NIO Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
September 5, 2024

There are 11 speakers on the call.

Operator

Second Quarter 2024 Earnings Conference Call. I'll now turn the call over to your host, Mr. Rui Chen, Head of Investor Relations of the company. Please go ahead, Rui.

Speaker 1

Thank you. Good morning and good evening, everyone. Welcome to NIO's Q2 2024 Earnings Conference Call. The company's financial and operating results were published in the press release earlier today and posted on the company's IR website. On today's call, we have Mr.

Speaker 1

William Li, Founder, Chairman of the Board and Executive Officer and Ms. Danny Chu, Chief Financial Officer. Before we continue, please be kindly reminded that today's discussion will contain forward looking statements made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995.

Speaker 1

Forward looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U. S. Securities and Exchange Commission, the Stock Exchange of Hong Kong Limited and the Singapore Exchange Securities Trading Limited.

Speaker 1

The company does not assume any obligation to update any forward looking statements, except as required under applicable law. Please also note that NIO's earnings press release and this conference call include discussions 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. With that, I will now turn the call over to our CEO, Mr. William Li.

Speaker 1

William, please go ahead. Hello, everyone. Thank you for joining NIO's 2024 Q2 earnings call. In the

Speaker 2

first half of this year, the NIO brand completed the 2024 model year sales lease, further enhancing the competitiveness of its MT2 products. In the meantime, as NIO Technologies, products, services and the user community were recognized by more people, its order intake and delivery continued to grow. NIO's delivery in Q2 reached our quarterly record of 57,373 units, up 143.9%. In China, NIO models had over 40% market share among all BEVs with a transaction price higher than RMB300000. Since Q3, NIO's product mix has been continuously optimized.

Speaker 2

In July August, the delivery was RMB 20,498 and 20,176 respectively. With that, NIO's monthly delivery has been more than 200,000 for 4 consecutive months. The total delivery in Q3 is expected to between 6,000,06,3000

Speaker 1

units. In

Speaker 2

terms of NIO's financial performance, with continuous cost optimization of core components and the supply chain, the vehicle margin Q2 increased to 12.2%. As the youth community became larger and more vibrant, the 2nd quarter also witnessed rapid growth in revenues from after sales and the power services. The gross margin of other sales continued to improve. Now, I would like to share with you the recent highlights of our product, R and D and operations. On July 27, NEAR hosted NEAR in 2024.

Speaker 2

At the event, we introduced a full domain operating system SkyOS and the smart system, Banyan 3. Moreover, we also announced the successful tape out of Cengage NS9031, our in house developed chip for smart driving. As for NAD, NIO continued to integrate its system capabilities. In July, the industry's first AEB function based on end to end architecture was released, with the scenario coverage 6.7 times better than traditional AEB that makes driving stable. At the near end, we also introduced the NIO World Model, NVM, the brand new architecture for smart driving.

Speaker 2

NAD Arc 2, we also released. This is the most advanced end to end architecture based on NVM, NWM. New features and the expenses of NAD R2 will be released in the second half of this year. On September 19, our family centric mass market brand Envoy is going to celebrate launch of its first model L60 and the use of delivery will start in late September with a strong confidence in this all around product, we will spend no effort in ramping up production and fulfilling the market demand. For sales and services, as of now, the NIO brand has 161 NIO houses and 408 NIO spaces, as well as 351 Service Centers and 63 delivery centers.

Speaker 2

The Onward brand has already opened 105 stores in 55 cities and we have over 200 stores by the end of the year. By the year end. About charging the swapping network, so far, NIO has over 2,561 power swap stations worldwide and has provided over 52,000,000 swaps. Besides, NEAR has installed over 23,000 power chargers and destination chargers. Quick and hassle free recharging is critical for convincing IC owners to drive EVs.

Speaker 2

On August 20, we hosted the Neo Power Up event, where we announced a plan of power up countries. In the first half of twenty twenty five, NIO's charging network will become available in every country in Chinese mainland. By the end of 2025, the swapping network will become available in more than 2,300 counties in China. To better support these initiatives, we also announced the PowerUp Partner plan and signed agreements with the 1st partner. The continuous deployment of the charging and swapping network will help expand the market reach of NIO and Envall and further drive sales growth.

Speaker 2

As for market development, we are accelerating the international expansion. On August 20, NIO's UAE website went live. And in Q4, the product will be launched and delivered in UAE. While ensuring controllable investment and efficient operations, we will also actively evaluate opportunities worldwide, introducing products to markets. In the NEV quality study released by JD Power in early June, NIO models ranked the highest in the respective segments.

Speaker 2

NIO is also the only NV company winning top ranking for 6 consecutive years. Ever since its establishment, NIO has been committed to making itself a global benchmark of quality and providing great user experience through lifecycle quality management. As NIO has been funded for almost 10 years with the multi brand strategy and the international business rolled out, as well as the external change, we upgraded the company's value system in July. In the quest of a blue sky coming, NIO aspires to shape a sustainable and bright future and envision itself as a user enterprise where innovative technology meets experience excellence. With new brands and the products being launched step by step, the fundamental tech capability and the long term strategical planning that NEAR has been developing will have a greater effort effect.

Speaker 2

NEAR's cumulative R and D investment, sophisticated community operations and efficient infrastructure deployment will lead to better sales and margin. We look forward to NIO's performance in the second half. Thank you for your support. With that, I will now turn the call over to Stanley for Q2's financial details. Over to you, Stanley.

Speaker 1

Thank you, William. Now let me go over our key financial results for the Q2 of 2024. I will refer to RMB only in my discussion today unless otherwise stated. Our total revenues were RMB17.4 billion, up 98.9 percent year over year and up 76.1% quarter over quarter. Revenues from vehicle sales were RMB15.7 billion, representing an increase of 118.2 percent year over year and an increase of 87.1 percent quarter over quarter.

Speaker 1

The increase year over year was mainly attributed to higher deliveries, partially offset by lower average selling price due to changes in product mix and user rights adjustments since June 2023. The increase quarter over quarter was mainly attributed to higher deliveries. Other sales were RMB1.8 billion, representing an increase of 11.3 percent year over year and an increase of 15.6% quarter over quarter. The year over year increase was mainly due to the increase in sales of parts, accessories and after sales vehicle services and provision of power solutions, which both grew with our user base and partially offset by lower sales of used cars. The increase quarter over quarter was mainly attributed to the increase in sales of parts, accessories and after sales of vehicle services, provision of power solutions and other products, and the increased revenues from technical R and D services.

Speaker 1

Vehicle margin was 12.2% in this quarter, compared with 6.2% for the same period of 2023 and 9.2% for the last quarter. The year over year increase was mainly due to the decreased material costs and was partially offset by a lower average selling price. The quarter over quarter increase was mainly due to decreased material costs. Overall gross margin was 9.7%, compared with 1% in the same period of last year and 4.9% in the last quarter. R and D expenses were RMB3.2 billion, decreased 3.8% year over year and increased 12.4% quarter over quarter.

Speaker 1

The quarter over quarter increase was mainly due to the incremental design and development costs and the increased personnel costs in R and D functions. SG and A expenses were RMB3.8 billion, increased 31.5 percent year over year and increased 25.4 percent quarter over quarter, which was mainly driven by higher personnel costs related to sales functions and increased sales and marketing activities. Loss from operations was RMB5.2 billion, representing a decrease of 14.2 percent year over year and a decrease of 3.4% quarter over quarter. Net loss was RMB5 1,000,000,000 representing a decrease of 16.7% year over year and a decrease of 2.7% quarter over quarter. As of June 30, 2024, our company had cash and cash equivalents, restricted cash, short term investments and long term term deposits in total of RMB41.6 billion.

Speaker 1

For more information and details of our unaudited Q2 2024 financial results, please refer to our earnings press release. Now this concludes our prepared remarks. I will turn the call over to the operator to facilitate our Q and A session. Thank you.

Operator

Thank Your first question comes from Tim Hsieh from Morgan Stanley. Please go ahead.

Speaker 3

Hi, management team. Thanks for taking my question. I have two questions. The first question is about our new model L60, because some L60 started pre sale in mid May. And since then, I think the model has received tens of thousands of preorders, which is very robust compared to all the new launches lately.

Speaker 3

But how could NIO also ensure a high conversion rate this time after the official launch on September 2019? Would the company consider getting more aggressive with the official pricing given the competition? And in the meantime, what kind of supply chain preparation the team has done to avoid any potential supply disruption after the delivery starts? That's my first question. Thank you.

Speaker 2

Thank you,

Speaker 4

Thank you for the question. On August 15, we have witnessed the offline of the very first mass produced L60 and the head of sales of the Ambo brand is actually driving this very first mass produced car having a road trip in China and he has been driving the car for almost 20 days while doing the broadcast on the social media. It has received a lot of attention from the public. Every day there are several millions of views of the broadcast by the members. In terms of the pre order intake, it actually is pretty good and has surpassed our expectations.

Speaker 4

So we are quite confident with the overall competitiveness of this project. Regarding the pricing strategy, while we launched the project in mid May, we have announced a pre sell price, which is RMB299,900 that is around RMB30,000 cheaper than Model Y. And before the official launch of the product on September 19, we still have some time and room for the final price adjustments and decision. But overall speaking, we will try to strike a balance between the vehicle margin and the price point of the product to find the sweet spot. In general, we will not be very aggressive as we needed to realize a reasonable margin for the product.

Speaker 4

Regarding the supply chain security, our target is that by the end of this year, which is in September, we hope that we can realize a supply capacity of 10,000 units. And sometime next year we will be able to realize a supply capacity of 20,000 units per month.

Speaker 2

Understood.

Speaker 5

Next question?

Speaker 3

Sure. Thank you, Rui Van for sharing your details. My second question is about the NIO brand, Ricos on the NIO brand, because we noticed the monthly sales of models on the NIO brand have stabilized at the 20,000 levels in the second quarter. So looking for, would there be any further upside to the repo sales and the gross profit margin based on our current product portfolio? If yes, could you share with us that where would be the upside to the volume and the margin of new branded vehicles coming from?

Speaker 3

That's my second question. Thank you.

Speaker 1

Hi, Tim. This is Danny. Your question about

Speaker 4

Thank you for your question. Regarding the vehicle margin of the NIO brand, in the Q2, we have achieved the vehicle margin of 12.2%. That is mainly because of the efficiency improvements on the supply side and also in the production. As in the past 4 months, we have realized the monthly delivery volume of 20,000 units of more than 20,000 units. We also see the opportunities for further improvements, including the cost optimization of the product as well as to improve the high margin products in the product mix from the marketing side.

Speaker 4

With that, we will keep improving the vehicle margin in the following 2 quarters of this year and expect to realize a vehicle margin of around 15% by the end of the year. And also a comment to add here is that we also see opportunities to improve our delivery volumes month over month, Yet we will also need to strike a balance between the vehicle delivery volume and the vehicle margin. Both will increase, but will not be in a very drastic manner for either margin or the vehicle volume as we ultimately we pursue a very good gross profit with our product. So we need to find the sweet spot in between. And for the much longer time as new brand target our premium segments priced over RMB300000 as we are going to launch new products and also do face lifts and upgrades on the products, we believe that in the battery electric vehicle segment, realizing a monthly volume of around 30,000 to 40,000 units is a reasonable target in the volume.

Speaker 4

So I'll sum up for the NIO brand, our long term operational target is to realize a monthly volume of 40,000 units at a vehicle margin of 25%. As for the Anmol brand, it faces a much larger market with a total car park of more than 8,000,000. In that case, leveraging our battery as a service as well as our well established charging and swapping network, we believe that Amol's products will be competitive even against the competition with P Hive, RAS and other BaaS models. So for Amol products, they do have a higher potential or bigger potential for a higher sales volume month over month. And for the longer term, our operational target for onboard products will be 15% for more than 15% for the vehicle margin.

Speaker 4

And we believe that it's also a reasonable target.

Speaker 2

Thank you

Speaker 3

very much. We understand it. Thanks for the all the insight and looking forward to the LX60 launch. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from Bin Wang from Deutsche Bank. Please go ahead.

Speaker 6

Okay. Thank you so much. My first question is also about the ongoing LAS 60. You previously mentioned that this year your volume target is about 20,000 units. Given the strong order, do you still maintain such a volatile target?

Speaker 6

And if you can break down by March because we are not exactly in the end of this month, so what's the progress for, say, October, November, December? So that is my first question. And second question is about the expense, SG and A expense. It seems that expense has kept increasing. What's your target for this quarterly SG and A expense?

Speaker 6

Do you have guidance for each quarter in the upcoming second half? Thank you.

Speaker 4

I will take the first question. This is William. Regarding the Amol L6 gs, we will start the delivery of the products from late September, but it will take some time for us to ramp up the production and supply of our new product. So most of our deliveries this year will happen in Q4. We will start delivery from September, but not in a very significant volume.

Speaker 4

And towards the end of the year, we hope that our monthly delivery will be around 10,000 units for the month of December. In terms of the supply side, as the car is equipped with many new technologies, it will also take some time for the supply side to ramp up their production. Thank you. This is Sandy. I will take the second question.

Speaker 4

Regarding expenses, there are 2 categories. The first is R and D expenses. We will still keep the similar R and D investment pace and intensity on a quarterly basis. So roughly on the non GAAP basis, it will be around RMB3 1,000,000,000 every quarter, but there will also be fluctuations or slight differences from quarter to quarter as they are relevant to our actual R and D activities conducted. And regarding the second category, SG and A expenses, as we have mentioned that in late Q3, we will start the delivery of L60.

Speaker 4

With that, there will be increase in our SG and A expenses. But as we ramp up the delivery volume of the product, we also think that we will keep optimizing the percentage of the SG and A expenses against the overall sales revenue from L16. Thank you.

Speaker 2

Thank you, Ankit.

Speaker 6

Thank you.

Operator

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

Speaker 7

Thanks for taking my question. So my first question is also regarding AMOL60. So just wondering at, let's say, 10 ks volume in December this year and 20 ks volume next year, what kind of gross margin should be reasonable for this model? Also, as we are ramping up to higher and higher volume, what is our capacity expansion plan and also CapEx plan for 2025 and maybe 2026? Should we expect CapEx to become higher versus 2024?

Speaker 7

So that's the first question. The second question is also regarding the sales marketing expense. So we had over 30% SG and A expense growth in the second quarter. Wondering, could you give more details on the sub items, which is the one that's growing the fastest? And also, is any of the sales policy recorded in the SG and A expense?

Speaker 7

Yes, so that's my second question. Thanks.

Speaker 2

Thank you, Tina.

Speaker 4

Thank you for your question. This is William. I will take your first question. Regarding L60, when its overall production volume reaches a reasonable and expected target, we believe that it will naturally realize a 15% vehicle margin. Of course, against the fierce competition, we have also reserved some room for the variable marketing of the product so that we will be more flexible in the competition.

Speaker 4

Yet overall speaking, as the product itself is designed for efficiency and the cost, 15% vehicle margin is a reasonable target for this model as we actually manage to realize a good balance between the technology advancement and the cost competitiveness. Regarding the capacity preparation, we are having the mid and long term planning for our production capacity in 2025 and 2026. As of now, we already have 2 factories in operation. F2 has already started to upgrade to double shift to support the production of L60. In late September or early October, the upgrade to 2 shifts will be completed in F2.

Speaker 4

And in the meantime, we are also planning our projects, which means that by Q3 next year, we will have 3 factories in operation and it will be sufficient to support our production. Overall speaking, we don't think production capacity will be a bottleneck for us, especially it will not be a long term bottleneck for us. Here in China, the production capacity and capabilities of vehicles and parts are quite competent. Maybe some companies will face short term disturbance in their capacity and the supply, yet for long term, it will not be a bottleneck. Especially last year, we have obtained the independent manufacturing qualification.

Speaker 4

This has also laid a foundation for our long term stable capacity. This is Stanley. I will take your second question. Regarding the CapEx, according to the status quo of the company, we are making prudent control and management of the pace of our investment and expenses. Especially starting last year, we have already started such management by postponing certain projects or even canceling some projects.

Speaker 4

So overall speaking, the R and D or the CapEx in the year of 2024 will be significantly lower than that in 2023. As for 2025, as we haven't started budgeting for the next year, we don't have a clear picture over that, but we believe that the overall expense intensity will be similar to this year. Thank you. As for the increase in the SG and A expenses in Q2, it's mainly contributed to two reasons. The first is that in Q1, we delivered around 30,000 units and in Q2, we delivered a total of more than 57,000 units.

Speaker 4

The increase of our sales volume naturally drove up the staff cost, mainly because the team site has grown and also the incentives for the sales force has increased as well. And the second reason is that in the first half of this year, we have launched our model year physics and many of the new products were launched in around April around March April. In that case, we have also started a series of communications and marketing campaigns relevant to our model year products that has also increased the relevant expenses from Q1. Thank you, Tina.

Speaker 7

Thank you so much. Can I have a very quick follow-up? So in terms of Envoy store, do you have the average store rental cost versus a NIO store? And also how many employees do you plan to deploy in an Envoy store versus that of a NIO store? Thank you.

Speaker 4

Regarding the opening of Arnold Stores, we actually require the team to open up the stores in a quick and efficient manner. So in terms of the CapEx as well as the rent of a single Arnold store, it is significantly lower than that of a new store. But we don't have the specific numbers for comparison as the actual expenses may be quite different depending on the locations and the type of the store. But overall, the expense is lower, significantly lower than that of NIO. And in terms of the renovation fee for each of the Arnold store, we actually have a very strict requirement.

Speaker 4

For the existing 100 Amol stores we have just opened, for each store, the renovation fee was no more than RMB1 1,000,000. And for the following 100 stores we are going to open by the end of the year, we will have an even more strict requirement on renovation. With that, we will be able to make full use of the existing resources and to renovate the store in a more efficient manner. In terms of the team size for each of the store, it depends on the actual number of orders and the deliveries we plan for each depends on the actual number of orders and the deliveries we plan for each store in each city. But in general, we will make sure that the team is also set up in the most efficient and compact way.

Speaker 2

Thank you, Tina.

Speaker 5

Thank you.

Operator

Thank you. Your next question comes from Yucian Ding from HSBC. Please go ahead.

Speaker 8

Thank you, Tim. You can hear I've got 2 questions. First is about the tons driving progress and second is about market and competition dynamics. First question, could you share the NIO NLP progress, especially could you break down in terms of the consumer take rate, our disengagement rate, scenario coverage, the original expansion, these aspects? And the second question is to ask against the backdrop of in the premium EV segment, there's a couple of new models coming, especially in the coming months to the end of the year.

Speaker 8

And also we noticed the high tier city versus the low tier city, the consumer consumption is sliding in general and more so than the low tier city. So could you help us to get comfortable and a conviction on NIO and Onboard's portfolio product technology and service expansion could counter these macro headwinds and still book growth, quote on quarter perspective, maybe, in an aspect of channel order momentum and latest consumer feedback? Thank you.

Speaker 4

Thank you for your question. We also noticed the fierce competition in the area of smart driving. Yet we are also confident that NIO is among the top players in this area. Regarding NLP plus it is now being used by more than 300,000 users as it is now offered as a standard feature on our NT2 product. In the meantime, the cumulative knowledge driven with NOP and NOP plus has reached or has surpassed 1,100,000,000 kilometers.

Speaker 4

So in terms of the user base as well as the total mileage driven with the functionality, we are also a top player in China. Regarding the technology roadmap, right now inside of the industry many players are converging their technology solutions and the roadmap into end to end model, be it Tesla or other players in China. For NIO, we are also working on our end to end model and we have already released our first end to end based feature that is end to end AEB. Its performance has been significantly improved than the traditional AEB functionality as its scenario coverage is 6.7x better than the traditional AEB. And in the meantime, at the Neo in, we have also released our end to end architecture based on the Neo word model.

Speaker 4

Because end to end is an architecture, but its foundation technology is also very important. And we are the 1st company to develop and announce such word model and the end to end architecture based on the model. We have also released the NAD ARC 2.0. So the end to end model will be based on the new the end to end architecture will be based on the new word model or you can see that the new word model is developed with the end to end architecture solution. Overall speaking, we believe that we are still leading the block in terms of the smart driving technologies.

Speaker 4

We have already tested the latest functionality on NAB Arc2 at the small scale and its performance is pretty impressive. Overall speaking, with world model and end to end architecture, we will be able to realize quicker functionality iteration, better experience at a lower cost. In terms of the Envoy brand, its product will come with a single array with pure vision technology solution. But even with that, it has realized a very good performance in the urban driving scenario. The other days, I have tested the functionality in Shanghai and it's also pretty good.

Speaker 4

So overall speaking, we believe that and we also saw facts that the smart driving functionalities will help users improve the safety of driving. In terms of the actual usability of the functionality, we will also keep working on that. Regarding your second question, we also understand the intensity of the market competition and this is not the first time for us to face such fierce competition. Yet NIO has the NIO brand has been realizing a pretty stable market share in the premium segment for years. This is mainly because we have a diversified and rich product portfolio to offer for the premium segment.

Speaker 4

We have ET5, 5T, ES6, EC6, ET7, EC7, ES7 plus ES8. So it's a pretty wide range of product offering that will be enough to cover many product segments. And many of these products are also leading the sales volume in their respective BEV product segment. Not to mention that for some niche products like ET5T, EC7 or EC6 in their respective segments, their volume is even higher than some of the ICE competitors. So overall speaking, we have made a quite successful product portfolio and offering strategy.

Speaker 4

Plus, we also have other advantages such as charging and swapping network, leading technologies, good product experience, service and the user community. This has further enhanced and solidified our foothold in the premium segment. Of course, in the meantime, we also hope that more players can also come into this segment so that we can work with them together to enlarge the size of this premium segment, premium BV segment. In the meantime, for the entire new company, we actually have a pretty clear and straightforward strategy for the continuous business growth. The first is via wider price range.

Speaker 4

From next year, we are going to have 3 brands in the markets. With battery, our price range the price range that can be covered by this 3 brands will be as wide will be pretty wide ranging from RMB140,000 all the way to RMB800,000. And with battery as a service, the price range will be from RMB100000 to RMB700000 which will be a very strong competition to the ICE cost in the respective segments. With 3 brands with wide price range, we will be able to reach a broader market than many of our other competitors. The second approach is via our products, wide product range.

Speaker 4

We have 3 brands. We also have a very diversified product portfolio of each brand. In that case, we will be able to cover a pretty comprehensive product segment with clear differentiation between each brand. And the 3rd approach is through the market and regional coverage. Right now, we are expanding our point of sales into the lower tier cities, especially for NIO.

Speaker 4

At the moment, most of our sales are in the 1st and second tier cities. So such coverage expansion is also very important. We have also announced other plans like the county power up plan where we will expand our charging and swapping network to the counties at all levels. With that, it will help us to further enhance the reach of all 3 brands. Plus, we also have the business development plan for the overseas market.

Speaker 4

So overall speaking, for the long term growth and the development, we have a clear roadmap that is via wide price range, wide product range and also broader regional coverage.

Speaker 2

Thank you, Vitesse.

Speaker 8

Awesome. Thank you.

Speaker 7

Thank you.

Operator

Thank you. Your next question comes from Paul Gong from UBS. Please go ahead.

Speaker 5

Hi, William. Thanks for taking my questions. Two questions here. The first one is regarding the flagship sedan ET9. I think it was launched to schedule for launch in Q1 next year.

Speaker 5

Is that still on schedule? And can you give some updates regarding this model in terms of the positioning, new technology adoption as well as, say, the target volume outlook? Yes, the second question is regarding the overseas expansion. You are going to open the store in UAE and start delivering there. Is it a signal of the change of direction as a result of the EU tariff that you are switching the direction from Europe into Middle East?

Speaker 5

Also, one of your peers has nowadays been delivering over 10% of their volume into the overseas market. Do you think this serves as a benchmark for your overseas expansion over the next 1 or 2 years? Thank you.

Speaker 4

Thank you for the question. Regarding the first question on the ET9, we're still proceeding the ET9 launch preparation according to the plan and we haven't made any changes on SUD of this product. But in the meantime, as you know that the ETMI is equipped with many new technologies, including steer by wire, fully active suspension, in house developed chip, as well as SkyOS. So we will need to bear no effort in making sure and preparing for the successful launch of this product next year. Regarding your second question on our international expansion, we haven't changed our direction.

Speaker 4

Yes, because of the tariffs in Europe, now selling or exporting costs from China to Europe becomes more expensive. So we will focus on the existing 5 European markets that we have already started. We also know that to establish NIO, such a premium brand in the European market will also take a longer time and we are very patient with that. But in the meantime, it doesn't mean that we have stopped our activities there. Earlier this year, we have just opened our new house in Amsterdam and we are still installing and deploying our power swap stations in Europe.

Speaker 4

So we will still keep the same plan. In terms of the market entry into UAE, as you may know that last year we have received a US3 $1,000,000,000 strategic investment from the Abu Dhabi government and then the market entry into UAE is part of the plan. With that, we will work with our strategic partners in UAE to offer our products and services to the local markets. Starting next year, a big difference is that we not only have new brand and products, but also products from Amo and the Firefly, which are more suitable for the global market. With that, we will be actually more active with our international expansion.

Speaker 4

But in the meantime, we will also need to keep a good balance between our investment skill and the efficiency to make sure that we enter into the global market in a smarter and more efficient way. Thank you.

Speaker 5

Thank you. That's helpful. Thank you, Paul.

Operator

Your next question comes from Ming Sun Lee from Bank of America.

Speaker 9

William Stanley, I also have two questions. So my first question is more related to the overall macro. So in your view, what is the potential growth rate for the China EV market in the next few years? Because I think recently some investors expect that the EV penetration will slow down because right now the EV penetration is already very high. So yes, just what is the EV penetration in the next few years?

Speaker 9

Yes, that's my first question. And my second question is regarding the Firefly pipeline. So right now, will you launch 1 or 2 models in 2025 for Firefly? Thank you. That's my two questions.

Speaker 4

Thank you for the question. If you look at the overall passenger vehicle market, in the first half of this year, it has increased by around 3.6%. For the longer term, actually if you look at the total PV population in China, it's as big as 20,000,000 to 30,000,000 units. So it's already a very significant amount. Definitely, it will keep growing, but probably not at a very significant growth rate.

Speaker 4

And it's even normal for the PV segment or PV market to suffer a slight decrease. But even with that, the Chinese market will still be the largest passenger vehicle market in the world. In terms of the penetration rate of the new energy vehicle, it has already surpassed 50% and I think that it will continue to increase and at an even faster manner. Because for the replacement of the ICE cost, it's like BVs or peehives, it will be much faster once it has surpassed this 50% tipping point. We can take Norway as a reference or example.

Speaker 4

It actually grew at 50% penetration rate at first and then it has quickly increased to 80% 90%. So similarly for China, I believe that in 2 to 3 years, the penetration rate of new energy vehicles among new vehicle sales will surpass 80%. If we look at the ICE costs in China, actually they have entered into an unsustainable cycle or a vicious cycle because many ICE brands have to cut their prices to keep their market share, be it premium brands or mass market brands, be it brands from China or from other countries. Many of these ICE costs are having a price slashed for the sake of a market share. But as they cut prices, it also hurts the profit and interest of their dealers, hurts the image of the brand as well as the residual value of their products.

Speaker 4

With that, it is even more difficult for them to keep a very strong market share in their segments. So the decline of their market share is even faster than it should be. For the recent years, we have already witnessed the significant decline of the market shares of the Korean brands like Honda, Kia, including Ford and General Motors. And for the recent years, Japanese brands like Toyota, Honda and Nissan are also entering the same space. So in general, we believe that the IT cost from these joint venture brands will face quite the difficulties in the future competition.

Speaker 4

And when they lose the market shares, they normally lose market shares to other new energy vehicle brands, including brands from China and Europe. So in that regard, I believe that the penetration rate of the new energy vehicle will grow at a pretty quick pace, even faster than we expected. And regarding your second question, yes, we are going to deliver the product from FireFly from 2025. We are in smooth progress with our product preparation.

Speaker 2

Thank you, Ming.

Operator

Thank you. Your next question comes from Cheng Jing from CICC. Please go

Speaker 10

ahead. Okay. Thank you for taking my questions. I have two questions. The first is regard to our new operating system SkyOS, which has been released in July.

Speaker 10

So it has shown very comprehensive and in-depth our software self development ability. So can you just introduce us more details of what other technical challenges we have faced and what advantages and also the improvement of our product can be brought by the new system? So this is the first question. The second is regard to the other income gross profit margin. We have seen the second in the Q2, the gross profit margin has improved significantly.

Speaker 10

So how to understand these major drivers? And also what's our forecast for the trend and continuity of the margin improvement in the future. So also with our growth of our sales volume, can we see that our charging especially charging and battery swap business can turn to profit

Speaker 4

Regarding SkyOS, it's the world's 1st full domain vehicle operating system. That is the special thing with SkyOS, which is also the difficulty or the challenge we have faced when developing the SkyOS. Because when it comes to the era of the smart electric vehicles, we cannot use the fragmented operating systems to manage the electric architecture of the car anymore. With that, we have developed the SkyOS. It comes at three levels.

Speaker 4

At the bottom, we have the SkyOS H that is the hypervisor. And in the middle, we have 4 kernels for the SkyOS. And on the top, we have SkyOS middleware. So it's a very comprehensive solution we have developed. We've used 4 years with 20,000 person mouse with this great work.

Speaker 4

In terms of its benefits, the SkyOS is definitely making the car safer and more secure. It also makes the system stable and it also help us to realize more efficient R and D process and iteration process. It also help us solve the problems faced by the smart electric vehicles like huge data throughput, cross domain fusion and also the latency along the communications. Because we know that it's impossible to realize such benefits by simply working on the duplication layer adaptation. We need to do something at the foundational level and we are very happy that we have made it happen.

Speaker 4

The SkyOS will be applied to our author brands including NIO, Envoy and Firefly. We can say that SkyWest is a software cornerstone for our future products and development. Regarding the revenues or the loss on other sales in Q2, we have significantly narrowed the losses on other sales in Q2. It's mainly because of the two reasons. I think in Q2, we have improved or increased our user deliveries.

Speaker 4

With that, well, actually there are two reasons. The first is that we have improved the profitability and the efficiency of our aftermarket sales. Earlier this year, on February 20, we have released the 2024 Warrior Freight Service policy. With the new policy, our after sales services become more efficient and also more profitable. And secondly, we have also decoupled the lifetime free power swap from the sales of the vehicles.

Speaker 4

With that, more and more users, especially new users, have to pay for the power swap services. This has also helped us improve the revenues and the margin on the Power Swap related services. With that, we have significantly narrowed the losses on the other sales. And we believe that in the future, as we continue to grow the total user base and the sales volume, especially with the launch and the degree of the onboard products, the profitability of the other sales will also become stronger and we look forward to the breakeven or even the profit from this part. And in terms of the profitability of the Power Swap service or in general Power Swap stations, if we look at the single swap station, if it can offer more than 60 Power Swaps per day, it itself will and in the meantime, if we charge all the Power Swap services at the same level for the supercharging, then the single station will become breakeven.

Speaker 4

And right now in China, we have more than 2,500 Power Swap stations. And on average, each station can complete around 30 to 40 swaps per day. So from 30 to 40 to 60, it's not a long way to go for us to make the Power Swap Station breakeven. But in the meantime, we still suffer the loss on the Power Swap business. It's mainly because of two reasons.

Speaker 4

The first is that at the early stage for the early adopters of NIO products, we have offered free lifetime Power Swaps to many of these users, which has actually worsened the burden on the cost of the Power Swap stations and the Power Swap services. And secondly, as we roll out our business and the network, we also came to realize that the network effect of the Power Swap station actually has a very significant meaning to the boost of the sales volume. In that case, we are more active in installing power swap stations even ahead of the actual need. So this swap station deployed in advance also bring additional losses or burden to the business. So in general, if we look at the Power Swap Station itself, it's not far away from breakeven and profitability.

Speaker 4

Yet considering its actual contribution to the sales volume, we have decided to deploy many stations in advance and this has caused the loss on the business.

Speaker 10

Thank you.

Operator

As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

Speaker 1

Thank you again for joining us today. If you have further questions, please feel free to contact NIO's IR team through the contact information on our website. This concludes the conference call. You may now disconnect the line. Thank you.

Powered by Quartr
Earnings Conference Call
NIO Q2 2024
00:00 / 00:00