NIO Inc

NYSE:NIO

Earnings Call Analysis

NIO's Q4 2023 Growth and Strategic Moves

In Q4 2023, NIO's vehicle deliveries rose by 25% year-over-year to 50,045 units, with annual growth of 30.7%, reaching 160,038 total deliveries. Q1 2024 is expected to yield 31,000 to 33,000 deliveries, signaling recovery. A key technological advancement, the NIO ET9, was introduced, setting the stage for delivery in Q1 2025, while 2024 models with significant upgrades will soon roll out, enhancing NIO's competitiveness. Financially, Q4 2023 saw total revenues of RMB 17.1 billion, a 6.5% year-over-year increase, and vehicle gross margin improved to 11.9%. NIO's balance was solidified by a USD 2.2 billion investment from CYVN Holdings, underpinning investments in core next-generation technologies.

NIO's Year of Strategic Growth and Expansion

The narrative of NIO Incorporated in 2023 speaks of a promising surge in product delivery and financial performance. Occupying the stage with a commendable 25% year-over-year growth, the company delivered 50,045 premium smart EVs in the final quarter. The solid year has rounded off with a cumulative delivery of 160,038 units, marking an appreciable 30.7% increase from the previous year. For investors, such progress indicates not only robust demand for NIO's products but also the company's capability to scale its operations effectively.

Innovation as a Cornerstone: NIO's R&D and Product Pipeline

Innovation has been a cornerstone for NIO, as evidenced by their NIO Day 2023 event where the company unveiled its executive flagship, the NIO ET9, slated for delivery in Q1 of 2025. This model represents the zenith of NIO's technological prowess with its slate of in-house developed features. Investors may look forward to the upcoming NT2 software updates, including improvements in autonomous driving technologies with the release of NOP+ for urban roads in Q2, which could possibly become the largest public release of its kind in China. These developments are crucial in maintaining a competitive edge in the rapidly evolving EV market.

Strategic Partnerships and Expansion of Services

NIO's blueprint for growth is reinforced by strategic partnerships and the expansion of its charging and swapping networks. Notably, the company plans an ambitious rollout of 1,000 new battery swap stations and 20,000 chargers in 2024, with an even more extensive network of over 3,310 swap stations and 41,000 chargers envisioned by year's end. This expansive infrastructure could be a game-changer, positioning NIO as a formidable player in the EV ecosystem, potentially enhancing user convenience and boosting sales.

Cementing Financial Foundations with Strategic Investment

The financial fortitude of NIO has been bolstered by a significant USD 2.2 billion strategic investment from CYVN Holdings, priming the company for further investment in next-generation core technologies and products. This infusion of capital enhances NIO's balance sheet and could provide reassurance to shareholders regarding the company's financial stability and commitment to sustained growth.

Financial Performance: Balancing Growth and Profitability

From a financial standpoint, the fourth quarter of 2023 was a mixed bag for NIO, with total revenues climbing to RMB 17.1 billion, a modest 6.5% year-over-year growth. While vehicle sales constituted the lion's share at RMB 15.4 billion, a gentle 4.6% year-on-year bump, other sales surged by 27.6% due to expanding accessory sales and power solutions. Despite a dip in overall gross margin to 7.5%, vehicle margin notably improved to 11.9% due to reduced material costs, offering a positive outlook for profitability amid efforts to scale.

Operating Expenses and Net Loss: A Focus on Sustainability

A prudent investor would note a stable year-over-year expenditure in Research and Development (R&D) at RMB 4.0 billion, showcasing NIO's continued investment in innovation. Yet, a widened net loss to RMB 5.4 billion, up 17.8% quarter-over-quarter, signals the competitive and high-cost landscape of the EV space. Nevertheless, the strengthened balance sheet with RMB 57.3 billion in cash reserves provides a safety net for ongoing investments and navigating market fluctuations.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by for NIO Incorporated's Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded.I will now turn the call over to your host, Mr. Rui Chen, Head of Investor Relations of the company. Please go ahead, Rui.

[Rui Chen, executive]

Good morning and good evening, everyone. Welcome to NIO's Fourth Quarter and Full Year 2023 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 CEO; Mr. Steven Feng, CFO; and Ms. Stanley Qu, Senior VP of Finance.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 Stock Exchange of Hong Kong Limited and the Singapore Exchange Securities Trading Limited. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.Please also note that NIO's earnings press release and this conference call include discussions of the 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.

[Bin Li, executive]

Hello, everyone. Thank you for joining NIO's 2023 Q4 and full year earnings call. In Q4 of 2023, NIO delivered a total of 50,045 premium smart EVs, up 25% year-over-year. In 2023, NIO's cumulative delivery reached 160,038 units, representing a growth of 30.7% from 2022. In January and February of 2024, due to the seasonality of our industry and the Chinese New Year, NIO delivered 18,187 vehicles. On March 7, NIO will start to deliver the 2024 models, featuring enhanced performance and experience.With that, NIO's sales will gradually bounce back and the total deliveries in Q1 is expected to be between 31,000 to 33,000 units. In terms of NIO's financial performance, with continuous improvements on the [ bond ] cost, the vehicle gross margin increased to 11.9% in Q4.Now, I would like to share with you the recent highlights of our products, R&D and operations. On December 23, NIO Day 2023 was held in Xi'an, Shaanxi Province, where the smart electric executive flagship, NIO ET9 was unveiled. ET9 embodies NIO's full-stack capabilities and the global leading technologies, featuring core technologies such as in-house developed AD chip, NX9031; full-domain 900 volt architecture; SkyRide chassis system; and the flagship safety and security. ET9 defines the technology standard for the next-generation premium smart EVs. The delivery will start in Q1 2025.In the meantime, NIO will soon start to deliver its 2024 models with the configuration and the performance upgrades, including the brand new Central Computing Cluster, Adam, which brings the computing power to a new level. Enabled by the industry's highest computing power, NIO's software release has become faster, making our products more competitive.With respect to NIO Assisted and Intelligent Driving or NAD, NIO's collective intelligence capability has seen better growth, with the total validated urban mileage increasing a 100 volt in 5 months. As of the end of January, Navigate on Pilot Plus were validated and made available more than 1 million kilometers of roads in China, including 650,000 kilometers of complicated urban driving scenarios in 606 cities.In Q2, the NOP+ for urban roads is expected to be released to all NT2 users, which will make this OTA update the largest public release of its kind in China. Through computing sharing across different domains on the Central Computing Cluster, NOMI GPT, a multi-modal large vision model will be released soon, making the cockpit smarter and more secure. In addition, NIO's mass market brand will make its debut in Q2. The first product will be launched in Q3 with the mass deliveries to start in Q4.As for the sales and service network, so far, NIO has 148 NIO Houses and 352 NIO Spaces, as well as 314 service centers and 62 delivery centers.. About the charging and swapping networks, to-date NIO have 2,419 power swap stations worldwide, providing over 39.5 million swaps cumulatively. It also has installed over 10,000 power chargers and 11,600 destination chargers.During the Chinese New Year, on the previous date, NIO completed 19,199 swaps, [indiscernible] stations on highway provides to 195 swaps. Battery swap has become the most reliable solution for NIO users. Following the battery swap cooperation with Changan and Geely, another 2 strategic cooperation agreement was signed with JAC and Chery in January. NIO will rollout comprehensive and in-depth cooperation on battery swap with these partners.Moreover, NIO has partnered with multiple energy companies, such as Anhui Energy Group and the China Southern Power Grid to jointly build swap stations. The value of our battery swap has been appreciated by more people, making a holistic chargeable, swappable and upgradable solution, a well-recognized the core advantage of NIO. In 2024, NIO plans to build 1,000 new battery swap stations and 20,000 chargers, bringing the total to over 3,310 swap stations and 41,000 chargers by the end of 2024.Regarding the capital market, in December, NIO received USD 2.2 billion strategic investment from an Abu Dhabi investor CYVN Holdings. The investment has further strengthened NIO's balance sheet, laying a solid foundation for NIO's investment into the next-generation core technologies and products.Shouldering the corporate social responsibility and supporting global sustainable development, NIO always have stayed true to its foundation vision of Blue Sky Coming. In general, NIO was selected by Corporate Knights into the 2024 Global 100 Most Sustainable Companies, making to the list for the second time in a row. NIO was placed 15th among more than 6,000 companies worldwide, up 29 spots from last year.As the competition intensified in 2024, we see both challenges and opportunities with faster deployment of charging and swapping facilities, and the change in consumer behavior, the premium BEV segment to which NIO brand belongs will soon arrive at an inflection point of growth.In the second half, a new brand for the mass market will also become our growth lever. In 2024, we will continue to focus on the corporate top priority; level-up system capabilities, strengthen [ cost mindset ] and the cost to management so as to bring our A game to the next phase of the competition.As always, thank you for your support. With that, I will now turn the call over to Steven for Q4's financial details. Over to you, Steven.

[Wei Feng, executive]

Thank you, William. I will now go over our key financial results for the fourth quarter of 2023. And to be mindful of the length of this call, I will reference to RMB only in my discussion today. I encourage listeners to refer to our earnings press release, which is posted online for additional details.Let me start with revenue. For the fourth quarter of 2023, total revenues reached RMB 17.1 billion, up 6.5% year-over-year and down 10.3% quarter-over-quarter. 90% of revenue comes from vehicle sales in Q4, which was RMB 15.4 billion, representing an increase of 4.6% year-over-year and a decrease of 11.3% quarter-over-quarter. The improvement year-over-year was driven by growing delivery volume, despite the impact of lower average selling price, resulted from product mix changes. The decrease quarter-over-quarter was mainly attributed to a decrease of 9.3% in delivery volume.Moving to other sales. Other sales reached RMB 1.7 billion, growing 27.6% year-over-year and 0.4% quarter-over-quarter. The year-over-year increase was mainly due to increased sales in accessories and the provision of power solutions, which both grew with our user base.Then, let's have a look at the gross margin. Overall gross margin was 7.5% compared with 3.9% in the same period of last year and 8.0% in the last quarter. The increase year-over-year was mainly attributed to the increased vehicle margin. The slight decrease quarter-over-quarter was due to the decrease in margin from provision of power solutions as a result of expanded power network, even though vehicle margin was growing.A closer look at vehicle margin, which was up to 11.9% in this quarter compared with 6.8% in Q4 2022 and 11.0% in Q3 2023. The year-over-year increase was mainly due to the decreased material cost per unit in Q4 2023 and lower base in Q4 2022, which resulted from the inventory provisions, accelerated depreciation on production facilities and the losses on purchase commitments for the previous generation of ES8, ES6 and EC6 recorded.Let me move on to the operating expenses. R&D expenses were RMB 4.0 billion, remained stable year-over-year and increased 30.7% quarter-over-quarter. The increase was mainly driven by incremental design and development costs for new products and technologies and higher personnel costs in R&D functions. SG&A expenses were RMB 4.0 billion; increased 12.6% year-over-year and 10.1% quarter-over-quarter, which was mainly related to higher personnel costs in sales functions and increased sales and marketing activities.Let's move further to the bottom line. Loss from operations was RMB 6.6 billion, representing a decrease of 1.6% year-over-year and an increase of 36.8% quarter-over-quarter. Interest and investment income was RMB 1.4 billion, increased 288.7% year-over-year and 375% quarter-over-quarter. The increase was primarily attributed to the recycling of unrealized gains from other comprehensive income to investment income of RMB 977.3 million for the available-for-sale debt related to upstream industry investment.Net loss was RMB 5.4 billion, representing a decrease of 7.2% year-over-year, and an increase of 17.8% quarter-over-quarter. Last but not least, our balance sheet gets strengthened with RMB 57.3 billion in cash and cash equivalents, restricted cash, short-term investments and long-term time deposits as of December 31, 2023. For more information details of our unaudited 2023 full year financial results, please refer to our earnings press release.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] Your firs question comes from Tim Hsiao from Morgan Stanley.

[Tim Hsiao, analyst]

I have 2 questions. The first one is about our upcoming mass-market agreement with Alps. So, is NIO still targeting to launch and deliver the first model on the Alps in [ late third ] quarter? And separately, as it is just less than 2 quarters away, could you share more information about the channel strategy, targeted numbers of stores, store types and the scale of our charging network et cetera. So, any additional colors about Alps would be highly appreciated. So, that's my first question.

[Bin Li, executive]

[Interpreted] Thank you for the question. As I've mentioned in the prepared remarks, in the second quarter of this year, we are going to unveil our second brand, the brand for the mass market. And in the third quarter, we will launch the very first product of this new brand, and the mass release and delivery will be starting from the fourth quarter of this year. Actually, the verification build, the [ baby build ] of this car already rolled off the line in Q4 last year and we were pretty satisfied with the conditions of that build.In terms of the sales and service network of this new brand, for the point of sales, it will have its separated and independent sales network. But in terms of the after-sales services and the touch points, we do can leverage the existing service resources of the new brands.In terms of the power swap network, we've previously mentioned that for the power swap network, we have a private network and a public network, similar to the cloud infrastructure and cloud service. For the private network, basically, it's the power swap stations and the facilities that's designated and exclusive to the new brand. But in addition to that, we have a public network where we will share the power swapping resources with not only our second brand as well as other car companies. As you've also show -- know that we've already signed the agreements with several car companies and more will join the public service facility as well.[Interpreted] Our fourth generation power swap station will have the compatibility for both NIO products as well as Alps products, and we will start to build the fourth generation swap stations from April this year. Previously, we've mentioned that in 2024, we are going to install another 1,000 swap stations, and most of these stations will be fourth generation stations for the public network.

[Tim Hsiao, analyst]

Really appreciate all the details. So, my second question is now on the margin target because I recall that, back to third quarter results, I think the management team mentioned that vehicle gross profit margin for 2024, i.e. this year would be around 15% to 18%. And there could be additional like 0.5% margin uptick contributed by in-house production. So, based on current market environment and competitive landscape, do you still maintain the same target this year or [ ripped ] for any potential changes to the margin target? That's my second question.

[Wei Feng, executive]

Tim, about the margin, yes, for the whole year, I think we keep this 15% to 18% target. But the quarter to -- by quarter, I think there will be some change. As you may know, we will upgrade our -- all our NT2 product to 2024 version in March. And during the transition of old and new products, more promotions are offered for the old models, leading to the decrease of gross profit margin in Q1.But starting from Q2, along with the volume ramp up of our 2024 version and also the further cost optimization activities as we mentioned, we believe our vehicle margin can come back to an upward trend. And so, starting from Q2, we are confident that 15% to 18% weaker margin can be achieved for NIO brands. And from a long run, our target -- our margin target for NIO brand will also be over 20%.

[Operator]

Your next question comes from Ben Wang from Deutsche Bank.

[Unknown Analyst]

My first question is about 2024 volume targets. In the mid-year report, you target 200,000 units for the full year '24, which means 25% growth. Can you confirm whether this is your target? That's number one question. Number two is about a second product from the NIO brand, mass market brand. In a recent interview, Wei actually mentioned a full-size SUV bigger than the first one. There will be a second product followed by MPV. Can I confirm this is your plan for the -- your plan in the next second and third products?

[Bin Li, executive]

[Interpreted] Thank you for the question. Definitely, for this year, the competition is going to be -- continue to be intense. But as we've also mentioned that we will be having our products for the 2024 model with enhanced performance, especially much better computing power, the computing power will continue to lead the global market. So this will help us to improve the overall competitiveness of our investing into products. This year, we will focus on accelerating the software release so that we can release more new [Technical Difficulty] on the chips and computing power.And also in the second quarter, we are going to release our NOP+ for urban roads to all the NT2 users. By doing this public release, we can also enhance the competitiveness of the products. Plus, we also have other new features like large language models, large vision models and the NOMI GPT et cetera.In terms of our sales channel and the network, so far, we have around 500 NIO Houses and NIO Spaces, and we will continue to enlarge the reach of our sales and service network to the lower-tier cities. And in the meantime, from last year, we have enlarged our sales force as the team is getting more matured and skillful with the sales and getting more -- getting better understanding of our products. We also see this sales force start to kick in, especially in our delivery results for the February.Inside of the BEV segment or the new energy vehicle market, our delivery results in February was actually pretty good, especially in comparison to our results in January. This has also reflected the effectiveness and the efficiency of our sales force and also sales channel enlargement.And thirdly, we will also continue to deploy our power swapping network. As I've mentioned, we will deploy both public network and private networks for NIO and for Alps. And for our power swap network this year, we will mainly serve the purpose of boosting sales volume because we already have more than 2,000 swap stations. So we basically have established initial network for the power swap services, and now we will focus more on boosting sales via installing these stations.So, overall speaking, we are confident with our sales and the delivery results this year. As in our guidance, in the first quarter of this year, we are going to deliver around 31,000 to 33,000 units. In March, as whether it gets better and the market gets more dynamic and vibrant, we are also confident that our sales volume will increase. For the mid-term, we hope that our sales volume can still be back to around 20,000 units per month, and we hope that this can happen sooner.[Interpreted] And for your second question about our mass market brand, some media has already captured some of our publicly tested vehicles on the roads and also reported some sneak peeks of our very first product. For our second brand, as we've previously introduced, its overall positioning is to target at the family-oriented users, basically families of different sizes or for family of different sizes, we are going to launch different sizes of vehicles, but all with strong product competitiveness.As we started relatively late in the family-oriented segment, we do can leverage such opportunities to better look into the real demand of the target users and launched competitive products accordingly. The first product of our mass market brand will have head-on on competition with the most popular model of Tesla, that is Model Y. But our car will support battery swap. So in terms of the cost and performance, we believe that this model will be highly competitive.In terms of the BOM cost, it will be roughly 10% lower than that of Model Y, which also gives us better flexibility for the product pricing. And the second model of our mass market brand will be a SUV model for the large family. The R&D is in good progress. We have already kicked off the toolings for the second model, and this car will be launched in 2025. And the third model is also underway. We have already started product designation and R&D, but it's too early to share the information, and we will disclose more information when it's appropriate.

[Operator]

Your next question comes from Yuqian Ding from HSBC.

[Yuqian Ding, analyst]

Thanks, team. Yuqian here. I've got 2 questions. The first is, we want to understand what is management's priority or strategy between pricing and volume? We noticed that the company acted quite refrained in pricing among universal price action from peers. Has that been -- we have been seeing the ticket price rather stable. So, does that read as more profitability as a priority over volume for this year or it's a rope-a-dope tactic before our new mass market brand coming to the market? That's the first one.

[Bin Li, executive]

[Interpreted] Thank you for the question. Starting in the second half of this year, NIO Group will sell 2 brands simultaneously. So strategy-wise, we have also differentiated for these 2 brands. For the NIO brand for this -- for now, we will not sell any products that will be cheaper than the existing ET5. Even for the products in our pipeline, we will be targeting at the premium segment, which means that our products for the NIO brand will be more gross margin oriented. We will be carrying more on the gross profit of our product than the volume. So we will not cut the prices. We'll enter the price war. We will not realize higher volume at the cost of our compromised margin or gross profit.And for the second brand, the brand for the mass market, it is targeted at the mass market and also for the family-oriented users, where the competition is also more intense. But luckily, it can leverage the existing electrification and smart technologies and infrastructures already developed by NIO. So it has certain advantages than starting a completely new brand from the ground up. For this second brand, we will be focusing more on the volume. So the volume is prioritized over the gross margin of the products. That's the overall strategy for these 2 brands. We believe that with this combined brand portfolio, it will also help us to realize a healthier, long-term sustainable development and operations.

[Yuqian Ding, analyst]

Got it. And my second question is, the recent 2 sessions talked about supporting SOEs to move more aggressively on the EV without constraint on the profitability. So it looks like another pressure and making the industry harder and harder to consolidate. So, thanks for the strong color on the new mass market brand and value proposition. I guess, this is us changing the way of asking other than the strong product, are we aggressive enough on the pricing? You talked about the volume priority, but if the pressure is going to be overhang for longer, are we be ready for being aggressive on the pricing for longer?

[Bin Li, executive]

[Interpreted] It's true that doing business in China, it's inevitable that we will face competitions coming from all types of car companies, including companies like Tesla, many start-ups from China, private companies well-established ones in China and also joint ventures and the state-owned enterprises. Overall speaking, the China's automotive market is a highly open market and such competition can actually benefit or bring benefits to the end users.However, it can be more difficult and challenging for car companies. But we believe that by the end of the day, those companies with good overall capabilities and competence as well as those companies who care about the experience of the end users will survive from the fierce competition. And we are confident that we will withstand such competition from all the competitors.But in the meantime, we also see cooperations out of the competition. For example, we have announced power swap cooperation with many car companies. China Automobile is the first car company to partner with NIO in power swap. Later, we also collaborated with Geely Holding, JAC Group and Chery on the battery swap.We also have partnerships with energy companies like Sinopec and PetroChina for the construction of power swap stations as well as with China Southern Power Grid on the energy storage as well as power swap stations. So, in general, NIO is pretty good at partnering up with the peers in the industry. Since the competition is inevitable, we would like to look at how we can navigate through the intense competition from the reasonability of the business perspective.

[Operator]

Your next question comes from Ming-Hsun Lee from Bank of America.

[Ming-Hsun Lee, analyst]

So, I also have 2 questions. So first question is regarding the overseas market. Do you expect NIO to enter the new countries this year? Will you cooperate with more local distributors in other overseas market or you will maintain the direct sales business model? Also, do you have any overseas sales target for this year? That's my first question.

[Bin Li, executive]

[Interpreted] Thank you for the question. Regarding the global market or international markets, at the moment, we will still primarily focus on the Chinese market as it is the largest and also the most competitive market for the automotive industry. But, in the meantime, we will not stop our exploration into the international markets.So far, we have already entered 5 European countries, and we will keep refining our operations and management in these 5 European countries. And this year, we are also planning to enter into several new countries. For example, UAE, as we are invested by the Abu Dhabi strategic investors So we are also preparing for the market entry and the sales and service in that market.For the other countries, we are more waiting to see the development of the conditions and strategic wise, we will also become more flexible because there are 2 major changes. The first change is that as we will soon have our mass market brand and the next year, we are going to announce our third brand. The price will be below RMB 200,000, which means that with all 3 brands combined, we will be able to cover larger markets with more segments, because NIO as a brand, primarily focused on the premium segment, basically China, U.S. and Europe.These 3 continents contribute 90% of the sales of the premium segment. But for our second and third brands, as they are more affordable, they will be standing a bigger chance of tapping into a more diversified markets and in more regions. So, our global market entry will also take these 3 brands into consideration.And the second change is regarding our strategy entering into each market. At the moment, in China and in 5 European countries, we adopted a direct selling model. And in China, we will continue to have the direct sale with -- direct touch points with users. But for the other markets outside of China, we need to respect the local conditions and also the special characteristics of each market.In that case, we will keep our strategy very flexible and very open. We will look at which way we'll be bringing us quicker return on investment. We don't exclude any possibilities of cooperating with local partners for the market entry. So in general, we will have a very flexible and very open strategy towards markets outside of China.

[Ming-Hsun Lee, analyst]

My second question is -- my second question is regarding the battery technology. So recently, some auto brands started to launch 5C 800-volt charging battery and the system. So when do we expect that the NIO brand and also probably your second brand will start to provide this spec? And if after you have a fast-charging battery, will you switch to expand more charging station instead of battery substation in 2025?

[Bin Li, executive]

[Interpreted] Thank you for the question. In terms of the battery technologies, actually, NIO has been having this long-standing strategy of studying the ultrafast charging as well as ultra quick battery swapping. In terms of charging, actually, NIO is the most active brand in terms of deploying public chargers for the users in China. And as of now, 80% of our [ electricity ] were charged for the non-NIO users than for the NIO users.For the NIO Power's charging business by itself, it is already breaking even, and we will continue to deploy the chargers for the users. Very soon, we are going to install and launch our 640 kilowatt power chargers. So, definitely, we will follow the latest technologies in the charging industry. In the meantime, we also need to emphasize on how fast the power swap can be because no matter how quick you are on the charging rate, it can never outrun the power swap. Some media has used the analogy where power swap is as fast as charging at 20C in comparison to 5C on a common charger. Not to mention that battery swap also have the best experience for the users.And in NIO's holistic solution, in addition to chargeable and swappable, we also have upgradable, which is also very important, especially to serve the interests of our users. Very soon, we are going to have our 150-kilowatt-hour battery. We also have a 5C charging rate that will become available on our first model from the third-generation products, ET9.But in addition to looking at the battery capacity and the charging rate, what really matters is the lifetime of the battery. For that, we think that it's very important because at the moment, the industry average warranty duration is around 8 years or a 100,000 kilometers something or when the battery hit 70% state of health. But if you look at the vehicle, it has a life cycle of around 15 years.For most of the electric vehicles running on the street, they haven't really hit the end of life of their batteries yet. But as the car companies, we really need to consider about the 15-year life cycle of your products, including cars, including batteries. That's why the calendar lifetime of the batteries becomes more important for the car companies.Over the past several years, we have tackled the difficulties on the battery safety, efficiency of charging and also the accessibilities of the charging and swapping facilities. And from this year, we will focus on the long life batteries. We have already done some research and studies on the technologies and recently, we are going to share more information with the industry.What we believe is that with a longer battery life, especially longer calendar life, it will help not only the battery electric vehicles, but also PHEVs and EREVs or the new energy vehicles in general. Because after 8 years, when the battery hits its end of warranty life, you cannot ask the user to pay another RMB 100,000 to upgrade the battery or to buy a new battery.Even for a smaller battery pack of only 40 kilowatt hour capacity, you cannot ask them to pay RMB 80,000 or RMB 90,000 for a brand new battery. So as a car company, we needed to look after both battery and cars across -- or throughout its life cycle. In that case, we needed to provide the ultimate battery solution to the industry.

[Operator]

Your next question comes from Paul Gong from UBS.

[Paul Gong, analyst]

My first question is regarding your R&D budget for 2024. How much do you plan to spend into R&D for this year? And if you can, would you please give a rough breakdown, how much of this would go to the NIO models and how much go to the Alps? How much do go to the third brand and how much go to the autonomous driving software and some key components, et cetera? Yes. So, regarding the R&D spending plan for 2024.

[Stanley Qu, executive]

Paul, this is Stanley. Regarding your question about the R&D expense expectation for 2024. Generally, the scale of R&D expense will be consistent with 2023. And on average, the quarterly spendings for R&D will also be around RMB 3 billion. Yes, that's the general guidance for R&D.

[Bin Li, executive]

[Interpreted] In terms of how to allocate the R&D expenses this year, we will mostly allocate our resources on the fundamental technologies as well as the technologies that can be shared across all 3 brands. We have mainly focused on the smart and electric technologies, which can already be shared across NIO Alps and also Firefly, which is our third brand. And last year, in September, we have announced our 12 full-stack technologies at the NIO Inc. Tech Day. And basically, our R&D investments will be dedicated into these 12 main areas. And in terms of the personnel structure, around 70% of our R&D people are focusing on the smart technologies were relevant areas.

[Paul Gong, analyst]

No, sure. My second question is regarding the cost of Alps. Just now I think you mentioned that the cost is going to be about 10% lower than Tesla. Can we give a little bit more color given this is actually pretty impressive number when you consider Tesla is building almost 1 million cars in China a year of which 700,000 is already like Model Y. What volume scale are you based on to assume the Alps' costs, and what are the key advantages that you have adopted for this cost advantage compared to Tesla?

[Bin Li, executive]

[Interpreted] Thank you for the question. Actually, for Tesla, as they also public their gross margin details on the product, so it's easy for us to make a comparison. In terms of what advantages we can take for the Alps and its cost structure, actually, China is the largest automotive market. It is also the biggest market for the smart electric vehicles with already well-established supply chain.So we can already leverage the advantages of the domestic supply chains here in China, not to mention that in the past several years, we have made investments and also we achieved accumulations on the R&D activities. And R&D is one of the key drivers of improving the cost structure and reducing the BOM cost of the product.In that case, we already have a pretty good foundation. And with that, we doesn't needed to really realize a very huge volume to realize that level of cost structure. In China, for the manufacturing facility, a reasonable volume will be around 10,000 units per month. We don't need to really go to the level of 1 million to realize that level of BOM cost.

[Paul Gong, analyst]

So the costs here are compared to Tesla China or Tesla Global for the 10%. Sorry, just a quick follow-up.

[Bin Li, executive]

[Interpreted] Yes, to translate for that, we didn't really look at the Tesla China specifically, we are comparing with Tesla globally.

[Operator]

Your next question comes from Chang Jing from CICC.

[Jing Chang, analyst]

Okay. I have 2 quick follow-on questions. The first is also about the charging and also battery swap network. We can see that our network is still -- our construction progress of the charging network is still the fastest in China. But at the same time, we see many other companies are still also accelerating their construction of the -- especially the fast charging network. So how do we think that we can maintain our first-mover advantage? And also how do we look at the relationship between fast charging and also battery swap?

[Bin Li, executive]

[Interpreted] Thank you for the questions. As we are very happy to see that many other car companies, including peers as well as other third-party companies are also dedicating their resources into installing chargers in China, as the more chargers we have publicly, the better the charging experience and the charging efficiency will be. So we are also dedicating -- or actually we are also installing a lot of charges.But in addition to that, we also have many power swapping facilities. We are the car company with the most power swap stations. Some companies in the industry are also installing power swap stations, but so far, we are still the single largest swap station operators with already establishing -- with that, we have already established a very good network effect where we can further leverage on that.So, overall speaking, many other car companies who are serious about the battery swap or who are interested in battery swap, now choose to join our battery swapping network and alliance because they can also rely on our network effect. But another thing is that the charging and swapping, these two are never in conflict with each other. Of course, for the charging, there are some special benefits. For example, if you have chargers at home, you can always enjoy the best charging experience or if you are on the go and you only need to charge for 20% or 30% SoC, you can also choose faster charter. But if you need to have a full charge in a very short time frame, power swap is still the best option for you.Like during the Spring Festival, over 90% of our users traveling on highways chose to do the power swap than doing their charging. So, that's the special benefit of power swap, not to mention that battery swap station itself is a natural energy storage system. When users are doing power swap, they don't need to get off the car. The entire process is fully automated, not to mention that we also have a battery upgrade that is enabled by the swappabilities of the battery.For example [Technical Difficulty] 80% of them chose a 100-kilowatt hour battery pack. That is our long-range backer pack. But before we had this many power swap stations in China, 50% of our users actually chose a 100-kilowatt hour battery pack. By having more users choosing standard range battery packs, the benefit is that if you're only driving the car in Shanghai for the daily commute, you can be having a sufficient range with 75 kilowatt hour. But when you need to have a weekend getaway, where you need to travel for long distance during the holidays like during the Spring Festival, you can use the flexible battery upgrade to upgrade to 100-kilowatt hour battery.For example, during the Spring Festival, many of our users have chosen to upgrade their batteries flexibly. And very soon, we will launch a 150 kilowatt hour battery pack, which will fulfill a very rare need, maybe only 1% to 2% of the use cases where users needed to travel much longer.And another benefit of power swap is regarding how it can benefit the management of the battery life because, I can use the analogy, if you eat too fast, it can damage your stomach than eating in a very slow manner. It's the similar thing to the power swap because if you always use supercharging, such quick charge may damage the battery life of your battery. But with battery swap, we can balance out the battery life, not to mention that we can also use other operating approaches and mechanism to further enhance the battery life. So, overall speaking, we don't think battery swap and charging are conflicting with each other and these 2 actually [indiscernible].

[Jing Chang, analyst]

Okay. My second question is regarding to the lower tier cities market. And I see that in 2023, our sales proportion in first tier cities has been increased a little bit percent. So will also our sales proportionally -- especially in third tier and below, is still less than 20%. So compared to like BMW, which that will be exceeding 40%. So in terms of marketing and other aspects, so do we have some efforts to break through further to the lower tier cities?

[Bin Li, executive]

[Interpreted] Thank you for the question. It's true that in 2024, we needed to solve the problem regarding enlarging our reach in the lower-tier cities and also boosted the sales in those cities. We have realized the significance of this, and we have already started to take actions in the second half of 2023 by enlarging our reach into the lower-tier cities.Right now, if you look at our sales volume distribution, basically more than 50% of our sales volume is contributed by the sales in the Yangtze River Delta areas. And if we look at all the Tier 1 cities, more than 70% of the sales actually happen in the first tier cities. So it's very important for us to find the right approach to penetrate into the lower-tier cities and enlarge our channel reach in these cities.On the other hand, we have also realized that the infrastructure like the charging and the swapping facilities are also playing a very important role in boosting the sales in these lower-tier cities. So this year, we will also focus on installing more chargers and swap stations in this third -- in the third or fourth tier cities so that we can enhance the overall user experience and the competitiveness in those areas. This is an opportunity as well as a challenge for us in 2024. We need to find the efficient approach to tap into the lower tier cities and to improve the sales volume in those areas.

[Operator]

Your next question comes from Tina Hou from Goldman Sachs.

[Tina Hou, analyst]

So the first question is regarding your sales network and sales team expansion plan this year. So just wondering for both the NIO rand and for the Alps brand, how many new stores do you expect to open this year, and how many new sales people do you expect to hire for each of these brands?

[Wei Feng, executive]

Hi, Tina. Can you repeat your question, please?

[Tina Hou, analyst]

Sorry. So, my first question is regarding your sales network and sales team expansion. So, could you share for 2024, how many stores do you plan to open for both NIO and the Alps brand? And also how many sales people do you expect to hire for these brands?

[Bin Li, executive]

[Interpreted] Thank you for your questions. For NIO, as the brand, actually, we have already opened 500 NIO Houses and NIO Space in China. So for this year, our priority is not on opening up more stores or spaces for the NIO brand. Instead, we will focus on improving the efficiency of each point of sale, including phasing out some low-efficiency locations and replace them with stores and locations of higher efficiencies.And in terms of the sales force for the NIO brand, so far, we have already have more than 5,000 people on the team. And enlarging the team will not be the focus either, instead, we will focus on the efficiency of the overall operations of the team. So enlarging sales team, we're increasing the number of self-stores for NIO will not be the priority for the current year.But when it comes to our new brand, the second brand, the approach will be different. We have already secured some locations and resources for the new brand. So we will not have a very long lead time to prepare for the store opening. Basically, when we launched the brand, we also hope that we can open no less than 200 points of sales for the second brand.In terms of people, it's the same logic, as we can leverage the existing training system of NIO to train the team, to make the entire sales team to be prepared for the launch of the very first model. So we will focus on the efficiency of such sales team. Not to mention that for Alps, they will start with only one product. So the efficiency of the cells be relatively easy to manage and improve. This is also another advantage of starting a brand based on existing resources and the network of NIO than starting everything from ground up.

[Tina Hou, analyst]

William, can I just have a follow-up? So would the Alps store location resemble that of NIO's location?

[Bin Li, executive]

[Interpreted] As Alps, our second brand, is targeting at different types of user groups with different price segments and the range, which means that this brand will also have its own principal and logic for the store locations and network development. So for Alps, they will select their own stores and locations and also deploy the network according to their own demand.[Interpreted] And of course, the sales network of Alps will also be more efficient as Alps does not need to have the full-fledged sales stores like NIO House. So its -- point of sales will be more efficiency oriented, similar to the sales stores of Tesla.

[Tina Hou, analyst]

And my second question is, could you give us some CapEx guidance for 2024? And then the breakdown between vehicle CapEx and also your charging/swapping infrastructure CapEx?

[Wei Feng, executive]

Yes, sure. We will control our CapEx investment in 2024. Like we already canceled a delayed project with payback period longer than 2 to 3 years. And generally, the CapEx in this year will be significantly lower than 2023. Regarding the deployment of our power swap station network, we will fully leverage the resources of our business partners for the further expansion, as mentioned in [ William's ] previous statements. Yes, that means we'll utilize our own resource to build the network.

[Tina Hou, analyst]

So, will not utilize your own resource?

[Wei Feng, executive]

Yes, for the power swap network -- station network, we've minimized the use of our own resource.

[Tina Hou, analyst]

That's very -- yes, that's very clear and helpful.

[Operator]

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

[Rui Chen, executive]

Thank you, again, for joining us today. If you have further questions, please feel free to contact NIO's Investor Relations team through the contact information on our website. This concludes the conference call. You may now disconnect the line. Thank you.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]