Gross Margin:
Q: The vehicle margin has significantly increased from 17.2% in 2020Q4 to 21.2%. Can you help us quantify the contribution of the vehicle delivery volume, average selling price, 100kWh battery package, and lower material cost to the increase in vehicle margin, respectively?
Stanley Qu:
At present, the BOM and other relevant costs remain stable. The increase in vehicle margin is mainly due to the higher take-rate of the 100 kWh battery package and NIO Pilot.
The 100 kWh battery package contributes to an increase of about 5,000 RMB in vehicle margin, while NIO Pilot drives the margin up by around 8,000 RMB. In Q1, the take-rate of the 100 kWh battery package was 25%, which, according to our predictions, will sustain for some time. This is the primary reason for the increase in vehicle margin.
William Li:Just now, Stanley focused on the growing proportion of vehicles with superior configuration whose cost were brought down. In our view, vehicle margin of more than 20% is a healthy indicator of our business since we don’t consider selling cars at a cheaper price. In general, we are doing well at present.
But now, we don’t expect the margin to rise by several percentage points on a quarterly basis as what we saw last year even if the potential of further growth is still there.
Q: Here comes the 2nd question. We find that the cost of both raw materials and chips is on the rise. Will you pay attention to vehicle cost that might be driven up based on your prediction of the raw materials’ price increase every week or month? How much do you think the cost will go up?
Stanley:According to our prediction, the cost of raw materials is likely to increase in the next few quarters. However, considering the overall selling price of vehicles, such an increase will be manageable with only limited influence on vehicle margin.
William Li:
We have achieved routine cost reduction for some auto parts whereas the price of some main products has gone up. If we do the math, the amount we manage to save far outstrips the increase of the cost, enabling us to finally cut the overall cost.
Q: In terms of gross margin, it turns out to be exceptional for NIO as a young company. But in terms of market share, it might be a different story. Do you focus too much on gross margin while neglecting your market share? Will you choose to sell even higher-end vehicles or roll out more lower-end vehicles instead?Also, what do you think of the rise of raw materials as well as the potential increase of battery price? You mentioned that the take-rate for 100kWh battery package is 25%. Then what about the take-rate for NIO Pilot?
William Li:
When it comes to the choice between gross margin and market share, a good gross margin is necessary from an operational perspective. We believe that our current gross margin is better than expected. We have clearly stated that we will not reduce the selling price. Instead, the revenue we generate will be used to improve our services, including battery swapping facilities, and to protect the rights and interests of our users in the community. Providing better service requires more investment.
We need to differentiate between niche markets and mass markets. For example, the market share of Ferrari, Porsche, and Wuling Hongguang cannot be the same, which is a characteristic of the auto industry.At NIO, we set our eyes on the market share of the premium vehicle market. Some brands will constantly reduce their selling price. But, each brand has its own targeted market in the auto industry. This explains why Porsche has a high profit ratio of over 40% in VW Group, despite the moderate sales of no more than 300,000 vehicles.
We need to adopt a long-term approach on this matter, that is, to maintain a strong brand identity. I don’t think it is wise to gain market share via price reduction, which, in fact, might not work as a result.
We believe the better way is to improve our products, infrastructure and service with growing gross margin. And this is our long-term strategy.
Approximately 10 million cars are sold in the global premium vehicle market. However, we have just secured a few thousandths of the market share today, meaning our potential for growth is still very huge. This is our long-term thinking on market share.As for how to enter the mass market, it is another strategic issue. But we will never seek to get us into the market using NIO the brand. That is for sure in the long run.
Chips:
Q: Chip shortage is a global issue which will not ease until Q4 of 2022 for the auto industry. The guidance of vehicle delivery volume for Q2 has been modified, from 7,500 vehicles per month to 21,000 – 22,000 vehicles for the whole quarter. When the turning point, namely, the time to see the easing of short supply in chips will occur based on your prediction?
William Li:
Speaking of chip shortage, we have to be honest that the chips market fluctuates a lot. Every day, we have to closely follow its influence on the supply chain which can be very long in the auto industry.As you all know, the plant of Renesas in Japan caught fire not long ago, leading to production suspension for several weeks. The actual influence of the incident on the entire supply chain might be delayed and we will see the global industry chain of the auto industry being seriously disrupted around mid-May.
Based on our observation, incidents like this one do happen every now and then in our industry, posing a great challenge to us. Looking back, the production of chips was suspended for 5 days in late March, which would surely make it harder for delivery in April.
7,000 – 7,500 production capacity of our entire supply chain in the upcoming quarter turns out to be quite challenging already but we will surely try to achieve it to the best of our ability. We are still full of confidence even if this is hard to accomplish.## In terms of the turning point, things will get slightly better in Q3 based on the status quo and a full recovery can be expected in Q4 in our industry. But there are also pessimistic views – the next year will not see the coming of such a turning point and the pressure will still be enormous.
Q: Nowadays, many automakers plan to develop chips on their own. Maybe NIO has a similar plan. Have you ever thought about working on chips without the resources of NVIDIA?
William Li:
It is fair to say that the focus of the smart electric vehicle industry will be shifted towards software, chips, and smart hardware in order to create greater value. In my view, the leading companies are likely to increase their investment in smart hardware in the long term.But currently, we cannot disclose any plans related to this matter at NIO. As you are all aware, our company consistently prioritizes our investments in research and development, specifically in autonomous driving technology and full-stack technology for intelligent electric vehicles. These investments will continue to be a significant focus for us and will be supported by our ongoing and long-term commitment.
ET7 and R&D Investment
Q: William anticipates that the upcoming year will be challenging. Does this imply that the delivery of the ET7 might be delayed due to difficulties in the supply chain? Given that the ET7 is equipped with a range of new hardware and software, is there potential for bottleneck issues during the installation process? If so, what could be causing these potential bottlenecks?
William Li:# Indeed, ET7 means a lot to NIO
ET7 is more than just a model, it’s the first car from NIO’s next-generation platform, NT2. This is significant because it marks the start of mass production on the platform, which sets us apart from other companies who are only partway through the transition to their next-generation products. At NIO, we’re all about embracing new technologies and pushing the boundaries of what’s possible. In fact, we’re the first in the industry to apply sensors, chips and all kinds of new technologies to our cars. However, achieving mass production of new products like lidar is extremely challenging. Even NVIDIA, our partner in chips for autonomous driving – are struggling with the mass production of their ORIN chip. Despite planning well ahead of production schedules, the pressure is still intense.We believe that the delivery of ET7 in Q1 next year is achievable, and we are making great efforts to attain this objective. As we produce our new products, we prioritize ensuring their quality and overcoming production capacity limitations. Our strength lies in our ability to quickly launch high-quality new products, exemplified by the release of a new product of top-quality in the industry yearly over the past few years. We have confidence in our ability to further expand production capacity.
Q: In regards to R&D, we noticed that the investment seems to have decreased slightly this quarter compared to the previous one, despite your stated intention to increase R&D investment in 2021. Could you please elaborate on your investment strategies and key areas to invest in, as well as the proportion of investment allocated to vehicle R&D and autonomous driving technology?
William Li:Thank you for the question. For R&D, the investment for Q1 is not very large based on the statistics. However, it’s worth noting that the investment in R&D always follows the schedule of product releases. Currently, the mass production of ET7 is underway, which will lead to an increase in R&D expenses related to ET7 mass production from Q2 onwards, as we invest in tests and R&D with our partners. Financially, ET7’s R&D expenses account for a relatively big portion of our overall R&D expenses, even as we develop many products simultaneously. We are looking to apply NT2 technologies to the production of new vehicles as soon as possible. Therefore, you will see a significant increase in R&D expenses from Q2, mainly due to the mass production of an increasing number of new vehicles later.Besides, we will accelerate our investment in autonomous driving, software, all kinds of basic technologies, NT2, and even the upcoming NT3 technologies with more R&D staff on board with us. The previous quarter saw tremendous growth in R&D investment, and we will continue to engage more R&D professionals. The investment in basic technologies also soars, particularly the technologies developed on our own platform, including EDS. It will be challenging for us to make full use of the 5 billion R&D fee and spend it wisely this year. It is clear that our R&D is being accelerated given the statistics.
LFP Battery
Q: In order to lower the cost and improve the market penetration rate, many automakers have chosen to adopt LFP battery technology. According to recent news, NIO might release its LFP battery at the end of this year. Could you please share more information with us on this technology?
William Li:# Tesla and other Companies Switching to LFP Battery
Tesla and other major automotive companies are now equipping their models with LFP batteries. This type of battery has its advantages, such as being low cost. However, if the battery’s cruise range per charge and performance cannot be improved at low temperatures, it is likely to affect the user experience during the winter. In our view, satisfactory performance of LFP battery in a cold environment is a precondition for its use.
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.