Xpeng Inc

NYSE:XPEV

Earnings Call Analysis

XPeng Projects Growth and Margin Improvement

In Q3 2023, XPeng's revenues soared to RMB 8.53 billion, marking a 25% increase year-over-year alongside a vehicle delivery projection of 59,500 to 63,500 units in Q4 2023, indicating expected growth of 48.7% to 58.7%. The revenue expectation for Q4 stands between RMB 12.7 billion to RMB 13.6 billion. Despite a negative gross margin of 2.7%, the company forecasts a significant gross margin enhancement due to new cost-reducing technologies. It concluded Q3 with RMB 36.5 billion in cash and aims for accelerated growth and scale expansion from Q4 2024, targeting the leadership position in smart EV technologies by 2030.

Entering a Virtuous Cycle of Improvement and Growth

XPeng, a prominent name in smart car manufacturing, has announced a significant transformation over the past three quarters, indicating a positive swing in sales, brand image, team morale, and importantly, free cash flow. Management's acknowledgment of the difficulty in achieving such turnaround in the smart car industry, coupled with their gratitude towards stakeholders, underscores the scale of their accomplishments. With a confident forecast for rapid sales growth and improved gross margins in the fourth quarter, XPeng positions itself to snatch a considerable share of the market in 2024, aiming at growth well above industry average.

Expansion and Adoption of ADAS Technology

The company stands at the forefront of Advanced Driver Assistance Systems (ADAS) adoption, a key selling point for customers seeking smart electric vehicles (EVs). By initiating public testing of XNGP in cities lacking high-definition maps and planning to reach 50 cities by year-end, XPeng is not only advancing its technology outreach but also reinforcing its lead in the ADAS field. It is this technology, along with the nationwide coverage for customer experience, that the company believes will drive demand for its smart EVs significantly over the next five years.

Strategic Organizational Reforms and Performance

XPeng has implemented extensive reforms in its corporate strategies, organizational structure, and product technology roadmap with the guidance of President Ms. Wang Fengying, who champions systematic innovation. While such sweeping changes could introduce risks that affect short-term results, the company has navigated this transition smoothly, as evidenced by exceeding vehicle delivery targets and generating positive free cash flow, all while maintaining control of their pricing across sales channels. These changes hint at the groundwork laid for continued growth and competitive pricing power in the future.

Sales Network Expansion and Improved Store Efficiency

The company is intent on extending its retail network, with plans to open 100 new stores in Q4, reaching a total of 500 stores nationwide by the end of 2023. This expansion aims to bolster sales growth, especially in lower-tier cities in China. XPeng recognizes that there is room for improvement in store efficiency and looks forward to a significant uptick in this area by 2024.

Guidance and Improving Margins

Management's confidence is backed by strong order intake momentum and an optimistic backlog, setting realistic targets for the future. Their expectations stem from improved product mixes such as the new G9 2024, which boasts greater gross profit margins over previous models, thus driving overall product profitability. Consistently, they are laying out plans for significant cost reductions by leveraging scale and a controlled sales process, especially with the launch of new products on the SEPA 2.0 platform, promising to elevate gross margins in 2024.

Commitment to R&D and Long-Term Strategy

XPeng dedicates focus to Research and Development (R&D), intending to inject more resources in 2024 than in the preceding year. This investment will enhance product designs, improve manufacturing craftsmanship, advance smart features catering to international markets, and support overall global competitiveness. The company has stressed on adopting a module-based design approach to economize on R&D expenses, with efforts to integrate suppliers' R&D into the bill of materials, thus streamlining costs and promoting rapid, innovative development.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for the Third Quarter 2023 earnings conference call for XPeng Inc. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to your host, Mr. Alex Xie, Head of Investor Relations of the company. Please go ahead, Alex.

[Alex Xie, executive]

Thank you. Hello, everyone, and welcome to XPeng's Third Quarter 2023 Earnings Conference Call. Our financial and operating results were issued by newswire services earlier today and available online -- we can also view the earnings press release by visiting the IR section of our website at ir.xpeng.com. Participants on today's call from our management team will include our Co-Founder, Chairman and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Jiaming Wu; Vice President of Corporate Finance and Investment, Mr. Charles Zhang, Vice President of Finance Accounting; Mr. James and myself.

Management will begin with prepared remarks, and the call will conclude with a Q&A session. A webcast replay of this conference call will be available on the IR section of our website.

Before we continue, please note 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 results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the company as filed with U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Please also note that XPeng's earnings press release and this conference call include the disclosure of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. XPeng's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures.

I will now turn the call over to our Co-Founder, Chairman and CEO, Mr. He Xiaopeng. Please go ahead.

[He Xiaopeng, executive]

[Interpreted] hi, everyone. Today, I'm pleased to report to our shareholders and customers that after 3 quarters of transformation and efforts, we have entered into the initial phase of a virtuous cycle driving improvements in sales Brent image, [indiscernible] and free cash flow. It is extremely difficult to deliver such a turnaround in the smart car manufacturing industry. Therefore, I would like to express my gratitude for your support and patience throughout the journey. Going forward, we're confident in achieving rapid sales growth and notable improvement of gross margin in the fourth quarter. And we're ready to gain considerable market share in 2024, achieving a high growth target that is significantly above the industry average.

China's new energy vehicle industry has witnessed resilience and growth in this increasingly intensified competition throughout 2023, creating great opportunities to reshape the industry landscape. The competition on electrification and smartification is speeding up the replacement of ICE cars with NAV. And AI is revolutionalizing the technical structure of smart EVs and transforming automakers business models. There are no shortcuts to ADAS technology. The only way to determine whether massproduction and the inflection point of ADAS technology have been reached is the achievement of nationwide coverage with low cost, a high level of safety and great customer experience across different models.

During our tech day on October 24, we launched the public testing of XNGP in the first batch of 20 cities where high-definition maps are unavailable. Our plan is to expand our coverage to 50 cities by the end of this year. Our technology and AI will empower our customers to use ADAS wherever they drive throughout the country. XPeng has been a pioneer and leader in ADAS technology and its customer adoption. I strongly believe that the demand for ADAS will surge in the next 5 years and XPeng will be the preferred smart EV brand for customers.

Next year, we'll consolidate and integrate our full stack in-house R&D capabilities in a wide range of systems, including the next-gen EE architecture to unifi ADAS domain, smart cockpit and voice assistant, brand-new large language models, the NextGen chassis and powertrain. As a result, we'll be able to deploy multiple models for the global market rapidly and realize the integration of cars between different platforms as well as between cars and other vehicles. I believe this will significantly enhance our engineering capabilities to support various products in the global market, strengthening our edge and smart technologies by integrating different systems.

Apart from our commitment to ADAS and smart EV technologies, we have made crucial changes to our corporate strategies, organizational structure, senior management team and product and technology road map over the past 3 quarters. Making various changes at such a magnitude simultaneously could have brought risks and impacted near-term results. However, thanks to the mutual trust and endeavors of the whole XPeng team, these changes did not affect our short-term performance. Instead, they allowed us to deliver better-than-expected results.

For the third quarter of 2023, our vehicle deliveries exceeded 40,000, representing a 72% increase quarter-over-quarter. Additionally, we achieved positive free cash flow with over RMB 1 billion in cash inflow. We're confident of setting a new record for vehicle deliveries in the fourth quarter. Our target is over 6 million units -- sorry, 60,000 units.

Regarding product sales, the G6 electric SUV has become the top-selling vehicle in the RMB 250,000 price range during its first quarter on the market. In October, over 8,700 G6 vehicles were delivered. This early success of the G6 is a strong validation of XPeng's ability to create and introduce a new benchmark model in the relevant market segment, thanks to our highly differentiated technologies and effective marketing. By doing so, we're bringing smart EV technologies to a much broader customer base.

In September, we launched the 2024 addition of XPeng G9 with a higher gross margin than that of the original version. This cost reduction was made possible through advancement in technology and engineering. In October, we delivered over 4,000 units of G9, making it 1 of the top-selling electric SUVs in the RMB 300,000 price segment.

In October, we achieved a record-breaking sales month with over 20,000 vehicle deliveries and secured the top spot among EV start-ups for BEV sales volume again.

We're excited to announce that we will showcase our flagship NPV, the XPeng X9 at the Guangzhou Auto Show and start presell on November 17. The X9 is a 7-seater pure electric smart NPV built on the SEPA 2.0 architecture. It stands out from traditional NPV models with superior space design and maneuvering that perfectly combine the advantages of MPV and SUV. Moreover, the X9 comes equipped with rear wheel steering as a standard configuration, enabling a turning radius similar to that of the P7. With XNGP, our industry-leading technology that does not rely on high-definition maps, maneuvering and NPV has never been easier and more agile. These technical capabilities are not found in any other NPV models on the market. X9 will be delivered from the beginning of January 2024. We're confident that X9 will become the top seller in the large electric MPV market.

In 2024, we plan to launch highly competitive new models based on the SEPA 2.0 architecture. Additionally, we intend to introduce a new EV brand in the RMB 150,000 price segment. Leveraging our partnership with DD, China's leading mobility technology platform, we believe that this new brand will greatly accelerate our sales growth and expand our market share in the A class EV market. Our team is currently on track to develop Mona, the first model under this brand, with an expected launch date in the third quarter of 2024. We believe that Mona is just the beginning of an exciting journey, and we're committed to pushing the boundaries of technology and keeping costs under control. This will enable us to launch smart EV models that both autonomous driving technology in the mass market segment at a price point of RMB 150,000 or USD 20,000. This move will give our product a significant edge over other models in the segment, allowing us to reach a wider audience in the Blue Ocean market segment.

Our President, Ms. Wang Song Min, has been meeting a significant overhaul of our sales network, making it more efficient, flexible and expanding faster to cover more Tier 3 and Tier 4 cities. We closed almost 100 low-performing stores during the first 3 quarters this year and launched the Jupiter project, a program to recruit more competent franchisee partners. We secured investment for over 100 new stores within 2 months and established cooperation with top-tier dealer groups specializing in luxury vehicles.

As we head into the fourth quarter, we're accelerating new store openings and expanding our sales network to reach our goal of 500 stores by the end of the year or early next year. These upgrades and rapid expansions, coupled with innovations and marketing, will become 1 of the most important drivers for [indiscernible] sales growth in 2024 and beyond.

During late September, I had the opportunity to visit the Volkswagen Group's headquarters in [indiscernible]. We had a detailed discussion with Mr. Bloom and Volkswagen's senior management regarding our comprehensive strategic partnership, which helped clarify the blueprint for our long-term strategic cooperation in technology. We also explored deeper strategic cooperation opportunities in the international market. Currently, we're jointly developing models based on the G9 platform, which is in full swing. The strategic corporation in the supply chain is also progressing effectively, and we expect cost reduction in the supply chain to generate meaningful results in the next year.

To enhance our cost control, we learn from the best practice of OEMs in the industry. The progress of cost reduction in the entire process of design, R&D and manufacturing and marketing has given me confidence in accelerating the progress to reach the goal of 25% cost reduction by the end of 2024 or even exceed it, which will significantly increase the gross profit margin next year.

Let's look at the cash flow. We had approximately RMB 36.5 billion in cash at the end of the third quarter of 2023, and we generated over RMB 1 billion in positive cash flow during the same quarter. With our new products and technology-driven cost reduction, we expect to see a significant improvement in our gross margin, resulting in even stronger positive free cash flow in the fourth quarter. This is an important milestone for us to achieve profitability at scale in the long term.

Looking ahead, we're projecting our total vehicle deliveries to be between 59,500 and 63,500 units in the fourth quarter of 2023, with a quarter-over-quarter growth rate of 48.7% to 58.7%. We expect our revenue to be between RMB 12.7 billion and RMB 13.6 billion during this period. We are committed to implementing transformation primarily in our organization and marketing strategy, which we believe will produce more favorable results in 2024 and beyond. This, in turn, will enable us to accelerate our growth and expand our scale from the fourth quarter of 2024. Our aim is to capitalize on growth opportunities arising from our leadership in smart EV technologies, improve our organizational efficiency and gain a dominant market share. Our ultimate goal is to establish XPeng as the top smart EV company by 2020 -- by 2030.

Thank you, everyone. And with that, I'll now turn the call over to our VP of Finance, Mr. James Wu to discuss our financial performance for the third quarter of 2023.

[Jiaming Wu, executive]

Thank you, Xiaopeng. Now I'd like to provide a brief overview of our financial results for the third quarter of 2023. I'll reference RMB only in my discussion today, unless otherwise stated. Our total revenues were RMB 8.53 billion for the third quarter of 2023, an increase of 25% year-over-year and an increase of 68.5% quarter-over-quarter. Revenues from vehicle sales were RMB 7.84 billion for the third quarter of 2023, representing an increase of 25.7% year-over-year and an increase of 77.3% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly attributable to the accelerating sales growth of the G6 in the third quarter of 2023.

Gross margin was negative 2.7% for the third quarter of 2023 compared with 13.5% for the same period of 2022 and negative 3.9% for the second quarter of 2023. Excluding the negative impact attributable to the G3i end of production, as we described in the prior quarter, the gross margin would have been breakeven for this quarter.

Vehicle margin was negative 6.1% for the third quarter of 2023 compared with 11.6% for the same period of 2022, and negative 8.6% for the second quarter of 2023. The year-over-year decrease was explained by: first, the inventory write-downs amounting to RMB 0.23 billion related to the Moto G3i as we finish the rest of the production in its life cycle, with a negative impact of 2.9 percentage points on vehicle margin; and secondly, increased sales promotions and the expiry of new energy vehicle subsidies. The quarter-over-quarter increase was primarily attributable to the improvement in our product mix and battery cost reduction.

R&D expenses were RMB 1.31 billion for the third quarter of 2023, representing a decrease of 12.9% year-over-year and a decrease of 4.5% quarter-over-quarter. The year-over-year and quarter-over-quarter decreases were mainly in line with the development timing and progress of new vehicle programs.

SG&A expenses were RMB 1.69 billion for the third quarter of 2023, representing an increase of 4% year-over-year and an increase of 9.6% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were primarily attributable to the higher commissions paid to our franchise stores.

As a result of the foregoing, loss from operations were RMB 3.16 billion for the third quarter of 2023, compared with RMB 2.18 billion for the same period of 2022 and RMB 3.09 billion for the second quarter of 2023. Fair value loss on derivative liability was RMB 0.97 billion for the third quarter of 2023. On July 26, 2023, our company entered into an agreement with Volkswagen Group to issue up to 4.99% of our company's ordinary shares for a fixed purchase price of USD 15 per ADS. Until the transaction closes, fluctuations in the fair value of the forward share purchase agreement were measured through profit and loss resulting in a noncash loss of RMB 0.97 billion for this quarter.

Net loss was RMB 3.89 billion for third quarter of 2023 compared with RMB 2.38 billion for the same period of 2022 and RMB 2.8 billion for the second quarter of 2023. Non-GAAP net loss, which excludes share-based compensation expenses and fair value loss on derivative liability, was RMB 2.79 billion for the third quarter of 2023, compared with RMB 2.22 billion for the same period of 2022 and RMB 2.67 billion for the second quarter of 2023.

As of September 30, 2023, our company had cash and cash equivalents, restricted cash, short-term investments and time deposits in total of RMB 36.48 billion. The positive free cash flow in Q3, as Xiaopeng mentioned earlier, was the main driver for our higher quarter-over-quarter cash balance. To be mindful of the length of our earnings call, I would encourage listeners to refer to our earnings press release for more details on our third quarter financial results. This concludes our prepared remarks. We'll now open the line to questions. Operator, please go ahead.

[Operator]

[Operator Instructions] Your first question comes from Tim Hsiao with Morgan Stanley.

[Tim Hsiao, analyst]

[Foreign Language] So my first question is about the competition. As we noticed that there are more [indiscernible] companies like Huawei and Xiaomi challenging the company makers. We noticed that tech companies have the advantages of a cross division ecosystem, as well as the channel that remain quite difficult for carmakers to replicate. How would XPeng make up for such shortcomings versus take players in the following quarters? That's my first question.

[He Xiaopeng, executive]

[Interpreted] Thank you so much for your question. This is Xiaopeng. Now this is a very good question, but not an easy question. I'd like to start by reviewing my path entrepreneurly experience. I first started with an international Internet company. And also, and then I went on to invest in XPeng. I mean your question has always been a question of thinking for many years in the past of my experience. Let me give you an example. When I was in the Internet mobile net business, we saw a lot of competition, and there are different ways to compete in that landscape. For example, people turn to acquiring traffic, and that is a good way to actually make up for different shortcomings in the ecosystem or the lack of different capabilities or abilities in different aspects. And you saw a lot of crossover from different players in different sectors. And you realize that the problem with or relying PLA on traffic is that there are a lot of media that has the traffic that is not transferable. Let me give you an example. Audience from traditional -- watching traditional TV, may not be the same audience who rely so heavily on mobile phones, et cetera.

And so that actually leads to a lot of failures. But right now, you also are seeing a lot of competitions from players across different sectors who tried to actually enter a new domain using different ecosystem or capabilities their own sector. For example, you see players from the real estate, the smartphone industry and also from the Internet and a lot of tech companies as well. So when we compare ourselves against these players from other sectors, we have to really come down to our internal capability. We have to look at what we have as our strength, for example. We are very strong with our technology. We're very strong with our AI capability and also manufacturing capability as well as the supply chain as well. So really what help us to differentiate ourselves and stand out from the crowd is that we can actually focus on what we already have and expand using different partnerships. For example, we've been started -- we have been very committed to actually expand our ecosystem by, for example, investing in our other different vehicle format. We have invested in our robotics technology and flying cars, et cetera.

We also have announced our partnership with Volkswagen in different aspects, including supply chain technology, global sales and marketing and also aftersales and services as well. And in August, we also announced our partnership with DD, a leading mobility tech platform, to expand our market share in the A-class vehicle segment also to build the foundation for our future expansion in robotaxi, et cetera. Now these are just some of the examples of how we try to make up for our shortcoming in the ecosystem. And we believe that by combining different capabilities through this partnership, we can actually strengthen our overall competency, building on the strong foundation that we already have, which is our technology and our core manufacturing capability as a carmaker.

[Tim Hsiao, analyst]

[Foreign Language] So my second question is about the pricing power because as mentioned earlier in the call, I think the company targets to cut the 2024 production cost by 25% as the company optimizes design and efficiency, et cetera. However, without enhancing the pricing power, very likely the benefit of cost savings might still be depleted by the constant price on the cutting, especially quite a lot of carmakers outsource their pricing strategies these days to like test and BYD and just respond passively. So how does XPeng plan to strengthen its pricing power on top of the cost reduction into 2024? That's my second question.

[He Xiaopeng, executive]

[Interpreted] First of all, I agree with your opinion that pricing power is very important. And in the long term, we definitely want to become the Apple in automaking, which has very, very strong bargaining power and pricing power. As a carmaker, an OEM, we believe that there are several aspects that is important that our pricing power. One is scale, and the other is cost control capability as well as our branding and differentiation. Definitely, the scale of sales affect our cost and it's also the same the other way around as well. And right now, we are in the process of reshaping our overall capability as well as our brand. It is very important that we can actually of all, build our brand image as well as contributing to the customer value by really strengthening our differentiation. Our President, Ms. [indiscernible] is a big advocate on internal and also somatic innovation. So going forward, going into 2024 and 2025, we will continue our effort and commitment in the second up our sales and volume, controlling our cost, building our brand as well as our differentiation in order to gain bigger pricing power.

[Operator]

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

[Ming-Hsun Lee, analyst]

[Foreign Language] So after Ms. Wang joined XPeng, the channels sales stores reforming is continuing. So do you have any metrics regarding to evaluate your progress on your channel reform? And besides that, do we have any target to -- about the long-term direct sales and also dealership percentage?

[He Xiaopeng, executive]

[Interpreted] Thank you for your question. Now I would like to address this by giving you a little bit of background information about our President, Ms. Wang. She comes from Changhong, Great wall, traditional OEM, and she has been excellent in controlling costs, developing channels and also leading innovative systematic overhaul of the company. So in the first few months that she joined our company, she's spent a lot of time observing what we currently have. We used to have this hybrid channel of having our cell phone stores together with some franchisees, but we had a total control of the pricing for all of the stores -- I mean, all of the channels. And going into Q3 -- I mean for the past quarter in Q3, we have already set our future strategy of channel innovation or reform, which will actually cater to different kinds of dynamics or changes coming to -- going into 2025 to 2026. We are talking about, for example, significantly more models that we're going to launch in 2025. And also we take into consideration the future market competition, market environment and also our future expansion to cover not just Tier 1, Tier 2 cities but also Tier 3, Tier 4 cities as well.

So in the mid- to long term, we aim to have at least 5 franchise stores that capable of not only doing sales, but services as well. And in the mid- to long term, we also plan to have a total of at least 1,000 service centers across the country that can help us to provide better services to our customers. And going into Q4, we plan to open 100 new stores that can allow us to expand our sales network more extensively. And so by the end of 2023, we're going to have a total of 500 stores of different modes. And over time, because it takes time for those new stores to build up their capability and experience, so we believe that the time of the Q1 and Q2 next year will be the time when we could actually see a lot of growth in our deliveries and sales, and that can also allow us to see growth in deliveries and sales in lower-tier cities in China as well because we are going to build more stores in those areas and regions.

In terms of the pricing control, we will remain very strong in terms of the extent of price control, and we are going to evaluate the performance of different stores from different aspects, including their NPS, and we can equip them and empower them with a wide range of tools, and we can control the procedures, and we can do a lot more things to maintain our strong control of the service qualities of those stores as well.

Now in terms of the efficiencies of the performance of the stores, I agree with you. And we believe that it is very important that we keep improving the overall efficiencies of our stores. Because currently, we see still a lot of room for growth there for improvement there. And by 2024, we expect to see a huge uptake in terms of the efficiencies of our store.

[Ming-Hsun Lee, analyst]

[Foreign Language] So my second question is related to export business. So in October, you also shipped a few thousands of cars to overseas market. So in the future, will you consider to build more direct operated stores or you will rely more on the distributors locally? And regarding your current product portfolio, do you think that you will export all the models overseas or you will select a few models for overseas market?

Lastly, do you have any plan for Southeast Asia market?

[Gui Hongdi, executive]

Ming, it's Brian. Let me address your question. Regarding the international expansion, you're correct that we currently employ sort of hybrid model in the Nordic countries. We have direct own stores as well as our partnership and agents. But going forward, we're probably going to opt to use more of a collaborative partnership model using either agents or distributors for specific markets. So that's probably going to be likely the mix will shift towards the more partnership-oriented model.

In terms of products there for international markets, you saw that we currently have G9 and P7i currently starting in Europe already. We will be launching G6 as a global product next year. So I would say it's only the subset of product that we will design and approve for international use, not all our products. So the products I mentioned are the ones that we currently decided for global markets. And also, we have plans for right-hand driving models next year as well. For example, by the end of next year, we plan to roll out our first right-hand driving model likely to be based on the G6 model. So with that, we'd be able to tackle Southeast Asia market. So that would definitely be in our sight, and we'll be also looking at other right-hand driving model markets as well.

[Operator]

Your next question comes from Tina Hou with Goldman Sachs.

[Tina Hou, analyst]

[Foreign Language] So my first question is regarding our sales volume. So according to our fourth quarter sales volume guidance, it seems that November and December will be flat versus the October volume. So just wondering what is the reason here? Are we just being conservative? Or is there any specific trends that we've observed in the industry?

And then the second question is regarding gross margin. So management mentioned, excluding the impairment loss of G3, the vehicle gross margin was breakeven in third quarter '23. So the last time we delivered over 40,000 units of vehicles was in the fourth quarter of 2021. And then back then, the vehicle gross margin was actually 10.9%. So just wondering what is leading to the differential in gross margin?

And also related to that, management mentioned that next year, we're expecting to see a great gross margin enhancement. Obviously, we know the cost reduction is pretty on track, even ahead of our progress. But then how much price decline are we factor into this gross margin expectation because we see that this year -- for the 3 quarters this year, an average ASP actually declined by 6% year-over-year. So how much of the competition are we factoring in into next year in terms of gross margin guidance?

[Gui Hongdi, executive]

So Tina, this is Brian. Let me first answer your first question. The guidance of 60,000 this quarter, I think, reflect our confidence of the progress we've made in the recent months. We think it's actually a very important milestone for us to reach on average 20,000 per month. So this is, I think, is a very, I would say, important milestone for us. And also by giving this guidance, we also are considering the competition as well as macroeconomic backdrop that we're facing in the fourth quarter. We are very confident with the guidance because obviously, the backlog we have already as well as the momentum we've seen in our order intake. But I think this is also reflective of the market at the moment, and we hope that this is a realistic target for us.

And now I'll hand over to James for the growth process comments.

[Jiaming Wu, executive]

Yes, Tina. From a gross margin perspective, first of all, as we talked about earlier, even if we compare to -- on a year-over-year basis, the reduction in margin came from, as you mentioned, the G3 EOP impact that we have booked in this quarter. And this is -- this will be the final impact from the G3 EOP perspective. And secondly, going into 2023, the new energy vehicle subsidy has been removed from the market. And that obviously has an impact on our margin as well. You did mention our ASP has reduced over time. I believe that's a overall market dynamic as well because we are -- we've been trying to improve the product competitiveness for our product as well throughout this journey.

In the meantime, as Xiaopeng mentioned, we do expect our gross margin to improve in Q4 meaningfully, particularly our vehicle margin will become positive, we believe, in the fourth quarter. And 1 proving factor as we improve our product mix is that as we launched a new G9 in 2024, we see the gross profit margin is actually higher than our older version of G9. This is a great proving point for us to continue to drive profitability of our products. Hopefully, that answers your question.

[Tina Hou, analyst]

[Foreign Language] I just have a very quick follow-up. So in terms of the cost reduction technology, improvement cost reduction, which are the models that can benefit from the cost reduction?

[He Xiaopeng, executive]

[Interpreted] All of the models that we have will benefit the cost reduction driven by technology advancement. But among our top-selling models, we are going to put more effort into driving up the cost reduction.

[Operator]

Your next question comes from Paul Gong with UBS.

[Paul Gong, analyst]

[Foreign Language] So my first question is regarding the positioning of the Mona brand. I understand the pricing point is generally lower than our main brands, but it's not really too much lower. And how should we differentiate the brand positioning of the 2 brands? Is Mona also going to be available at our current stores to be sold simultaneously?

[He Xiaopeng, executive]

[Interpreted] We are going to disclose more information regarding Mona next year, I mean 2024. We'll talk about this new brand in terms of spending positioning, it's channels and after-sale services. And right now, we are actively preparing for the launch of Mona for next year. One thing that I can address or I can share is that there's definitely going to separate channels -- going to have separate channels to sell Mona with -- apart from our current XPeng lineups.

[Paul Gong, analyst]

[Foreign Language] So my second question is regarding your earlier comments, you have discussed with Volkswagen regarding the global market. How do you think the business model between [indiscernible] and [indiscernible] Chinese products leverage with global OEMs, global footprint and going to the global market? Would that accelerate your globalization in terms of the market reach?

[Charles Zhang, executive]

Paul, this is Charles here. I will address the question. I think first of all, our joint development on -- for the model based on the G9 platform has been going on really efficiently. And I think we're going to achieve a milestone very soon. And I think the international market collaboration is 1 of the strategic initiatives we are exploring with our partner, Volkswagen. And I think that we are -- I think Volkswagen has global manufacturing footprint and also the supply chain capabilities. I think there's a lot of same areas we can learn from our partner and also leverage each other's strengths in the international market. We wouldn't comment on other company's collaboration model. Thank you.

[Operator]

Your next question comes from Pingyue Wu with Citic Securities.

[Pingyue Wu, analyst]

[Foreign Language] So my first question is about -- to sell cars in the lower-tier markets. How do we think of the demand for the lower-tier cities? And how do we utilize our strengths in those markets?

[Foreign Language] My second question is about the research and development for 2024. What will -- will the R&D total amount like increase next year? And where will this money be spent on?

[He Xiaopeng, executive]

[Interpreted] Let me address your first question. Regarding our product lineup, we are going to meet the lower-tier city demand by offering Mona and other new products. And right now, we're not in a position to disclose too much specific information, but what I can see -- what I can say right now is that we aim to offer top-notch ADAS technology and capabilities to a lower-tier market as well, including Tier 2 all the way to Tier 4 cities' audience -- I mean, customers. And we are going to those autonomous driving capability as standard configurations in our future lineups for those cities as well. And we are also going to reform our distribution channels for the lower-tier markets.

Regarding your second question on the R&D expenses, actually, we've been putting in a lot of thought in the past 3 quarters, and we've actually done a lot in -- starting from the beginning of this year to reduce our R&D fee. Let me give you several examples. When we started the overhaul in our restructuring of the organization, the first thing we did is cut R&D expenses. And we also have been advocating this module-based designed rationale that allow us to put everything on the same architecture to SEPA 2.0. We also have actually encouraged and asked our suppliers to put their R&D expenses into the [indiscernible] to reduce the overall R&D expenses on our front.

The last thing that we -- another thing that we did was to actually equip our R&D team with more systematic tools and says that can allow better integration and mutual compatibility of different parts so that our overall R&D expenses can be cut even further. So going into 2024, we are going to actually strengthen several capabilities. The first 1 is our overall design [indiscernible]. We also will strengthen our craftsmanship, which is also critical in manufacturing. We will continue to improve our smartification -- I mean, the intelligence of our products. We'll also do R&D improvement in the -- for the international market to strengthen our globalization capability. And we will also put in some R&D efforts to prepare for our long-term development and also for our long-term strategy as well.

So in terms of the absolute value of our R&D expenses in 2024, definitely it's going to be higher than this year.

[Operator]

The next question comes from Jing Chang with CICC.

[Jing Chang, analyst]

[Foreign Language] Okay. This is my only 1 question regards to autonomous driving, which we believe will become the key factor in the few next years. So how do we expect to see automating to reship the competitive landscape of the industry? Will it be very quickly to be seen in the maybe next 1 to 2 years, or will it take a much longer time? We also see that many traditional OEMs have chosen to cooperate with other companies in the practice of autonomous dirving. So in contrast, can you share some details of our advantages of our in-house research?

[He Xiaopeng, executive]

[Interpreted] Thank you for your question. This is Xiaopeng. I think the upcoming 5 years will actually usher in an era of rapid development for ADAS adoption and technology development. It's going to be very similar to the stage where we see the rapid development of [indiscernible] penetration from back in 2018 to 2022. And I remember back in 2020, we saw a huge uptick in the penetration rate of new energy vehicles in the market. And I think, right now, in terms of ADAS technology adoption, we're still in a warming up stage in terms of the technology readiness also for the whole industry as well. We definitely are seeing more and more younger customers who are embracing this new technology who are willing to try this new experience. And in the future, we are very optimistic optimistic about the adoption rate improvement. Because we -- first of all, we're very excited to see that there are more and more participants in the industry that are helping us to educate the wider audience that are cultivating the market to get it ready for this upcoming exciting era of ADAS adoption.

Now regarding our advantages or strengths in having this full stack in-house R&D capability, there's a long list of examples of strength that I can give you. I mean, just name a few, localization, the cell development of the technology is 1 of them. And the second thing is control the cost of production. Because even though we are seeing a wider customer base that are trying to embrace the technology, they still want to have both safety in terms of experience and also affordability as well. So having full stack development capability definitely allow us to control the cost better. And another good advantage of having that capability is that it can allow us to embrace upcoming and their cutting-edge technology very timely as well. For example, in the past year, we saw this emergence of the application of large language models and having full stack R&D capability allow us do full domain end-to-end application of this new technology, which would not be possible without that capability, and that is actually happening with a lot of our peers who are struggling to adopt new technology as well.

And another good point that I would like to make is that we are seeing more and more tighter and tighter coupling with AI technology with car manufacturing capability or R&D capability. And we need to have, for example, the next-gen EE architecture, the unified ADAS domain, [indiscernible] and voice assistant to actually embrace this tighter coupling with AI technology. And that actually requires a lot of integration on not just the hardware level, but also hardware together with software and AI as well. And we are very proud that currently we are very capable of doing that, thanks to our full stack R&D capability.

[Operator]

And the last question is coming from Nick Lai with JPMorgan.

[Y.C. Lai, analyst]

[Foreign Language]. I recall in the second quarter results call, which may indicate that the 4Q vehicle margin will likely turn to positively territory. Is that guidance is still still so [indiscernible]? And at the same time, we are launching the new A segment sedan under Mona brand with pricing point of about RMB 150,000. At the same time, the new product will be equipped with a high-end ended product. How do we reconcile the competition in the low-end segment and also also [indiscernible] will equip the product with much more advanced content?

[Jiaming Wu, executive]

Thanks, Nick. This is James. So I'll answer your questions 1 by one. First of all, to reconfirm, we do believe our fourth quarter vehicle margin will turn positive to confirm your question. And this is bolstered by a better mix of products in Q4 compared to Q3. And as I mentioned earlier, we did see some level of battery cost reduction that came through towards the end of Q3. So for Q4, we'll see a full quarter of better cost reduction coming through and barring the lithium prices stable over time.

Going into 2024, we do expect our gross margin to be meaningfully improved versus 2023 on a full year basis. And this is also bolstered by our continued cost reduction to achieve our 25% or even more cost reduction targets, as Xiaopeng mentioned earlier. We will have better product mix next year as we launch, for example, G9, which will be amongst the highest -- X9 I'm sorry, X9, the highest gross margin product at this point in our portfolio.

And obviously, the new products coming from our SEPA 2.0 platform next year, we'll be -- we'll have better margin as well.

And lastly, to your question on Mona, you're correct. It is targeting A segment, but we do see the Mona has a very good cost control and planning process, a very competitive from a cost perspective. first of all, and second of all, Mona will help us achieve great scale, which will benefit to the entire company from a scale perspective as we've seen our cost allocation, and therefore, improve our margin. And lastly, we do expect more controlled associated sales expense related to the Mona sales because of the scale. So it should not be a drag from a bottom line perspective in terms of profitability. Thank you.

[Operator]

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

[Alex Xie, executive]

Thank you once again for joining us today. If you have further questions, please feel free to contact Axon's Investor Relations through the contact information provided on our website or the Pearson Financial Communications.

[Operator]

This concludes today's conference call. You may now disconnect your lines. Thank you.