NIO Achieves Significant Rebound in Operating Data in Q3, Consolidating its Leading Position in New Car Manufacturing

Author: Kaijun Qiu

Editor: Kaijun Qiu

NIO saw a significant rebound in its operating data in Q3, consolidating its leading position in new car manufacturing.

On November 11, NIO released its Q3 financial report, with a revenue of 13 billion RMB, a YoY increase of 32.6%, and a delivery of 31,600 vehicles, a YoY increase of 29.3%.

“We launched and delivered three new car models, comprehensively improved our product competitiveness, entered more high-end niche markets, and propelled the sustained growth of demand,” said William Li, founder, chairman, and CEO of NIO, during the Q3 earnings conference call.

NIO staged a remarkable comeback in Q3, climbing out of the pit of COVID-19 production halts, delivering a large volume of the new platform models, improving cash flow, and substantially increasing research and development. Building on this foundation, NIO will launch a multi-model, multi-brand scale war in 2023 and 2024.

“Next year, we will introduce five new models, and one of them will be the NIO Model Y… By the first half of next year, up to June, we will have eight models on sale,” Li said. In addition, they expect “one car to reach 50,000 monthly sales” for the upcoming mass-market brand model.

Clearly, NIO is ready to become a mainstream car company.

Rapid Recovery in Growth

In terms of core data, NIO achieved a Q3 revenue of RMB 13 billion, reaching a new record high for a single quarter, and most importantly, it has resumed its rapid growth momentum. In the preceding three quarters, NIO’s revenue was all around RMB 10 billion, but Q3 increased by 26.33% QoQ. For companies on the upward trajectory, high growth is the passing line.

Revenue came mainly from car sales. NIO delivered 31,600 vehicles in Q3, with monthly deliveries staying above 10,000, and remaining stable. Q1 was the annual low point, Q2 was heavily hit by the Shanghai epidemic, with deliveries falling to about 5,000 in April, slightly recovering in May, and returning to above 10,000 in June.

And, during this period, NIO’s old and new products have completed upgrades, and the three new cars ET7, ES7, and ET5 incubated by the second generation platform have become the main force.

In the conference call, William Li said that NIO has basically overcome the previous supply chain and production capacity limitations.

“Supply chain still faces challenges, and the delivery number in December will be limited by the power semiconductor. Excluding the impact of the epidemic, the supply chain and production capacity are not the delivery bottlenecks.”

In terms of production capacity, “we have a total production capacity of 300,000 with two bases of 150,000 each per shift. In the short term, it can support our entire production.”

He revealed that in December he hopes to achieve a production target of 20,000 units per month.

On the demand side, NIO is very confident. In response to Tesla’s continuous price reductions and promotional activities, Li Bin said, “The demand for ET5 is undoubtedly very strong, in line with expectations. Tesla’s price reduction is not a new thing and has no impact on NIO’s demand. Due to the price difference, Tesla Model 3 and Model Y are not in the same range as NIO.“

Unfortunately, NIO’s gross vehicle margin continued to decline in the third quarter, to 16.4%. NIO’s vehicle margin was 18.1% in Q1, and 16.7% in Q2.

When talking about the gross profit margin in the conference call, Li Bin said, “This year’s gross profit margin faces challenges, mainly due to battery prices… If the unit price of lithium carbonate drops by RMB 100,000, our gross profit margin will increase by 2%; if the unit price of lithium carbonate drops to RMB 400,000, we can increase by 4 percentage points.” He believes that the price of lithium carbonate should decrease.

NIO is very optimistic about car deliveries in Q4, with a delivery guide of 43,000 to 48,000 units.

Reinvestment in Research and Development

In the third quarter, NIO’s investment in research and development increased significantly to RMB 2.94 billion, a 36.74% increase from the second quarter.

Moreover, Li Bin said that in the next period of time, “the research and development expenses will be maintained at about RMB 3 billion per quarter, and the systematic efficiency of research and development will continue to improve.”

The direction of research and development investment is undoubtedly the core technology including autonomous driving and the development of new models.“We are actively developing AD chips with a team of 500 people, and progress is smooth. The AD chip is strongly related to algorithms, and combining our algorithms will customize chip efficiency and improve our gross margin.”

Does the US’s chip restrictions on China affect NIO’s autonomous driving research and development?

Li Bin said that Nvidia’s chips mainly involve cloud AI training chips. “Currently, we have enough A100 chips in hand to meet the AI training needs for a long time. We are also cooperating with cloud service providers to meet long-term needs. Currently, there is no impact on AD development.”

Li Bin believes that investing in research and development will help NIO improve its gross margin. “NIO’s research and development efficiency is very high. Assuming that battery prices return to normal and rational levels, a 25% gross margin is not a big problem. In the long run, as we vertically integrate and invest in batteries and chips, it is very important for us to achieve a gross margin of 25%-30% in the long term.”

However, he emphasized that “in the mainstream market, challenges will be greater. If all companies are added together, the overall gross margin is negative. BYD has vertical integration of batteries and parts and is still doing very well. For the mass market, it will be very difficult to achieve a gross margin of 20-25% without vertical integration capabilities.”

The Scale War is About to Begin

Starting with the Model 3, Tesla has entered the third stage of the Master Plan designed by Musk – mass production of economic models.

Not only Tesla, almost all electric car brands will eventually face the problem of large-scale production.

NIO will expand the NIO model lineup and launch two new brands to cover more markets, hoping to break through the ranks of new car forces and become a mainstream automaker.

“We will launch 5 models in the first half of next year, and one of them will be NIO’s Model Y. We care more about the total amount of products on the same platform. Our overall strategy is to meet the needs of high-end customers in a more efficient way. By June next year, we will have 8 models on sale to meet diverse needs of users. We have confidence in total sales.” Li Bin said.

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Tesla Model Y surpasses the electric vehicle market and competes with popular gasoline vehicles in sales – 23,350 cars delivered only in China from January to October.

Of course, a greater potential lies in NIO’s upcoming mass market brand.

“I just finished another brand meeting today, and one of the mass market brand cars can reach 50,000 monthly sales. In a mass market, we hope to sell 50,000 cars and cater to different user interests in different segmented markets,” said Li Bin.

Despite disruptions caused by the pandemic, supply chain, and product iteration, NIO stumbled in the first half of the year but returned to the growth track in the third quarter and began large-scale production increases and expansion.

However, NIO also values financial returns. “With our existing cash reserves and reasonable bank support, we have enough confidence to ensure and achieve company-wide profitability. Our financial management is very strict,” said Li Bin.

“By Q4 2023, the NIO brand can achieve a balance of profit and loss,” said Li Bin.

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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.