NIO Inc. (NIO) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for standing by for NIO Inc.'s Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to your host, Ms. Eve Tang from Capital Markets and Investor Relations. Please go ahead, Eve.

Good morning, and good evening, everyone. Welcome to NIO's Third Quarter 2021 Earnings Conference Call. The company's financial and operating results were published in the press release earlier today and are posted at the company's IR website. On today's call, we have Mr. William Li, Founder, Chairman of the Board and Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; and Mr. Stanley Qu, Senior Vice President of Finance. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that NIO's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to NIO's press release which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Li. William, please go ahead.

[Interpreted] Hello, everyone. Thank you for joining NIO's Third Quarter 2021 Earnings Call. In the third quarter of 2021, we delivered 24,439 ES8, ES6 and EC6, a new quarterly record representing a solid growth of 100.2% year-over-year. Based on the overall production planning, from September 28 to October 15, to prepare for further capacity expansion and new product introductions including ET7, we implemented upgrades and the restructuring of the manufacturing lines at the Hefei JAC-NIO Advanced Manufacturing Center. Affected by the upgrades and the restructuring, we delivered 3,667 vehicles in October. The plant has resumed normal production since late October. According to the data published by China Passenger Car Association, the penetration rate of battery electric vehicles among passenger vehicles reached 17.5% in September. As the automotive industry is accelerating its transformation towards smartization and electrification, more and more users are now choosing smart EVs over ICEs. The order momentum continues to be strong, and our new orders have reached a new all-time high in October. Currently, our delivery volume is mainly constrained by supply chain volatilities. We expected the total delivery in the fourth quarter of 2021 to be between 23,500 to 25,500 vehicles. In the third quarter, the vehicle gross margins stood at 18.0% while the overall gross margin reached 20.3%, benefited from the sales of a regulatory credit. Next, I would like to share with you some recent operational highlights of the company. In September, the first batch of ET7 tooling trial built rolled off the production line, representing that the try out and the commissioning of the overall manufacturing process has been completed. The teams are making final preparations for the mass production of ET7. During this appropriation process, we have also made various product optimizations on ET7. For example, the drag coefficient of ET7 was improved from 0.23 to 0.208. We are very confident about the final product competitiveness and the market performance of the ET7. The software and hardware development of NAD are also pressing ahead on schedule. The development of the other 2 new products on NIO Technology Platform 2.0 are also moving forward smoothly, and the delivery to users is expected to start in the second half of next year. We will share more product details at NIO Day 2021. In September, we launched the 75-kilowatt hour standard range battery pack with LFP NCM hybrid cells, which has further enhanced the competitiveness of NIO's battery system, empowered by the industry first LFP NCM cell layout and advanced software and hardware systems of a thermal management and SoC estimation. NIO's battery systems team worked closely with our partner in overcoming the disadvantages of the LFP cells in aspect of low-temperature performance and SoC estimation. On top of that, the 75-kilowatt hour hybrid battery pack has also achieved higher energy density and lower -- a longer drive range and lower cost compared with the 70-kilowatt hour NCM battery pack. In terms of production capacity, besides the upgrades and restructuring of the manufacturing lines in JAC-NIO Advanced Manufacturing Center, the second manufacturing site at NeoPark in Hefei is also under construction. After the kickoff on April 29, we completed the main structure construction on August 26, and we'll start the equipment installation at end of this month. In the third quarter of 2022, we will begin production officially. On the supply side, due to global COVID-19 pandemic, extreme weather events and other factors, the overall supply chain remained challenging. Our supply chain team, R&D team and the partners have adopted a series of measures to support the record high quarterly delivery in the third quarter and we'll continue to secure the supply for the delivery in the fourth quarter and upcoming new product production. With regards to the sales and service network, we now have 32 NIO houses and 285 NIO spaces in 132 cities in China. We will continue to expand and optimize our NIO house and NIO space coverage to effectively penetrate into more Tier 2 and Tier 3 cities. As of now, we have 43 new service centers and 181 authorized service centers in 141 cities. We will build more service centers to ensure high-quality services to the rapidly growing user base. Up until now, we have deployed 608 battery swap stations in 153 cities in China and completed over 4.74 million swaps. In addition, we have built over 460 power charger stations and 3,155 destination chargers across China. As we speed up the deployment of the battery -- of the swapping and charging infrastructure, the superior experience and value brought forward by battery swapping technology and Battery as a Service have made us the go-to choice for more and more users. Regarding the global market, we opened our NIO house in Norway on September 30, which has attracted wide attention from both the public and the media. On the same day, we started to deliver ES8 and provide services to our users in Norway. Besides achieving Euro Uncapped 5-star safety rating, the ES8 has also received rave reviews on its performance and the product experience from the local users and the media. The order intake has exceeded our expectations. More importantly, among all the orders, 92% of the users have chosen [ BaaS ]. NIO's products, services and innovative business model not only have been well received in China, but also present unique value and strength in the global market. In 2022, we will further step up our efforts in entering more global markets. Users have always been the foundation of NIO, a diversified user community brings greater vitality to NIO and the drive to NIO to become better. In October, NIO and NIO users trust joined hands with Sanjiangyuan Ecology Protection Foundation to build a green ecosystem in the Sanjiangyuan National Park. With much anticipation, we have announced that NIO Day 2021 will be held in Suzhou on December 18 this year. NIO user advisors and the NIO Day organizing committee are working closely on the final preparation. Please stay tuned for the coming NIO Day organized together by NIO and our users. In 2021, NIO has doubled down on investment in product development, capacity expansion, charging and swapping network as well as the sales and service network. In 2022, we will continue to make a decisive investment to further enhance our long-term competitiveness and provide better products and services to users. As always, thank you for your support. With that, I will now turn the call over to Steven to provide the financial details for the quarter. Steven, please go ahead.

Thank you, William. I will now go over our key financial results for the third quarter of 2021. And to be mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in the third quarter were RMB 9.8 billion or USD 1.52 billion, representing an increase of 116.6% year-over-year, an increase of 16.1% quarter-over-quarter. Our total revenues are made of 2 parts: vehicle sales and other sales. Vehicle sales in the third quarter were RMB 8.64 billion or USD 1.34 billion, accounting for 88% of total revenues in this quarter. It represented an increase of 102.4% year-over-year, an increase of 9.2% quarter-over-quarter. The increase in vehicle sales year-over-year and quarter-over-quarter was mainly attributed to the increase of vehicle delivery volume. Other sales in third quarter were RMB 1.1 billion or USD 181.4 million, representing an increase of 350.8% year-over-year, an increase of [ 117.9% ] quarter-over-quarter. The increase in other sales year-over-year and quarter-over-quarter was mainly due to the sales of automotive regulatory credits and batteries upgrade service as well as other revenues, which increased in line with incremental vehicle sales in the third quarter of 2021. Cost of sales in the third quarter was RMB 7.81 billion or USD 1.21 billion, representing an increase of 98.3% year-over-year and an increase of 13.6% quarter-over-quarter. The increase in cost of sales was in line with revenue growth, which was mainly driven by the increase of vehicle delivery volume in the third quarter of 2021. Gross profit in the third quarter was RMB 1.99 billion or USD 0.31 billion, representing an increase of 240.3% year-over-year, an increase of 26.6% quarter-over-quarter. Gross margin in the third quarter was 20.3% compared with 12.9% in same quarter of 2020 and 18.6% in the second quarter of 2021. The increase of gross margin year-over-year was mainly driven by the increase of vehicle margin and the sales of automotive regulatory credits. The increase of gross margin quarter-over-quarter was mainly due to the sales of automotive regulatory credits. More specifically, vehicle margins third quarter was 18.0% compared with 14.5% in the same quarter of 2020 and 20.3% in the second quarter of 2021. The increase of vehicle margin year-over-year was mainly driven by the higher average selling price as well as lower material costs. The decrease of vehicle margin quarter-over-quarter was mainly due to the increased financing and subsidized rates for vehicle purchases which resulted in a deduction of vehicle revenue and increase in tooling depreciation costs. R&D expenses in the third quarter were RMB 1.19 billion or USD 185.2 million, representing an increase of 101.9% year-over-year and increase of 35% in quarter-over-quarter. The increase of R&D expenses year-over-year and quarter-over-quarter was mainly attributed to increased personnel costs in research and development functions as well as incremental design and development costs for new products and technologies. SG&A expenses in the third quarter were RMB 1.82 billion or USD 0.28 billion, representing an increase of 94.1% year-over-year and increase of 21.8% quarter-over-quarter. The increase in SG&A expenses year-over-year and quarter-over-quarter was primarily due to the increase of personnel costs in sales and service functions and costs related to sales and service network expansion. Loss from operations in third quarter was RMB 0.99 billion or USD 153.9 million, representing an increase of 4.9% year-over-year and increase of 29.9% quarter-over-quarter. Share-based compensation expenses in the third quarter were RMB 265.6 million or USD 41.2 million, representing an increase of 439.8% year-over-year, an increase of 5.6% quarter-over-quarter. The increase in share-based compensation expenses year-over-year was primarily attributed to additional options and restricted shares granted. Net loss in the third quarter was RMB [ 835.3 ] million or USD 129.6 million, representing a decrease of 20.2% year-over-year and increase of 42.3% quarter-over-quarter. Net loss attributable to NIO's ordinary shareholders in third quarter was RMB 2.86 million or USD 443.7 million, representing an increase of 140.7% year-over-year and increase of 333.6% quarter-over-quarter. In the third quarter of 2021, NIO repurchased 1.418% equity interest in NIO China from a minority strategic investor for a total consideration of RMB 2.5 billion and recorded an amount of RMB 2.02 billion in accretion on redeemable non-controlling interest to redemption value. Basic and diluted net loss per ADS in the third quarter were both RMB 1.82 or $0.28 per ADS. Excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB 0.36 or $0.06 per ADS. Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB 47 billion or USD 7.3 billion as of September 30, 2021. And now for our business outlook. As William mentioned, for the fourth quarter of 2021, the company expect deliveries to be between 23,500 and 25,500 vehicles, representing an increase of approximately 35.4% to 46.9% from the same quarter of 2020, and a decrease of approximately 3.8% to an increase of approximately 4.3% from third quarter of 2021. The company also expects the total revenues on the fourth quarter of 2021 to be between RMB 9.38 billion and RMB 10.11 billion, representing increase of approximately 41.2% to 52.2% from the same quarter of 2020 and a decrease of approximately 4.4% to an increase of approximately 3.1% from the third quarter of 2021. This business outlook reflects the company's current and preliminary view on the business situation and market condition, which is subject to change. Now this concludes our prepared remarks, I will now turn the call over to the operator to facilitate our Q&A session.

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

Will and Steven. I'm Tim. It's great to see NIO managed to navigate through the component crunch and the production hiccup in first half. Just 2 quick questions from my side. The first one, we've seen restructuring and upgrade of the production lines cost around 2 rounds of disruption to your delivery and production this year. Just wanted to have a confirm that if we completed all the necessary restructuring for the 3 new models next year, or should we expect any similar disruption sometime next year? My second question is about the details of the other sales. Could you share more information about NIO's third quarter audit sales because it has been surging quite a lot? I think more significant revenue increase was attributable to the sales of NEV credit and the battery upgrade services. Could we have the further breakdowns regarding the contribution from both items and what could be the scales of the contribution into fourth quarter? Because if you look at this current fourth quarter revenue guidance, it seems that it just mainly reflected the contribution from the vehicle sales. So should we expect the contribution from other sales to rise further? Those are my 2 questions.

[Interpreted] Tim, thank you for your question. I will answer the first one and then Stanley is going to answer the second one. In the previous remarks, we have also talked about the progress of our capacity expansion for the 2 plants. For the first plant, just like you mentioned, starting from the end of September to the middle of October, we have some restructuring and upgrades of the manufacturing lines to further expand the production capacity and prepare for the new product introduction. Following this upgrade, we probably will do some minor restructurings and the modifications of the production lines, but we believe the following restructuring is not going to have a very significant impact on the normal production of the vehicles. Secondly, regarding the new products, some of the new products will be manufactured in the second plant. Then this means that for the second plant, we will need some time to ramp up the production for the new products, but this is not going to affect the manufacturing of the existing products.

Tim. Regarding the second question, among the other revenue, RMB 570 million was contributed by the NEV credit sales. And after deduction of this NEV credit sales, our total gross margin for other revenue decreased from minus 5.6% to 12.6%. That's because the -- it's driven by the expansion of our sales and service network in Q3. And as mentioned by William in his explanation, the construction of our sales and service network infrastructure move earlier and faster than our sales increase, especially in this year. So we are expecting the total revenue of other service will increase by the gross profit margin for this part will decrease a little bit in Q4. Yes.

Could you -- sorry, just a quick follow-up. So could you highlight some potential contribution from the sales of credit into fourth quarter?

Yes, almost majority of the NEV credit sales was realized in Q3. So in Q4, we don't expect significant revenue from this part. Yes.

[Interpreted] Just like Stanley explained, this year is a little bit different from last year, we recognized the sales of the regulatory credits much earlier compared with last year.

Your next question comes from Nick Lai of JPMorgan.

It's Nick from JPMorgan. My 2 simple question is number one, related to margin, and the second question is related to ET7, the new exciting model. First of all, on the margin front, yes, the vehicle margin in third quarter was 18%, slightly down from 20% in 2Q. Yes, I wonder how should we think about the margin into 4Q or first half next year? Taking into account of 2 factors. The first factor is the pricing dynamic or competition from the peers. And the second is raw material prices, especially on the battery front. That's the first question. And I mean I think you answered part of my question earlier on the credit sales. So second question on ET7 is certainly a very exciting product. When should we expect the car to hit the showroom in the near term and the medium to longer term? After the production is ramped up, how should we think about the volume and the possibility of ET7 relative to our current high-end product, ES8? ES8's current monthly run rate sales volume is roughly about 1,500, so how should we think about the profit margin and the volume for ET7? That's 2 simple questions.

This is Stanley. About your first question regarding the gross profit margin. In our 75-kilowatt hours battery will start to be delivered from November, and gross profit margin will be improved a little bit compared with 70-kilowatt hour battery. But prices of our key materials like aluminum, copper and also chips increase -- are increasing, and there will be pressures for our cost controlling. But we are confident to continuously improve our gross profit margin, with combined efforts either from the product design or supply chain optimization. So for Q4, we're expecting the gross profit margin will keep stable. And for next year, our target is to achieve 20% gross profit margin for recourse. And along with our launch of NP2 products, from a long run perspective, we try to achieve a higher profit margin with about 25%, yes, recourse.

[Interpreted] As Stanley mentioned, yes. As Stanley mentioned, basically for the NP2 product, we expect that with the economy of scales and the volume ramp-up as well as the optimizations in every aspect, we should be able to average 25% vehicle gross margin in the long run. At the beginning, of course, we will need some time to ramp up the production of the new products based on the new technology platform 2.0. According to our preliminary estimation internally, we believe the vehicle gross margin of the new product should be quite good. And for the ET7 delivery, we are going to start the delivery of ET7 in the first quarter of next year, so it means that we will have the cars in our NIO houses and the NIO spaces around the spring festival time. Then afterwards, we will start the deliveries to the users because we have used many advanced chips and sensors on the ET7, so this has put a lot of pressure on the mass production of ET7, but we believe everything is on schedule.

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

William, Steven and Stanley. So my question is regarding your supply chain. So right now, actually, we are hearing some of the auto companies expect the chip shortage situation will not be fully resolved by the mid of next year. So right now, I want to hear your latest view regarding your chip supply situation and also the large-sized battery pack supply situation? And also, right now for your consumers, if they place the orders to you, I think the waiting time is more than 2 months already. So how will you retain those consumers? And also next year, we expect the EV purchase subsidy to be cut further. So in this case, if the consumer place an order before the year-end, but then they need to -- we need to deliver the car after I think next year. So we continue to give them a similar subsidy amount, so we absorbed the subsidy cut? This is my question.

[Interpreted] Thank you, Ming, for your question. Regarding the chip shortage situation, we believe right now is much better than the situation in Q3, but the challenge is still quite big because it's very difficult for us to forecast what is going to happen for the chip supply. I think everyone knows about the [ SD Micro's ] situation in Malaysia and the situation basically is improving right now. The good thing is our teams have learned to adapt to the situation and face the challenges head on, and we have always been able to find a solution to all those challenges. On the other hand, over volume compared to the mature OEMs is still relatively small, so the challenges for us is smaller compared to the mature OEMs. I would like to specifically mention that because the many domain controllers in our vehicles are actually developed by ourselves in-house. So if there is a shortage of certain chips in the domain controllers, our teams have the capability to quickly find the alternative and do the rapid validation and faster production of those vehicles and the chips. So because of these capabilities, we have already resolved some chip shortage situations happened to our vehicles. For the 75-kilowatt hour battery pack, we announced this in September, but we will gradually start the delivery of the 75-kilowatt hour battery pack in late November. We also need some time to ramp up the production of the new battery pack, and we believe that the production is going to reach a reasonable level to the first quarter of next year. The battery is actually a very big constraint for us. CATL is our partner on the battery side. They have invested a lot to help us and support our vehicle production, but we believe the battery is still the main constraint on the overall production and the supply capacity. Yes. As I mentioned, if you place the order right now, you will need to wait for some time to get the cars delivered. But recently, we have also announced some policies regarding the subsidy reduction for the next year to keep our customers and also keep our customers during this long waiting time. For example, we will provide the new credit or new point to the users during this waiting time and this kind of incentives to have helped us in the past. For example, starting from 2018, we have already got those policies in place, and we believe that this is not going to affect the users regarding the waiting time. Regarding the EV subsidy, we believe this is not going to have a significant impact on us because our average selling price is actually quite high regarding our product. So even considering the subsidy is not going to be a very big amount comparing to the selling price of the vehicles.

Your next question comes from Bin Wang of Credit Suisse.

I've got 2 ones, and the first one is about the application IPO because one of the key concerns that NIO seems to be the only ones still just in the U.S. So -- and also [indiscernible] products is because of the NIO user trust. Can you explain a little bit why NIO user trust could be one of the reason what made you come back to Hong Kong IPO? That is my first question. And second thing is about the gross margin. Actually, you mentioned one of the reasons because auto finance led to the margin decline. However, if you've seen the demand has been very good instead of supply. I'm just curious why we're in a very tight supply? We still increased the auto finance due to the falling margin. [indiscernible] reduce the auto finance side. And also, I talked -- some of my friends told me actually may remove or reduce the auto finance in the #4 quarter. Can I confirm this is the case? If it is the case, can I assume the gross margin will have increase in the #4 quarter compared to #3 because you don't provide auto brands anymore. And the average ASP also will increase because although [indiscernible] seems to be one of the reason for the ASP decline in the #3 quarter compared to second quarter.

Bin, this is Steven. Thank you for your question. I would like -- with regard to your first question, I have 2 comments. First, we are open minded. We closely monitor the market and we'll make the right choice in the best interest of our shareholders. Second, we actually explore the possibilities to get listed in Hong Kong market, and we are in the -- doing what necessary to evaluate and communicate.

Yes. [Interpreted] Thank you, Bin, for your question. Yes. So we will make the decisions to best serve the interest of our investors and we will be open-minded to different choices. Regarding the impact of the auto financing on the margin, if you get to know about our business operations, you will know that we will need to take some measures to balance the supply and the product configurations as well as the user demand. For example, with the 75-kilowatt hour battery pack, we announced this battery pack in September. Many users would like to wait for this 75 per kilowatt of a battery pack, but just like I mentioned, we will start the delivery of this battery pack in late November. And even at that time, we will still need some time to ramp up the production of the battery pack to a reasonable level. That is why we will need to take some measures to balance this demand among the users and the product configuration as well as the battery supply, and we encourage the users to choose the 100-kilowatt hour battery pack in that case. We believe the right approach for us is not to reduce the price of our product to offer discounts to our users on the vehicle price. So that is why we would like to take those measures to balance the demand and the supply, but this is not going to be the long-term measures we take. This is only a short-term measure for us to balance the supply and the demand situation. Once the supply get to a reasonable level in the long run, then we believe the overall gross margin and the vehicle gross margin is going to improve.

Your next question comes from Edison Yu of Deutsche Bank.

First question is on the ET7 ADS capabilities. Could you maybe discuss what kind of features we could expect at launch? And if you can't reveal that right now, would you expect to do any sort of demonstrations on the road in the coming months, similar to what other competitors have done? And then second question, more longer term. Last year, at NIO Day, you kind of teased a solid-state battery or hybrid solid-state battery coming to the vehicles, I believe, at the end of next year. Is there any update on this? Is this still on track? Any details you could provide there? That would be great.

[Interpreted] Actually, I believe a lot of people are working on the demos. So we don't actually want the teams to focus their energy on the demo. We would like to have the team to be fully dedicated to the mass production of the technology and of our new products like the ET7. Regarding the ET7 NAD, we will need some time to gradually release those advanced features to the users. And we believe for all those features, of course, it will be based on our in-house full stack technology. Previously, I've also explained that the NAD features will be released to the users based on the subscription like the AD as a Service. So this innovative business model has offered us some flexibilities in terms of how should we provide and when should we provide all those services and features to the users. We will need to strike a balance between different factors, including the regulations, the safety and reliability. Then after we strike the perfect balance or find a sweet spot, then we can start to provide those services to the users. I believe right now, there are hundreds of companies working on those kind of demos, so we don't want to waste our energy on that. Regarding the 150-kilowatt hour battery pack, we are now working together with our partners and everything is basically on track. Previously, we mentioned that we will start the delivery of this battery pack in the fourth quarter of next year, and we believe we should be able to meet this schedule.

Your next question comes from Jeff Chung of Citi.

William, Steven. I've got 3 questions. Number one, what kind of annualized total volume production from the NP2 platform should lead to the 25% GP margin according to your guidance? Second question is, apart from the 3 brand-new products launch in 2022, how likely are we going to launch the face lift version of the existing products, the ES8, ES6 and EC6? So how likely we are going to launch 6 new products next year instead of 3 brand-new products? And finally is the NEV credit. So could you guide us how many points we sold in the third quarter? So -- and from what we can estimate the ASP of the NEV credit compared with previous quarters.

Jeff, with regard to your first question about GP margin, our 25 GP margin for NP2 platform is based on the annual production volume of 300,000 units per year.

[Interpreted] Just like Steven mentioned that -- our plan is if we can achieve the annual production of 300,000 units, we should be able to reach 25% vehicle gross margin on the NIO Technology Platform 2.0. We are very confident to achieve these targets. For the existing products, of course, we have a plan to upgrade our product to the NIO Technology Platform 2.0. And we believe that this is very important for the company, and that we will need to focus on -- manage the schedule for the product upgrade in specific details. Internally, we have already kicked off the development work on this regard, and we have started how should we upgrade the different products to the NIO Technology Platform 2.0.

Yes. About the NEV credits, totally around 200,000 points were sold in Q3. And what I want to remind is the price volatility for NEV credit is also high, along with the China's NEV penetration increase recently, so I hope this can help you to build the expectation for our futures and your credit revenue, yes.

[Interpreted] This year, basically, we believe the number of the credits we receive will increase. But this year, the penetration rate of the NEV has increased very rapidly. This probably is going to change the situation for next year regarding the regulatory credit sales. According to my personal estimation, I think, considering all those factors, the price of the NEV credit is going to be different or probably going to be lower compared with this year's price.

Your next question comes from Paul Gong of UBS.

I have 2 questions. The first one is regarding the Norway operation, and -- obviously, it has been more than 1 month, and you just briefly mentioned 92% of the users chose BaaS and the order has been exceeding your expectation. Can you give us more color like how the achievement was there? And what is the challenges, where they are? Obviously, it's a rich country, but the labor cost might also be much higher than in China. What can you share with us? And after Norway, what is your next destination for the overseas operation? The second question is regarding your expense spending. It seems that this quarter, the increase in SG&A has been a bit faster than expected while the R&D increase has been a little bit slower than expected. What is the key rationale behind and key reasons behind? In view you have so many orders undelivered because of the supply chain disruption? Will you consider a slowdown a little bit of the SG&A and instead put more budget into the R&D in the following 1 or 2 quarters?

[Interpreted] Thank you for your question. Regarding our operations in Norway, we believe the basic operations have met our expectations in all aspects. After the NIO House opened on September 30, I would like to share with you some data. After the test drive, 1/4 of the users have placed the orders for our products. We believe that this is very impressive and this shows the -- basically, the efficiency is much higher compared with that of here in China. This is on the delivery side. On the services side, we still need a lot of work to do. Our swap stations in Norway have just started the operation because previously, we need to send people over to work on the installation and the commissioning of the swap stations. And then for the after sales, we also encountered some challenges brought forward by the COVID situation. But the order momentum is quite strong. We have done some trial delivery at the end of September and in October, and we believe the delivery in November is going to improve significantly. There is a lot of order backlog, but we would like to control our pace of delivery a little bit at the beginning because internally, we said that the target for ourselves especially on the user satisfaction rate. We have a kind of VAU is a Vision Action Upgrade system in the company, and basically, we use the VAU to set the target for ourselves. My personal VAU is to make sure we can achieve a high user satisfaction rate. Right now, according to the feedback we got from the ground in Norway, we understand that the word of mouth reputation has been quite good. And one of my friends actually send a video to me to show that there are lots of visitors in the new house. I'm very happy to see this video and to see so many people over NIO House in Norway. We will continue to make a decisive investment on the service and on other aspects, and we will do this step by step. Next year, besides Norway, we're going to enter additional 5 countries in Europe. And for this product planning of all those European countries, basically, the ES8 based on the NIO Technology Platform 1.0 will only be sold in Norway, but for the other new Norway countries we're going to enter, we will only sell the products based on the NIO Technology Platform 2.0. I believe for the investment question, this is more about the long-term competitiveness or the long-term strategy of the company. In China, the competition is becoming more fierce because there have been many new entrants into the smart EV industry. We believe product development, technology development, service network infrastructure, including swapping and the charging network, are part of the long-term competitiveness of the company. That is why we doubled down on our investments in all those regards in 2021. in 2022, we will continue to make decisive investment on those aspects. We believe the NIO infrastructure like the swapping, charging network, the sales and service network are also part of the long-term competitiveness of the company. Maybe in the third quarter of this year, the investment on those aspects ramped up a little bit faster than expected. That is why we can see the SG&A cost increased higher than the previous expectation. But on the R&D side, we have also doubled our R&D personnel this year, and we have worked on -- we have been working on many new products and new technologies. But for all those new products and the technologies, it will need some time to ramp up all the pace. In the fourth quarter, we will be able to see some R&D expenses and the cost increase in this regard. You can imagine internally right now, we have multiple new products and the new projects working in parallel. Then probably at the beginning, when we set up those projects, the cost is not going to be that high, and it will need some time to reflect all those R&D investments of our balance sheet or P&L at the beginning is relatively small, but gradually along with the project this cost is going to increase. But we believe the product and technology should be the cornerstone of the company, the long-term competitiveness. And that's why we will continue to make a decisive investment on those regards.

Your next question comes from Chang Liu of CICC.

My first question is regarding the capacity expansion. So could you give us a guidance on next year's sales volume, especially for the new 3 models and also our current 3 models? So can our capacity meet the need in next year and considering the strong EV demand on our new -- more new models in 2023, do we have a plan in constructing more new plants? My second question is regarding the upgrade of smart hardware because we are expecting a really fast upgrade in the smart hardware in next years. So how do we keep our competitiveness of our next models and to keep our users satisfied? Also I have a follow-up question for our globalization. So in longer term, do we have a guidance for the proportion of overseas sales account for the -- our overall sales?

[Interpreted] Thank you, Liu Chang, for your question. Right now, we have basically 2 plants. The first plant, like I mentioned, that we have upgraded the manufacturing lines to further expand the production capacity. For the new plant we are going to start the production in the third quarter of next year. So for our product and operations, we believe these 2 new -- these 2 plants that would be able to support our demand for the short term. If we combine these 2 plants together, the maximum production capacity we can support is up to 600,000 annual production capacity based on double shifts. So we believe this maximum production capacity should be able to satisfy our demand in the short term. For the NIO Technology Platform 1.0 smart hardware upgrades. We previously communicated with our users is that we will study some plans to upgrade the hardwares on the NIO Technology Platform 1.0 based on our design on the NIO Technology Platform 2.0. We plan to probably provide these services starting from next year, and we will provide some more details and updates on this regard at a more simple time. Of course, this smart hardware upgrade on the NIO Technology Platform 1.0 is not going to be the same as the same kind of experience of the NIO Technology Platform 2.0, but we believe that the digital carpet of the existing product is going to significantly improve. We have already considered all those flexibilities and the possibilities of the hardware and the software upgrade in our product design. For example, just now I mentioned about the hardware upgrades, and then for the software aspect, we have been continuously upgrading our software. We launched and released our Aspen 3.0 to our users of the existing products and received great reviews and feedback from all those users. And we will continue to upgrade our software and integrate our software to make sure we can provide much better services and experience to our users. Regarding the previous Aspen 3.0, we also believe this provides a solid foundation for our global market entry. And if we go back to your question about the global market entry and the target for the global market, NIO has always aspired to build a global brand. If we look at the global market, we can see that China is still the biggest auto market and the biggest premium market, so China will still be the most important market for us. But regarding our aspiration for the global market, I cannot provide a very specific target for the global market at this moment. But I believe for the markets outside of China in the long term, they should account for around 50% of the -- of all sales of our product.

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

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