XPeng Inc.

Ladies and gentlemen, thank you for standing by for the third quarter 2023 earnings conference call for Xpeng 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 Zhu, Head of Investor Relations of the company. Please go ahead, Alex.

Thank you. Hello, everyone, and welcome to Expo's third quarter 2023 earnings conference call. Our financial and operating results were issued via 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 team will include our 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 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. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from 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 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. Xpeng'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. 大家好,我很高兴地向各位股东跟朋友们汇报经过三个季度的变革跟努力。

From the third quarter of this year, Xiaofeng's sales, brand, market and free cash flow have all entered the initial positive cycle. In such a complex smart manufacturing industry, it is very difficult to achieve such a carbon recovery. Therefore, I would like to thank everyone for your support and patience. Next, we are very confident to achieve rapid growth in sales in the fourth quarter, as well as a significant rebound in the interest rate, and to achieve

Hello, everyone. Today, I'm pleased to report to our shareholders and customers that after three quarters of transformation and effort, we have entered into the initial phase of a virtuous cycle, driving improvements in sales, brand image, team morale, and free cash flow. It is extremely difficult to deliver such a turnaround in the smart car manufacturing industry. Therefore, I would like to express my gratitude for your support and patience throughout the journey. Going forward, we're confident in achieving rapid sales growth and notable improvement of gross margin in the fourth quarter, and we're ready to gain considerable market share in 2024, achieving a high growth target that is significantly above the industry average.

The competition in the new energy car industry has been growing day by day since 2023. However, this has also brought about major changes in the entire industry pattern. The car industry is accelerating the entire process of the smart electric car to subvert the traditional oil car in an electric and intelligent way. And AI is redefining the structure of the smart electric car and the business model of the entire car industry. The entire product system of AI driving is not so close. The only standard for testing AI driving to the turning point is to complete a very low cost, high safety, and good experience in nationwide coverage and all-car coverage. So on the Science Day of this year's 1024, we launched the first 20 unmanned city projects of XMGP, and at the end of next month, that is the end of December, We will cover 50 cities across the country. We will use technology and AI to enable users to enjoy free and free self-support driving in the country, and to first cross the threshold of self-support driving. From now on, I believe that in the next five years, it will be the outbreak of self-support driving. Xiaotong Motor Company's goal is to become the leading brand in the self-development of users' minds.

China's new energy vehicle industry has witnessed resilience and growth amidst increasingly intensified competition throughout 2023, creating great opportunities to reshape the industry landscape. The competition on electrification and smartification is speeding up the replacement of ICE cars with NEVs. And AI is revolutionizing the technical structure of smart EVs and transforming automakers' business models. There are no shortcuts to ADAS technology. The only way to determine whether mass production and the inflection point of ADAS technology have been reached is the achievement of nationwide coverage with low cost, a high level of safety, and great customer experience across different models. During our tech day on October 24th, we launched the public testing of XNGP in the first batch of 20 cities where high-definition maps are unavailable. Our plan is to expand our coverage to 50 cities by the end of this year. Our technology and AI will empower our customers to use ADAS wherever they drive throughout the country. XPeng has been a pioneer and leader in ADAS technology and its customer adoption. I strongly believe that the demand for ADAS will surge in the next five years, and XPeng will be the preferred smart EV brand for customers.

Next year, in 2024, we will integrate the capabilities of many different systems to integrate the infrastructure of the next generation of electronic vehicles, the unified infrastructure of the intelligent driver, the intelligent auxiliary system that can drive and drive, and the intelligent voice, intelligent sitting ability, and the new large language model capability. The next generation of intelligent chassis and intelligent power infrastructure will integrate all of these. Then it can quickly deploy to different models and advance to globalization. Next year, we'll consolidate and integrate our full-sec in-house R&D capabilities

and a wide range of systems, including the next-gen EE architecture, the unified ADAS domain, smart cockpit, and voice assistant, brand-new large language models, the next-gen chassis, and powertrain. As a result, we'll be able to deploy multiple models for the global market rapidly and realize the integration of cars between different platforms, as well as between cars and other vehicles, I believe this will significantly enhance our engineering capabilities to support various products in the global market, strengthening our edge in smart technologies by integrating different systems.

In the past three seasons, we have made significant adjustments and upgrades to the company's strategy, organization, management team, and product technology plans. Apart from our commitment to ADAS and smart EV technologies,

we have made crucial changes to our corporate strategies, organizational structure, senior management team, and product and technology roadmap over the past three quarters. Making various changes of such a magnitude simultaneously could have brought risks and impacted near-term results. However, thanks to the mutual trust and endeavors of the whole X-Plane team, these changes did not affect our short-term performance. Instead, they allowed us to deliver better than expected results.

For the third quarter of 2023, our vehicle deliveries exceeded 40,000, representing a 72% increase quarter over quarter.

Additionally, we achieved positive free cash flow with over 1 billion RMB in cash inflow.

We're confident of setting a new record for vehicle deliveries in the fourth quarter. Our target is over 60 million units. Sorry, 60,000 units. Regarding product sales,

the G6 electric SUV has become the top-selling vehicle in the 250,000 RMB price range during its first quarter on the market. In October, over 8,700 G6 vehicles were delivered. This early success of the G6 is a strong validation of Xpeng's ability to create and introduce a new benchmark model in a relevant market segment, thanks to our highly differentiated technologies and effective marketing. By doing so, we're bringing smart EV technologies to a much broader customer base.

在9月,我们推出了竞争力全面提升的2024款机构,并推现了技术性的降温,实现了整个毛利超过了原来机构。 新的机构在10月交付量已经突破4,000,成为30万级纯电SUV的明星产品。

In September, we launched the 2024 edition of Xpeng G9 with a higher gross margin than that of the original version. This cost reduction was made possible through advancement in technology and engineering. In October, we delivered over 4,000 units of G9, making it one of the top-selling electric SUVs in the 300,000 RMB price segment.

在10月份,我们的总交付量突破2万,创下历史新高,重新夺回在造车心思里的纯电的销量第一名的排名。 In October, we achieved a record-breaking sales month with over 20,000 vehicle deliveries and secured the top spot among EV startups for BEV sales volume again. 在11月17日即将开幕的广州车展上面,我们... The new flagship model X9 will officially meet the consumer and start the pre-sale. X9 is a pure electric, intelligent, large-scale MPV. However, it perfectly combines the characteristics of MPV and SUV in terms of space and appearance. It is a completely different from the traditional new MPV. The X9 is standard with rear-wheel-drive. The turning radius is even equivalent to P7. In addition, XMGP, which is the leading unmodified XMGP in the industry, can make it easy for large cars to drive. I believe that there are no other MPV models in the market that have the same technical capabilities as X9. X9 will also start delivering at the beginning of January 2024. I expect X9 to be the first in the large pure electric MPV market.

We're excited to announce that we will showcase our flagship MPV, the Xpeng X9, at the Guangzhou Auto Show and start pre-sale on November 17th. The X9 is a seven-seater pure electric smart MPV built on the separate 2.0 architecture. It stands out from traditional MPV models with superior space design and maneuvering that perfectly combine the advantages of MPV and SUV. Moreover, the X9 comes equipped with rear-wheel steering as a standard configuration, enabling a turning radius similar to that of the P7. With X-NGP, our industry-leading technology that does not rely on high-definition maps, maneuvering an MPV has never been easier and more agile. These technical capabilities are not found in any other MPV models on the market, X9 will be delivered from the beginning of January 2024. We're confident that X9 will become the top seller in the large electric MPV market.

new brands will greatly accelerate our sales and share in the A-level car market. Our new brand's first product, that is, the A-level smart pure electric car, MOLA, is not bad at all. The current development progress is very smooth. We estimate that MOLA will be listed in the third quarter of 2024. In my opinion, the launch of MOLA next year is just the beginning. Through further innovation and extreme cost control, we will still be in the mainstream In 2024, we plan to launch highly competitive new models based on the SEPA 2.0 architecture.

Additionally, we intend to introduce a new EV brand in the 150,000 RMB price segment. Leveraging our partnership with Didi, China's leading mobility technology platform, we believe that this new brand will greatly accelerate our sales growth and expand our market share in the A-class EV market. Our team is currently on track to develop Mona, the first model under this brand, with an expected launch date in the third quarter of 2024. We believe that Mona is just the beginning of an exciting journey, and we're committed to pushing the boundaries of technology and keeping costs under control. This will enable us to launch smart EV models that boast autonomous driving technology in the mass market segment at a price point of 150,000 RMB or 20,000 US dollars. This move will give our product a significant edge over other models in the segment, allowing us to reach a wider audience in the Blue Ocean market segment.

Mowei has eliminated nearly 100 sales stores and launched a new project to attract more powerful sales partners. We have completed more than 100 new sales stores in two months, and cooperated with a large number of excellent luxury car sales companies for the first time. We will accelerate the opening of new sales stores from the fourth quarter and achieve more than 500 sales stores by the end of this year and early next year. Our president, Ms. Wang Fengying, has been meeting a significant overhaul of our sales network, making it more efficient, flexible, and expanding faster to cover more Tier 3 and Tier 4 cities.

We closed almost 100 low-performing stores during the first three quarters this year and launched the Jupiter Project, a program to recruit more competent franchisee partners. We secured investment for over 100 new stores within two months and established cooperation with top-tier dealer groups specializing in luxury vehicles. As we head into the fourth quarter, We're accelerating new store openings and expanding our sales network to reach our goal of 500 stores by the end of the year or early next year. These upgrades and rapid expansions, coupled with innovations in marketing, will become one of the most important drivers for our sales growth in 2024 and beyond.

At the end of September, I visited the Nambao headquarters of Dazhong Group. We met with Mr. Bloom and Dazhong's colleagues We have discussed the next full-scale strategic cooperation project in depth. Both sides have a clearer blueprint for long-term strategic cooperation in technology. We have also actively discussed strategic cooperation opportunities in the international market in more depth. We and Dazhong have jointly developed a model based on the G9 platform. It is in rapid and efficient development. At the same time, our strategic cooperation on the supply chain is also in the development of all performance. It is expected that the price of our supply chain will produce significant results next year. At the same time, in order to strengthen the comprehensive cost control ability, we will learn from excellent entrepreneurs in the industry in the design, development, manufacturing, marketing, and other full-circumstances. So this progress is now very fast, and I am very confident that the goal of accelerating or even exceeding the original plan to reduce 25% by the end of 2020 is to significantly increase the overall net profit next year.

During late September, I had the opportunity to visit the Volkswagen Group's headquarters in Wolfsburg. We had a detailed discussion with Mr. Bloom and Volkswagen's senior management regarding our comprehensive strategic partnership, which helped clarify the blueprint for our long-term strategic cooperation in technology. We also explored deeper strategic cooperation opportunities in the international market. Currently, We're jointly developing models based on the G9 platform, which is in full swing. The strategic cooperation in the supply chain is also progressing effectively, and we expect cost reduction in the supply chain to generate meaningful results in the next year. To enhance our cost control, we learn from the best practice of OEMs in the industry. The progress of cost reduction in the entire process of design, R&D, and manufacturing and marketing has given me confidence in accelerating the progress to reach the goal of 25% cost reduction by the end of 2024, or even exceeded, which will significantly increase the gross profit margin next year.

From the perspective of cash flow, our cash flow at the end of the third quarter was about $36.5 billion. In the third quarter, we achieved a positive free cash flow of more than $1 billion. Let's look at the cash flow. We had approximately 36.5 billion RMB in cash at the end of the third quarter of 2023, and we generated over 1 billion RMB in positive free cash flow during the same quarter.

With our new product and technology-driven cost reduction, we expect to see a significant improvement in our gross margin, resulting in even stronger positive free cash flow in the fourth quarter. This is an important milestone for us to achieve profitability at scale in the long term. 最后我们预期2023年第四季度,我们的总交付数量约为59,500至63,500两。

The growth rate is 48.7% to 58.7%. So the revenue is expected to be 12.7 billion to 13.6 billion yuan. So the next step, Xiaopeng will focus on organization and marketing and continue to change in product innovation. I believe that the effect of this year's series of changes will be more obvious in 2024 and later. Looking ahead, we're projecting our total vehicle deliveries to be between 59%

and 63,500 units in the fourth quarter of 2023, with a quarter-over-quarter growth rate of 48.7% to 58.7%. We expect our revenue to be between 12.7 and 13.6 billion RMB during this period. We are committed to implementing transformations primarily in our organization and marketing strategy, which we believe will produce more favorable results in 2024 and beyond. This, in turn, will enable us to accelerate our growth and expand our scale from the fourth quarter of 2024. Our aim is to capitalize on global opportunities arising from our leadership in smart EV technologies, improve our organizational efficiency, and gain a dominant market share. Our ultimate goal is to establish Xpeng as the top smart EV company by 2030. Thank you, everyone.

With that, I'll now turn the call over to our VP of Finance, Mr. James Wu, to discuss our financial performance for the third quarter of 2023. Thank you, Xiaopeng.

Now I'd like to provide a brief overview of our financial results for the third quarter of 2023. I'll reference RMB only in my discussion today, unless otherwise stated. Our total revenues were $8.53 billion for the third quarter of 2023, an increase of 25% year over year, and an increase of 68.5% quarter over quarter. Revenues from vehicle sales were $7.84 billion for the third quarter of 2023. representing an increase of 25.7% year-over-year and an increase of 77.3% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly attributable to the accelerating sales growth of the G6 in the third quarter of 2023. Growth margin was negative 2.7% for the third quarter of 2023, compared with 13.5% for the same period of 2022 and negative 3.9% for the second quarter of 2023. Excluding the negative impact attributable to the G3i and the production as we described in the prior quarter, the gross margin would have been breakeven for this quarter. Vehicle margin was negative 6.1% for the third quarter of 2023 compared with 11.6% for the same period of 2022 and negative 8.6% for the second quarter of 2023. The year-over-year decrease was explained by, first, the inventory write-downs amounting to $0.23 billion related to the Model G3i as we finished the rest of the production in its life cycle, with a negative impact of 2.9 percentage points on vehicle margin. And secondly, increased sales promotions and the expiry of new energy vehicle subsidies. The quarter-over-quarter increase was primarily attributable to the improvement in our product mix and battery cost reduction. R&D expenses were $1.31 billion for the third quarter of 2023, representing a decrease of 12.9% year-over-year and a decrease of 4.5% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases were mainly in line with the development timing and progress of new vehicle programs. SG&A expenses were 1.69 billion for the third quarter of 2023, representing an increase of 4% year-over-year and an increase of 9.6% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were primarily attributable to the higher commissions paid to our franchise stores. As a result of the foregoing, loss from operations were 3.16 billion for the third quarter of 2023, compared with $2.18 billion for the same period of 2022 and $3.09 billion for the second quarter of 2023. Fair value loss on derivative liability was $0.97 billion for the third quarter of 2023. On July 26, 2023, our company entered into an agreement with Volkswagen Group to issue up to 4.99% of our company's ordinary shares for a fixed purchase price of $15 per ADS. Until the transaction closes, fluctuations in the fair value of the forward share purchase agreement were measured through profit or loss, resulting in a non-cash loss of $0.97 billion for this quarter. Net loss was $3.89 billion for the third quarter of 2023, compared with $2.38 billion for the same period of 2022 and $2.8 billion for the second quarter of 2023. NUMGAP net loss, which excludes share-based compensation expenses and fair value loss on derivative liability, was $2.79 billion for the third quarter of 2023, compared with $2.22 billion for the same period of 2022 and $2.67 billion for the second quarter of 2023. As of September 30, 2023, our company had cash and cash equivalents, restricted cash, short-term investments, and time deposits in total of $36.48 billion. The positive free cash flow in Q3, as Xiaopeng mentioned earlier, was the main driver for our higher quarter-over-quarter cash balance. 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 third quarter financial results. This concludes our prepared remarks. We'll now open the line to questions. Operator, please go ahead.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then 2. If you are on a speakerphone, please pick up the handset to ask a question. 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 Tim Zhao with Morgan Stanley. Please go ahead.

So my first question is about the competition. As we notice that there are more tech companies like Huawei and Xiaomi challenging the company to be makers, we notice that tech companies have the advantages of a cross-division ecosystem as well as the channel that remain quite difficult for car makers to replicate. How would Xfin make up for such shortcomings versus tech players in the following quarters? That's my first question. Thank you.

Thank you. I'm Xiao Peng. This is a very good question, but I think it's also a very difficult question to answer. In my original Internet business, when I invested in Xiao Peng, I was thinking about this topic. Let me give you some previous examples. In my last mobile Internet business, we saw two kinds of competition. The first one is whether it is possible to use traffic in many fields. a competitive environment for each other. In the end, we found out that there are many places where the traffic can complement each other, because it can penetrate different capabilities. But in the middle, for example, in the PC, in the mobile phone, in the TV field, their content and their traffic can't interact. In other words, in such a case, it didn't succeed. So in today's situation, we can see more and more cross-border enterprises In the past, we have seen business from real estate, from mobile phones, from the Internet, or from other industries in the industry to compete in cross-border. Let's take a look at the ability of this cross-border and an electric car to make strong AI. Does it have a lot of extension? This is a cross-border that is very necessary. What I want to say is that, of course, in the layout of small companies, are all very eager to see Xiaofeng himself in this field have such a layout. So I will give an example. A few years ago, Xiaofeng has been considering how to carry out ecological layout on travel and AI, including our flight system. This year is already the ninth year, and the robot is already the fifth year. Such a layout includes the cooperation between us and the public in recent July. We actually want more in the supply chain, in the manufacturing field, in the global brand, sales, and after-sales service sector, and even in the manufacturing sector. This is also part of our ecosystem. In August, we and DD are working on the ecosystem in the A-class vehicles, the first-class vehicles, and the future RoboTaxi related sectors. In fact, we are all hoping to combine different capabilities. But we also want to make it very clear that Thank you so much for your question.

This is Xiaopeng. Now, this is a very good question, but not an easy question. I would like to start by reviewing my past entrepreneurial experiences. experience. I first started with an international internet company and then I went on to invest in Xpeng. Your question has always been a question of thinking for many years in the past of my experience. Let me give you an example. When I was in the mobile Internet business, we saw a lot of competition, and there are different ways to compete in that landscape. For example, people turn to acquiring traffic, and that is a good way to actually make up for different shortcomings in the ecosystem or the lack of different capabilities or abilities in different aspects. And you saw a lot of crossover from different players in different sectors And you realize that the problem with using or relying purely on traffic is that there are a lot of media that has traffic that is not transferable. Let me give you an example. An audience from watching traditional TV may not be the same audience who relies so heavily on mobile phones, etc. And so that actually leads to a lot of failures. But right now you also are seeing a lot of competitions from players across different sectors who try to actually enter a new domain using different ecosystem or capabilities from their own sector. For example, you see players from the real estate, the mobile smartphone industry, and also from the Internet and a lot of tech companies as well. So when we compare ourselves against these players from other sectors, we have to really come down to our internal capability. We have to look at what we have as our strengths. For example, we are very strong with our technology. We are very strong with our AI capability and also manufacturing capability as well as our supply chain as well. So really, what helps us to differentiate ourselves and stand out from the crowd is that we can actually focus on what we already have and expand using different partnerships For example, we have been very committed to actually expand our ecosystem by for example, investing in our other formats of mobility, different vehicle formats. We have invested in our robotics technology and flying cars, etc. We also have announced our partnership with Volkswagen in different aspects including supply chain technology, global sales and marketing, and also after sales services as well. And in August, we also announced our partnership with DD, a leading mobility tech platform, to expand our market share in the A-class vehicle segment, also to build the foundation for our future expansion in Robotaxi, etc. Now, these are just some of the examples of how we try to make up for our shortcomings in the ecosystem. And we believe that by combining different capabilities through this partnership, we can actually strengthen our overall competency, you know, building on the strong foundation that we already have, which is our technology and our core manufacturing capability as a carmaker.

Thank you. Thank you, Mr. Wang.

我第二個問題是有關於產品的定價權。 雖然剛才在Call上面小彭總也提到, 計劃明年實現整體降本25%的目標。 那如果我們希望從四季度到明年開始, 這個能夠有一個比較可持續的一個毛利率的增長之外, 是不是除了降本之外, 產品在細分市場的定價權會不會扮演一個更重要的角色? 因為我們看到國內部分車企似乎是外包了這個價格策略給特斯拉跟比亞的一等企業啊, So my second question is about the pricing power, because as mentioned earlier in the call, I think the company targets to cut the 2024 production cost by 25%, as the company optimizes design and efficiency, etc., However, without enhancing the pricing power, very likely the benefit of cost saving might still be depleted by the constant price undercutting, especially quite a lot of cut makers outsource their pricing strategies these days to like Tesla and BYD and just respond passively. So how does X10 plan to strengthen its pricing power on top of a cost reduction into 2024? That's my second question. Thank you.

Yes, thank you. I agree with your point of view. We all hope that in the long term, the world will have a very good price range like Apple's mobile phone. I believe that in the automotive industry, the price range comes from the scale and the comprehensive cost control ability. Although the scale affects the cost, the scale also affects the sales. Especially in the current the ability to re-create, the process of re-creation of the brand. Secondly, I think it also comes from the value of the brand and the difference in the ability to satisfy the customer. According to what we have been talking with our CEO, Wang Hongying, he is a firm supporter of product innovation. So we will consider how to satisfy the customer's needs in many of the following products. Thank you.

Thank you for your question. First of all, I agree with your opinion that pricing power is very important. And in the long term, we definitely want to become the Apple in automaking, which has very, very strong bargaining power and pricing power. As a carmaker, an OEM, we believe that there are several aspects that are important that's affecting our pricing power. One is scale, and the other is cost control capability, as well as our branding and differentiation. definitely the scale of sales affect our cost. And it's also the same the other way around as well. And right now, we are in the process of reshaping our overall capability as well as our brand. It is very important that we can actually, first of all, build our brand image, as well as contributing to the customer value by really strengthening our differentiation. Our president, Ms. Wang Fengying, is a big advocate on internal and also systematic innovation. So going forward, going into 2024 and 2025, we will continue our effort and commitment in scaling up our sales and volume, controlling our costs, building our brand, as well as our differentiation in order to gain bigger pricing power. Thank you.

Thank you very much for sharing all the great insights. Thank you.

Your next question comes from Ming Zhong Li with Bank of America. Please go ahead.

Thank you. At the beginning of this opening, Mr. Fang also mentioned this, including the third quarter, this power outage and some new power outages. I want to know, that is to say, we can talk about it, that is to say, at present, how is the progress of this channel reform going? In the future, do we have one? For example, by the end of next year, how many stores do we want to open? In addition, there is a latest one. We hope that in the future, there will be a branch of Zhiyin's store and Jingxiao's store. Then I also want to know, if we look at it from some numerical indicators, can we see that through this So after Ms. Wang joined Xpeng, the channel's sales stores reforming is continuing. So do you have any metrics regarding to evaluate your progress on your channel reform. And besides that, do you have any targets about the long-term direct sales and also dealership percentage? Thank you.

Thank you, Amin. Let me talk about the changes in the channel. Feng Ying, He originally came from Changcheng. He did a very good job in the field of cost channels and product innovation. In the first few months of his career, he has been observing Xiaodong's channel and Xiaodong's sales system. Because in the past, Xiaodong's innovation was to be self-sufficient but not fully self-sufficient. There is a self-sufficient channel and a sales channel, but it controls the price and the unified price. So we have been observing and discussing this. In the third quarter, we will clarify the way we discussed this, because it is related to the number of our vehicles in the future, in 2025 and 2026. We can also share with you that the number of our vehicles in 2025 will be higher than it is now. At the same time, we will consider the changes and competition in the future market, and consider from the current first and second line to the future one and two lines, plus three and four lines,

Thank you for your question. Now, I would like to address this by giving you a little bit of background information about our president, Ms. Wang. She comes from Changcheng Great Wall, a traditional OEM. And she has been excellent in controlling costs, developing channels, and also leading innovative, systematic overhaul of the company. So in the first few months that she joined our company, she spent a lot of time observing what we currently have. We used to have this hybrid channel of having our cell phone stores together with some franchisees, but we had total control of the pricing for all of the channels. And going into Q3, I mean, for the past quarter in Q3, we have already set our future strategy of channel innovation or reform, which will actually cater to different kinds of dynamics or changes going into 2025 to 2026. We are talking about, for example, significantly more models that we're going to launch in 2025, And also, we take into consideration the future market competition, market environment, and also our future expansion to cover not just Tier 1, Tier 2 cities, but also Tier 3, Tier 4 cities as well.

So, our mid-term goals in the coming few years, we will build 500 medium-sized stores with sales and service functions, as well as nearly 1,000 experience centers and satellite stores to implement sales services. At the same time, we expect to open more than 100 new business stores in the fourth quarter of this year, which will allow us to have more than 500 in total at the end of the year. So the proportion is mainly based on business stores. Of course, we know that a store needs a certain amount of time from deep training to training, so we are more confident that it will bring us huge sales growth in the first and second quarter of next year. At the same time, because we are expanding in low-end cities, it will also make us and the sales of low-end cities will be improved. We will maintain the price range that is still difficult to control in Yunnan. So, the sales representatives of the local areas of Xiaopeng will be responsible at the same time for the sales, satisfaction, and NPS of Zilin and Jinxiao two systems. We will use consistent standard service and will invest heavily in tools and processes to strengthen the supply and demand control. As for your last question, it is about e-commerce. I think today, looking at Xiaopeng's e-commerce, So in the mid to long term, we aim to have...

at least 500 stores that are capable of not only doing sales but services as well. And in the mid to long term, we also plan to have a total of at least 1,000 service centers across the country that can help us to provide better services to our customers. And going to Q4, we plan to open 100 new stores that can allow us to expand our sales network more extensively. And so by the end of 2023, we're going to have a total of 500 stores of different modes And over time, because it takes time for those new stores to build up their capability and experience, so we believe that the time of the Q1 and Q2 next year will be the time when we can actually see a lot of growth in our deliveries and sales. And that can also allow us to see growth in deliveries and sales in lower tier cities in China as well because we are going to build more stores in those areas and regions. In terms of the price and control, we will remain very strong in terms of the extent of price control. And we are going to evaluate the performance of different stores from different aspects, including their NPS. And we can equip them and empower them with a wide range of tools. And we can control the procedures. And we can do a lot more things to maintain our strong control of the service qualities of those stores as well. Now, in terms of the efficiencies of the performance of the stores, I agree with you. And we believe that, you know, it is very important that we keep improving the overall efficiencies of our stores because currently we see still a lot of room for growth there, for improvement there. And by 2024, we expect to see a huge uptick in terms of the efficiencies of our store. Thank you.

Thank you, President Xiaopeng. My second question is about overseas. In fact, including in October, we have a few thousand exports here. I would like to explain that we are in the European market, especially overseas, because we have opened some branch stores recently. In the future, we think it will be similar to domestic branch stores, which is the proportion of branch stores and sales. It will also be more sales. At the moment, in the short term, there will be more branch stores for the process of establishing a brand. My second question is related to export business. So in October, you also shipped a few thousands of cars to overseas market. So in the future, will you consider to build more direct operated stores or you will rely more on the distributors locally? And then regarding your current product portfolio, do you think that you will export all the models overseas or you will select a few models for overseas market? Lastly, do you have any plan for Southeast Asia market?

Hey, Ming. It's Brian. Let me address your question. Regarding the international expansion, you're correct that we currently employ a sort of hybrid model. In the Nordic countries, we have direct-owned stores as well as our partnership and agents. But going forward, we're probably going to opt to use more of a collaborative partnership model using either agents or distributors for specific markets. So that's probably going to be likely the mix will shift towards a more partnership-oriented model. And in terms of products for international markets, you saw that we currently have G9 and P7i currently selling in Europe already. We will be launching G6 as a global product next year. So I would say it's only the subset of products that we will design and prove for international use, not all our products. So the products I mentioned are the ones that were currently decided for global markets. And also we have plans for right-hand driving models next year as well. For example, by the end of next year, we plan to roll out our first right-hand driving model likely to be based on the G6 model. So with that, we'll be able to tackle Southeast Asia market. So that will definitely be in our sights. And we'll be also looking at other right-hand driving model markets as well.

Thank you, Brian. I don't have any questions.

Thank you. Your next question comes from Tina Ho with Goldman Sachs. Please go ahead.

Thank you for your time. I have two questions. The first question is about the total sales of the fourth quarter. In fact, in October, we broke a very good result of 20,000 monthly sales. But if we look at the sales of the fourth quarter, it may be relatively flat in November and December. What kind of reason is this? Is it a relatively conservative budget? Or have you seen any special market conditions? This is the first question. Then the second question is to ask, we just talked about if we run to the G3, the one-time impairment loss, if we run out of this part, then the vehicle's horsepower is flat, is break-even. Then I see that our last time, the monthly sales were more than 40,000, which is the fourth quarter of 2021. In that quarter, we reported a 10.9% interest rate for vehicles. But in this quarter, the sales volume is also more than 40,000. But the interest rate may only be at a level of 10%. I would like to ask what is the reason for this? And what is the interest rate related to this? Next year, of course, we will have a very clear route for down payment. It can even be completed ahead of schedule. Thank you very much for your time management. So my first question is regarding our sales volume. So according to our fourth quarter sales volume guidance, it seems that November and December will be flat versus the October volume. So just wondering what is the reason here? Are we just being conservative, or is there any specific trends that we've observed in the industry? And then the second question is regarding gross margins. So management mentioned excluding the impairment loss of G3, the vehicle growth margin was breakeven in third quarter 23. So the last time we delivered over 40,000 units of vehicles was in the fourth quarter of 2021. And then back then, the vehicle growth margin was actually 10.9%. So just wondering what is leading to the differential in growth margins. And also related to that, management mentioned that next year we're expecting to see great gross margin enhancement. Obviously, we know the cost reduction is pretty on track, even ahead of our progress. But then how much price decline are we factor into this gross margin expectation? Because we see that this year, for the three quarters this year, an average ASP actually declined by 6% year-over-year. So how much of the competition are we factoring into next year in terms of gross margin guidance? Thank you.

So, Tina, this is Brian. Let me first answer your first question. You know, the guidance of $60,000 this quarter, I think, reflect about confidence of the progress we've made in the recent months. we think it's actually a very important milestone for us to reach an average 20,000 per month. So this is, I think, is a very, I would say, important milestone for us. And also, by giving this guidance, we're also considering the competition as well as the macroeconomic backdrop that we're facing in the fourth quarter. We're very confident with the guidance because, obviously, the backlog we have already, as well as the momentum we're seeing in our order intake But I think this is also reflective of the market at the moment, and we hope that this is a realistic target for us. And now I'll hand over to James for the gross profits comments.

Yeah, Tina, from a gross margin perspective, first of all, as we talked about earlier, even if we compare to on a year-over-year basis, the reduction in margin came from, as you mentioned, the G3 EOP reduction. impact that we have booked in this quarter, and this will be the final impact from the G3 EOP perspective. And secondly, going into 2023, the new energy vehicle subsidy has been removed from the market, and that obviously has an impact on our margin as well. You did mention our ASP has reduced over time. I believe that's a overall market dynamic as well because we've been trying to improve the product competitiveness for our product as well throughout this journey. In the meantime, as Shampo mentioned, we do expect our gross margin to improve in Q4 meaningfully. Particularly, our vehicle margin will become positive, we believe, in the fourth quarter. And one proving factor as we improve our product mix is that as we launch the new G9 2024, we see the gross profit margin is actually higher than our older version of G9. This is a great proving point for us to continue to drive profitability of our products. Hopefully that answers your question.

非常感谢两位的回答。 我还有很快的一个follow-up, 就是我们明年这个技术降本,

All of the models that we have will benefit from the cost reduction driven by technology advancement, but among our top-selling models, we are going to put more effort into driving up the cost reduction.

Thank you.

Your next question comes from Paul Gung with EVS. Please go ahead.

谢谢接受我的提问。 我的第一个问题是关于Mona的这个品牌的定位的。 就我理解这个价格比我们的主品牌是略微低一点, 但是这个其实低的也不是太多。 我们怎么样来区分就是说Mona和主品牌的一个品牌的定位, 然后Mona会在我们现有的渠道里面同时的销售吗? So my first question is regarding the positioning of the Mona brand. I understand the pricing point is generally lower than our main brand, but it's not really too much lower. And how shall we differentiate the brand positioning of the two brands? Is Mona also going to be available at our current stores to be sold simultaneously? 对,我们会在明年和大家分享关于Mona

This is the location of the second brand of Xiaopeng, as well as the overall channel, as well as the information related to the overall after-sales. So far, we have started to do this part of the preparation work. I can share a little bit, that is, in the channel field, there must be a considerable number of channels that will separate Xiaopeng from this channel for sales. On this line. OK, thank you.

Thank you. We are going to disclose more information regarding Mona next year, in 2024. We'll talk about this new brand in terms of its branding positioning, its channels, and after-sales services. And right now, we are actively preparing for the launch of Mona for next year. One thing that I can address or I can share is that there's definitely going to separate channels, going to have separate channels to sell Mona with, you know, apart from, you know, our current X bank lineups.

Okay. My second question is about what Mr. Peng said at the beginning, that is, he also discussed the topic of the internationalized market with the public. I don't know, from Mr. Peng's point of view, So my second question is regarding your earlier comments you have discussed with Volkswagen regarding the global market. How do you think the business model between Stellantis and DeepMotor that bring the Chinese products leverage with global OEMs, global footprint, and bring to the global market. Would that accelerate your globalization in terms of the market reach?

Hey Paul, this is Charles here. I'll address the question. First of all, our joint development for the model based on the G9 platform has been going on really efficiently and I think we're going to achieve a milestone very soon and I think the international market collaboration is one of the strategic initiatives we're exploring with our partner Volkswagen and I think that we're I think Volkswagen has global manufacturing footprint and also the supply chain capabilities I think there's a lot of areas we can learn from our partner and also leverage each other's strength in the international market. We wouldn't comment on other companies' collaboration model. Thank you.

Thank you. Your next question comes from Ping He Wu with CITIC Securities. Please go ahead.

So my first question is about to sell cars in the lower tier markets. How do we think of the demand for the lower tier cities? And how do we utilize our strengths in those markets? 那我的第二个问题是关于这个R&D 明年的R&D的这个计划 My second question is about the research and development for 2024. What will... will the R&D total amount increase next year, and where will this money be spent on? Thank you.

Hello, Ms. Wu. Let me answer your first two questions. Regarding the product issue, in fact, the demand for the downstream market is at the MOLA level. Thank you. Thank you. Thank you.

Let me address your first question. Regarding our product lineup, we are going to meet the lower tier city demands by offering MONA and other new products. And right now, we are not in a position to disclose too much specific information, but what I can say right now is that we aim to offer top-notch ADAS technology and capabilities to the lower tier market as well, including tier 2 all the way to tier 4 cities, customers. And we are going to set those autonomous driving capability as standard configurations in our future lineups for those cities as well. And we are also going to reform our distribution channels for the lower tier market. Thank you.

关于R&D的问题,非常好,是我近期一直在思考的一个话题。 我想说的是,小鹏在最近的三个季度,我们在做了一系列的事情。 to make the cost of R&D more efficient. For example, the first thing when I reorganize the organization, the first thing I do is to do a review, remove unnecessary R&D. The second is to vigorously promote modularization, so that different models and different platforms can become a floating structure system. For example, I will give an example. We are now communicating with many developers and suppliers. We directly record the cost of R&D for suppliers to BOM. We would rather make BOM higher, but we have to reduce the cost of R&D. Through this series of things, we can strengthen the R&D tool system throughout the entire system. This is what we have been doing recently. Starting next year, we will definitely Taiwan Taiwan Taiwan Thank you.

Regarding your second question on the R&D expenses, actually we've been putting in a lot of thoughts in the past three quarters, and we've actually done a lot starting from the beginning of this year to reduce our R&D fee. Let me give you several examples. When we started the overhaul in our restructuring of the organization, the first thing we did is to cut R&D expenses. And we also have been advocating this module-based design rationale that can allow us to put everything on the same architecture, the separate 2.0. We also have actually encouraged and asked our suppliers to put their R&D expenses into the BOM to reduce the overall R&D expenses on our front. Another thing that we did was to actually equip our R&D team with more systematic tools and ways that can allow better integration and mutual compatibility of different parts so that our overall R&D expenses can be cut even further. So going into 2024, we are going to actually strengthen several capabilities. The first one is our overall design capability of our models and products. We also will strengthen our craftsmanship which is also critical in manufacturing. we will continue to improve our smartification, I mean the intelligence of our products. We will also do R&D improvement for the international market to strengthen our globalization capability. And we will also put in some R&D efforts to prepare for our long-term development and also for our long-term strategy as well. So in terms of the absolute value of our R&D expenses in 2024, definitely it's going to be higher than this year.

Okay, thank you for your answer. Thank you.

The next question comes from Jing Cheng with CICC. Please go ahead.

OK, this is my only one question. In regards to autonomous driving, which we believe will become the key sector in the field next year. So how do we exact the seed of autonomous driving to reshape the compacted landscape of the industry? We will be very quickly to be seeing in the maybe next one to two years how it will take a much longer time. We also see that many traditional OEMs have chosen to cooperate with other companies in the practice of autonomous driving. So, in contrast, can you share some details of our advantages of our in-house research?

Hi, Jim. This is Xiaopeng. So, in terms of autonomous driving, we think that in these five years, it will be similar to the five years of high-speed development of new cars in 2018 to 2022. I probably think that In 2025, it is equivalent to the rapid development of new energy vehicles in 2020. We can see that if we look at the Chinese new energy vehicles in 2020, the rate of penetration of new vehicles is faster in 2020. So now I think it's still in the preparation of technology, in the development of the industry, in the entertainment process. Now there are more and more innovative people who are willing to explore and like technology. This young mentality of customers are starting to try, but I believe that after a period of time, there will be more general users, and I will enter this market. I am particularly happy that now there are more and more friends and business partners with us to go to the entire self-sufficient market to offer electricity, education, and recovery. I think this is a very good thing. So for the whole station, help me translate the first paragraph first, thank you.

Thank you for your question. This is Xiaopeng. I think the upcoming five years will actually usher in an era of rapid development for ADAS adoption and technology development. It's going to be very similar to the stage where we see the rapid development of, you know, energy penetration from back in 2018 to 2022. And I remember back in 2020, we saw a huge uptake in the penetration rate of new energy vehicles in the market. And I think right now in terms of ADAS technology adoption, we are still in a warming up stage in terms of the technology readiness and also for the whole industry as well. We definitely are seeing more and more younger customers who are embracing this new technology who are willing to try this new experience. And in the future, we are very optimistic about the adoption rate improvement because first of all, we are very excited to see that there are more and more participants in the industry that are helping us to educate the wider audience that are cultivating the market to get it ready for this upcoming exciting era of ADAS adoption.

关于全站资源,我相信优势太多了。 我随便举几个例子。 第一,例如如何进行本地化。 那么在中国有很多ETC, 中国有很多的不同的减速带。 那么想做到这个,在这个技术里面做得好, 你需要有本地化的资源。 I will give you the first point. The second point is how to achieve super low cost. Customers are now more and more comfortable with all-automatic driving. However, they still hope that in the right cost, in the right safety and experience environment, how to make the cost of the whole thing better. Only the whole world speaks for itself. For example, how to embrace new technological changes? We have all seen in the past year, the change in the model of the language. How to make the language model from which part of autonomous driving is part of autonomous driving or part of the whole area of autonomous driving to assist autonomous driving. Only autonomous driving can be done. Because we see a very interesting point of view, that is, now autonomous vehicles and original vehicles are getting more and more into AI's core. Only in many areas, such as in the cabin, in autonomous driving, in EEA architecture, in language models, and so on, autonomous driving can be done. Thank you.

Now regarding our advantages or strengths in having this full stack in-house R&D capability, there's a long list of examples of strengths that I can give you. Just to name a few, localization of the self-development of technology is one of them. And the second thing is to control the cost of production because even though we are seeing a wider customer base that are trying to embrace the technology, they still want to have both safety in terms of experience and also affordability as well. So having full stack development capability definitely allows us to control the cost better. And another good advantage of having that capability is that it can allow us to embrace upcoming and very cutting edge technology very timely as well. For example, in the past year we saw this emergence of the application of large language models And having full-stack R&D capability allow us to do full domain end-to-end application of this new technology which would not be possible without that capability. And that is actually happening with a lot of our peers who are struggling to adopt new technology as well. And another good point that I would like to make is that we are seeing more and more tighter and tighter coupling with AI technology, with car manufacturing capability or R&D capability. And we need to have, for example, the next-gen EE architecture, the unified ADAS domain, start a cockpit and voice assistant to actually embrace this tighter coupling with AI technology. And that actually requires a lot of integration on not just the hardware level, but also hardware together with software and AI as well. And we are very proud that currently we are very capable of doing that thanks to our full-stack R&D capability.

Okay, thank you. I don't have any more questions.

And the last question is coming from Nick Lai with JPMorgan. Please go ahead.

Okay, thank you, Mr. Guan. This is a relatively simple question about profitability. In the last phone call, I remember I didn't remember it wrong, but in the last phone call, I mentioned that there should be a chance for the market to turn around. I don't know if this is still in place. At the same time, the trend of the profit margin next year, because I see that the price of G6, G9, and NPV is relatively high next year, so basically next year's profit should be higher I recall in the second quarter is our code indicate that the 4Q vehicle margin will likely tend to positive territory. Is our guidance is still still so at the moment. And at the same time, we are launching the new A-segment CDN under Monarch brand with pricing point of about 150,000 RMB. At the same time, the new product will be equipped with a high-end added product. How do we reconcile the competition in the low-end segment and also the sector will equip the product with a much more advanced added content? Thank you.

Hey, thanks, Nick. This is James. So I'll answer your questions one by one. First of all, to reconfirm, we do believe our fourth quarter vehicle margin will turn positive, to confirm your question. And this is bolstered by better mix of products in Q4 compared to Q3. And as I mentioned earlier, we did see some level of battery cost reduction that came through towards the end of Q3. So for Q4, we'll see a full quarter of battery cost reduction coming through, barring the lithium prices stable over time. Going into 2024, we do expect our gross margin to be meaningfully improved versus 2023 on a full-year basis, and this is also bolstered by our continued cost reduction to achieve our 25% or even more cost reduction targets, as Xiaotong mentioned earlier. We will have better product mix next year as we launch, for example, G9, which will be amongst the highest, X9, I'm sorry, X9, the highest gross margin product at this point in our portfolio. And obviously the new products coming from our SIPA 2.0 platform next year we'll have better margin as well. And lastly, to your question on MONA, you're correct, it is targeting A segment, but we do see that MONA has a very good cost control and planning process, very competitive from a cost perspective, first of all. And second of all, MONA will help us achieve great scale. which will benefit to the entire company from a scale perspective as we've seen our cost allocation and therefore improve our margin. And lastly, we do expect more controlled associated sales expense related to the mona sales because of the scale. So it should not be a drag from a bottom line perspective in terms of profitability. Thank you.

Okay, thanks. Was there a follow-up question? No, it's clear. Thank you. It's clear.

Thank you. 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 Exxon's investor relations through the contact information provided on our website for the Pearson Financial Communications.

This concludes today's conference call. You may now disconnect your line. Thank you.