NIO 2021 Q1 Earnings Call Core Information:
About Gross Profit:
Q: The gross margin of the vehicle increased significantly from 17.2% in the fourth quarter to 21.2%. Can you help us break down how specific sales volume, average transaction price, 100 kWh battery pack, and material cost savings contribute to the gross profit?
Qu Yu:
Our current BOM cost and some other costs are relatively stable overall. Gross profit growth is mainly attributable to the increase in the penetration rate of 100 kWh battery packs and NIO Pilot.
The gross profit contribution of the 100 kWh battery pack is about 5,000 yuan, and that of the NIO Pilot is about 8,000 yuan. The penetration rate of 100 kWh battery packs in the first quarter was 25%, and we expect this rate to continue in the near future. This is the main reason for our gross profit improvement.
Li Bin:
Just now, Stanley mainly talked about the increase in the proportion of high-end models and some cost reductions. We think that a gross margin of over 20% is already in a relatively healthy state because we do not reduce prices. Overall, we still consider it to be comfortable now.
However, we should not expect that we will increase by several percentage points every quarter like last year, but we believe that there is still some room for improvement.
Q: The second question, we know that raw material and chip costs are increasing. Will there be a weekly or monthly estimate of the impact of rising raw material prices on vehicle costs? What is the trend of cost increases?
Stanley:
We expect that there will be some increase in raw material costs in the next quarter, but compared with the overall sales price, the magnitude of this growth will be within control, and the impact on our gross margin will also be limited.
Li Bin:
We have some parts with routine cost savings, but there are also price increases in products like Volkswagen. Overall, we save more from that part than we get impacted by the increase, so overall, costs are still expected to decrease.
Q: About our overall gross profit, for a young company like NIO, this gross profit performance is very good. But in terms of market share, have you focused too much on gross profit and overlooked the proportion of market share? Will you provide more high-end models, or will you go down?
In addition, how do you view the rise in material costs and potential increase in battery prices? Earlier, you mentioned that the penetration rate of 100 kWh batteries is 25%, and I would like to ask about the penetration rate of NIO Pilot?
Li Bin:# About the tradeoff between gross margin and market share
From the perspective of enterprise operation, a reasonable gross margin is needed. We think that our current gross margin is better than expected because we insist on not lowering the price and are willing to use the income in providing better services, including battery swapping facilities and community user benefits. There will definitely be more capital investment in this aspect.
We must look at this issue in different market segments, as in the automotive industry, the market share of Ferrari, Porsche, and Wuling Hongguang is different. NIO focuses on market share in the high-end market. Some brands keep lowering prices, which confuses the brand’s positioning in the automotive field. That is why even though Porsche sells less than 300,000 cars, its profit share in Volkswagen is very high, over 40%.
There is also a longer-term consideration to this matter. Brands need to be well-maintained, so I don’t think that increasing the so-called market share through price reductions is a good method, and in fact, it may not even achieve the intended goal.
We think that with a better gross margin, the better way is to improve the product and provide better infrastructure and services, which is our long-term strategy.
The global high-end market is a market of nearly 10 million vehicles, and we currently have only a fraction of the share, so we still have tremendous growth potential. This is our understanding of long-term market share.
Of course, how to enter the mass market? This is another strategic issue, but we certainly will not use the NIO brand to enter the mass market. This is something that is certain in the long term.
About the chip shortage:
Q: Chip shortage is a global issue, and the shortage in the entire industry will not be eased until the fourth quarter of 2022. The delivery guidance for the second quarter has been changed from 7,500 vehicles per month to 21,000 – 22,000 vehicles for the entire quarter. When is the turning point expected from the shortage to gradual relieving?
Li Bin:
Regarding the chip shortage, we honestly say that the market is still very volatile, and we have to track the impact of the supply chain every day because the automotive industry is very complex.
As you know, Renesas’ Japanese factory caught fire some time ago, causing a delay in the entire supply chain. This incident will impact the global automotive industry chain around mid-May.
From our perspective, such events are happening throughout the industry, and the challenges are indeed great. As of the end of March, we saw a production halt of five days, which will certainly have some impact on deliveries for April.
For the entire quarter, if our entire supply chain capacity can be between 7,000 and 7,500, it is already a significant challenge for us. We are still doing everything we can, and we are confident, but the difficulty is still very high.When it comes to turning points, from the overall perspective of the industry, it is generally believed that the third quarter will be better, and the fourth quarter should see a more comprehensive improvement. However, some are more pessimistic and believe that there will be great pressure next year.
Q: Many automobile companies are also planning to develop their own chips. Does NIO also have plans to get rid of NVIDIA’s chip resources?
Li Bin:
From the value perspective of the intelligent electric vehicle industry chain, it is definitely shifting towards software, chips, and intelligent hardware. In the long run, I believe that if it is a head company, it should continue to invest deeply in intelligent hardware.
Of course, currently there is no plan that can be announced publicly, but everyone should know that our determination in R&D investment is still very firm. We will continue to invest in the full-stack technology of autonomous driving and intelligent electric vehicles in the long term.
About ET7 and R&D Investment
Q: William has already mentioned that the next year will be very challenging. Do you think the delivery of ET7 may be delayed due to challenges in the supply chain? Especially since ET7 is equipped with many new hardware and software features, would there be potential bottlenecks? What possible factors determine the potential bottleneck?
Li Bin:
Indeed, ET7 is not only the first car of our second-generation platform, but also the start of mass production of our second-generation platform. We are the first in the industry in many new technologies and applications, such as sensors and chips.
Of course, some companies have launched some first-generation or half-generation products, but we do not think it is worth doing. We directly break through to the next generation, and the challenge of mass production is very great, such as laser radar and the ORIN mass production of our automatic driving chip partner NVIDIA. In fact, we have advanced their original plan by a long time, so the pressure is still very high.
But we currently believe that it is possible to deliver ET7 in Q1 of next year, and all aspects are being pushed in that direction. The main challenge is how we achieve quality targets and break through production capacity bottlenecks. We know that NIO’s speed in launching products in the past few years has proved our ability to launch a new product every year, and our product quality has always been ranked first in the industry. Therefore, we are very confident in the ramp-up of mass production.
Q: We see that R&D investment has actually decreased slightly this quarter compared to the previous quarter. You said that you will strengthen R&D investment in 2021. Can you share specific strategies, and what are the key areas of investment? What is the proportion of investment in automobile research and development and autonomous driving research and development?
Li Bin:Thanks, in terms of R&D, speaking from the numbers perspective, it’s true that the R&D investment for Q1 didn’t feel particularly high, but the development of cars still follows the product. The mass production of ET7 is in progress, so starting from Q2, the costs related to ET7 mass production including testing and some external partner R&D expenses will increase. Therefore, from a financial perspective, the spending on the development costs of ET7 itself is also comparatively high, but we are still developing many products in parallel because we want to quickly apply the NT2 technology to new car production. So from Q2, you will see a significant increase in R&D expenses, a large part of which is related to the increase in subsequent mass-produced models.
On the other hand, we will accelerate our investment in autonomous driving and software, including the investment in the comprehensive basic technology, the NT2 technology, and the investment in the next generation of NT3 technology. We will also increase personnel, and in the past quarter, we have increased R&D personnel and will continue to do so. Therefore, in terms of basic technology, platform technology, and EDS, we are increasing our efforts very quickly. Therefore, it is challenging to efficiently spend the R&D costs of 5 billion this year, which can be seen from the numbers, and our R&D is speeding up.
About LFP Battery
Q: Many car companies choose LFP battery technology to reduce costs and increase penetration. Some recent news has also said that NIO may release LFP batteries at the end of this year. Can you share more information with us about this technology solution?
Li Bin:
Tesla and some other companies are mainly using LFP in their products, and LFP has its advantages, especially in terms of cost. But if its range in low-temperature conditions and its performance in low-temperature conditions are not resolved, I think it will have a significant impact on the user experience in winter. We believe that the performance of LFP in low-temperature conditions must be resolved, and this is a prerequisite for using LFP.
🔗Source: Official NIO Website
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.