NIO Inc

NYSE:NIO

Earnings Call Transcript 2021-Q1

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated’s First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s conference call is being recorded.

I will now turn the call over to your host, Ms. Eve Tang from Capital Markets and Investor Relations. Please go ahead, Eve.

[Eve Tang, Capital Markets and Investor Relations]

Good morning, and good evening, everyone. Welcome to NIO’s first quarter 2021 earnings conference call. The company’s financial and operating results were published in the press release earlier today and are posted at the company’s IR website. On today’s call, we have Mr. William Li, Founder, Chairman of the Board and the Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; Mr. Stanley Qu, VP of Finance; and Ms. Jade Wei, AVP of Capital Markets and Investor Relations.

Before we continue, please be kindly reminded that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s actual results may be materially different from the views expressed today.

Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under the applicable law. Please also note that NIO’s earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to NIO’s press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

With that, I will now turn the call over to our CEO, Mr. William Li. William, please go ahead.

[William Li, Founder, Chairman and Chief Executive Officer]

[Foreign Language]

Hello, everyone. Thank you for joining NIO’s 2021 Q1 earnings call.

[Foreign Language]

In the first quarter of 2021, NIO delivered 20,060 ES8, ES6, and EC6, representing a strong year-over-year growth of 422.7%, and a solid quarter-over-quarter growth of 15.6%. All three models have achieved outstanding results in their respective segments, especially EC6. With its comprehensive performance, streamlined silhouette, and the superior digital experience, EC6 has outperformed other peers in the coupe SUV segment and has been well received among users, especially among the younger audience.

[Foreign Language]

On April 7, 2021, over 100,000 production vehicle was rolled off the line. It took NIO 26 months to roll off the first 50,000 vehicles but only nine months for the second 50,000. Together with our users, NIO has set a new speed record from delivering the first vehicle to the 100,000 vehicle among the premium auto brands.

[Foreign Language]

Driven by the growing brand awareness, competitive product portfolio, industry-leading technologies, outstanding services, and innovative business models, NIO has gained increasing recognition and support from our users. Our order momentum remains solid, while the risk of a global chip shortage still looms large in the second quarter. Despite the challenges, we expect to deliver 20,000 to 22,000 vehicles in the second quarter.

[Foreign Language]

In terms of the gross margin benefited from higher deliveries and solid average selling price. Other vehicle gross margin reached 21.2%, while the overall gross margin increased to 19.5% in the first quarter.

[Foreign Language]

On top of the positive operating cash flow for the full year of 2020, we have continued to realize positive cash flow from operating activities in the first quarter of 2021, while steadily improving operating efficiency and overall system efficiency. We remain committed to doubling down on our investments in research and development and stayed determined to accelerate the deployment of our swapping and charging network and off-line service channels.

[Foreign Language]

Next, I would like to share with you some recent key operational highlights of the company.

[Foreign Language]

After the launch of ET7, our first flagship smart electric sedan at the NIO Day, it has attracted great attention from the market and the industry. Our teams are fully focused on and devoted to the production and testing of ET7. On April 2, the first body-in-white of ET7 rolled off the production line in Hefei Manufacturing Centre. On April 19, the interior of ET7 was unveiled at the Shanghai Auto Show, showcasing its second living room design concept, which has been well received by the media and the public.

[Foreign Language]

On April 15, we kicked off the deployment of the Power Swap Station 2.0, the second-generation Power Swap Station can significantly boost its service capacity to up to 312 swaps per day by shortening the battery swapping time and carrying up to 13 battery packs. To further improve the swapping experience, we upgraded and optimized all the NIO Pilot based on the Power Swap Station 2.0 in NIO OS 2.10.0, which was released to users in April, to achieve an automatic, one-click, park-and-swap experience without getting out of the car throughout the whole swapping process. All new users can enjoy this feature once they have updated their vehicle operating system. As an organic part of NIO’s holistic charging and swapping network, the Power Swap Station 2.0 will be gradually deployed nationwide in China.

[Foreign Language]

NIO has created innovative battery subscription model based on vehicle battery separation and chargeable, swappable and upgradeable battery. As more users get to know better about the benefits of the Battery as a Service or BaaS and more battery pack options become available, BaaS has gained increasing popularity. We believe BaaS and NIO’s growing charging and swapping network will further elevate the user experience of owning an electric vehicle and attract more users to choose electric vehicles.

In addition, since its launch, the 100-kilowatt-hour battery pack has been widely welcomed by our users with a much higher take rate than we expected. As of April 16, more than 10,000 users have been using the 100-kilowatt-hour battery pack. On April 18, we have also officially made the flexible upgrade to 100-kilowatt-hour battery pack available for reservation and will offer this upgrade service to users starting from June.

[Foreign Language]

In terms of a production capacity at late March and early April, due to the semiconductor supply shortfall, JAC-NIO factory halted the production for five working days, which has posted certain negative impacts on our production and delivery in April. In the second quarter, we expect the challenges to the overall supply chain production capacity will continue to linger. In spite of the volatile microenvironment, we are working closely and diligently with our partners to secure supply chain resources. During the production suspension period and holidays, our partners and us have modified our production lines to prepare for the mass production of ET7.

[Foreign Language]

Not long ago, NIO signed further collaboration framework agreement with the Hefei government and announced to jointly build the NeoPark, a smart electric vehicle industrial park in Xinqiao. On April 29, 2021, NIO participated in the kickoff ceremony of the NeoPark and organized the NIO Partner Conference 2021 in Hefei. NIO strives to collaborate with partners in talent attraction and cultivation, research and development, supply chain, and manufacturing to facilitate the development of the smart electric vehicle in Hefei.

[Foreign Language]

To further support the production of NIO’s future models, together with our partners, we will plan and build a new factory in NeoPark. We are in discussion with our partners about the detailed execution plan and the Cooperation Model, and we’ll share more information at an appropriate time.

[Foreign Language]

With regards to the sales and service network, we now have 23 NIO Houses and 211 NIO Spaces, covering 123 cities in China. We’ll continue to strengthen the building of the NIO Houses and the NIO Spaces to further expand the sales network coverage, improve operational efficiency and enhance brand influence.

[Foreign Language]

NIO has built 206 swap stations in 77 cities. We have gradually started the deployment of Power Swap Station 2.0. We aim to have at least 500 battery swap stations in operation by the end of this year. At the same time, we will ramp up the availability of Power Chargers, our supercharging piles, and the destination chargers. Up until now, we have deployed over 146 Power Charger stations and 1,826 destination chargers and plan to increase it to 600 and 15,000 respectively by the end of 2021.

[Foreign Language]

On April 15, NIO signed a strategic cooperation agreement with Sinopec to work together on building battery charging and swapping infrastructure. This strategic collaboration will enhance efficiency of site selection for NIO’s charging and swapping facilities, better users experience of owning an EV, and help convert more gasoline car users to EV.

[Foreign Language]

In the meantime, to provide users in the Northern China region better and more convenient charging and swapping services, we announced the Power North Plan at this year’s Shanghai Auto Show in the next three years in the eight northern provinces and autonomous regions. We plan to deploy 100 Power Swap Stations, 120 Power Mobiles, 500 Power Charger stations with over 2,000 Power Chargers, and 10,000 destination chargers. We believe that Power North Plan will significantly improve the electric vehicle usage experiences for users in the north and further catalyze the adoption of smart electric vehicles in those areas.

[Foreign Language]

Up to now, we have 33 NIO service centers and 162 authorized service centers in operation. Coupled with continuously improving operational efficiency, we will keep expanding our after-sales service network and to further improve the service operation system.

[Foreign Language]

As a user enterprise, the trust and the support of our users has always been our most treasured resources and the driving force of our growth. At the just concluded Shanghai Auto Show, 180 user volunteers from different cities came to our group to introduce the concept, product, technology, and service of NIO to others. Fifteen NIO users collaborated with experts from various industries to jointly host 14 sessions of a brief talk to discuss how to shape a joyful lifestyle with smart technologies. Many users displayed their original artworks at the NIO user museum at our Auto Show booth through which they shared the joyful lifestyle NIO advocates and shapes.

[Foreign Language]

With the support from our users and the efforts of our teams in 2020, NIO has stepped on to the right track for the overall operation and has embarked onto the stage of accelerated development. The year of 2021 is of key importance for NIO’s development. We will further improve the establishment of power sales and service networks to enhance NIO’s brand reputation and provide the best holistic experience to NIO users. More importantly, we’ll continue our decisive and efficient investments in new products and technology research and development to solidify the foundation for NIO’s long-term growth.

[Foreign Language]

As always, thank you for your support. With that, I will now turn the call over to Steven to provide the financial details for the quarter. Steven, please go ahead.

[Steven Feng, Chief Financial Officer]

Thank you, William. I will now go over our key financial results for the first quarter of 2021. And to be mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in the first quarter were RMB7.98 billion or US$1.22 billion, representing an increase of 481.8% year-over-year, an increase of 20.2% quarter-over-quarter.

Our total revenues are made of two parts: vehicle sales and other sales. Vehicle sale in the first quarter was RMB7.41 billion or US$1.13 billion, accounting for 93% of total revenues in this quarter. It represented an increase of 489.8% year-over-year, an increase of 20% quarter-over-quarter. The increase in vehicle sales year-over-year was mainly attributed to higher deliveries achieved from more product mix offered to our users, the expansion of our sales network since 2020, and the slowdown of vehicle sales in the first quarter of 2020 due to COVID-19 pandemic in China.

The increase in vehicle sales quarter-over-quarter was mainly due to higher deliveries and higher average in price. Other sales in the first quarter were RMB576.5 million or US$88 million, representing an increase of 395.3% year-over-year, an increase of 23.4% quarter-over-quarter. The increase in other sales year-over-year was in line with the incremental vehicle sales in the first quarter of 2021. The increase in other sales quarter-over-quarter was mainly due to the increased revenues derived from 100-kilowatt-hour battery permanent upgrade service provided since December 2020, partially offset by sales of automotive regulatory credits in the fourth quarter of 2020.

Cost of sales in the first quarter was RMB6.43 billion or US$0.98 billion, representing an increase of 317.5% year-over-year, an increase of 16.9% quarter-over-quarter. The increase in cost of sales was in line with revenue growth, which was mainly driven by the increase of vehicle delivery volume in the first quarter of 2021. Gross profit in the first quarter was RMB1.55 billion or US$0.24 billion, representing an increase of RMB1.72 billion for a gross loss of RMB0.17 billion in the same quarter of 2020, an increase of 36.2% from the fourth quarter of 2020. The increase in gross profit was mainly contributed by increased vehicle sales and increased vehicle margin.

Gross margin in the first quarter was 19.5% compared with negative 12.2% in the same quarter of 2020 and 17.2% in the fourth quarter of 2020. The increase of gross margin was mainly driven by the increase of vehicle margin in the first quarter 2021. More specifically, vehicle margin first quarter was 21.2%, compared to negative 7.4% in the same quarter of 2020 and 17.2% in the fourth quarter of 2020. The increase of the vehicle margin year-over-year was mainly driven by the increase of vehicle delivery volume, higher average selling price, as well as lower material costs.

The increase of vehicle margin quarter-over-quarter was mainly attributed to higher take rate of NIO Pilot and 100-kilowatt-hour battery package. R&D expenses in the first quarter were RMB686.5 million or US$104.8 million, representing increase of 31.4% year-over-year and a decrease of 17.2% quarter-over-quarter. The increase of R&D expenses year-over-year was mainly attributed to less R&D, research and development activities in the first quarter of 2020 due to COVID-19 pandemic in China. The decrease in R&D expenses quarter-over-quarter reflected fluctuations due to different design and development stages with new products and core technologies.

SG&A expenses in the first quarter were RMB1.2 billion or US$0.18 billion, representing an increase of 41.1% year-over-year and a decrease of 0.8% quarter-over-quarter. The increase in SG&A expenses year-over-year was primarily to the increased marketing activities, as well as increased number of employees in sales and service functions in the first quarter of 2021. SG&A expenses remained relatively stable compared to the fourth quarter of 2020. Loss from operations in first quarter was RMB295.9 million or US$45.2 million, representing a decrease of 81.2% year-over-year and a decrease of 68.2% quarter-over-quarter.

Share-based compensation expenses in the first quarter were RMB96.5 million or US$14.7 million, representing increase of 198.1% year-over-year, an increase of 60.3% quarter-over-quarter. The increase in share-based compensation expenses was primarily attributed to incremental options granted to relatively higher grant date fair values during the period.

Net loss in the first quarter was RMB451 million or US$68.8 million, representing a decrease of 73.3% year-on-year and a decrease of 67.5% quarter-over-quarter. Net loss attributable to NIO’s ordinary shareholders in the first quarter was RMB4.88 billion or US$0.74 billion, representing an increase of 183% year-over-year, an increase of 226.7% quarter-over-quarter.

In the first quarter of 2021, NIO purchased 3.305% equity interests in NIO China from the minority strategic investors and recorded an amount of RMB4.4 billion or US$0.67 billion in accretion of redeemable non-controlling interests to redemption value. Excluding share-based compensation expenses and accretion on redeemable non-controlling interest to redemption value, non-GAAP adjusted net loss attributable to NIO’s ordinary shareholders was RMB354.5 million or US$54.1 million in the first quarter of 2021. Basic and diluted net loss per ADS in the first quarter were both RMB3.14 or US$0.48 per ADS.

Excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB0.23 or US$0.04 per ADS. Our balance of cash and cash equivalents, restricted cash, and short-term investments was RMB47.5 billion or US$7.3 billion as of March 31, 2021.

Additionally, we achieved further cash flow from operating activities for the first quarter 2021. And now, for our business outlook. As William mentioned, for the second quarter of 2021, the company expects deliveries to be 21,000 and 22,000 vehicles, representing increase of approximately 103% to 113% from the same quarter of 2020, an increase of approximately 5% to 10% from the first quarter of 2021.

The company also expects the total revenues of the second quarter 2021 to be between RMB8.15 billion and RMB8.50 billion or between US$1.24 billion and US$1.30 billion. This will represent increase of approximately 119% to 128.7% from the same quarter of 2020, an increase of approximately 2.1% to 6.5% from the first quarter of 2021. This business outlook reflects the company’s current and preliminary view on the business situation and the market condition, which is subject to change.

Now, this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

[Operator]

[Operator instructions] Our first question comes from the line of Nick Lai. Please ask your question.

[Nick Lai, J.P. Morgan]

Yes. Good morning, William, Steven, and management team. Congratulations for the great results. My simple two questions, first one is on gross margin and second one is really on chip shortage come across by many investors. On gross margin, indeed, a very good improvement of – from 4Q last year to 1Q this year. The vehicle margin increased from roughly 17% to 21%. And of that 4 percentage point improvement, I wonder if you could help us quantify a little bit the underlying driver, how much percentage is driven by ASP volume and on the flip side, raw material, price, batteries, and so on.

[Foreign Language]

That’s my first question. And second question on the chip shortage, it’s a common issue. And I know this probably is very low two to three months. And at the same time, we did revise down cycling our 2Q sales volume guidance from previously, William mentioned 7,500 per month in 2Q. And right now, it’s roughly about 21,000 to 22,000 in 2Q. And on the chip shortage, do we have any visibility on the potential easing of supply? Would that happen hopefully in 3Q?

[Foreign Language]

[William Li, Founder, Chairman and Chief Executive Officer]

[Foreign Language]

[Stanley Qu, Vice President of Finance]

Hi Nick, this is Stanley. Overall, our vehicle costs, including BOM and also manufacture cost, remained stable in Q1 2021. And the increase of vehicle margin are mainly driven by the increase of take rate of 100-kilowatt battery pack and also the NIO Pilot, of which 5,000 is for the 100-kilowatt battery pack, and 8,000 is for the NIO Pilot take rate. So the overall 100 battery pack take rate in Q1 is 25. And we think these trends will keep in the following quarters. So that’s the general reason of why we achieved a higher gross profit margin in Q1. Okay. William?

[William Li, Founder, Chairman and Chief Executive Officer]

[Foreign Language]

Overall speaking, the gross margin in the first quarter of 2021 is higher than our expectation. Just like Stanley mentioned, this is mainly driven by the higher take rate of some options by the 100-kilowatt-hour battery pack and the NIO Pilot. At the same time, the cost has also reduced to some extent. We believe the current gross margins around 20% is a very healthy situation for the company’s operations, because we don’t actually cut the price and we believe this is quite comfortable for us.

But at the same time, I would like to urge everyone to manage your expectations because this kind of rapid improvement of the gross margin will be quite challenging for us. But I believe there will still be room for improvement for the gross margin, but not at this big margin. So we should not be too optimistic about the gross margin improvement. But we believe, right now is quite good for us to reach 20% of the gross margin, and it’s earlier than we expected. Still, our focus for the company is the product and the service.

[Foreign Language]

[Nick Lai, J.P. Morgan]

[Foreign Language]

[William Li, Founder, Chairman and Chief Executive Officer]

The second question is about the chip shortage. The current situation in the market is quite volatile. And we have been tracking the chip supply every day. This has been a very severe issue for the whole industry supply chain. For example, the fire incident of one factory has caused several days delays for the chip shortage. And we believe this negative impact is going to kick in around the middle of May, and this is going to affect the whole industry supply chain. We believe this kind of incident will happen from time to time. That is why we believe the challenge for the whole industry will still be quite big for the following quarters or months.

At the beginning of April and at the end of March, we suspended the production of a factory for five working days, which is going to impact our delivery and production in April. For the full quarter, we believe that it will be possible, but still quite challenging for us to achieve 7,000 to 7,500 production units. We are trying our best to secure the supply and to maintain the production speed. Of course, we are quite confident, but the challenge is still quite daunting.

This is a common situation for the whole industry. The common understanding in the industry is the turning point will happen around the third quarter and the overall situation is going to improve around the fourth quarter. But some pessimistic – some also believe that probably this situation is going to continue to next year. Our supply chain partners have shown very strong support to the production of NIO. Yesterday, we had our partner conference in Hefei, which was attended by hundreds of partners to show their support of NIO’s production. And we believe the situation is quite challenging. But overall speaking, overall operation is relatively okay. Thank you, Nick.

[Operator]

Our next question comes from the line of Bin Wang from Credit Suisse. Please ask your question.

[Bin Wang, Credit Suisse]

Thank you so much. Actually, I got two questions. Number one is about – I found that you have an announcement about ESG. Can you elaborate what’s the detail and why you host another ESG maybe for the first time? That’s number one question. Sorry. The second question about the margin outlook. Actually, I found that a few factors may be impacting the second quarter. One is the NIO Pilot attach rate.

Second is the – was the penetration of about the 100-kilowatt-hour pack. Number three, I found that you offer a free insurance auto finance. Number four, maybe in the semiconductor pricing hike because not just the supply, but also – on the pricing also increase. Notably, lastly, it’s about the battery price. Can you provide guidance about dilution about the margin and the other key parts and movements? Thank you.

[William Li, Founder, Chairman and Chief Executive Officer]

[Foreign Language]

Thanks for your questions. At this morning, we announced that we are going to organize an EGM. There are some important points in this EGM that we’re going to discuss. The first one is we are going to increase the number of the directors in the board. Right now, our board member is five people, and we would like to increase this number because we want to improve the diversity and the flexibility of the board. At the same time, another important matter is we would like to give the user trust the right to nominate directors to the board. But this is a nomination right, it’s not an appointment right. So the Board will still have the power to appoint the directors.

At the IPO of the company, I have transferred one-third of my shares to establish this user trust. And the user trust focus is on environmental protection, the industry subcommittees, the social welfare, and the user care. We believe it’s quite important for us to allow the user trust to participate in the decision-making process of the company, which is a very important strategy for the company. That is why we would like to propose this in the EGM.

From this proposal, we believe it’s going to be quite beneficial for the long-term development of the company and it’s going to serve the best interest of our shareholders. This also showcase our mission of building a – and the vision of building a user enterprise, which will also help us to deepen our relationship with the users for the long run.

[Foreign Language]

[Stanley Qu, Vice President of Finance]

Okay. Hi Wang Bin, as explained by William in the prior questions and 20% gross profit margin is quite healthy at the current stage for us. So we don’t expect the margin will dramatically improve in this year, like quarter-on-quarter in 2020. But the 100-kilowatt battery pack and also the NIO Pilot features are both well accepted by our users. And we expect these two like options will further bring the high profit margin for us, yes. That’s the general trend we want to explain to you, yes. Okay.

[William Li, Founder, Chairman and Chief Executive Officer]

Thank you. Next question.

[Operator]

Our next question comes from the line of Tim Hsiao from Morgan Stanley. Please ask your question.

[Tim Hsiao, Morgan Stanley]

Thanks for taking my questions and congratulations on the result. So two questions from my side. The first question is about competition because as you may notice that a lot of traditional players launched their models during Auto Show this year. So if you look at the product pricing channel strategy, I think they are quick learners and catching up rapidly. Meanwhile, several tech names or smartphone makers also announced their EV plans. So I think William has shared a lot of initiatives during the quarters now. But what will really make NIO to be, say, differentiated in the following years? Are we going to change our pricing or product strategy in mid to long-term? So that’s my first question.

And second question is about the launch of ET7 because as William just mentioned, I think the supply dynamics stay tight and might stay challenged throughout the whole year. Considering like the more back-loaded second half, do you see any risk that the launch of ET7 might be delayed or face any production bottleneck, especially I think ET7 carries quite a lot of new hardware and software features? Where could be the potential bottleneck in your view? So, thank you.

[William Li, Founder, Chairman and Chief Executive Officer]

[Foreign Language]

In this year’s Shanghai Auto Show, we have witnessed the vitality of the China smart EV industry. If you have ever visited the Shanghai Auto Show this year, you should have seen this by yourself. That is we have a lot of innovations in the smart electric vehicle industry in China.

[Foreign Language]

Okay. In terms of the overall competitiveness, NIO is still quite confident in our specific market segments. In the premium market, we haven’t seen any brand with this kind of competitiveness yet in terms of the product, the service, technology, user experience, and user community.

[Foreign Language]

For the traditional brands, yes, there has been some highlights for their premium brands and premium products. But still, I believe they’re still lagging behind in terms of the digital experience and the autonomous driving capabilities. So it will be quite important for them to be more decisive and determined to transform themselves into this new era of smart electric vehicle.

[Foreign Language]

Of course, there have been many domestic players following NIO in terms of the technology adoption, user community contact, and direct services to users. They have been moving very fast as followers. But I believe it will be quite challenging and difficult for them to build a premium brand, and they will face significant pressure in terms of their pricing. Of course, the auto market is not a winner-takes-all market.

But our focus at this moment is still in the premium market. In this market, we can see that the EV still accounts a small share compared with that of the gasoline cars. Although in March, the EV penetration has reached 10%, but the majority of the vehicles in the market are still gasoline cars. So it means that we still have a lot of room and opportunities for growth.

[Foreign Language]

When it comes to the long-term differentiation, we believe in the auto industry, it’s quite important that you should not have any very significant and obvious weaknesses. With our comprehensive competitiveness in product technology, service, user operations, and the user community, we believe that we can solidify our position in the market with all those strengths and stood out in the competition, this differentiator and the competitiveness is going to continue to grow and stay strong in the long run.

[Foreign Language]

This is a marathon. This is not a sprint. So we’re quite confident in our long-term competition.

[Foreign Language]

The second question is about the mass production of ET7. ET7 will be the first product on our second-generation platform, NIO Technology Platform 2.0. So it means that this is not just about the production of ET7, it’s actually about the mass production of the second-generation platform. We are the first in many aspects.

For example, the advanced sensors, the computing power, SoC chipset, and other advanced technology applications. Some companies have launched their product with some kind of like 1.5-generation technology or transitional technology, which is not going to be our strategy because we would like to just leap forward to the next-generation technology and achieve significant technology breakthroughs. Of course, this kind of determination is going to raise a lot of challenges for us. For example, we have to pull ahead the production schedule of many advanced technologies like the LiDAR and the NVIDIA Orin SoC.

This has posed a lot of pressure on our teams and the partners. But we are still quite confident that we believe it’s possible for us to launch ET7 according to schedule in the first quarter of next year. Our teams and our partners are fully focused on achieving this goal and to pushing ahead despite all those challenges. Our objective is to make sure we can deliver the product according to our quality requirement and solve the production bottleneck.

So we can gradually ramp up the production and the delivery of our vehicles to the users. So as the history tells us that NIO has very strong capabilities to deliver one new product every year. And our quality has already been proven that we are at the top. So that’s why we are quite confident that we should be able to deliver ET7 according to the schedule with high quality. Next question.

[Operator]

Our next question comes from the line of Ming-Hsun Lee from BofA Securities. Please ask your question.

[Ming-Hsun Lee, BofA Securities]

Thank you. Thank you, William and team, and congrats for the good results. So my first question is regarding the details of NeoPark. So from the announcement that we saw that NeoPark, ultimately, it will reach 1 million-unit capacity.

So I want to understand that – probably your near-term plan for this NeoPark. Is 1 million capacity all for NIO? Or probably will have other EV companies? And also, for this NeoPark cooperation, will the current cooperation method continue? JAC built a plant and hire laborers, but NIO will purchase the equipment and the mold, et cetera. So that’s my question.

And the second question is regarding the battery form factor. So we are seeing more and more auto companies start to apply LFP battery to further control the cost, lower the selling price, and to increase the penetration rate. From the recent media, we also saw that NIO will probably consider to use LFP battery by the end of the year. So could you give us more update regarding the potential plan? Thank you, William and management.

[William Li, Founder, Chairman and Chief Executive Officer]

[Foreign Language]

Thank you for your question, Ming. Yesterday is quite important because Hefei government has kicked off the building of the NeoPark. But over here, I would like to emphasize the spelling of this park is N-E-O, it’s not N-I-O. The Chinese name of this industrial park is Xinqiao or the literal translation is new bridge. This bears the same name with the Hefei Airport. This is a very big park, occupies a huge area.

[Foreign Language]

It is around 11.3 kilometer – square meters.

[Foreign Language]

This industrial park will be a massive project including manufacturing facilities, R&D and residential areas, as well as culture areas. NIO is going to be a very important company in this park. But according to the planning of the Hefei government, they will also have probably hundreds of other companies joining this NeoPark.

[Foreign Language]

For the planning of the Hefei government regarding the NeoPark, NIO is not going to invest on the infrastructure building of the park. Hefei government is going to make this investment. But NIO is going to be a very important company using this park. Just now you asked about the capacity of the 1 million units and the 100-gigawatt hour whether this is only for NIO or whether this is going to be available for other companies.

Of course, if NIO is going to develop in a very fast speed, then I believe that the Hefei government is not going to make this matter very complicated for NIO and themselves. Then it means that NIO should be able to use all the resources and the capacities, and all the infrastructure built by the Hefei government in the NeoPark. But this is the planning of the NeoPark, which may be different from the actual execution in the future, we need to look at this step by step. NIO is going to be a very important player in this NeoPark.

And this NeoPark is also going to contribute to the long-term development of NIO because we believe if we can attract all the talent and consolidate all the resources in this NeoPark, it will be beneficial for NIO’s development. Just like what happened in Anting in our Shanghai headquarter. NIO is the – NIO was the first company or innovative company to build the offices in the Shanghai headquarter in Anting. And then many other companies followed suit to join in this offices area in Anting.

So we believe if we can consolidate all the resources together with other partners in this NeoPark, this is also going to help us to improve the operational efficiency, including our internal efficiency. Because if you imagine that we have all the people working in the same place, including our manufacturing teams, R&D teams and they are also living in the same place, this is going to help us to significantly improve the operational efficiency of the company.

[Foreign Language]

Then the next important factor we should consider is the external operational efficiency. If according to the current planning of the NeoPark, we will have the battery factory together with the vehicle factory, then it means that after we finish the production of the battery packs, we can ship directly to the vehicle factory in a very short distance. And that’s the same with the seat factory in the future. So it means that we can save significant logistic cost.

For example, the battery logistic cost is around US$100 per battery pack. So imagine in the future, the volume is going to be 100 – or is it going to be 1 million units, then this is going to be a huge saving in terms of the logistic cost, and this is also going to help us to improve the overall operational efficiency.

[Foreign Language]

When it comes to the operation model of the – cooperation model of the second factory, we will continue to focus on the manufacturing corporation. It means that we will still focus on the manufacturing processes, technologies, the quality, and the operations of the – of our plant. And we will invest in some dedicated equipment for NIO, but we are not going to invest on building the actual factories. In terms of the operators in the second factory, this will be managed by the joint venture between JAC and NIO, the name is Jianglai. And this joint venture is going to be responsible for the overall operation and management of the operators in the plant.

[Foreign Language]

The next question is about the LFP battery pack. Yes, many companies, including Tesla, are using the LFP battery pack. Of course, there are some inherent advantages of the LFP battery pack. A very important one is the cost. But there are also some weaknesses and shortcomings with this technology or form factor. For example, the performance of the battery pack in low temperature. This is going to significantly affect the user experience, especially during the winter. If we can solve the performance bottleneck under low temperature, I believe it should be the right timing and the right choice for us to use LFP battery pack and form factor. Next question.

[Operator]

Our next question comes from the line of Lei Wang from CICC. Please ask your question.

[Lei Wang, CICC]

Good morning. This is Wang, Lei speaking. I would say this is beyond our expectation to see the vehicle margin above 20%, so definitely congratulations to the team. I think most of my question has been properly answered. I only have one follow-up question regarding the collaborations with Sinopec group on swap stations. So will Sinopec burden some of the CapEx investments in the second-generation service stations? Or will Sinopec share some of the revenues as well? So I’ll translate my question.

[Foreign Language]

[William Li, Founder, Chairman and Chief Executive Officer]

[Foreign Language]

Thank you for your question. Of course, in the future, we’re going to deepen the cooperation with Sinopec. But for now, our cooperation is quite simple. Basically, we utilize their sites and the location resources. In the gas stations, of course, they will need to have a service personnel, so we believe this is also an opportunity for us to work together to share the service resources. But at this moment, we do not have any revenue-sharing mechanisms between NIO and the Sinopec. Next question.

[Operator]

Our next question comes from the line of Edison Yu from Deutsche Bank. Please ask your question.

[Edison Yu, Deutsche Bank]

Thank you and congratulations on the quarter. Two questions from the competitive angle, sort of. First, coming out of the Shanghai Auto Show, we obviously saw a lot of product, a lot of developments. Has this influenced or sped up your target about bringing in a mass-market brand into the market – I’m sorry, non-NIO brand? Is that effort kind of been accelerated? Or any sort of change to those kind of plans for going forward? And then second question, it seems like a lot of automakers now also potentially considering doing chips themselves. I think it’s reported that NIO has considered doing that as well. What’s your latest thinking on kind of moving away from NVIDIA and doing the chips yourself as well or designing the chips yourself? Thank you.

[William Li, Founder, Chairman and Chief Executive Officer]

[Foreign Language]

So thank you for your question, Edison. From the competition perspective, I checked out all the possible competitors and their new models. So to be honest, the most impressive one is from Wuling Hongguang, they’re a sub-brand in Beijing. They have a model called PV EV. For the mass market, we believe there are many new companies launching their new products. Just like I mentioned, in the China smart EV industry, the innovation capability has been quite strong. So we are quite confident about the popularization and the adoption of the smart EVs in the future. But in the premium sector right now, we don’t actually see any strong competitors.

[Foreign Language]

The second question is about the research and development of the chipset. In the smart electric vehicle industry, we believe that the industry chain is going to move toward chipset software and other smart technologies. For the long-term, the top leaders is going to deepen their investments in research and development of the smart powers, I believe this is the common outstanding of the industry. At this moment, we do not have any specific plans that we can disclose to the public or share with the public. But I believe it is quite obvious to everyone that NIO has always been very decisive in investing in the research and development of new technologies. We are determined to build our full-stack capabilities surrounding the smart electric vehicle technologies, including autonomous driving, and we believe that this is going to build the long-term competitiveness of the company. Thank you. Next question.

[Operator]

Our next question comes from the line of Paul Gong from UBS. Please ask your question.

[Paul Gong, UBS]

Yeah. Thanks, William, and thanks, everyone. Two questions. The first one is on the R&D and second one, a bit of a follow-up on the gross margin. On the R&D, I see in this quarter, it’s actually a pretty moderate even sequentially declined from the 4Q at less than CNY700 million. I recall last time you said you’re going to double down on the R&D activity in 2021 and significantly increase on the budget. So can you give us a little bit like an update on this strategy? And more importantly, which key areas is going to be the focus for the R&D? Any rough breakdown how much percentage goes to the vehicle development? What percentage goes to the maybe autonomous driving, et cetera? This is my first question.

My second question is a little bit follow-up on the gross margin. Obviously, this is pretty decent gross margin for a relatively young company like NIO. But in between of this margin versus market share, is it – I think it’s like overly focused on the margin and a little bit like under-focused on the market share. Do you think – will you strategically choose to – either adding higher specs or kind of making the vehicle more competitive in the market to balance in between of this margin versus market share?

And also, how do you think about, say, rising material cost impacts in the next few quarters? Because some battery makers have indeed mentioned that it’s possible for the battery price to go up. I think I caught your comments just now that the 100-kilowatt hours of the battery take about 25% in Q1. What was the NIO Pilot take rate in Q1, please? Thank you.

[William Li, Founder, Chairman and Chief Executive Officer]

[Foreign Language]

Thank you for your question, Paul. Regarding the R&D expenses, yes, the R&D expenses in the first quarter is not that high. But this follows the normal pace and the development stages of a vehicle. For example, right now, our ET7 is still under research and development.

Then, it means that starting from the second quarter, we’re going to see an increase in R&D expenses related with the testing cost and the ETD cost together with our suppliers. The ET7 R&D expenses will increase gradually as they get closer to the mass production. At the same time, we’re also developing multiple products in our pipeline because we would like to make sure we can apply the NG 2.0 Technology to more products in different segments in faster speeds. So starting from the first – second quarter, we are going to see some ramp-up of the R&D expenses.

This will be mainly driven by the research and development of other products in the pipeline. Just like you mentioned, we are determined to develop the autonomous driving full-stack capabilities, the software capabilities, and the smart electric vehicle technologies. We will accelerate the development of the NIO Technology Platform 2.0 and the NIO Technology Platform 3.0. At the same time, we’re also ramping up of R&D personnel.

In the past first quarter, the R&D personnel in the company has significantly increased, and we believe this will continue to increase in the following quarters. We have also increased our investments in terms of the R&D resources in the platform technologies, including EDS or the electric powertrain. In this year, it will be quite challenging for us to efficiently and effectively spend the RMB5 billion for the R&D expenses, but we are quite confident that we can achieve our objective and improve our R&D capabilities at a very efficient manner.

[Foreign Language]

The second question is about the balance between gross margin and the market share. Of course, for any company, if we want to have a sustainable operations and development, we need to maintain a reasonable gross margin. So the current gross margin, yes, it’s better than our expectation. But we have emphasized again and again that we’re not going to cut the price, and we would like to leverage our margin to invest more on user service including the power infrastructures and also the user community.

For the market share, I believe that we need to look at the market share in different market segments. For example, it’s not possible for us to compare the market share of a Ferrari and a Porsche in their market segments with the market share of a Wuling Hongguang in the mass market segment. So for NIO, our focus is the market share of the premium market. We don’t want to have the same strategy like other brands that just cut their price from time to time because we believe this is going to hurt the brand image and the users. For example, Porsche probably only sells around 300,000 units, but they contribute 40% of the gross margin of the Volkswagen – net profit of the Volkswagen Group.

So we believe if we want to build our market share in the premium segment, we need to devote more resources and energy to manage the brand and the user community. Our focus is not going to increase – or to cut the price of our product and then to increase the market share because even if you cut the price of the product, probably, in the end, you still cannot improve the market share. So we believe after we reach a reasonable margin, then we can use this margin to improve our product, our services, and the infrastructure that’s for our users.

So this will be of a long-term strategy. In the global premium market right now, the market volume is around CNY10 million, and we only accounted for a very small share. So it means that there’s still a huge room for us to grow in the future. For the mass markets, this will be a different story. And the entry of the mass market will acquire – will require a different strategy. But what I can say right now with 100% certainty is we’re not going to use a NIO brand to enter the mass market. Next question.

[Operator]

Our next question comes from the line of Evelyn Zhang from Daiwa. Please ask your question.

[Kelvin Lau, Daiwa]

Hello. Actually, it’s Kelvin from Daiwa. So I have two questions about company. So first of all, I want to know, I noticed that you have kind of a Norway – launching in Norway conference next week. So I want to know would there be any other overseas expansion plan that you can share with us? This is the first question. The second question is that can I know how – because what we know is that the raw material costs and also auto trip costs are all increasing. Do we expect like a month-on-month or even week-on-week increase affecting your component price? What’s the trend? Or how fast is this accelerated? Thank you.

[Steven Feng, Chief Financial Officer]

Kelvin, this is Steven. Sure. First, Norway is our first stop for our long-term globalization strategy. But for the May 6 conference call, we will still focus on the Norwegian market. Just for information, actually, in March, we already set up our national sales company in Norway, and we also have already built up a local team, who will take charge of our local operation and service. And in end, actually, we already selected the location for our NIO House in Oslo. And for more details about the Norwegian market, please do join our May 6 media conference to get more details. Thank you.

[Stanley Qu, Vice President of Finance]

The raw materials, we expect there will be some increase in the coming quarters. But compared with the overall selling price, I think the cost can be well controlled and also have a big impact to our gross profit margin, yes.

[William Li, Founder, Chairman and Chief Executive Officer]

[Foreign Language]

On one hand, we have some routine cost reductions. On the other hand, there are some cost increases, especially in terms of the chipset recently. But overall speaking, the saving is bigger than the cost increases. So we believe that the bill for material cost will continue to go down. Next question.

[Operator]

Our next question comes from the line of Vijay Rakesh from Mizuho. Please ask your question.

[Vijay Rakesh, Mizuho]

Hi, William and Steven. Good quarter and guide year. I just had a question on the longer term. When you look on your partnership with Sinopec, how do you expect them to roll out their stations? I know you have a 500-battery swap station target, but any thoughts on how Sinopec would be rolling out their 5,000 battery swap stations? Thanks.

[William Li, Founder, Chairman and Chief Executive Officer]

[Foreign Language]

Thank you, Vijay, for your questions. Yes, Sinopec announced that they will build 5,000 swap and charging facilities in their gas stations. But NIO is not the only partner working together with Sinopec. And they are not just only going to build the swap stations in the gas stations, they will also do the charging facilities. Of course, we hope to deploy more charging and the swapping facilities from NIO in the gas stations. But at the same time, we also have many other partners, both locally and nationally. So we believe the site resources will not be a big issue for us.

[Vijay Rakesh, Mizuho]

And also, on the solid-state battery road map – on your own solid-state battery road map, can you give us an update when do you see that in production or tests? That’s it. Thank you.

[William Li, Founder, Chairman and Chief Executive Officer]

[Foreign Language]

Overall speaking, the current process and the testing and the production of the solid-state battery is on track.

[Vijay Rakesh, Mizuho]

Thank you.

[Jade Wei]

Moderator, we need to conclude our conference call today. It has been attended. And big thanks for all the great questions asked by the analysts. Operator?

[Eve Tang, Capital Markets and Investor Relations]

Operator, we would like to conclude today’s conference call.

[Operator]

Certainly. As there are no further questions now, I’d like to turn the call back over to the company for closing remarks. Thank you.

[Eve Tang, Capital Markets and Investor Relations]

Thank you once again for joining us today. If you have further questions, please feel free to contact the NIO’s Investor Relations team through the contact information provided on our website. This concludes the conference call. You may now disconnect your line. Thank you.

[Operator]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.