gain in the second half, which will help to improve our operating cash flow.

Thank you. In addition to the expensive battery, is it because the density of the supercharger is not high enough, which leads to a lower fitting rate at that time and a lower proportion of orders? In recent years, there are supercharger acid-free iron batteries in the market. We will start to discuss with all our battery suppliers that supercharger batteries and acid-free iron batteries will be used in future models. So my second question is for the fast-charging battery. So in the past, on your G9, you already started to sell the 4C NCM battery on your G9. But at that time, the sales portion is very small, probably because the battery is expensive. and also the supercharging station is still not comprehensive enough. So since recently, there are some fast-charging LFP battery in the market. So will you start to discuss with your supplier to adopt such kind of battery in the future of your product to lower your cost? Thank you.

Yeah, thank you, Ming. This is Charles. So first of all, when we mass produced the G9, we already provided the customers with the 3C NCM and also LFP battery as the standard configuration. And at the time of the mass production, it's already the best in class and most fast charging technology in the market. And I think it's still, at this point, it's still the best in class fast charging technology in the market as well today. So I think that from the consumer perspective, first of all, we believe that the 3C LFP and NCM battery present a very cost-competitive and also fast-charging product, and it is still very competitive in the market this year. And to answer your question regarding the charging experiences, I want to clarify, yes, I think that the 3C battery coupled with 800-voltage platform it can achieve the most fast charging technology on our 480 kilowatt supercharger. But I think I also want to clarify that even though on the standard charging piles, I think 90% of the charging piles in the market also support 800 wattage and also can support fast charging to our 800 wattage and the 3C battery powertrain technology.

Thank you, Charles.

Thank you. As this does conclude the question and answer session, I would like to turn the call back over to the company for any closing comments.

Thank you once again for joining us today. If you have further questions, please feel free to contact Xpeng's investor relations through the contact information provided on our website or the Pearson Financial Communications.

Thank you. This concludes today's conference call. We now disconnect your lines. Thank you.