Q3 2018 NIO officially began to deliver a large number of ES8 models, with a total revenue increase of 3095.3% compared to the previous quarter, but Q3 gross margin also significantly narrowed to -7.9%. However, considering ES8’s large-scale deliveries in the past quarter, it is hard to see NIO’s actual operations from these data.
After the financial report was announced on November 7th, NIO’s management, including Li Bin and NIO CFO Xie Dongying, attended NIO Q3 financial conference which revealed many new pieces of information.
Production and Delivery
Can you give an overview of the growth of order flow and efforts to expand brand recognition?
The order flow is now relatively stable. We have delivered 5300 vehicles and expect to deliver 2500 vehicles each month in the next two months to achieve the goal of delivering 10,000 vehicles by the end of the year. We receive between 50-80 orders per day, with deposits of several hundred thousand yuan received daily, and orders remain relatively stable. Regarding brand recognition: NIO House has shown a significant effect. As of the end of October, the number of NIO App users was about 626,000, with around 170,000 active users per day. Old customer referrals, test drives, and other efforts have also helped.
Could you talk about our production bottleneck?
The production bottleneck is a new problem for us. The Chinese registration system for vehicle production qualifications usually takes some time to process, which we are currently waiting for. The factory is still climbing the ramp, and during the October national holiday, we closed the production line and did not produce cars. During this time, we improved the production line to allow it to produce ES6 and ES8 models simultaneously, while also adapting to some customized order requirements from customers.
Regarding orders, currently approximately 5000 orders have not been delivered out of the 5300 delivered. Does this mean that these undelivered orders have been canceled? With daily new orders between 50-80, does this mean future order acceptances and car deliveries will be roughly the same?
This depends on how many customers canceled their orders. Due to the long wait times, some customers who paid the 5,000 yuan deposit did cancel their orders. The 5300 vehicles delivered mainly came from production orders for customers who paid the 43,000 yuan deposit, while the yet-to-be-delivered orders are for customers who paid about 45,000 yuan in deposits. In the next few months, we will deliver 10,000-11,000 vehicles, and the daily 50-80 new orders have taken into consideration these canceled orders.
If I place an order today, can I receive the car in the next two months?> 目前大约 20% 的消费者选择了电池租赁/电池 SWAP 服务。电池 SWAP 服务对于用户而言十分方便，提高了电动汽车的使用体验，也更加环保。换电站的建设是公司长期规划的一部分，我们会在 2020 年底前实现 500 座换电站的建设。目前，我们已经在北京、上海、深圳、成都等城市建设了 50 座换电站，我们还将在未来推出更多的换电站。换电站建设会增加一定的投入，但同时换电站网络的建设和电池更换工作是公司一直在推动的，我们有信心达到目标。> 73% of battery leasing users (as of 2018Q3) and about 6% of users have not used battery SWAP services. City consumers can choose to use the mobile charging car/battery SWAP or install a home charging station through the one-click service function in the NIO App. Future planning will be based on user extension data.
The one-click service has been used more than 10,000 times and most users choose to use the mobile charging car. About 77% of users have installed a home charging station, and their income is much better than expected, greatly easing the pressure on our infrastructure investment. In addition, the use of charging stations/mobile charging cars in cities can basically meet the needs of users, and there is less pressure to deploy battery SWAP sites.
On the highway, users usually have a more urgent time requirement. We are currently trying to deploy battery SWAP sites (especially in developed areas such as the Yangtze River Delta and Pearl River Delta). We only need to rent three parking spaces to provide charging services for a high-speed segment without infrastructure investment. The deployment of battery SWAP will be adjusted according to the user extension situation for long-term planning.
About gross margin
What was mentioned before is that the gross margin will gradually turn positive in Q4. Could you talk about it in detail?
Two key factors are material costs and fixed costs. Considering the scale effect, better cash flow, and advantages in the supply chain, there will be some improvements in these two areas in Q4. The gross margin will improve in Q4.
Regarding the gross margin, how about the outlook for 2019 considering subsidy decline and battery costs?
Subsidies will be reduced next year, but it will not affect the gross margin. Our sales price is the price considering subsidies, which affects the actual cost to users, but does not affect the company’s revenue. We believe that battery costs will decrease, and increased procurement will further reduce it. However, it will be difficult to lower the overall vehicle cost to 10%. Additionally, increasing delivery volume will reduce the fixed cost per vehicle, which is also beneficial for improving gross margin.
How will the gross margin change in the future, such as what is the break-even delivery volume for ES6?
From the perspective of unit contribution, the ES6 has a lower marginal contribution with a lower price, which can be offset by a smaller fixed cost per unit (with more ES6 deliveries). In addition, both ES6 and ES8 have the same basic supply chain partners. An increase in component quantity will help improve the gross margin.Will the initial version of the car, the relatively inexpensive updated version, and subsequent new models have similar profit margins?
The profit margins for the cars after the initial version will be relatively higher. We want to offer consumers a unique experience with the initial version. In addition, the introduction of new features such as NOMI will also increase profit margins. The specific answer still requires data on subsequent user orders/demands.
The mass production and delivery of ES8 was a major step forward for NIO in terms of marketing and brand building, leading many new car manufacturers. However, the overly strict product cycle seems to have caused NIO to fall into the quagmire of insufficient product strength. From the financial report conference call, NIO, which has fallen into the public opinion storm, is gradually emerging from the haze, and NIO’s management is confident about the subsequent delivery of the ES8.
Is NIO’s aggressive production plan a “detour” or a major decision-making mistake? Let’s wait and see what’s in store for NIO in the future.
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This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.