Author: 63
Translator: Daniel Han CHEN

Gross Margin:

Q: Vehicle margin has increased substantially from 17.2% in 2020Q4 to 21.2%. Do you mind helping us quantify the contribution of vehicle delivery volume, average selling price, 100kWh battery package and lower material cost to the increase of vehicle margin respectively?

Stanley Qu:
The BOM and other relevant costs are kept relatively stable at the moment. The increase of vehicle margin is mainly attributed to higher take-rate of 100 kWh battery package and NIO Pilot.

100 kWh battery package leads to an increase of about 5,000 RMB in vehicle margin while NIO Pilot helps drive the margin by around 8,000 RMB. In Q1, the take-rate of 100kWh battery package stood at 25% which, according to our prediction, would sustain for some time. And this is the major reason for the increased 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 the perspective of operation. We believe the gross margin at present is better than our expectation. We’ve made it clear that we will not reduce the selling price so that the revenue we gain can be better used to improve our service including battery swapping facilities and to protect the rights and interests of our users in the community. Indeed, the provision of better service requires more investment.

We need to differentiate niche markets from mass markets. For example, the market share of Ferrari, Porsche and Wuling Hongguang cannot be the same, which is the 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 an 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 for now, no plans in this regard at NIO can be made public. As you all know, we are always very determined to invest in R&D, particularly, technologies in autonomous driving and full-stack technology for smart electric vehicles which will be backed by our continuous and long-term investment.

ET7 and R&D Investment

Q: William predicted the year ahead would be full of challenges. Do you think the delivery of ET7 might be delayed because of the challenges in supply chain? It is worth noticing that ET7 is equipped with a series of new hardware and software. Will the installation of all these hit the bottleneck? If so, what causes the potential bottleneck?

William Li:
Indeed, ET7 means a lot to NIO as it is the first model produced on our next-generation platform, NT2. And the significance goes beyond the production of the vehicle itself as it also marks the beginning of mass production on NT2. We are the first in the industry to apply sensors, chips and all kinds of new technologies to our cars. Some companies are simply halfway between the first- and second-generation products yet we don’t think it is worth doing as we want to go directly to the next-generation products. To achieve mass production of the totally new products such as lidar can be extremely challenging. Even for NVIDIA – our partner in chips for autonomous driving , the mass production of ORIN is not easy at all. Even if we have planned well ahead of their production schedule, the pressure is still too much to bear.

But we think it’s possible to deliver ET7 in the Q1 of next year and we are working so hard towards this goal. While producing the new products I just mentioned, we are always keen to ensure their quality and break through the bottleneck in production capacity. Our strong suit lies in fast release of new products, which is manifested by the fact that one new product has been launched every year in the past few years with the top quality in the industry. And we are very confident that the production capacity can be further expanded.

Q: With the regard to R&D, we found the R&D investment in this quarter seem modest, representing a slight decrease compared with the last quarter. However, you had clearly stated that you would invest more in R&D in 2021. Do you mind sharing with us the investment strategies in detail to let us know the key areas to invest in. And what will be the proportion of investment taken by vehicle R&D and autonomous driving technology respectively?

William Li:
Thank you for the question. For R&D, the investment in it for Q1 is not very large based on the statistics. But it’s worth pointing out that the investment in R&D always follows the schedule of product release. Currently, the mass production of ET7 is underway, meaning that the R&D expense related to ET7 mass production will go up since Q2 with the investment pouring into tests and the R&D conducted with our partners. Financially, ET7’s R&D expense (occupies a relatively big share of the overall R&D expense) though we are developing a lot of products all at the same time. We are seeking to apply NT2 technologies to the production of new vehicles as soon as possible. Therefore, you will see a significant increase in R&D expense since Q2, which is basically resulted from the mass production of an increasing number of new vehicles later.

Besides, we will speed up 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 an tremendous growth in R&D investment and we would 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 down cost and improve market penetration rate, many automakers have choose to adopt LFP battery technology. According to some recent news, NIO might release its own LFP battery at the end of this year. Could you please share more information with us on the technology?

William Li:
Tesla and some other companies are now equipping their major models with LFP battery which, of course, has its own advantages such as low cost. But if the cruise range per charge and performance of the battery cannot be improved at low temperature, then the user experience is likely to be spoiled during winter. In our view, satisfactory performance of LFP battery in a cold environment is the precondition for its use.