Xpeng Inc

NYSE:XPEV

Earnings Call Analysis

XPeng Experiences Strong Growth and Positive Outlook in Key Metrics

In Q3 2024, XPeng reported total revenues of RMB 10.1 billion, a year-over-year increase of 18.4%, driven by vehicle sales increasing by 12.1%. Deliveries surged 54% quarter-over-quarter, surpassing 46,500 units, reflecting strong momentum. The gross margin improved to 15.3% from a loss last year, bolstered by cost reductions. For Q4, XPeng anticipates revenue between RMB 15.3 billion and RMB 16.2 billion, with projected deliveries of 87,000 to 91,000 units. Moreover, cash flow is expected to turn positive, with over RMB 40 billion in cash by year-end, facilitating further innovations and growth in AI-defined vehicles.

Strong Revenue Growth Amidst Strategic Transformations

In the third quarter of 2024, XPeng reported total revenues of RMB 10.1 billion, marking an 18.4% increase year-over-year and a remarkable 24.5% increase quarter-over-quarter. This growth is largely attributed to a substantial rise in vehicle deliveries, which reached 46,533 units—a 54% increase from the previous quarter and a 16% increase compared to the same quarter last year. These figures not only exceeded the company's prior guidance but also highlight the ongoing recovery and strategic shifts XPeng has undertaken amidst a challenging market environment.

Improved Profit Margins Across Key Segments

Gross margin improved significantly to 15.3% for the third quarter, a turnaround from negative 2.7% in the previous year. Vehicle margins were also positive at 8.6%, up from a negative figure of 6.1% one year prior. This trend of increasing profitability is driven by cost reductions and improved product mix, indicating that XPeng is effectively managing operational efficiencies and leveraging scale as it grows.

Guidance for Future Deliveries and Revenue

Looking ahead, XPeng anticipates a robust performance for the fourth quarter with projected delivery volumes between 87,000 and 91,000 units, representing an impressive increase of 87% to 95.6% quarter-over-quarter and 44.6% to 51.3% year-over-year. Revenue is expected to range from RMB 15.3 billion to RMB 16.2 billion, which reflects a quarter-over-quarter increase of 51.5% to 60.4% and a year-over-year increase of 17.2% to 24.1%.

Investment in R&D and Strategic Collaborations

XPeng plans to deepen investments in research and development, bolstered by positive cash flow projections. The company aims to invest heavily to enhance its AI-driven technologies, which are becoming pivotal in defining its competitive advantage. In particular, collaborations with prestigious partners such as the Volkswagen Group for research and development are yielding fruitful results and significantly contribute to revenue streams.

Focus on Global Expansion and New Product Launches

On a global scale, XPeng's revenues from overseas markets grew by 70% sequentially, making up about 15% of total sales. The firm is committed to expanding its international footprint with plans to reach over 300 stores in strategic markets by the end of 2025. Additionally, XPeng is aiming to enhance its product offerings with upcoming models set for release, including an expected four new models, which will potentially further drive sales and market presence.

Commitment to AI Technology and Future Innovations

Positioning itself as a leader in smart electric vehicle technology, XPeng aims to leverage AI capabilities not only for vehicular intelligence but across its entire operations. The company's vision includes using AI as a core component of its product offerings, with expectations for substantial advancements in autonomous driving tech set for the coming years. This forward-thinking approach places XPeng at a strategic advantage within the competitive landscape of the automotive industry.

Operational Improvements Leading to Expected Profitability

XPeng forecasts moving towards profitability with plans to break even by late 2025. Cost management strategies are projected to further enhance operational efficiencies, compounded by the launch of new models that cater to various market segments. The company's anticipated improvement in cash flow, expected to exceed RMB 40 billion by year-end, supports the sustainability of its financial health as it navigates the rapidly evolving EV market.

Conclusion: Navigating Challenges with Strategic Vision

XPeng's 2024 third-quarter results reflect strong operational execution and a deliberate strategic pivot amidst a transitional automotive market. While the path ahead includes challenges, XPeng's commitment to innovation and its ability to adapt to market demands positions it well for future growth and leadership in the AI-defined vehicle segment.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for the Third Quarter 2024 Earnings Conference Call for XPeng, Inc. [Operator Instructions]

Today's conference call is being recorded. I'll now turn the call over to your host, Mr. Alex Xie, Head of Investor Relations and Capital Markets of the company.

Please go ahead, Alex.

[Alex Xie, executive]

Thank you. Hello, everyone, and welcome to XPeng's Third Quarter 2024 Earnings Conference Call. Our financial and operating results were issued by newswire services earlier today and available online. You can also view the earnings press release by visiting the IR section of our website at ir.xiaopeng.com.

Participants on today's call from our management will include a Co-Founder, Chairman and CEO, Mr. Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Corporate Finance and VW Projects, Mr. Charles Zhang, Vice President of Finance Accounting; Mr. James Wu 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 the 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 includes 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. Xiaopeng. Please go ahead.

[He Xiaopeng, executive]

[Foreign Language]

Hello everyone, I'm Xiaopeng,

[Foreign Language]

In the third quarter of 2024, we surpassed our key performance targets. We delivered 46,533 units in the third quarter, reflecting a 54% increase quarter-over-quarter and a 16% increase year-over-year, beating the high end of our prior quarterly guidance.

September's deliveries exceed 20,000 units, marking a record high. Furthermore, thanks to the technology-driven cost reduction and growth in scale, our gross profit margin increased to 15.3% in the third quarter achieving our [indiscernible] level and demonstrating continuous improvement for 5 consecutive quarters.

[Foreign Language]

Over the past 2 years, XPeng has undergone significant transformation amidst challenges. However, I remain calm at the center of the storm because crisis often present opportunities. Having overcome these adversities, XPeng has emerged stronger than ever. We're now poised to accelerate our growth and move forward steadily. I would like to express my gratitude to all of our shareholders and everyone who has consistently supported us.

We have implemented comprehensive changes in our strategy products, management and organizational structure. We've also addressed previous areas of improvement in marketing, sales channels and design. Moreover, our firm investment in AI technology has begun to yield advantages in both product experience and cost efficiency, helping to bolster our competitive edge. By prioritizing customer needs, maintaining a business-oriented approach and keeping the full picture in mind, we have established a robust capability across our entire operations from product definition and research and development to presell activities, product launches and delivery. As a result, we have created a series of standout products that truly surprise and delight our users.

[Foreign Language]

Second decade has started. And I believe the next 10 years will be the era of AI or Artificial Intelligence. I'll strive to lead XPeng to become a global AI defined car company, and Spear had the large-scale application of AI in the mobility industry. Looking at the industry landscape, I anticipate that between 2025 and 2027, which is upcoming 3 years, we'll see a knockout phase in the Chinese automobile industry. The penetration rate of China's new energy vehicles will likely rise to over 85%, while the integration of AI will lead to the next stage of consolidation of market share. Unlike the traditional car companies that has relied on corporative integrated supply chain models where research and development in the past, winners in the AI defined car sector will be those with Index full ex self-development capabilities.

We plan to harness the power of AI and use it as a data engine, integrated both software and hardware in our research development of the whole vehicle, AD, cabin and engines et cetera. This will allow us to iterate and upgrade and an unprecedented speed, creating a substantial advantage over companies that continue to use traditional R&D models regarding user experience and optimization speed. Starting next year, I expect significant advancement in autonomous driving and vehicle intelligence. Introducing AI large models will provide a transformative experience from all aspects, enabling users to embrace saver more comfortable, more comprehensive and smarter AI driving and AI-driven vehicles.

[Foreign Language]

On November 7, the world's first AI defined CAR, the P7 plus was officially launched. That night, the number of firm orders exceeded 30,000 and continues to rise. The P7 plus has become a phenomenal success in the mid- to large BEV sedan market and marks a milestone in a widespread adoption of AI defined cars.

I'm pleased to see that the core reasons users choose the P7 plus is its standard, high standard intelligent driving features across the entire model range. In the past, luxury was defined by configuration, but now it is defined by technology. And this trend is where we are striving to be.

We're collaborating with suppliers to expand the production capacity of the P7 plus and I expect the delivery volume of the P7 plus to exceed 10,000 units in December. Currently, both the M03 and the P7 plus have begun double-shift production.

As production capacity ramps up, we anticipate monthly deliveries will set a record in the fourth quarter and will strive to exceed 30,000 units in November. Additionally, steady and long-term progress is 1 of our main themes for 2025. We'll enter 2025 with tens of thousands of orders, which will increase our delivery volume in the first quarter of next year and lay a solid foundation for significant increase in sales next year.

[Foreign Language]

Starting from the P7 plus model, our new and facelifted MAX models will all feature the AI Hawkeye visual ADAS solution. This is the only ADAS solution in China that does not rely on HD Maps or [indiscernible] and we'll take it to the rest of the world soon. In the global automotive industry, we're the first to standardize high-level intelligent driving software and hardware across our entire lineup, providing an actual leading experience for the users.

We delivered experience of the Level 3 ADAS driving at the cost of Level 2, achieving what we refer to as intelligence for all tech power driving with the same cost as fuel. Excitingly, in the first half of next year, after the Lunar New Year, MONA-M03 MAX will start mass producing the platform-based AI Hawkeye visual ADAS solution. This will allow us to become the world's first car company to offer advanced intelligent driving vehicles for just RMB 150,000 or about USD 20,000, lowering the threshold.

With our leading AI technology and strong cost control, we have the competitive moat that will serve as our ultimate weapons for navigating from a [ terribly ] competitive red ocean to the opportunities of the blue ocean market.

[Foreign Language]

I believe that over the next 1 to 5 years, the penetration rate of smart features will significantly increase nonlinearly. Our AI designed vehicles, which incorporate powerful AI capabilities and autonomous driving features will accelerate the replacement of cars that like these technologies or cars that only claims have these technologies.

In 2025, we plan to launch at least 4 new models, including super electric vehicles, and we'll also update several existing models. Each of these new and facelift models will be very distinctive in their respective market segments. And I look forward to launching more top-selling models that users will love next year.

[Foreign Language]

At our recent AI tech day, we unveiled the Quinton Super Electric System. Our next-generation extended range products, along with our next-generation pure electric products will be our second largest growth engine. Together with our AI capabilities, it will drive strong momentum for accelerated development. Powertrain technology and industry-leading energy efficiency are key components of XPeng's brand. We have received widespread user claim for our exceptional energy consumption management with our electric vehicles regularly exceeding advertised range estimates.

In our brand-new extended range products will employ high-voltage electric technology, one generation ahead of the market to address common user pain points facing current extended range products in the market and provide a user experience as far as superior to many existing extended range products. The Quinton super electric drive system is built on our third-generation industry-leading 800-volt platform, supporting various features, including a pure electric range of 430 kilometers, a combined range of 1,400 kilometers and the 5G ultra charging battery while also controlling costs, all of which will lead the way for the next-generation excited range technology.

In the coming future, expand will adopt a dual-energy approach, offering a batch of new vehicle models with pure electric and super electric powertrain options to cater to the diverse needs of global customers. I believe that this will significantly expand our total addressable market, bringing multiple opportunities for sales growth and accelerating the mass adoption of AI defined vehicles worldwide.

[Foreign Language]

In terms of operations, the T7 Plus will also mark a brand-new starting point, but the overall improvement in vehicle gross margins for XPeng's next-generation models. New platform-based technologies we have implemented in the P7 plus will also be applied to new models in major facelift over the next 2 years of 2025 and 2026. We anticipate that the gross margin of our next-generation models will reach double digits, significantly increasing our sales volume to a new level during our strong product cycles and helping us move steadily towards achieving scale profitability.

[Foreign Language]

XPeng curing AI smart driving systems balance our robust full set of development capabilities. It indicates cloud-based and in-vehicle software and hardware, including chips, it set a new gold standard for next-generation full set development and highlights our exceptionally efficient R&D iteration process.

Many of our peers are still using a previous generation of architecture and technological routes. I believe that enhancing the capabilities of smart driving relies heavily on cloud technologies. Our 12 base large model has 80x more parameters than in-vehicle model, making it the most advanced technology currently available in China's ADAS market.

In the coming years, the synergy between our in-vehicle data, cloud-based computing power and both cloud and in-vehicle large models and our globalization and carbon manufacturing will grow exponentially, marking and making significant leads forward in our large models performance per the scaling law.

[Foreign Language]

We plan to realize door-to-door full scenario ADAS on [indiscernible] XOS 5.5 by the end of this year. This uninterrupted and ultra-smooth driving experience will elevate us from being on par with the first year to truly leading the pack. We actually were able to deliver similar experience 3 years ago already, but it was a combination of multiple solutions, whereas this 5.5 [indiscernible] is one-stop solution.

Next, we plan to achieve a L3 like intelligent driving experience by the fourth quarter of 2025, targeting less than 1 takeover per 100 kilometers. The more advanced ultra version of the vehicle, we are developing now will significantly enhance the computing power on board and incorporates a fully redundant design for core components.

This would enable us to max produce robotaxi at a low cost while ensuring sufficient safety. I firmly believe that the substantial improvement in autonomous driving capabilities will make AI a core differentiator among leading automating companies and a key factor in capturing user mind share. [indiscernible] discover that AI is not only applied to autonomous driving, but we'll also expand and integrate into various aspects, including in-car AI systems, AI cabin, AR Hub, Smart Chasse, smart audio systems and AI battery adaptors. In the medium to long term, the gap between AI leaders and laggers on product technology, brand image and profit models will continue to widen.

[Foreign Language]

Now let's talk about globalization. We're accelerating our global presence, leading the way for Chinese smart EV brands in their overseas ventures. Our organizational management, product planning, autonomous driving technology, smart profit design, supply chain management and manufacturing and production now all strategically aligned for global deployment.

By collaborating with high-quality overseas dealers, we have extended our reach to more than 30 countries with over 110 sell stores as of the third quarter. And we have experience strong initial cells in multiple regions. Currently XPeng ranks first in export sales of Chinese premium BEVs and our G9 ranks first in the mid-to-large sized battery electric SUV in Northern Europe.

In the third quarter, our overall overseas sales increased by 70% sequentially, accounting for 15% of our total sales volume. Looking ahead to 2025, we plan to further expand our international sales network to more than 300 stores, expanding to over 90% of the NEV market outside of North America.

Our goal is to maintain robust growth in overseas sales over the next 2 years, aiming to secure the leading position in mid-to-high end NEV export sales among Chinese automakers. The rapid expansion of our international business will further boost our profitability.

[Foreign Language]

Upto 2 years of headwinds, we're about to enter a brand-new positive cycle. In the fourth quarter of 2025, we expect to experience tailwinds driven by AI transformation and the super electric system, which will accelerate our growth and lead us toward profitability.

We anticipate our total delivery volume for the fourth quarter of 2024 will range from 87,000 to 91,000 units. This represents a quarter-over-quarter increase of 87% to 95.6% and a year-over-year increase of 44.6% to 51.3%. Additionally, we project our total revenue for the fourth quarter to fall between RMB 15.3 billion and RMB 16.2 billion, reflecting a quarter-over-quarter rise of 51.5% to 60.4% and a year-over-year increase of 17.2% to 24.1%.

Moreover, we expect our cash flow in the fourth quarter to improve significantly, resulting in positive free cash flow for the second half of the year. By year-end, we anticipate our cash on hand will exceed RMB 40 billion.

With healthier gross profit and cash flow, we'll have the capacity to invest deeply in research and development for the future, allowing us to consistently and confidently provide our customers in China and abroad with market-leading AI defined vehicles.

[Foreign Language]

Thank you, everyone. With that, I'll turn the call over to our VP of Finance, James to discuss our financial performance for the third quarter of 2024.

[Jiaming Wu, executive]

Thank you, [indiscernible] Now let me provide a brief overview of our financial results for the third quarter of 2024. I'll reference RMB only in my discussion today, unless otherwise stated.

Our total revenues were RMB 10.1 billion for the third quarter of 2024, an increase of 18.4% year-over-year and an increase of 24.5% quarter-over-quarter. Revenues from vehicle sales were $8.8 billion for the third quarter of 2024, representing an increase of 12.1% year-over-year and an increase of 29% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly attributable to higher deliveries.

Revenues from services and others were $1.31 billion for the third quarter of 2024, representing an increase of 90.7% year-over-year and an increase of 1.1% quarter-over-quarter. The year-over-year increase was mainly attributable to the increased revenue from the technical R&D services related to the platform and software strategic technical collaboration. As well as electrical electric architecture, also known as EEA technical collaboration with the Volkswagen Group. The quarter-over-quarter increase was mainly attributable to the revenue from technical R&D services related to the EEA technical collaboration with the Volkswagen Group, partially offset by the reduction in parts and accessories sales.

Gross margin was 15.3% for the third quarter of 2024 compared with negative 2.7% for the same period of 2023 and 14% for the second quarter of 2024.

Vehicle margin was 8.6% for the third quarter of 2024 compared with negative 6.1% for the same period of 2023 and 6.4% for the second quarter of 2024. The year-over-year increase was primarily attributable to the cost reduction and the improvement in product mix. The quarter-over-quarter increase was mainly attributable to the cost reduction.

R&D expenses were $1.63 billion for the third quarter of 2024, representing an increase of 25.1% year-over-year and an increase of 11.3% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly due to higher expenses related to the development of new vehicle models as the company expanded its product portfolio to support future growth.

SG&A expenses were RMB 1.63 billion for the third quarter of 2024, representing a decrease of 3.5% year-over-year and an increase of 3.8% quarter-over-quarter. The year-over-year decrease was primarily due to lower employee compensation in the third quarter of 2024, while the quarter-over-quarter increase was mainly due to higher commissions paid to the franchise stores.

As a result of the foregoing, loss from operations was RMB 1.85 billion for the third quarter of 2024 compared with RMB 3.16 billion for the same period of 2023 and RMB 1.61 billion for the second quarter of 2024. Net loss was RMB 1.81 billion for the third quarter of 2024, compared with RMB 3.89 billion for the same period of 2023 and RMB 1.28 billion for the second quarter of 2024.

As of September 30, 2024, our company had cash and cash equivalents, restricted cash, short-term investments and time deposits in total of RMB 35.75 billion. 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 2024 financial results.

This concludes our prepared remarks. We'll now open the call 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 a [indiscernible] because in the next 3 to 5 years, are you expecting a technology gap or smart driving be widening [indiscernible] ? Several leading local EV brands in China, considering making smart driving standard configuration for all mass market models. We get Tom lining to come a mid-to functioning in the future and how could XPeng consumers can feel and appreciate the difference on the chief expense cards because of that. That's my first question. Thank you.

[He Xiaopeng, executive]

[Foreign Language]

This is a very good question. Actually, we've been talking about this for the past 2 years while we are developing our end-to-end large model solution. Now what we need here for this next generation of capability is not only, first of all, the capital for R&D but also the computing power and big data as well. And in the coming 3 to 5 years, I think any companies who try to compete in this landscape will not only have the full set of developed R&D capability that combine software and hardware also on the cloud side whole vehicle, chip development and also EEA development across different car manufacturing capabilities are all essential for having that capability.

So in sum, I believe that the gap between different EV makers will actually be widened in the several years. Another point that I would like to mention is that ADAS capability is just like part of your brain, you have to not only have your mindset, what you think you can do, but you actually need to be able to deliver your claims, and that also will set the bar or the threshold for entering this competition. Another point that I would like to mention is the whole vehicle capability. How do we make sure that the whole car gets smarter in order to carry all this ADAS capability.

So I think going forward, users will actually have a better idea or awareness of how capable a company is, how good the product is, and they will have an [ intest ] experience or first-hand experience of what truly means to have a smart ADAS capability in the product.

[Foreign Language]

I also would like to add that traditionally, the model for OEMs to develop cars is to work with Tier 1 suppliers. However, in the future, when we require cars to adapt the ADAS capability from not only the brain, but you're up the [ tussle ] and your legs and the whole body. It will actually require a completely different model of development, which will also in the coming 3 to 4 years set us apart from the rest of the competition. Thank you.

[Tim Hsiao, analyst]

[Foreign Language]

My second question is about the profitability. Because over the past few quarters, we've seen [ expert ] posting consecutive margin improvement at both [ Veeco ] and to the group level. Looking to next year, how could the company further narrowed the loss and to systematically during the profit -- that's my second question.

[Gui Hongdi, executive]

Jim, it's Brian. Yes, let me address this question. First of all, I think in this quarter's financials, I think we're very encouraged to see that our non-GAAP operating margin, actually the loss has narrowed to 15.5% compared to -- in the second quarter, I think it's about 19%.

So you start to see operating leverage a narrowing of our operating losses. And I think that trend will continue as we mentioned that we're going to launch P7 plus, which we think is actually a better margin profile product. And also, overall, we actually can see the scale effect coming into play as well as additionally, we can see continued improvement on the vehicle margin front. And also on the expense side, I think we still also start to see very significant reduction opportunities. For example, for the fourth quarter, I think we are going to hold a very consistent R&D spend below RMB 2 billion in total and that will make our entire year's R&D to be probably less than RMB 6.5 billion lower than our original estimate.

So going into next year, we start to see these factors kind of compound with additional launch of more robust products. As we mentioned, we have new models as well as refreshed models to be launched. We also have models that tackling new segments, including, for example, extended range energy module. So with all that, I think we are very optimistic about our robust growth as well as continued margin improvement.

We still -- I think, hold the same view as I think, communicated to all of you starting 2 years ago, that we'll be breaking even at some point next year, probably towards the end of next year. And that is still a view I hold. I think we hope to deliver on that. And also, the improvement also will bring a healthy cash flow for the company as well next year. So for example, by the end of this year, we estimate we're going to have over RMB 4 billion on hand. And next year -- RMB 40 billion on hand, sorry, my -- and next year, I think we actually still continue to see healthy cash flow, which allows us to have very comfortable capital base to bring us to breakeven.

[Operator]

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

[Ming-Hsun Lee, analyst]

[Foreign Language]

So my first question is related to export outlook. So in 2024, how do you expect the export sales contribution to your total revenue. And currently, because some overseas markets, the charging infrastructure is not as good as in China. Therefore, do you see any potential bottleneck for EV penetration in certain countries? And in the longer term, will you see your EV product to be the major product for the overseas market.

[Gui Hongdi, executive]

Ming, it's Brian again. Yes, let me address your question on overseas market. First of all, I think we do see overseas market as a very robust growth market for us. It's still very early in the electrification process compared to the Chinese market. And also, I think given our current coverage of covering most of these markets by the end of next year, I think we are hoping to be able to tap into that growth.

As you mentioned, last year -- I mean, I would say this year, our overseas market percentage has increased to around 15% of our sales. I think the next year, we expect the contribution will be similar even though our domestic market growth is very, very significant, but we still think overseas growth will, I think, has a very similar growth profile as well. And then also in terms of the electric BEV versus extended range format. I think you're right. I think in some markets, we do recognize the lack of infrastructure could be a potential bottleneck for BEV penetration.

However, I think these markets, I think currently, the AV penetration is still very low. So there is still ample growth opportunity for BEV models themselves. So we are also very hopeful the growth of BEV exports as well as market penetration will increase as we expand into more markets. But at the same time, once we actually have extended range of products, we think in some markets particularly for the markets like, let's say, Latin America or Central Asia or Middle East, where charging facility infrastructure is lacking for efficient and fast charge and BEV products [indiscernible] the extended range product will actually be also attractive.

So we're actually very, very optimistic that both BEV as well as extended range products will be finding attractive growth opportunities in [indiscernible] global markets.

[Ming-Hsun Lee, analyst]

Yes. Thank you, Brian.

[Foreign Language]

So my second question is related to capacity. Could you advise your latest capacity and also your effective capacity in 2025. Do you have any plan to expand the new plant? Or you can just expand your current plant to meet the demand. And recently, do you also see any component shortage across your supply chain?

[Charles Zhang, executive]

This is Charles. First of all, I think as we mentioned in the earnings call that both our Guangzhou and [indiscernible] plant already turned on the second shift. I think each of the plants can support approximately 200,000 to 300,000 per annum based on the 2 shifts and also, I think as we communicated before, there are also ample reserve land and also existing the plant next to our Guangzhou and [indiscernible] manufacturing base. So we believe that we can expand our production capacity at fast lead and also with low capital intensity. And also, we already had our long-term production capacity planning until 2026. And so we believe that all these required manufacturing capacity has been well planned ahead. And also, given we have long-term planning for the -- our own manufacturing capacity, we are also working with our suppliers also to expand the suppliers' capacity because as you know that we are pushing really hard on the platform, a unified platform and also the components sharing across multi-platforms and vehicles.

So it is actually more efficient for our suppliers to expand their capacity with us.

[Operator]

Your next question comes from Bin Wang with Deutsche Bank.

[Bin Wang, analyst]

[Foreign Language]

My first question is about the gross margin of the vehicles. Actually, in the third quarter, you got 2.2 percentage points [indiscernible] expansion. Can you quantify each of the factors? How much came from the product mix [indiscernible] from production? How much comes from the high base because second quarter on cost? And secondly, okay, you actually guide for the 4 quarter, did you think the gross margin can go to double digit or not?

[Jiaming Wu, executive]

Bin, this is James. So to your question on the Q3 versus Q2 margin improvement, I'd say it's primarily driven by 2 aspects. One is we continued engineering cost reduction with regard to efforts on VAVE in combination of the battery cost reduction as we see the battery cost is coming down for the entire industry.

You didn't mention the EOP impact. We did have some EOP impact in the second quarter, which is less in the third quarter, which is also driving an improvement of the margin. So that's for the quarter-over-quarter improvement. As we look into Q4, we mentioned earlier, the P7 plus delivery will start in Q4. This is a product that will embed our latest platform with the cost reduction targets achieved and representing a double-digit gross margin as we communicated earlier, this is going to help us further improve our vehicle margin from Q3 into Q4.

So as a trend, we do see margin continue to improve, combined with larger scale, as Xiaopeng mentioned earlier, we expect our Q4 delivery to be exceeding prior quarters in the history, therefore, helping us sustain our manufacturing costs as well and improve overall margin.

[Bin Wang, analyst]

Can we have a double-digit gross margin in the number 4 quarter. Possible?

[Jiaming Wu, executive]

The overall margin will improve. As you can see, we have a overall margin in Q3 as reported, and you can expect that to improve in the fourth quarter.

[Bin Wang, analyst]

[Foreign Language]

The question is that recently media reported Taiwan foundry company may not be able to doing the OEM for China chip suppliers actually for 7-nanometer. Any potential impact for our upcoming chips?

[Charles Zhang, executive]

This is Charles. I think that the mass production of our touring [indiscernible] Still progressed well, and we haven't seen any impact on our development of the touring SoC.

[Operator]

Your next question comes from Tina Hou with Goldman Sachs.

[Tina Hou, analyst]

[Foreign Language]

So my first question is regarding long-term cost reduction of EP. So if we look at it from an angle of the powertrain, the ADAS bond including both smart cabin as well as autonomous driving as well as for maybe potentially the car body and interior exterior how much potential further cost reduction do you think there is in the longer term?

[He Xiaopeng, executive]

[Foreign Language]

Thank you for this question. Actually, we've been -- we've never stopped thinking about that and our understanding and our possible solution to it has been changing over the years.

I remember about 1.5 years ago, during the earnings call, I actually made a promise of achieving significant cost reduction. At that time, I actually someone my courage to make that promise, and I'm very happy and proud that able to actually deliver what we promised at that time. And in the coming 3 to 4 years, obviously, there are a lot of room for improvement when it comes to cost reduction. A lot of things are very obvious, for example, supply chain, optimization, economy of scale and also technology-driven kind of cost reduction. But specifically, we can do a lot more things as well. For example, on the 1 hand, we can do something that we call super integration, meaning that we can actually combine different capabilities of different parts together and make something that is significantly different from what we traditionally have or we can also learn and adopt the Apple model, which is to empower the Tier 1 suppliers or help them together develop the capabilities of Tier 2, Tier 3 suppliers advantages, leveraging their already existing logistic capability and a lot of other details that can help us to improve efficiency and cut costs.

In addition to that, we also can look at, for example, saving and cost control and in the electronic electric materials, et cetera. I mean, these are just some examples. The tip of iceberg here really. And as a company that's constantly driven by technology innovation, we also can look at the upgrade of our manufacturing process, our craftmanship in the coming 3 to 4 years. We're not going to stop until we achieve the optimal level of cost cutting.

Now in the future, AI Tech and also in the future earnings call, you can expect to hear our reporting of every year's cost control outcome. I don't think it's not just going to -- I don't think that it will come from only the scale or supply chain control optimization, but more likely being driven by technological innovation.

[Tina Hou, analyst]

[Foreign Language]

So second question is regarding our 2025 new model pipeline and also volume outlook. Could we get more details in terms of the 4 new models, which quarter will they come out? And then what kind of price range, what kind of body types and also our overall volume outlook for 2025. Thank you.

[Gui Hongdi, executive]

It's Brian. I think first of all, we are not providing obviously, annual guidance as we've done in the past. So I think right now, all I can say is that next year, we actually are very confident that we can continue the momentum, we're seeing in the second half of this year and also looking at the growth profile, I think it will be more moderate growth compared to this year. But still, I think it will be second half but slightly heavier than the first half.

In terms of the model, I think we gave you the total number. We're not at the moment, I think, ready to share specific models and exactly when they will be launched. But we mentioned that there will be 4 new models. One of those will be extended range model. And also in addition to those 4 models, we will have few refresh of current models. So -- and that will be spread over the next 4 quarters. So you'll expect to see a new model and refreshment potentially every quarter.

[Tina Hou, analyst]

[Foreign Language]

So for the 4 new models, our expectation should not be lower versus MONA as well as P7 Plus.

[Gui Hongdi, executive]

Well, I think we are very, very confident that the models we launched will be leading their respective categories. Obviously, different segments and different categories will have different volume expectations. But we do feel like our models will be very competitive in their respective segments.

[Operator]

Your next question comes from Nick Lai with JPMorgan.

[Y.C. Lai, analyst]

[Foreign Language]

Yes, at the moment, third quarter [indiscernible] overseas market accounted for about 50% of our sales volume but we understand from other competitors that for those who have overseas exposure, the possibility of profit margin is generally about 1.5 to 2x higher than the same car sold in China. Is it fair to say the same patent will apply to [indiscernible] and likewise, how do we execute all these customers that Level 2, Level 3 functionality is something very nice and they need to have in the future.

[Gui Hongdi, executive]

Nick, it's Brian. I think let me address your first question in terms of our overseas markets profitability contribution to us. I think there are a couple of areas to think about. One is that, yes, in general, I think the price of selling our models overseas are higher than domestic prices.

There's additional costs, obviously, and potential tariff and duties that we have to pay, but the margin in general is slightly higher than the domestic gross margin. But also to be mindful is that the margins that we achieved in a lot of these overseas markets actually our margins wholesale margins because we are working with importers or distributors in those countries, where we are now responsible for retailing and distribution of those products.

So a lot of those margins actually it's essentially direct contribution to us rather than just the gross margin. So that's -- there's a distinction -- but I think going into next year, I think clearly, we are in a need to deal with changes in tariffs, change in potential new markets, have different regimes. So we need to obviously have a more flexible approach to that structure. But this year, I think the contribution has been pretty positive. And I think [indiscernible] address your second question.

[He Xiaopeng, executive]

[Foreign Language]

Yes, indeed, different countries are different. They have different users, different presences, different regulations. By comparison, for example, Europe versus China, typically, China as a market has a younger group of consumers that are really attracted by NEVs, whereas in Europe, the majority of the users are in middle age and above. But also, we see a lot of similarities between China and other parts of the world outside of EU as well. But here, for this discussion, I'm going to focus on the differences between Europe and China.

Now -- right now, what when it comes to the capabilities being delivered to our Europe's customers, I think they really love smart cabin, fast and ultra-fast efficient charging, our high-quality services, after-sales services and also the late parking, auto parking, LCC, ACC, these are the sort of most daily commonly accepted and prefer ADAS features that are being loved by European customers. And when it comes to other parts of ADAS features because of the limitation or because of the regulatory environment in Europe, typically, the implementation of those features in Europe is about 12 months behind what we can see in China right now. But as a company that is being driven by technology, with heavy investment and very strong capabilities in software and hardware, we are very, very confident in adopting the same set of solutions, but using different combinations for different markets in order to build our global presence as a premium brand going forward. And right now, as have proven by market feedback that we are actually able to do that.

So in the future, when it comes to lending or implementing our solutions in different countries, we're going to focus more on not only product and service quality, but also the operations across different regions to customized for local consumers.

[Y.C. Lai, analyst]

[Foreign Language]

My second question is really about the trading policy from a top-down standpoint, what's our view on the continuity of the policy into '25 and likewise, our product sales volume has been very strong, especially for MONA3 and PC parts. If we place orders today and we only get a cut some time in first quarter next year and what's our marketing strategy for the customer to also get a car only in first quarter.

[Charles Zhang, executive]

Nick, this is Charles. I think we believe that our newly launched product like ML3 and also the P7 plus are very competitive in terms of the product capabilities -- and I think that the customer chose the product because I think there is no alternative product or less or very limited options available to them in the price range.

So we believe that we will continue to see the strong momentum for the orders for the ML3 and also P7 Plus. I think that more importantly, I think that we have very significant huge significant order backlog for both ML3 and the P7 plus. I think this is also -- I think this is also very different from a lot of our peers, we will be carrying probably tens of thousands of order backlog for both ML3 and the P7 plus into the Q1. So we believe that, that will be a foundation of our growth in 2025.

[Y.C. Lai, analyst]

[Foreign Language]

My question is [indiscernible] Charles. My question is for the customers who buy P7 plus MONA ML3. If it only get a car in first quarter of 2025, will [indiscernible] reimburse and provide additional incentive.

[Alex Xie, executive]

This is Alex. So first of all, we do not have any specific insights about the government subsidies. We expect the auto sector will still be supported by any of the potential stimulus policy is a priority of any of the economic policy. And regarding the customer expectations, I think they have quite reasonable expectations for the delivery time as you can see the delivery time for the P7 plus is 8 to 11 weeks.

So I don't think our customers they are expecting to see sort of delivery before December this year for most of the customers who put their orders right now, they have reasonable expectations. We don't think they will change their decision because of the subsidies they chose expand cars because of the unique value proposition we bring to these customers in these segments, P7 plus, MONA-M03, they exceeded the competitiveness of all our previous models. So we don't really expect to see a material impact from any potential continuation or discontinuation of subsidies.

We just focus on our product competitiveness as well as strengthening our channels.

[Operator]

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

[Unknown Executive]

Thank you once again for joining us today. If you have further questions, please feel free to contact XPeng'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.