NIO Inc. (NIO) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated's Fourth Quarter and Full Year 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 Fourth Quarter and Full Year 2021 Earnings Conference Call. The company's financial and operating results were published in the press release earlier today and are posted at the company's IR website. On today's call, we have Mr. William Li, Founder, Chairman of the Board and the Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; and Mr. Stanley Qu, Senior VP of Finance. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission and The Stock Exchange of Hong Kong Limited. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that NIO's earnings press release and this conference call include the discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial information. Please refer to news 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 Fourth Quarter and Full Year 2021 Earnings Call. In the fourth quarter of 2021, we delivered 25,034 ES8s, ES6 and EC6, representing an increase of 44% year-over-year. 2021 was a year full of challenges for NIO and the global auto industry by overcoming the pandemic, semiconductor shortages, supply chain volatilities and many other difficulties. We have continued to lead the premium smart electric vehicle market in China with a total delivery of 91,429 new vehicles in 2021, representing a strong increase of 109.1%. In January 2022, NIO delivered 9,652 vehicles, increasing by 34% year-over-year. In light of the Chinese New Year holiday, NIO delivered 6,131 vehicles in February 2022, representing a growth of 10% year-over-year. During the holiday, we adjusted the production lines to prepare for the delivery of ET7 in late March 2022. Although the user demand and order momentum remains strong, the production and delivery have been affected by the COVID and the volatility of the supply chain production capacity. We expect that the total delivery in the first quarter of 2022 to be between 25,000 to 26,000 vehicles. We will start the delivery of ET7, the first product on NT2.0, on March 28, 2022. In early March, we kicked off the test-drive of ET7 nationwide. Users who test-drove ET7 have spoken highly about the product. The test-drive to order conversion rate exceeds of expectations, which gives us great confidence towards the competitiveness of NT2.0. In 2021, the battery electric vehicle market maintained a faster-than-expected uptrend. According to China Passenger Car Association, the retail penetration rate of battery electric vehicles will grow from 5.9% in January to 18.6% in December last year. In Tier 1 and Tier 2 cities in China, such as Shanghai, the penetration rate of battery electric vehicle witnessed a more prominent growth. In Shanghai, among the sales of all ICE and electric SUV priced above RMB 350,000 NIO enjoyed a market share of 23%, which is the shares -- with these sales ranked at the top in 2021. We believe that this EV growth trend will also gradually expand to Tier 3 and Tier 4 cities in the future. In terms of our gross margin, benefited from the increase of revenue per vehicle and the cost optimization brought forward by the 75 kilowatt-hour LFP/NCM hybrid battery, the vehicle gross margin reached 20.9% in Q4 2021 and 20.1% for the full year of 2021, respectively. Currently, the whole industry is confronted with the pressure of cost increase. We are paying close attention to the dynamics in the supply chain and working closely with other partners to enhance efficiency in order to reduce the impact to the vehicle gross margin. On a separate note, NIO started to be listed by way of introduction on The Stock Exchange of Hong Kong under the stock code 9866 from March 10, 2022. The listing in Hong Kong marks another milestone in the history of NIO and enables us to serve more investors in the future. Next, I would like to share some recent key highlights of our R&D and operations. In 2021, we started to step up our investments in R&D with the overall non-GAAP R&D expenses exceeding RMB 4.1 billion in 2021. We have sped up the development of new products and increased our investments in full-stack autonomous driving and other core technologies. Investments in R&D is of a critical importance for NIO's long-term competitiveness. Starting from this year, we will be able to see part of the full results from last year's R&D investment and efforts. In 2022, we plan to deliver 3 new products based on NT2.0 with ET7 being the first. The mass production of ET7 is well on track. The product itself has led the industry in various aspects, including computing power for autonomous driving. At the NIO Day on December 18, 2021, we unveiled ET5, a midsize smart electric sedan as a perfect combination of NIO's super car DNA and the concept of design for EV. ET5 is equipped with NAD, NIO Autonomous Driving, and PanoCinema, panoramic digital cockpit enabled by AR and VR technologies. It comes with standard -- with 100 configurations for comfort, safety and smart technologies. After its launch, ET5 has attracted a wider and more diversified user base and received more orders than our expectations. The delivery of ET5 is expected to start in September this year. Soon, we will also launch ES7, our first SUV model on NT2.0, which is positioned as a mid-large, premium, 5-seater SUV and expected to start the delivery from the third quarter of this year. In the coming years, we will continue to elevate our R&D investment and efforts in core technologies, especially in key capabilities, such as the full-stack autonomous driving and battery technologies. We believe the investments in core technologies will not only enhance our sustainable competitiveness in both our technologies and products, but also improve our gross margin and profitability in the long run and ultimately, create long-term value for our shareholders. With regards to production capacity, the production line upgrades at the JAC-NIO Advanced Manufacturing Centre is in progress phase by phase. By midyear, the production cadence across all workshops will have reached 60 jobs per hour. We have largely completed the building construction of our second management facility, F2, located in NeoPark. Finished the equipment installation and are now working on the calibration, F2 is planned to be put in operation in third quarter this year with a designed production cadence of 60 jobs per hour. On March 16, the first validation build of ET5 rolled off the production line from the F2 vehicle pallet production center. On the side of the supply chain, we are still faced with the challenges from chip supply volatility, raw material cost increase, COVID and the changing international situation. In the past 2 years and more, our teams and partners have accumulated rich experience in securing supplies for production. We will continue to work closely and try our best to safeguard the production and delivery going forward. 2021 has been a year of decisive investments in charging and swapping infrastructure as well as the sales and service network. In terms of the sales and service network, we now have 46 NIO houses and 341 NIO spaces in 155 cities worldwide. In China, we have 60 NIO service centers and 179 authorized service centers in 146 cities. As the sales and service network expands quickly, we have been continuously optimizing the network deployment and the operational efficiency of each touch point, while delivering high-quality services to users. In 2022, we plan to open more than 100 new sales outlets and over 50 new service centers and authorized service centers. In terms of the charging and swapping network, we have deployed 866 battery swap stations in 190 cities and completed over 7.6 million swaps in China. So far, we have 711 supercharging stations and 3,786 destination chargers in China. In 2022, we will add 30 new destination charging routes to the Power Up Plan. With that, NIO will accumulatively operate over 1,300 battery swap stations, 6,000 power chargers and 10,000 destination chargers in China. We will further expand our power network to provide a better charging and swapping experience to users. In the global market, ES8 has formed the appreciation of users in Norway. This year, our monthly deliveries have ranked the top 2 among the 6-seater or 7-seater passenger cars. The successful delivery and high-quality user service in Norway also helped us accumulate valuable experience in providing services in other countries and regions and gain confidence in entering more new markets. In 2022, NIO will bring its products and comprehensive services to Germany, the Netherlands, Sweden and Denmark. The team building and market entry preparation are moving forward smoothly. The mass-market brand has been progressing according to plan. We have established the core team, specified the strategic direction and the brand positioning and reached a critical research and development stage after the first batch of product. The development of NIO won't be possible without the continued support of our users. In 2021, 3,756 user volunteers contributed their time and efforts in events like auto shows and NIO Day. More than 12,000 users participated in over 260 charity events to make active contributions to society. At NIO Day 2021, we announced the user partner program with which NIO users can share benefits with each other and build an even deeper connection among users in the community. In addition, NIO launched the Clean Parks, an ecosystem co-construction initiative. So far, we have rolled out of the initiative in 6 national parks and natural reserves in China. We aim to contribute to ecosystem building, support the adoption of smart electric vehicles and clean energy infrastructure in the natural reserves and establish a clean and low-carbon energy circulation to protect the authenticity and the integrity of ecosystem. 2021 was a year for NIO to develop fundamental powers and make comprehensive preparations for the next stage of development. 2022 is a year for NIO to press ahead at full speed. We will deliver 3 new products, continue to invest in R&D and infrastructure to improve our long-term competitiveness, expand our production capacity to meet the fast-growing user demand and serve users in more countries and regions. We will always stay true to our original aspiration of putting users' interests first, make continuous improvements and deliver products and services beyond user expectations. 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 fourth quarter and full year 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 revenue in the fourth quarter were RMB 9.9 billion or USD 1.6 billion, representing increase of 49.1% year-over-year, an increase of 1% quarter-over-quarter. Our total revenues are made of 2 parts, vehicle sales and other sales. Vehicle sales in the fourth quarter were RMB 9.2 billion or USD 1.4 billion, accounting for 93% of total revenues in this quarter. It represented an increase of 49.3% year-over-year, an increase of 6.7% quarter-over-quarter. The increase in vehicle sales year-over-year was mainly attributed to higher deliveries. The increase in vehicle sales quarter-over-quarter was mainly attributed to higher average selling price decreased in subsidization in user vehicle financing arrangements and higher deliveries. Other sales in the fourth quarter were RMB 0.7 billion or USD 107.5 million, representing an increase of 46.8% year-over-year and a decrease of 41.3% quarter-over-quarter. The increase in other sales year-over-year was mainly attributed to the increased revenues derived from the sales of service and energy packages and accessories in line with the incremental vehicle sales as well as increased revenues from used car sales and auto financing services in the fourth quarter of 2021, which was partially offset by the sales of automotive regulatory credits in the fourth quarter of 2020. The decrease in other sales quarter-over-quarter was mainly attributed to the sales of automotive regulatory credits in the third quarter. Cost of sales in the fourth quarter was RMB 8.2 billion or USD 842.8 million (sic) [ USD 1.2869 billion ], representing an increase of 49.1% year-over-year, an increase of 5.0% quarter-over-quarter. The increase in cost of sales year-over-year was mainly driven by the increase of delivery volume in the fourth quarter of 2021. Gross profit in the fourth quarter was RMB 1.70 billion or USD 266.7 million, representing an increase of 48.8% year-over-year and a decrease of 14.7% quarter-over-quarter. The increase in gross profit year-over-year was mainly contributed by increased vehicle sales and increased vehicle margin. The decrease of gross profit quarter-to-quarter was mainly resulted from the sales of automotive regulatory credits in the third quarter of 2021, which contributed to a higher profit. Gross margin in the fourth quarter of 2021 was 17.2%, compared with 17.2% in the fourth quarter of 2020 and 20.3% in the third quarter of 2021. The decrease of gross margin quarter-over-quarter was mainly resulted from sales of automotive regulatory credit in the third quarter of 2021, which contributed a higher gross margin. More specifically, vehicle margin in the fourth quarter was 20.9% compared with 17.2% in the fourth quarter of 2020 and 18.0% in the third quarter of 2021. The increase of vehicle margin year-over-year was mainly driven by the higher average selling price with higher take rate of 100 kilowatt-hour battery. The increase of vehicle margin quarter-over-quarter was mainly attributed to decrease in subsidization in user vehicle financing arrangements. R&D expenses in the fourth quarter were RMB 1.83 billion or USD 286.9 million, representing an increase of 120.5% year-over-year, an increase of 53.3% quarter-over-quarter. The increase of R&D expenses quarter-over-quarter and year-over-year was mainly attributed to the increased personnel costs in research and development functions as well as the incremental design and development costs for new products and technologies. SG&A expenses in the fourth quarter were RMB 2.36 billion or USD 370.1 million, representing an increase of 95.4% year-over-year, an increase of 29.2% quarter-on-quarter. The increase in SG&A expenses year-over-year and quarter-on-quarter was primarily due to the increase in personnel costs in sales and service functions and costs related to the sales and service network expansion as well as incremental marketing and promotional expenses, including for the host of NIO Day in December 2021. Loss from operations in the fourth quarter was RMB 2.45 billion or USD 383.7 million, representing an increase of 162.5% year-over-year, an increase of 146.5% quarter-over-quarter. Share-based compensation expenses in the fourth quarter were RMB 396.7 million or USD 62.3 million, representing increase of 559% year-over-year, an increase of 49.4% quarter-over-quarter. The increase in share-based compensation expenses year-over-year and quarter-over-quarter was primarily attributed to additional options and restricted shares granted. Net loss in the fourth quarter was RMB 2.14 billion or USD 336.4 million, representing an increase of 54.4% year-over-year, an increase of 156.6% quarter-over-quarter. Net loss attributable to NIO's ordinary shareholders in the fourth quarter was RMB 1.49 billion or USD 228.7 million, representing a decrease of 48.4% year-over-year, an increase of 25.6% quarter-over-quarter. Basic and diluted net loss per ADS in the fourth quarter were both RMB 1.36 or USD 0.21 per ADS. Excluding share-based compensation expenses and accretion on redeemable noncontrolling interests to redemption value, non-GAAP adjusted basic and diluted debt loss per ADS were both RMB 1.0 or USD 0.16 per ADS. Our balance of cash and cash equivalents, restricted cash and short-term investment were at RMB 55.4 billion or USD 8.7 billion as of December 31, 2021. Additionally, we achieved positive cash flow for operating activities for the full year 2021. And now for our business outlook. As William mentioned, for the first quarter of 2022, the company expects deliveries to be between 25,000 to 26,000 vehicles, representing an increase of approximately 24.6% to 29.6% from the same quarter of 2021. The company also expects the total revenue of the first quarter of 2022 to be between RMB 9.63 billion and RMB 9.99 billion or between USD 1.51 billion and USD 1.57 billion. This would represent an increase of approximately 20.6% to 25.1% from the same 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] First question comes from the line of Tim Hsiao of Morgan Stanley.

Congratulations on the solid results. Basically, I have 2 questions. The first question is about the cost and margin. Because we know that NIO is better positioned to cope with the battery cost inflation even without a price hike, but may I know if the rising mix of the high margin 100 kilowatt-hour, 75 kilowatt-hour hybrid battery pack or other initiatives could have sufficiently offset the margin pressure this year? And separately, if any or only if we need to raise the prices one day, can NIO increase the price to the consumers who bought the batteries and also the battery asset management companies simultaneously? Or either it would take longer to renegotiate the terms and contract with the battery asset management company if it's more like to beat business? So that's the first question. And second question is about the model. Currently, I think ES6 and ES8 have comprehensively covered the SUV market with pricing range from RMB 350,000 to RMB 600,000. Since we will soon launch ES7, as William just mentioned, how could we effectively differentiate ES7 from incumbent SUV models without volume dilution? And are we going to adjust the pricing strategy or reposition current SUV models, along with the launch of ES7? So those are the 2 questions from my side.

[Interpreted] Thank you, Tim. Regarding the first question, actually, starting from the fourth quarter of last year, we started to deliver the 75 kilowatt-hour LFP and NCM hybrid battery pack to the users, which has contributed to the cost optimization and benefited over vehicle gross margin growth in the fourth quarter. But I believe everyone knows that starting from the third quarter and the fourth quarter of last year, we have been seeing some raw material cost increases in the industry. And there has been a lot of cost increase in the upstream of the whole industry chain, which means that we won't need to share the pressure across the whole industry gradually. At this moment, we do not have any plan to increase our pricing yet. But because during the year, we are going to upgrade our product competitiveness and the capabilities, so at that time, probably based on the cost of the raw materials in the industry, we will reevaluate our pricing strategy as well. But at this moment, we're not going to increase our price for the products. On another point, because of the sales growth, we believe this has also contributed to the amortization of the cost and the benefit of a vehicle gross margin increase. But regarding the raw material cost increase, it's not just about the battery but also other commodities like the copper and aluminum. Those raw material cost increases have also affected our vehicle gross margin as well. In light of the cost increase of those raw materials I've just mentioned and the other BOM costs, our full year vehicle gross margin for 2022, we'll still target to reach around 18% to 20%. The second question is about the ES7, this is going to be the first SUV product based on the NT2.0 and they positioned as a mid-large 5-seater SUV. In this specific segment, we have witnessed some user demand increase recently. For example, the BMW X5, we believe it's going to start the local production very soon. For the ES7, it's going to have industry-leading battery electric powertrain and also the smart technologies as well. And we believe it's going to showcase the high-performance capabilities of the product and also satisfy user's demand in terms of the premiumness and the luxury feeling. And we also believe this is going to attract the users who will have very high requirements regarding the product quality and the premiumness. So all in all, we believe ES7 is going to contribute and going to be complementary to other current -- ES8, ES6 and EC6 instead of affecting the sales of the current products. We are going to launch the ES7 in the second quarter of this year, and we'll share pricing information as well at that time. At this moment, we can see that regarding the market segment of the mid-large SUV priced above RMB 400,000, it actually has an addressable market size of over 200,000 units. And this market size is also growing. That's why we're very confident with the performance of the ES7 after its launch.

Next question comes from the line of Bin Wang of Credit Suisse.

[Interpreted] Actually, I have a question about ET7 sales because recently, there was a media call, first one EV listed as -- ET7 received very good order flow, about 15,000 order backlog, which indicates monthly volume could be around 5,000. So what's your comment about this? And second thing is about the margin because within the number 4 quarter last year, the service actually has a very big [ indexed ] gross margin, more than 30%. And what's the reason behind that? And what's the outlook of this service margin going forward? Meanwhile, you just provided an 18% to 20% margin guidance. Is this just a vehicle gross margin or actually including the service margin already?

[Interpreted] Regarding the first question of the ET7, of course, we cannot disclose the specific order number at this moment. But what I can say is that it's actually much more than the media report. And for the ET7 market segment, we can see some other benchmarks, for example, the BMW 5 Series, Audi A6 and the Mercedes C-Class. ET7 has the similar pricing and the target group for with -- those products as well, especially regarding the BMW 5 Series. So for BMW 5 Series, we can see that the monthly delivery number is around 12,000 to 15,000. Of course, for the EV product, it will need some time for the users to adopt and accept. But if we look at the examples of the Shanghai market, right now in the premium SUV segment in Shanghai, our market share is around 23%. So if we wait -- also mirror this to the sedan market, we believe there is a lot of room for growth and also potential for our ET7. So at this moment, we cannot see how much we're going to deliver every month. But according to the user feedback that we receive right now, we are very confident with the ET7's performance in the future. Regarding the ES7, previously, I have also mentioned that ES7 is positioned in the mid-large premium SUV segment. And if we talk about the specific benchmark, we can refer to BMW X5. After the local production of BMW X5, we can see that the market actually has a very high expectation for BMW X5's performance. The current market size of this segment is over 200,000 units. So if we look at the comparables, we can use BMW X5 as a reference. And based on this, we are very confident with our ES7 because we believe they can actually outcompete the BMW X5.

Okay. For the second question, for the service law, we accelerated the Power -- the construction of Power Swap Station in 2021. And more Power Swap Station partly to provide service to end users, which lead to the cost increase of other revenue business compared with Q3. And in 2022, we will continue to deploy the batteries charging and swapping facilities. The anticipated depreciation and operating expenses will keep rising. But we believe the upfront deployment of battery swap stations can contribute to our branding, user experience and also sales and with the long-term value to the company. So bearing a short-term loss of Power Swap Station constitutes a strategic decision of the company. In the long run, the cumulative vehicle deliveries going up and the improvement of service efficiency, we expect that the negative margins resulting from power, I think this and repair service and other services will gradually improve. And other revenues and margins contributed by innovative business models like BaaS, NIO Life and also AD as a Service will keep growing. Okay. And the gross profit margin target, 18% to 20% for 2022 is for vehicle, not the overall gross margin, yes.

Next question comes from the line of Ming-Hsun Lee of Bank of America.

[Interpreted] So my question is regarding your capacity in LiDAR, hybrid battery and also the chip, especially [ SPN ] yesterday just also announced that chip shortage will cause the price hike. So I also want to know whether the NVIDIA Orin chip will constrain your vehicle delivery this year.

[Interpreted] So regarding the production capacity, previously, I have also mentioned that by the middle of this year of our first factory, that is the JAC-NIO Manufacturing Centre, is going to reach a production cadence across the different workshops that is around 60 jobs per hour. And the designed production capacity of the factory 2 is also going to be around the -- 60 jobs per hour. But of course, for the factory 2 because this is a new factory, then we will need some time to ramp up the production gradually. So if we think about the 60 jobs per hour, it means that if we work with 4,000 hours every year, then the annual production capacity is going to be 240,000 units and for every month, it's around 20,000 units. If we work over time a little bit to 5,000 hours per year, then it means that the annual production capacity is going to reach around 300,000 units. So this is about the vehicle production capacity. We believe in the fourth quarter of this year, we will see some fundamental improvements regarding the vehicle production capacity, which is going to support our next step of production. For the battery production capacity bottleneck, yes, previously, we have also mentioned about this. And starting from last year, we have been working together with our partner, CATL, to add additional production lines for the battery cells. And we believe according to the current plan in 2022, the battery production capacity should be able to meet our demand. Of course, the cost increase of the battery is another matter. And actually, I believe the chip shortage is a bigger challenge for us because in our vehicle, we have over 1,000 chips. And among those 1,000 chips, we have probably around 10% of the chips that may face the supply shortages or challenges from time to time. So for us, starting from 2021, we started to see some chip cost increase, and this has affected our vehicle gross margin in 2021. Based on this experience in 2021, we have already taken into consideration of the chip cost increase in terms of setting of our target for the vehicle gross margin. We believe that the main challenge regarding the chip is more about the supply. But regarding those high-end chips like the NVIDIA Orin chips and the Qualcomm 8155 (sic) [ Qualcomm Snapdragon SA8155P ], we have a long-term and direct strategic cooperations with NVIDIA and Qualcomm, so we believe we should be able to have sufficient supplies for our production. But for those common chips or the cheaper chips like from TI and Infinium, we may face some challenges from time to time, and this is going to affect our production. Of course, we have some other ways to mitigate those challenges. For example, we can find some other chips to replace those chips or we can probably scan the market to build up our strategic inventory to avoid those risks. We believe, overall speaking, in the second half of this year or around the fourth quarter of this year, we should be able to see some fundamental improvement in terms of our vehicle production capacity and the battery production capacity. But we may still face some challenges in terms of the supply chain volatilities, especially the semiconductors.

Our next question comes from the line of Jeff Chung of Citi.

[Interpreted] I've got 3 questions. So number one is should we consider any MSRP hike in the near term to offset potential battery and aluminum cost hike? If yes, how? And if no, why not? The second question is about the existing 8, 6, 6 product to sales volume visibility over the next few months. Any confidence we can maintain 10,000 units a month as well as the -- could you give us more color on the ET7 ramp-up pace in the second quarter? Last but not least, is the lithium spot price in China. Do you think it has already peaked due to the recent government intervention?

[Interpreted] For the current ES8, ES6 and the EC6, of course, if we look at the digital corporate chipset, this is actually based on the NIO Technology Platform 1.0, which was developed in 2018. So for this chip, the efficiency may be impaired if we run some complicated software, so that's why starting from this year or within this year, we're going to upgrade to the smart hardware of our existing products. And we are also going to provide the after-sales upgrade services for the users regarding the smart hardware upgrades. We are going to launch this program in an appropriate time. For the existing ES8, ES6 and EC6, we believe we do not need to adjust the pricing at this moment. But of course, based on the smart hardware upgrade of the existing products and also we are going to launch some model year product, then at that time, we believe that probably we can reevaluate our pricing strategy based on the cost increase in the supply chain. You have also asked about the performance of our current product, whether it should be able to still maintain the 10,000 units per month. According to our order momentum in March, we believe that this can meet our expectation, and we believe that the user demand is not a problem for us because if we compare our current ES8, ES6 and EC6 with other EV products and ICE products in the market, we believe we still have a lot of competitive advantages. So the overall demand momentum stays quite strong. For the ET7 products ramp-up because the ET7 is going to be manufactured in the first factory, we called F1, and is going to share the production line with the current ES8, ES6 and EC6, at the same time, we will also introduce some new manufacturing technologies and the techniques in the production of ET7, so that's why starting from last year, we started to adjust the production lines in the F1 to support the new product production. In the meantime, I have also mentioned about the ES7, which is going to start the delivery in the third quarter of this year. This product is also going to be manufactured in the F1. So the situation in F1 is quite complicated, as you can see, because we need to make sure we have sufficient production capacity to support the current ES8, ES6 and EC6. But at the same time, we also need to produce the ET7 and also prepare for the production of the ES7. So that's why we believe the ramp-up of progress of the ET7 is probably going to be a little bit slower compared with that of the ET5. So think ET5 is going to be manufactured in a separate, new plant called F2. So we believe that probably around the third quarter of this year, we should be able to reach a normal production cadence for the ET7. Regarding the lithium carbonate cost increase, we have done very in-depth research regarding the overall industry chain and especially the upstream. We believe the cost increase or the price hike is mainly due to the opportunistic price hikes, and there is no specific big gaps in terms of the demand and the supply of the lithium carbonate materials. Of course, right now, we can see some Chinese authorities like MIIT have already started to set up some mechanisms to manage the situation. At the same time, we also like to urge the companies in the upstream of the industry chain that they should think more from the long-term benefit of the overall development of the whole industry instead of manipulate or take the opportunity of the cost increase to increase their price.

Next question comes from the line of Nick Lai of JPMorgan.

Two simple questions. First on margin and the second on export business. I mean yes, [ leading -- and ] then we can talk about the GP margin already. Let me switch focus to the OP margin. Yes, last year, we understand the R&D spend and SG&A increased a lot and in part largely part -- largely due to the top line increase. As we move into 2022, how should we think about SG&A and R&D expense in terms of either dollar terms or percentage to revenue? Is it fair to say on R&D percentage to revenue should increase -- should drop meaningfully while SG&A should more or less in tandem with the top line sales? And the second question is regarding export. I understand it's probably not a big portion of our total sales. But considering the latest dynamics in Europe and advising stronger renminbi against either dollar or euro, any update on export front?

[Interpreted] Regarding the OP margin, last year, in terms of the company's strategy, we would like to make sure that the gross profit can cover the SG&A cost. And we believe that through the efficiency improvement and execution, we have followed through this strategy in 2021. In the coming years, we will continue to make decisive investments in terms of the R&D and the infrastructure. Of course, our strategy will stay the same, that is we would like to make sure we can use the gross profit to cover the SG&A cost. If we look at the EU market, of course, the last year because that was the first year for us to enter the global market, then it means that last year, we needed to make some advanced investment. And we believe that this year, the efficiency is much higher than last year. But in terms of the R&D front, we are going to step up our R&D investments. This year, we believe the R&D investment is going to be more than doubling than that of 2021 because we are going to invest in some long-term core technologies and some fundamental technologies as well as new products for 2023 as well as some product adaptation for the global market by the year-end of 2022, our R&D headcount is going to reach around 9,000. And we believe that this is going to be a big increase compared with our current R&D team size. So this is the overall plan for the 2022. In terms of the overall strategic direction for the company, our target is that we can achieve breakeven for a single quarter in the fourth quarter of 2023, and we can achieve breakeven or reach profitability in 2024 for the full year.

Okay. So the second question is about our global business, right? Actually, right now, every month, we deliver about 100 ES8s in Norway. So that pulls our confidence a lot. It improves our product competitiveness and also our business model. But however, since we will kick off our SUT in Europe in the second half of this year, so the contribution of the European market to SUT volume would be very significant in this year. But in [ Netherlands, we will continue ] to develop and improve its product portfolio and services work, establish local user communities and pursue a high-yield transaction. With that, we believe that market share and sales volume in Europe will come along naturally.

Allow me to take the next questions from Fei Fang of Goldman Sachs.

[Interpreted] Can management talk a little bit about the utilization metrics of your infrastructure, battery swap stations, supercharging stations, how often people use it? What's the unit economics? Or what's the difference between top cities versus lower-tier cities?

[Interpreted] Previously, I have also mentioned that accumulatively we have completed over 7.6 million swaps. And it means that the current status for the swap station is that every day, we can complete around 30,000 swaps. For some areas with more users, of course, we will be able to accommodate over 1,000 swaps for 1 Power Swap Station in 1 day. But on highways, probably in 1 day, the Power Swap Station's going to accommodate around 10 to 20 swaps to -- per Power Swap Station because we have deployed the Power Swap Station network in advance, probably 1 or 2 years in advance. Because of the design target of the Power Swap Station network is that the ratio between the user -- the ratio between the Power Swap to the user should be around 1:1,000. But if we look at our current power network, especially for the Power Swap network, we have overdeployed some Power Swap Stations at this moment to make sure we have a much better experience for the users.

Next question comes from the line of Edison Yu of Deutsche Bank.

First one, can you give us some sense of the future rollout cadence of NIO autonomous driving? What kind of features do you think the LiDAR will enable? And when can we expect those to arrive on the car? And then the second question is about the NIO ecosystem. More broadly speaking, the reports that you're working on a smartphone. How do we think about what's going on beyond the car? I know there's -- VR could be a big part. Any thoughts there would be appreciated.

[Interpreted] Thank you for your question. Of course, at the time of the delivery of the ET7, we are going to start to provide the enhanced ADAS features first to the users. But on top of that, we have already queued up the full-stack autonomous driving capabilities from the production to the controlling strategy. So we target to start -- provided the AD as a Service probably in the fourth quarter of this year with our NAD technology. Of course, we have always been actively explore the possible connections and the synergies between the vehicle and the smartphones and other mobile terminals because we believe that there are lots of synergies between these 2 products in terms of the fundamental technologies, the supply chain and the software. At the launch of the ET5, at the NIO Day, we have also introduced some AR and VR technologies as well. And we believe that there should be a lot of room for innovation, and we can also think about some innovative applications in the vehicle.

Next question will come from the line of Xue Deng from CICC.

[Interpreted] So my next question is what's the CapEx budget in 2022? And will you please introduce the detail about the main deductions and the exact amount of money.

Thank you. Yes, as mentioned, by way -- our gross profit margin already can cover our SG&A expense, and this is also our target for 2022. So our cash on hand will mainly be used to -- for our R&D activities and also capital expenditures for our new product developments and production facilities, sales service network and expansion and also the charging and its working infrastructures. And overall -- also as I mentioned in our previous explanations, we will increase our Power Swap Stations to 1,300 stations by the end of 2022. And we will further open 100 NIO House and NIO Space and 60 NIO Service centers -- 50 NIO Service centers in 2022. So -- and we will further to construct our NeoPark located in Hefei in 2022. So the total expenditure, I think, is over -- could be a big increase compared with 2021, yes. Thank you.

The next questions comes from the line of Paul Gong from UBS.

Yes, let me just limit my question to one. I want to know more about the -- your thoughts about the mass-market brands. Obviously, you have to compromise some of the features that NIO has for more attractive pricing points or some cost competitiveness. So among all the features that NIO are offering, including, say, the exterior, the interior, the autonomous driving features, the acceleration, the driving range and the battery swap station as well as the -- let's say, the digital experience and also the surface, so what do you think is the thing that you are willing to compromise on your mass-market brands that would be reserved exclusively for the NIO brands and you are not expecting from the mass-market brands? Just this question.

[Interpreted] Thank you for your question. Of course, if we want to increase our overall volume and expand our user base, different companies will have very different strategies. For example, some peers like Tesla, they have adopted very different strategies compared with ours. For Tesla, they basically differentiated the Model 3 and Model Y from the Model X and the Model S with a very big price gap. So by doing this, they entered the mass market with the Model 3 and Model Y. So far, this has been quite successful. But at the same time, we have also seen some downsides. For example, the sales of the Model X and the Model Y have decreased significantly despite the product cycle. So we believe there are some underlying fundamental rules of the auto industry, that is there is a limited bandwidth of a specific brand. It's very difficult to imagine a single brand can actually support the pricing range from RMB 100,000 to RMB 1 million, it's not feasible, and I believe that this is against the common sense. So for NIO right now, we target the market segment that is around USD 50,000 to USD 100,000. And if we want to reach down to the mainstream market, that is priced around USD 30,000 to USD 50,000. We believe that this is a much bigger market, and there is reasonable market size for us to grow, and we can also achieve reasonable gross margin. We also need to take some lessons learned from the Model 3 and Model Y. We understand, of course, for this mass market, we will also need to rethink the fundamental architecture of our product and also need to think about using different kind of materials and also different manufacturing technologies for our product. Because in terms of the mass-market brand, of course, they need to be efficiency driven. And for this specific market segment, they're priced from USD 30,000 to USD 50,000. We believe a more sensible approach for us is to use a new brand to enter this new market segment. And we believe that this is a better strategy for us. We can offer some successful examples in the market with this strategy, for example, Audi and Volkswagen and the Lexus and the Toyota. We believe this can also be a strategy for us to disrupt the market as well. But of course, for the mass-market brands, the prerequisite for that base is to make sure we can achieve high efficiency and also achieve reasonable vehicle gross margin.

Now I would 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 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.]