Nio Inc. NIO Q3 2020 Earnings Call Event Transcript

Speaker 1: (00:00) Ladies and gentlemen, thank you for standing by for NIO, Incorporated's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. And I will now turn the call over to your host, Mr. Rui Chen, director of investor relations at the company. Please go ahead, Rui. Rui Chen: (00:27) Thank you. Good morning and good evening, everyone. Welcome to NIO's third quarter 2020 earnings conference call. The company's financial and operational results were published in the press release earlier today, and are posted at the company's IR website. Rui Chen: (00:43) On today's call, we have Mr. William Li, founder, chairman of the board, and chief executive officer, Mr. Steven Feng, chief financial officer, Mr. Stanley Qu, VP of finance, and Ms. Jade Wei, AVP of capital markets and investor relations. Rui Chen: (01:01) Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainty is included in certain filings of the company with the US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Rui Chen: (01:49) Please also note that NIO's earnings press release and this conference call include discussion of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to NIO's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Rui Chen: (02:13) With that, I will now turn the call over to our CEO, Mr. William Li. William, go ahead, please. Interpreter for William Li: (02:24) Hello, everyone. Thank you for joining NIO's 2020 Q3 earnings call. Interpreter for William Li: (02:47) In the third quarter of 2020, NIO delivered 12,206 ES8, ES6, and EC6, representing a strong growth of 154.3% year over year and 18.1% quarter over quarter. In October 2020, we delivered 5,055 vehicles, achieving another monthly delivery record. ES6 has been the fastest-selling electric SUV in China for 13 consecutive months. ES8 has reached the number one in sales this year in the premium electric SUV segment, priced above 400,000 RMB in China. Our third product, EC6, has started the deliveries in September. We have gained and maintained a great word-of-mouth reputation for our product quality and service, and continuously receive positive feedback from our users. Interpreter for William Li: (04:31) In the 2020 China New Energy Vehicle Experience Index released by J.D. Power in September, NIO has once again ranked highest in any new vehicle quality among all brands. Interpreter for William Li: (05:00) After the launch of the Battery as a Service product, NIO's products and services have been increasingly accepted by more users. The new order intake in October broke the historic record and exceeded our expectations. In the fourth quarter, we're confident that the deliveries will further grow to between 16, 500 and 17,000 units. Interpreter for William Li: (05:49) In terms of a gross profit, supported by the steadily growing quarterly deliveries, increase of higher margin products in our product mix, as well as continuous improvement on material cost and the manufacturing efficiency, our gross margin in the third quarter has continued to the upward trend, with the vehicle margin and overall gross margin reaching 14.5% and 12.9%, respectively, surpassing our previous expectation. Interpreter for William Li: (06:24) NIO's existing efficiency is getting more and more self-evident. The operating loss has further narrowed to 946 million RMB in the third quarter of 2020, representing an 18.4% decrease month over month, and a 60.7% decrease year over year. In addition, we have achieved the positive cash flow from operating activities for the second sequential quarter in Q3. We are confident to achieve a positive operating cash flow for the full fiscal year 2020. Next, I would like to share with you some key topics of the company. Interpreter for William Li: (07:34) With respect to R&D, we released the Navigate On Pilot feature, or NoP, to users via FOTA in October, which has further boosted the competitiveness of NIO Pilot over [inaudible 00:08:23] system, and received great reviews from users and the media. Through fusing the environmental data from the sensor suite with high definition maps, NoP can guide the vehicle to follow the navigation route, automatically drive from on-ramp to off-ramp, and overtake slower cars. It can engage not only on highways, but also urban expressways, with optimizations that are based on specific use cases in China. We are accelerating the development of the second-generation technology platform, NP 2.0. The core of NP 2.0 is industry-leading mass production autonomous driving system. We will share more details of NP 2.0 at NIO Day 2020. On November 6, NIO launched the 100 kWh battery pack. It features a highly integrated cell-to-pack architecture with 37% energy density increase, which significantly extends the drive range of our product lineup. It has also adopted other advanced technologies, including thermal propagation prevention design, all-climate thermal management, and bi-directional cloud BMS, to make the battery safer and better. The 100 kWh battery pack will begin deliveries in December. Interpreter for William Li: (10:51) Together with the launch of the 100 kWh battery pack, we also provide permanent upgrades and flexible upgrades by month or by year to users of the 70 kWh battery pack. As of today, we have successfully closed the loop for our innovative BaaS models through vehicle-battery separation, battery subscription, and chargeable, swappable, and upgradable battery solutions. Interpreter for William Li: (11:40) As for production capacity, our overall supply chain production capacity has already reached 5,000 units per month in September. The teams are working diligently together with other partners to further elevate our production capacity. They target to expand the overall supply chain production capacity to 7,500 units per month in January 2021 to meet the growing user demand. Interpreter for William Li: (12:29) In regards of the sales and service network, NIO has opened 22 NIO Houses and 159 NIO Spaces in 106 cities, and 159 power swap stations in 70 cities in China. Moreover, we're developing the second-generation power swap station with lower costs and a better experience, and are planning to deploy the second-generation swap station in the first half of 2021. As our user base continues to expand, the NIO user community is becoming ever more vibrant. November marks the second anniversary of the NIO User Volunteer Initiative. As of November 10, 2020, there are 3,101 user volunteers from 118 cities. They take it upon themselves to promote NIO and contribute to the community at the showroom, auto shows, live streaming platform, delivery centers, and NIO Day. Users' trust and support have always been the biggest motivation for NIO to do more and be better. Interpreter for William Li: (14:15) On November 26, 2020, NIO will embrace its sixth anniversary. With previous support and a team effort, we have achieved a milestone performance. But we're still a startup with a rather short history. In the face of fierce competition and intense challenges, we will remain committed to making decisive investment into product and the core technologies, and offering the best service and holistic user experience to live up to the expectations of our loyal user community. Interpreter for William Li: (15:25) Thank you for your support. With that, I will now turn the call over to Steven to provide the financial details for the quarter. Steven, please go ahead. Steven Feng: (15:35) Thank you, William. I will now go over our key financial results for the third quarter of 2020. And to be mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online, for additional details. Steven Feng: (15:52) Our total revenues in the third quarter were 4.53 billion RMB, or $666.6 million, representing an increase of 146.4% year over year, an increase of 21.7% quarter to quarter. Steven Feng: (16:11) Our total revenues are made of two parts, vehicle sales and other sales. Vehicle sales in the third quarter were 4.27 billion RMB, or $628.4 million, accounting for 94% of total revenues in the quarter. It represented an increase of 146.1% year over year, and an increase of 22.4% quarter over quarter. The increase in vehicle sales year over year was primarily due to the increase in sales of ES6 and ES8. Other sales in the third quarter were 259.2 million RMB, or $38.2 million, representing an increase of 150.7% year over year, an increase of 11.3% quarter over quarter. The increase in other sales year over year was mainly attributed to increased revenues derived from the home chargers installed, service package and energy package subscribed, and accessories sold, which were in line with increased vehicle sales in third quarter of 2020. Cost of sales in third quarter was 3.94 billion RMB, or $580.3 million, representing an increase of 91.4% year over year, an increase of 15.7% quarter over quarter. The increase in cost of sales year over year was mainly driven by the increase of delivered volume in the third quarter of 2020. Steven Feng: (17:59) Gross profit in third quarter of 2020 was 585.8 million RMB, or $86.3 million, representing an increase of 874 million RMB, from a gross loss of 221.6 million RMB in third quarter of 2019, an increase of 272.7 million RMB from the second quarter of 2020. The increase in gross profit was mainly driven [inaudible 00:18:32] contributed by increased vehicle sales and increased vehicle margin. Steven Feng: (18:38) Gross margin in the third quarter of 2020 was 12.9%, compared with -12.1% in the same quarter of 2019, and 8.4% in third quarter of 2020. The increase of gross margin was mainly driven by increase of vehicle margin in the third quarter of 2020. More specifically, vehicle margin the third quarter of 2020 was 14.5%, compared with -6.8% in the same quarter of 2019, and 9.7% in the second quarter of 2020. The increase of vehicle margin was mainly driven by the decrease in purchase price of certain materials and lower unit manufacturing costs, attributed from increased production volume of ES6 and ES8 in the third quarter of 2020. Steven Feng: (19:34) R&D expenses in third quarter were 590.8 million RMB or $87 million, representing a decrease of 42.3% year over year, an increase of 8.4% quarter over quarter. The decrease in R&D expenses year over year was partly attributable to higher design and development costs incurred in the third quarter of 2019 for EC6, an all-new ES8 launch in the fourth quarter of 2019, and the company's overall cost-saving efforts and improved operational efficiency in R&D functions since the fourth quarter of 2019. Steven Feng: (20:50) SG&A expenses in the third quarter were 940.3 million RMB, or $138.5 million, representing a decrease of 19.2% year over year, an increase of 0.4% quarter over quarter. The decrease in SG&A expenses year over year was primarily driven by the company's overall cost saving efforts and improved operational efficiency in marketing and other supporting functions. Steven Feng: (20:54) Loss from operations in third quarter was 946 million RMB, or $139.3 million, representing a decrease of 60.7% year over year, and decrease of 18.4% quarter over quarter. Share-based compensation expenses in third quarter were 49.2 million RMB or $7.3 million, representing a decrease of 30.1% year over year, an increase of 8.3% quarter over quarter. The decrease in share-based compensation expenses year over year was primarily due to less options granted driven by the decline in the number of employees, and impact of part of the share-based compensation expenses being recognized by using the accelerated method, under which the expenses decrease gradually over the vesting period. Steven Feng: (21:55) Net loss in the third quarter was 1.05 billion RMB, or $154.2 million, representing a decrease of 58.5% year over year, and a decrease of 11% quarter over quarter. Net loss attributable to NIO's ordinary shareholders in the third quarter was 1.19 billion RMB, or $175 million, representing a decrease of 53.5% year over year, and a decrease of 1.6% quarter over quarter. Steven Feng: (22:34) Basic and diluted net loss per ADS in the third quarter were both 0.98 RMB, or $0.40 per ADS. Excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both 0.82 RMB, or $0. 12 per ADS- Steven Feng: (23:05) Our balance of cash and cash equivalents, restricted cash and short-term investment was 22.2 billion RMB or $3.3 billion as of September 30, 2020. Additionally, we've achieved positive cash flow for operating cash activities for the second sequential quarter. And now, for our business outlook. As William mentioned, for the fourth quarter of 2020, the company expects deliveries to be between 16,500 and 17,000 vehicles, representing an increase of approximately 100.6% to 106.7% from the same quarter of 2019, an increase of approximately 35.2% to 39.3% from the third quarter of 2020. The company also expects the total revenues of the fourth quarter 2020 to be between 6.26 billion to 6.44 billion RMB, or between $ 901.8 million to $947.9 million. This would represent an increase of approximately 119.7% to $ 126% from the same quarter of 2019, an increase of approximately 38.3% to 42.2% from the third quarter of 2020. This outlook reflects the company's current and the preliminary view on the business situation and market condition, which is subject to change. Now, this concludes our prepared remarks. I will now turn the call over to operator to facilitate our Q&A session. Speaker 2: (25:08) [inaudible 00:25:08]. Ladies and gentlemen, we will now begin the question and answer session, and if you wish to ask questions, please press star-one on your telephone and wait for your name to be announced. The first question we have is from the line of Tim Hsiao from Morgan Stanley. Your line is now open. And for the benefit of all participants on today's call, please limit yourself to two questions, and if you have additional questions, you can re-enter the queue by pressing star-one again. The first question we have is from the line of Tim Hsiao from Morgan Stanley. Your line's now open. Tim Hsiao: (25:46) Hi, Will and Steven, Jade, and Tim. This is Tim from Morgan Stanley. Congratulations on a strong result, and thanks for taking my questions. So, I have two question, and we'll quickly go through them and in Mandarin first. So my first question, we saw NIO making solid operational progress this year at all fronts for example, like in the launch of EC6, BaaS and 100kWh battery pack. So looking to 2021, in addition to the fourth model launch and ongoing investment in autonomous driving, what else would be our key focuses for R&D investment? And, if possible, could the management share any rough guidance regarding the overall R&D spending versus 2020? My second question is about BaaS, battery-as-a-service. Could you please share some market feedbacks on the battery-as-a-service program, and with the launch of the 100kWh battery pack? What's our expectation of the take rate of bus services for 2021 and beyond? These are my two questions. Thank you. Interpreter for William Li: (27:41) Thank you, Tim. Thank you for your question. Regarding the R&D focuses for next year or over recent focus, just like I mentioned in my prepared remarks, the NP 2.0 is the focus in terms of the core technology. The core of NP 2.0 is the industry-leading mass production autonomous driving system. Of course, we also have other ongoing projects. In terms of the vehicle models, we have already successfully launched the three SUV. For the next product that we're going to launch is going to be a sedan on the NP 2.0 platform. It means that we're going to enter the sedan market. At the same time, we're also developing other vehicle models. For example, the second new product in the pipeline is also going to be a sedan. So, with the launch of the next two new products, we believe we can complete our product portfolio. Interpreter for William Li: (30:06) In terms of the BaaS take rates, after we announced the BaaS in August, we're very happy to see the increase with the take rate every week. And in November, we can see that among all those new orders the take rate of BaaS is around 35, which is a factor and better than our previous expectations because the model is made to order, so this will be reflected a little bit later in offer deliveries. We are very happy to see this BaaS take rate momentum and we believe that it is also going to improve in the future. BaaS can help us to lower the initial purchase price and eliminate the users' concerns regarding the battery's degradation and also provide a flexible upgrade services to the user. The purpose of BaaS is to convert more gasoline current users to EVs. After the launch of a 100kWh battery pack, we believe the competitivity of BaaS has been significantly enhanced, and as the users can get much better understanding about the benefits of a BaaS, we believe the take rate will increase in the future in the long run. Tim Hsiao: (33:01) Perfectly clear. Thank you, William, and congratulations again on your results. Thank you. Interpreter for William Li: (33:09) Thank you, Tim. Speaker 2: (33:12) Thank you. And the next question we have is from Ming Lee from Bank of America. You may now proceed with your question. Ming Lee: (34:02) So my first question is regarding the margin expansion from second quarter to third quarter, your gross margin increased around five percentage points. Could you give a rough breakdown on how would you improve your gross margin? And do you also see any extra contribution from the sales of NEV credit. So that's my first question. Thank you, William. Stanley: (34:50) Hi, Ming. This is Stanley. The vehicle margin increased in Q3 compared with Q2, mainly contributed by two factors. The first is the average selling price increased by 10,000 RMB per vehicle, mainly because the more ES8 with higher price are sold in Q3. Second is bond cost reduced by 7,000 RMB per vehicle, also which are contributed by the cost reduction of battery pack and also EDS. You mentioned the revenue from [inaudible 00:35:35] credit coins. We received the revenue in Q4, with total amount of 120 million RMB, and we will recognize this as other revenue in Q4. So in Q3, we'll not include it in the financial results. Yeah. So that's your question about the vehicle margin. Regarding the service revenue, I think we are continuously working on to improve the service margin to reduce the loss. So, I think the trend will be positive in future. Okay. That's it for me. Interpreter for William Li: (36:24) Yeah. William speaking. Regarding the gross margin for other service and the sales, we believe it will be further optimized as our user base continues to expand, and this is going to be reflected with the growing economics of itself. In the Q2 and the Q3, the change is not very evident, but we are quite confident that this is going to have a continuous optimization in the future. Ming Lee: (37:37) [Mandarin 00:37:37]. Speaker 3: (39:05) Hi, Lee. I think your line got dropped. Speaker 2: (39:12) Sorry. The participant's line got disconnected. May we suggest please press star-one if you have further questions. I will move on to the next one. We have Bin Wang from Credit Suisse. Interpreter for William Li: (39:23) Operator, let the management answer the question first. Sure, sir. Please go ahead. Speaker 2: (39:32) Sure. Sure, sir. Please go ahead. Just to recap a little bit on the question, basically, the question is about the average selling price in the fourth quarter is into that the average selling price will increase compared with the third quarter by around 12,000 to 13,000 RMB. So, we would like to know whether it is driven by its effects or the 100kWh battery pack. And we also would like to know whether the battery packs what is the take rate ratio between the 100kWh battery pack and the 70kWh battery pack? Interpreter for William Li: (40:29) In terms of the sales revenue guidance, we are delighted to clarify a little bit just like as Stanley mentioned, for the due credit to revenue, this is going to boost the revenue for the other sales. And in our guidance, we don't actually consider the increase of the average selling price as part of the target. We believe the average selling price in the fourth quarter is going to be at the similar level as the third quarter, according to the orders we receive right now, and we just started the deliveries of the 100kWh battery pack in the fourth quarter, so we believe that this is not going to have any impact on the gross margin in such a short time. But we're very confident that we continuously improve our gross margin throughout the fourth quarter. Speaker 4: (42:09) Operator, we can move on to the next question. Speaker 2: (42:20) Certainly, sir. The next question is from Bin Wang from Credit Suisse. Your line is now open. Bin Wang: (43:31) Actually, I just want to know what the margin effect is in the BaaS. Going forward, we see a few patterns for example of BaaS adoption, 100kWh battery, and removal of the interest rate subsidy for the previous different battery and what factors will impact of margin in the BaaS? That's about the margin. Second about the new products. Because we've seen the [inaudible 00:44:30] likely to be lower pricing or maybe lower margin. So is there any plan for an even bigger SUV, or even bigger one, because, for example, [inaudible 00:44:38], we've seen the peers actually running for much bigger one? So, basically, what's the upcoming plan for even bigger products? Thank you. Stanley: (44:52) Hello. This is Stanley. I will break down into the sector to further explain the gross margin improvement. The first we mentioned is about the subsidy. We further reduced the subsidy to the end users into Q3 with the launch of our BaaS model. And so in Q3, there is a little bit light sector due to the subsidy reduction. And the second is the scale of the economy. As you can see, the production volume in Q3 is 12,000 vehicles and almost a 20 over 20 increase compared with Q2. As William mentioned prior, we invest more to improve our production capacity in September to 5,000 units, so the manufacturing cost I think almost all the same with the second quarter. Stanley: (46:02) ... are the same with the second quarter, and about the BaaS and also the 100-kilowatt impact, I point to William to answer the questions. Yeah. Interpreter for William Li: (46:12) Okay. I would like to add some points regarding the manufacturing cost and efficiency. In the long run, of course, we will further improve our manufacturing efficiency and the cost and we believe this is going to reduce gradually, but we're going to stop with the reduction at a certain point. Of course, we can see more contribution in the third quarter compared with the second quarter, but this is going to diminish in the future, but we will continue to work on the optimization of the manufacturing efficiency and the cost. Interpreter for William Li: (48:14) For the Battery-as-a-Service, we will sell other cars to the users and the battery to the battery as a company under the BaaS model, so it means that this is not going to affect the vehicle gross margin, but with our battery upgrade service, this is going to provide us some good benefits to other revenues. So in the long run, this is not going to have any significant impact on the vehicle gross margin, but it will give some incentives to other revenue. For the due credits, we actually included this in other revenues or other sales. We have different approaches compared with Tesla because Tesla consider the revenue of the credit in the vehicle margin, but we include that in the other revenue. For the new product planning, we have a very common sense of the product and the market include planning. This is going to be carried out step by step. For example, we started with our flagship SUV ES8 in the mid and large segments, then we entered the mid-sized SUV segment with the ES6, then the coupe SUV with the EC6. This is a very systematic approach. For the next step, we're going to enter the sedan market. When selecting different market segments, we need to balance the size of the segments and the volume objectives. At this moment, the rich markets are not going to be our focus. Stanley: (51:09) I think, what else from the automation, the one-time factors in Q3. We did not receive significant live sales rebate from the suppliers in Q3. So I don't think, yeah, we have also the material contractors. Yeah. Okay. Wang Bin: (51:30) Okay, I think you also answered me about the 100-kilowatt hours battery, whether that were improving your margin? Also, I think that in this process, you also mentioned about 150 kilowatt hour battery upcoming. So did you see that margin for the upsale from the battery upgrade? Interpreter for William Li: (52:55) For the 100-kilowatt hour battery pack, the users can purchase the battery pack as an option, which is going to improve the vehicle gross margin, but at the same time, will also providing a flexible upgrade, which can contribute to the gross margin of other services and sales. These are two different stories and approaches. After the launch of the 100-kilowatt hour battery pack, we have seen some users choose to install the 100-kilowatt hour battery pack as an option. And at the same time, we'll also provide the flexible upgrade, so we also have some users opted to the flexible upgrades by month or by year. We believe this is going to improve the gross margin of the company, but in terms of the new car gross margin or new vehicle gross margin, we think it's not going to have a significant impact, but in the long run, this is going to give us some boost to the gross margin of the other sales and revenues. Our logic for this approach is basically the 70-kilowatt hour battery pack can meet the daily needs of the users and if the users need to travel for long distance, then they can subscribe to the bigger batteries or the batteries with higher density or capacity. Users can choose these facilities on demand. This is quite flexible and this is the advantage of our service. We believe this is also going to contribute to the possibilities of a gross margin growth in the long run and the battery pack is going to provide a very good opportunity for us to improve the gross margins among the existing users and this is a very unique advantage of our business model. Interpreter for William Li: (56:50) The 100-kilowatt hour battery pack or the future bigger battery pack can, in the end, improve the attraction of the 70- kilowatt hour battery pack, because the users of the 70-kilowatt hour battery pack will have the opportunity to upgrade the battery pack on demand. They don't actually need to have the 100-kilowatt hour battery pack or 150 kilowatt hour battery pack right from the beginning, they can just use their 70-kilowatt hour battery pack to meet their daily usage needs. Then when it made it, they can upgrade to the bigger batteries and we believe this is going to significantly improve the competitiveness of over 70-kilowatt hour battery pack. Wang Bin: (57:40) Thank you. Interpreter for William Li: (57:45) Thank you, Wang Bin. Speaker 5: (57:47) Thank you. Once again, ladies and gentlemen, you may press star-one for questions, and it is the hash key to cancel the question. And again, may we remind everyone to please commit yourself to two questions, and you may press star-one again if you have additional questions. The next one is from Edison Yu from Deutsche Bank. Your line is now open. Edison Yu: (58:12) Thanks everyone for taking the questions. First, can you talk a little bit about the operational plan to boost the production target in January? What needs to get done just underground? And then secondly, as it relates to the next-gen autonomous platform, can you talk about your latest thinking in terms of in-sourcing the chip design, maybe the implications for Mobileye and that relationship and how you think about the use of LIDAR? Interpreter for William Li: (58:52) Thank you, Edison. [Mandarin 00:58:56]. We have always been emphasizing on the awards of plan change, production capacity, not just about the production capacity of our own plant. We would like it to work together with all the supply chain partners to make sure they can support us to boost our production capacity. The users right now will need to wait for some time to pick-up their parts because of the production capacity constraints. We are also trying to speed up the deliveries to satisfy the users' demand. So right now, we are working on our own plants' production capacity expansion, and also working together with the supply chain partners to improve their production capacity. We're very confident to be able to improve our production capacity to 7,500 units. Interpreter for William Li: (01:00:50) The second question is about the chipset of the NT 2.0. We understand this attracts lot of attention in the industry and in the market, but we still need some time to disclose the specific information at the NIO Day 2020. It's still too early for us to share those information. Of course, we have already made our decision internally. We believe that we should be able to provide the most advanced chipset with the best performance in the industry and this can also help us to guarantee our leading position in the industry for the coming years. Interpreter for William Li: (01:02:05) For the LIDAR question, I would like to share some thoughts on the autonomous driving directions first. When thinking about autonomous driving, we should evaluate the two aspects. The first one is how much time we can free up for the users. This is a question of availability over usability. The second question is, how many accidents can we prevent with the autonomous driving system. This is a matter of a reliability, so we need to think about these two aspects when we evaluate the strategy of autonomous driving. We believe LIDAR should be able to help with both aspects. This is a very simple math, but we will need to tackle the issue of cost when it comes to LIDAR and that we need to balance this out with our product strategy. In the future, with the improvement of cameras and the computer power, we do believe that LIDAR can play a role in some cases and the domains because they can help us to reduce the extended rate, in some corner cases, so LIDAR is a very good addition to the technology competent. If a company put users' interest first, then they should find ways to tackle these technical issues in terms of cost and performance. Speaker 6: (01:05:15) Thank you, Edison. Speaker 5: (01:05:23) Thank you. We have the next question from Nick Lai. Your line is now open. Nick Lai: (01:05:32) [Mandarin 01:05:32]. Let me translate my question very briefly. The first question is regarding the cash burn and the CapEx and the investment in the next one year. For instance, William just mentioned that our monthly capacity can ramp up to 7,500 in January. And would that mean that in the next one year also, we need to expand our capacity at the Zhangzhou plant? On top of that, how should we think about the CapEx needed to build the swap station as well as new space? So the first question is about cash burn and CapEx related. And second question on longer term autonomous driving solution or strategy based on what, William, Chairman, just commented just now. Is it correct to understand that our long-term strategy is to procure chip from top vendor, but at the same time, we will do most of the operating capability solution in-house. Thank you? Speaker 7: (01:07:36) So Nick, with regard to the CapEx to improve our production capacity, most of the CapEx will be covered by JMC. Of course, we will spend very little CapEx our own, but the majority will be covered by JMC. Stanley: (01:08:02) Yeah, and those will [inaudible 01:08:05] more in the expansion of sales and service network and also the power substation, but we will manage well with the progress, so I don't think there will be a very big, big cash burn I think next year. So yeah, that's about the question about the CapEx. Interpreter for William Li: (01:09:04) [Mandarin 01:09:04]. Interpreter for William Li: (01:09:41) Of course, for the current development plan and cash position, we believe we have no need for financing in the short-term. We should be able to have sufficient resources to support the business development of the company. With respect to autonomous driving directions, our objective is to build in-house full stack capabilities for autonomous driving. Of course, we have always had this capability in our company in- house. Recently, we have even enhanced over capabilities in terms of the algorithm and system development. Starting from 2016, we have developed the new pallet first generation by ourselves in-house. But for the first-generation, NIO pallets, chipset is closely bundled together with the algorithm. For the second-generation NIO pallet, we would like to make sure we can have the in-house capabilities, especially in terms of the algorithms, data and system development. Speaker 8: (01:10:53) Thank you, Nick. Nick: (01:10:56) Thank you. Speaker 9: (01:10:58) Thank you. We have the next question from the line of Jeff Chung from Citigroup. Your line is now open. Jeff Chung: (01:11:18) [Mandarin 01:11:18]. So my first question is about first quarter next year sales volume outlooks, whether they can still expand Q-on-Q? And second question is about the differences between vehicle GP margin and non-vehicle GP margins growth outlook and forecast. Thank you. Interpreter for William Li: (01:13:57) Thank you for your question, Jeff. It's very early to provide the guidance for the first quarter of 2021, but of course, we need to be fully prepared in terms of the production capacity to make sure we can meet the user demand and the order backlog. According to the current order momentum and the current backlog, we will need to have a sufficient production capacity for the first quarter of next year to meet the order backlog right now. So in our company, our business model is make-to-order, so we would like to focus on the level of orders. Interpreter for William Li: (01:14:39) For other companies, they talk about the inventory level, but we focus on the order level. We would like to control the order level within a reasonable range, so users don't need to wait for long time to pick up their cars. We would like to improve our production capacity to make sure we can control the order level within one month. It means from the order placement to the user delivery, the wait time should be between three to four weeks. Then we can achieve good user experience. At this moment, we still need a long time to meet these targets, but we will need to ramp-up our production to make sure we can improve the experience and we're quite confident that we can achieve this target in the future. The gross margin has been on the rise. In the past, we have witnessed a consistent trend. That is the non-vehicle gross margin is lower than the vehicle gross margin. In the past few quarters, we have seen both the vehicle gross margin and the non-vehicle gross margin have been increasing. Just like I've mentioned, the carbon credit revenue will be included in the non-vehicle gross margin in the future, and this year, we can see the value of the carbon credit has become more and more evident in China. In the coming years just going forward, we believe that carbon credit is going to contribute to the improvement of the non-vehicle gross margin. At the same time, the revenue from our services and the power swap can also help us to narrow the operating loss, so this is going to improve together with the expansion of our user base. [inaudible 01:18:13] the non-vehicle gross margin is going to improve in the long run and the battery-as-a-service, BaaS can also improve the non-vehicle gross margin. Everything is going according to the plan. Interpreter for William Li: (01:18:27) In the fourth quarter, we're going to receive the revenues on the carbon credits, which is generated by the vehicles sold in 2019. In this year because of the sales increase, the carbon credit number has increased by over 2.5 times, and we believe with the price of the carbon credit will also double next year. So the overall revenue on the carbon credit will be four times to five times more next year compared with this year. Now, a lot of OEMs are in discussion with us about the purchase of the carbon credits, so we believe that this due credit system and mechanism is going to be very beneficial to the development of the EV industry. Jeff Chung: (01:20:58) [Mandarin 01:20:58]. Interpreter for William Li: (01:20:58) [Mandarin 01:20:58]. Jeff Chung: (01:20:58) [Mandarin 01:20:58]. Interpreter for William Li: (01:20:58) [Mandarin 01:20:58]. Jeff Chung: (01:20:58) [Mandarin 01:20:58]. So my last two question is about the carbon credit. Will it be impacting on our P&L next year in 4Q as well, rather than spread evenly throughout the four quarters? This is number one. Number two is about the attach rate on our NoP and BaaS right now and going forward? Thank you. Interpreter for William Li: (01:22:19) The confirmation of the carbon credit revenue is quite flexible. We are not going to put the revenue confirmation in a specific quarter next year, because this depends on the specific market conditions. If we sell too early, maybe it's little bit too cheap. For the BaaS take rates, just like I mentioned, in November, the take rate of the BaaS has reached 35% among the new orders. Going forward, we believe this is going to further improve in the long run and the take rate of the NIO pilot is around 50% after the launch of Navigate on Pilot, we believe this is going to have a much better performance. Speaker 8: (01:23:08) Thank you. Jeff Chung: (01:23:09) [Mandarin 01:23:09]. Interpreter for William Li: (01:23:09) [Mandarin 01:23:09]. Speaker 9: (01:23:09) Thank you. We have the next question from the line of Mei He from US Tiger Securities. Your line is now open. Mei He: (01:23:24) Hi, thanks for taking my question. Great quarter, guys. My question first is could you please comment on your thoughts about Tesla's made in China Model Y. Will this impact your order momentum? And secondly, could you please give us some updates on your internationalization plan? For instance, do you have a timetable for multiple steps of going global? Where could be your social market? What kind of models are you going to introduce to international market, and how to hire local and competent team? [Mandarin 01:23:58]. Interpreter for William Li: (01:27:01) Thank you for your question, Mei. Tesla has officially announced that they're going to have the local production of the Model Y. We believe this is actually good for the users, because if we have more options for the users, this kind of helps us to accelerate the popularization of EVs in the market. Of course, we believe that Tesla's strategy is quite different from NIO. Starting from last year, Tesla has cut their price multiple times, and they basically have the pricing strategy based on the cost. At the end of last year and the beginning of this year, their price cuts has affected us for about one week, but afterwards our order intake bounced back very quickly. After this pricing trend, they also had several rounds of price cuts. The most recent one is around the 1st of October. The price cut is around the 10%. We didn't see any specific impact over order intake. Actually in October, our order intake has broken the historic record and exceeded our expectations. Interpreter for William Li: (01:28:27) Our transaction price is around hundreds of thousand RMB higher than Tesla's average selling price, so we believe this proves that we have our own unique advantages with our products and services. Model Y's introduction to the China market is going to be beneficial for the overall market, but we believe the competition is more about the competition between Model Y And the Model 3 because we have our own unique advantages regarding our product and services. For the market, the situation basically we believe that the pie is growing bigger, and our main competitors in that market should be the gasoline cars, as the China premium market is a very big market with the volume of millions and this gives us a great confidence that we can have a sustainable growth in the long run. Steven Feng: (01:29:35) Mei, this is Steven. I'll give you some high-level update of our globalization efforts. First, we have a very concrete short-term target. That is when we enter EU market in the second half of 2021. At the same time, globalization is the long-term vision for NIO, so NIO is a global brand and we will be very patient to implement this strategy step-by-step, so we have three principles. First, we will speak to our users on the price of this model. We believe it's global and universal, this philosophy. Second, we will retain our premium brand positioning. So our key competitors are Benz, BMW, Audi and Tesla. Third, our sales and service must be localized to suit the European customers' needs. That's the update of our globalization efforts. Speaker 8: (01:30:53) Thank you, Mei. Mei He: (01:30:53) Perfect. Thank you. Speaker 9: (01:30:53) Thank you. That will be last question for today. I'd like to turn the call back over to the company for closing remarks. Speaker 8: (01:31:00) Thank you again for joining us today. If you have any further questions, feel free to contact NIO's Investor Relations team through the contact information on our website. So this concludes the conference call. You may now disconnect your lines. Thank you. Interpreter for William Li: (01:31:26) Thank you, everyone. Steven Feng: (01:31:26) Thank you, everyone. Speaker 10: (01:31:26) Thank you, everyone.