NIO Inc. (NIO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by for NIO Inc. Third Quarter 2022 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. Please go ahead, Eve.

Good morning, and good evening, everyone. Welcome to NIO's Third Quarter 2022 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; 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 Stock Exchange of Hong Kong Limited and the Singapore Exchange Securities Trading Limited. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that NIO's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. 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 Third Quarter 2022 Earnings Conference Call. In the third quarter of 2022, NIO delivered a total of 31,607 smart electric vehicles, up 29.3% year-over-year, setting a new quarterly high. Based on our latest technology platform, NT2.0, we have launched and delivered 3 new products, which has improved the competitiveness of our product lineup in all aspects and enabled NIO to enter more premium segments, capitalizing continuous demand growth. In October, overcoming the production and supply chain volatilities, we delivered 10,059 vehicles, representing a 174.3% increase year-over-year. We will continue to collaborate closely with our supply chain partners to stabilize components supply and further accelerate the vehicle production and delivery. We expect the total number of deliveries in the fourth quarter of 2022 to be between 43,000 to 48,000. Next, I would like to share some recent highlights of our R&D and operations. In September, the show cars of ET5, a smart electric midsized sedan, began to be on display in our stores. Store traffic reached a record high and order intake witnessed a strong growth momentum. On September 30, we officially kicked off the delivery of ET5, and the preliminary user satisfaction rate exceeded our expectations. Over the past couple of months, Banyan, the digital system of NT2.0 has iterated and upgraded multiple times with continuous user experience improvement. We have strong confidence in the market competitiveness of the NIO models based on the NT2.0 platform. With respect to the sales and service network, we now have 399 new houses and new spaces in 149 cities and 280 service centers and delivery centers in 160 cities. In terms of the charging and swapping network, NIO has installed a total of 1,210 power swap stations and provided 14 million battery swaps for users. NIO has installed 2,055 charging stations with 5,765 power chargers and 6,077 destination chargers in place. In the meantime, our power map has connected to over 590,000 third-party chargers in China and more than 380,000 chargers in Europe. Since we entered the Norwegian market last September, our products and services have been well received by local users, and the user community has been growing rapidly, which has laid a solid foundation for and boosted our confidence in entering more markets in Europe. On October 7 this year, we held NIO Berlin 2022, where we comprehensively introduced our products and services to users in Europe, marking our official market entry in Germany, the Netherlands, Denmark and Sweden. NIO Berlin drew a lot of attention and recognition from users and the auto industry in Europe. We are now organizing large-scale test drives and kicked off user delivery in Europe. Yesterday, NIO ET7 won the 2022 Golden Steering Wheel award, granted by the prestigious German magazine Auto Bild as ET7 was voted the best car in the medium and upper class category. Both our products and innovative technology have been highly recognized by the users, industry experts and professional media in Europe. To better serve user communities in Europe, we plan to open new houses and new spaces in 10 major European cities, such as Berlin, Frankfurt, Rotterdam, Copenhagen and Stockholm. We also plan to install 20 power swap stations in Europe by the year-end and another 100 by the end of 2023, so that more users can experience NIO's chargeable, swappable and upgradable power system in Europe. In addition, we have established an R&D center in Berlin for localized development and deployment of digital carpet and ADAS to continuously improve the intelligent digital experience of local users. On September 27, NIO announced the collaboration with the Danish Society for Nature Conservation and the Danish Nature Foundation under Clean Parks initiative. NIO hopes to actively engage with the local communities, share the responsibilities, and jointly make contributions to a more sustainable future. On September 30, upholding NIO's original aspiration of Blue Sky Coming, NIO released the first NIO Environment, Social and Governance Report 2021, where NIO shared it's ESG management practices and performance in 2021. In 2022, NIO has further advanced in product core technologies, charging and swapping network, as well as sales and service network, which has laid a solid foundation for us to compete in the global market for the long run. In spite of the operation challenges brought forward by the changing macro environment, we believe that NIO is fully capable of staying focused on product and technology innovations as well as service capability improvement, while further optimizing the cost structure and improving operational efficiency to introduce more beyond experience products and services to users worldwide. 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 third quarter 2022. Over to you, Steven.

Thank you, William. I will now go over our key financial [Audio Gap] for the third quarter of 2022, and be mindful of the length of call. I will reference RMB only in my discussion today. 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 13.0 billion, representing an increase of 32.6% year-over-year and 26.3% quarter-over-quarter. Our total revenues are made of 2 parts: legal sales and other sales. Legal sales in the third quarter were RMB 11.9 billion, representing increase of 38.2% year-over-year and 24.7% quarter-over-quarter. The increase in vehicle sales year-over-year and quarter-over-quarter was mainly attributed to higher deliveries as a result of more diversified product mix offered to our users. Other sales in third quarter were RMB 1.1 billion, representing a decrease of 8.5% year-over-year, and an increase of 48.2% quarter-over-quarter. The decrease in other sales year-over-year was mainly due to the decreased revenue derived from sales of automotive regulatory credits, offset by the increase in other revenues in line with the incremental vehicle sales. The increase in other sales quarter-over-quarter was mainly attributed to the increased revenue derived from sales of automotive regulatory credits and increase in other revenues in line with incremental vehicle sales. Gross margin in the third quarter of 2022 was 13.3% compared with 20.3% in the third quarter of 2021 and 13.0% in the second quarter of 2022. The decrease of gross margin over the year was mainly attributed to, first, the decreased revenue derived from sales of automotive regulatory credits with high sales margin; second, the decrease of vehicle margin; and third, the reduction on the sales margin resulting from expanding investment in power and service network. The increase of gross margin quarter-over-quarter was mainly attributed to sales of automotive regulatory credits with high sales margin. More typically, vehicle margin in the third quarter was 16.4% compared with 18.0% in the third quarter of 2021 and 16.7% in the second quarter of 2022. The decrease of vehicle margin year-over-year was mainly attributed to the increased battery cost per unit, which was partially offset by decrease in subsidization in user vehicle financing arrangements. Vehicle margin remained stable quarter-over-quarter. R&D expenses in the third quarter were RMB 2.9 billion, which was an increase of 146.8% year-over-year and 37% quarter-over-quarter. The increased R&D expenses year-over-year and quarter-over-quarter was mainly attributed to the 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 2.7 billion, which was an increase of 48.6% year-over-year and 18.8% quarter-over-quarter. The increase in SG&A expenses year-over-year and quarter-over-quarter was primarily due to, first, the increase in personnel costs related to sales and general corporate functions; second, increased expenses related to the company's sales and service network expansion; third, increase in marketing and promotional activities to promote our vehicle in China and Europe. Loss from operations in the third quarter were RMB 3.9 billion, representing an increase of 290.2% year-over-year and 36.0% quarter-over-quarter. Other losses in the third quarter of 2022 was RMB 495.6 million, representing increase of RMB 528.2 million from other income of RMB 32.6 million in the third quarter 2021, an increase of RMB 305.6 million from the second quarter of 2022. The increase of other losses over the third quarter of 2021 and second quarter of 2022 was mainly due to the loss from the revaluation of our oversales RMB-related assets as a result of the depreciation of RMB against U.S. dollars in the third quarter of 2022. Net loss in the third quarter was RMB 4.1 billion, which is an increase of 392.1% year-over-year and 49.1% quarter-over-quarter. Net loss attributable to NIO's ordinary shareholders in the third quarter was RMB 4.1 billion, representing an increase of 44.9% year-over-year and 50.9% quarter-over-quarter. Our balance of cash and cash equivalents, restricted cash, short-term investment and long-term deposits were RMB 51.4 billion as of September 1, 2022. Now this concludes our prepared remarks. I will now turn the call over to the operator to proceed with our Q&A session.

[Operator Instructions] Our first question comes from Ming-Hsun Lee with Bank of America.

[Foreign Language] Previously, your capacity is capped by component suppliers, especially the welding part as well as chips. So could you also update your latest component capacity, if there is no COVID control impact?

[Interpreted] Thank you, Ming, for your question. Yes, regarding the production in October, there has been some impact due to several reasons and the impact is around several thousands. One factor is because of the subframe like you mentioned, but we expect that this will be resolved in November. And then the second reason is the new EDS for ET5. We actually have a new EDS plant next to our Factory 2, and the automation level of the new EDS plant is very high. We only need to have around 30,000 people to support the overall operation of these new EDS plants. Due to the ramp-up volatilities of the EDS, overproduction is affected by around 2,000 to 3,000. And the third reason is the COVID-19 situation. I believe this has impacted the production for around 1 week. So overall speaking, all those factors have affected the production in October, but we have resumed normal production now and we expect to have a new production line for the new EDS next week and probably by the end of this month, this new EDS line will be ready and we can ramp up the production. We have already solved the subframe issue. And I believe, probably in December, ET5 production will not be an issue. And as of now, I don't believe there is any production issue for the ET7 and the ES7.

[Foreign Language] The U.S. semi ban, how will this impact the development for the industry and also NIO? Besides NVIDIA currently can sell A800 chips to China if compared to A100. How do you see the impact to the progress of our autonomous driving training?

[Interpreted] Thank you for your question. Regarding the CHIPS Act, I believe this may affect the chip used for cloud training. Right now, I believe that we have sufficient chips like the A100 to satisfy the need for the AD training in the long run. But at the same time, we are also exploring different opportunities, for example, where considering working together with some cloud service providers, and we are also evaluating some long-term solutions to support the integration of our AD solutions. As of now, I don't actually see any impact on our operations.

Our next question comes from Paul Gong with UBS.

[Foreign Language] So my first question is regarding the ET5 order. Just now you mentioned that the satisfaction level has beat your expectations. But you did not mention how the order intake has been. How do you see the order intake since the launch and especially after late October after Tesla launched another wave of price cuts. Do you see any impact from there? This is my first question.

[Interpreted] Thank you, Paul, for your question. Of course, I understand regarding the ET5 orders. The more important thing for us is right now to find a way to deliver the ET5 to users and shorten the waiting time for the users. So generally speaking, order is not an issue for us regarding ET5. Regarding the ramp-up of ET5, because this is still at a relatively early stage, so we would like to pay more attention to the quality improvement and make sure we can stabilize the quality of the ET5. The demand for ET5 is very strong as we expected. Of course, if the order can be even stronger, the stronger the better. But at the same time, we don't want the users to wait for a really long time. If we come back to Tesla, Tesla often cuts its prices. So we don't actually think this affects the user demand regarding NIO products. If we look at the specific product, like the Model 3, there is a big price gap compared with other products. And if we compare the Model Y with our ES6, we don't actually believe that we are competing in the same segment. So if we look at the pricing of our product and the positioning of our product, strictly speaking, we're not competing with Tesla in the same segment.

[Foreign Language] So my second question is regarding the expenses, including both R&D and SG&A. It seems to be climbing up a lot Q-on-Q this quarter. Is that just temporary because you have new products and trying to explore the new market in Europe? Or is it more like structural? And if so, what is your expectation for its trend going forward?

Paul, this is Stanley. The increase of SG&A in Q3 compared with Q2 is because our sales and service network in China and also in Europe since we entered more country markets in Europe in this third quarter and also some marketing and promotional activities in Q3 compared with Q2. From the long term, I think also you can check this result from Q3. SG&A as a percentage of sales revenue will continue to be optimized along with the improvement of our operational efficiency. I think in 2023 and also the coming years, you will see a stable trend for further improvement of this issue.

[Interpreted] Regarding the R&D expenses, yes, we do see some increase in the third quarter compared with the second quarter. This is mainly because of our new product development cadence as well as other initiatives like the battery chipsets and the tests and the validations when we enter new markets, as well as the employee cost and the ETD cost. This is actually part of our plan, and we don't think that there is any other additional R&D expenses that is out of the planning of the company. Regarding the R&D operations, I believe right now, we have entered a relatively stable phase regarding the R&D development work as well as the operations. So for us, we believe when it comes to the R&D expenses, including the human resources cost, it will stay at a relatively stable level. For example, probably every quarter, it should be around RMB 3 billion. Of course, at the same time, we will continue to improve the system efficiency of our R&D efforts, but for some time now, I believe it will stay at this level to make sure we can have more product and technology innovations to provide better experience for the users.

[Foreign Language] So what is roughly the ratio of Europe accounts for this quarter.

Yes. Paul, Europe is now at quite initial stage. So currently, the overall expense is not a big percentage of the overall SG&A. Now the sales and marketing team for our Europe business is about 500 headcount. So yes, that's basically the information for our Europe business.

Our next question comes from Tim Hsiao with Morgan Stanley.

[Foreign Language] So my first question is about the production and delivery. So I think based on the fourth quarter guidance, basically, the average delivery in November, December could be around 17,000 to 19,000. So what would be the peak monthly output NIO can reach by end of this year? And how the trajectory looks like into first half next year?. Will the supply chain bottleneck become a structural issue given the unchanged COVID policy and more new model, new players and a likely longer time for supplier to expand their capacity, to improve their production yield.

[Interpreted] Overall speaking, it's quite difficult for us to make estimation regarding the impact of the COVID control and prevention measures on the operation of the company. But if we talk about the supply chain and the vehicle production, I believe the vehicle production capabilities should be able to meet the delivery target with that for next year. And if we speak of the supply chain, we do see some challenges. For example, in December, we will face some constraints regarding the supply of the silicon carbide. But if we look at 2023, I believe the supply chain and production capacity have the ability to meet the demands and the target we set up for ourselves. For 2023, I believe, for the vehicle production, we will have a relatively sufficient production capacity to meet the demand. And if we can achieve 150,000 production capacity on 1 shift, I believe the production of the vehicle will be carried out in a very smooth manner.

[Foreign Language] So my second question is about the profitability because based on our own observation, we noticed the life cycle of smart TV in China is actually getting shorter rather than longer than traditional cars. So considering the very sizable R&D and manufacturing investment, what would be the more reasonable terminal growth or operating margins we should look for, especially, as I think the competition is getting more intense?

[Interpreted] Thank you for your questions. Regarding the smart electric vehicles, I believe we have a much faster iteration cycle compared with the traditional vehicles. And we believe the iteration cycle should be around 3 years, and this is how we are iterating our smart technologies in NIO. Of course, different companies have different strategies and different iteration cycles. But in NIO, if we look at our technology platforms, and we believe with one technology platform that we actually have the same kind of hardware and software for all the vehicles based on data technology platforms. So for example, previously, we have explained, we have the NIO Technology 1.0 and the NIO Technology 2.0 for all the products. Based on NIO Technology 1.0, they have the same kind of software and hardware when it comes to the smart technologies, and that's the same for NIO Technology 2.0. At the same time, we also have the unified battery pack, and we also share a lot of commonalities when it comes to the vehicle platforms. Of course, previously, we mentioned we would like to offer different kinds of top hats to meet the diversified demands and take for different users. So if we think about the technology platforms and of vehicle platform strategy, I think 20% to 25% vehicle gross margin is not a very big challenge for us. But if we look at 2022, specifically, the cost of the battery skyrocketed. So of course, at the same time, we have increased the price of our products. And even against this backdrop, we have, I believe, achieved a relatively reasonable vehicle gross margin. Previously, we have also achieved 20% vehicle gross margin in the past. Like in the past, we didn't have the battery cost increases. So this is a relatively reasonable vehicle gross margin for our products. In the future, if the battery cost can come down to a reasonable level, I think it's possible for us to regain the 20% to 25% vehicle gross margin with our product. In addition to that, with our vehicle technology vertical integration, including the battery, the chipset, I believe we will have more room to improve for the vehicle gross margin, and it's possible for us to achieve 25% to 30% vehicle gross margin. If we look at the mass market, I believe the challenge is much bigger because if we combine all the companies in the mass market right now, I think the overall gross margin is actually negative. Of course, BYD is an exception because they have the vertical integration of the batteries and other technologies. So if we do not have the vertical integration capabilities in the mass market, it will be quite challenging to survive in the mass market. But if we have this capabilities in place, I think it's possible for us to also achieve 20% to 25% with other mass market products.

Our next question comes from Bin Wang with Credit Suisse.

[Foreign Language] My question, first one is about your guidance. You actually had 3 things. Number one, the ET5 will be higher volume than BMW X3 series. And number two guidance is that you will break even in the number 4 quarter next year. And number three guidance is that this year you have an 18% to 20% gross margin for the vehicle. Did you maintain this guidance for this year?

[Interpreted] Thank you, Bin, for your question. Overall speaking, that still the direction we're aiming for, for the core business of NIO. We are still aiming to achieve breakeven in the third quarter of 2023, and this is still our plan. At the same time, we're also working on different strategic new business. For example, we have 2 new brands and the battery chipset and the smartphone business at the same time. So if we look at 2023, the investment for those strategic new business is going to be around RMB 3 billion to RMB 4 billion. It means that probably around RMB 1 billion every quarter. If we take all those strategic NIO business aside, we are still very confident to achieve breakeven for NIO core business in the fourth quarter of 2023. So for the second question regarding ET5, previously one of our co-founders mentioned that the ET5 volume is going to exceed the volume of the BMW X3 Series in event. Of course, this is not a guidance for us, but because I believe ET5 is much, much better than BMW X3 Series, so we are very confident to achieve this target. For the vehicle gross margin, in 2022, I believe, there's still many challenges for us, especially when it comes to the lithium carbonate cost. Right now, lithium carbonate cost still stays at a very high level. Previously, it had dropped to around RMB 400,000, and now it is going back or actually reached a new high, that is around RMB 600,000. This has significantly affected the battery cost. And for us, this is actually out of our control, and it's very difficult for us to predict. But I believe we can still remain at a relatively stable vehicle gross margin in the fourth quarter compared with the third quarter. For the lithium carbonate cost, I would like to probably share some impact. I don't think that the price or the cost of the lithium carbonate is due to the supply situation. Because right now, if you look at the car companies in China, I don't think that there is any car companies that cannot deliver their products because of the battery shortage. So of course, in the future, we believe the lithium carbonate cost will go down, but we cannot predict when. This has a relatively big impact on us because for all of the products, we have a relatively high battery capacity. Averagely speaking, for each of our vehicles, the battery is around 80 to 90-kilowatt hours. So if the lithium carbonate cost stays at a very high level, this is going to have a big impact on the vehicle gross margin. For us, maybe I can give you some numbers which will probably help you to understand the situation. If we think about RMB 400,000 cost for the lithium carbonate, this is actually affecting our vehicle gross margin by around 2.02%. And if we can see the lithium carbonate cost drop from RMB 600,000 to RMB 400,000, then this is going to improve our vehicle gross margin by around 4%. So if the lithium carbonate cost can drop to even lower, probably around RMB 100,000, which is a reasonable price for the lithium carbonate, then it means that over vehicle gross margin can improve by probably around 8%. So this is the reality we are facing.

[Foreign Language] Actually, we just did some dealer check about ET5 vehicles ordered today. You actually can only get a car in February or March. This coupled with accessory products that of Model 3. So my question is about what is the [indiscernible] for Model Y? [indiscernible] NIO may launch a product called ET5 vehicle. And we see this going to be showcased in the upcoming NIO Day in December this year?

[Interpreted] So for the product lineup in the first quarter of next year -- in the first half of next year, we're going to have 5 new products. And I believe probably 1 of them is going to be like the Model Y to Tesla like you mentioned. But for us, we focus more on the overall volume of all the product lineup. We are in the premium market segment. So our philosophy is to satisfy the diversified user demand with high efficiency. In the price range from 300,000 to 500,000, we will provide different products to satisfy the diversified user demand and taste. So I believe that with our product lineup, we should be able to achieve a good overall delivery volume that can meet our expectations. I don't actually expect that 1 product can sell over 100,000 units in China. For example, for ET5, if it can sell probably over 30,000 units per month, it's going to be a very common street car, and I don't think this is good for the ET5 or for NIO. For the mass market, this is a different story. We just had a meeting today with the mass market team. And for us, we believe the mass market product can sell probably over 50,000 units per month for 1 model because this is different market segment and different target user group.

Our next question comes from Jeff Chung with Citi.

[Foreign Language] So my first question is about the sales volume growth into November and December. So in order to meet our medium quarterly target, 43,000 units, and if the month-on-month improvement to be linear at around 37%, we should be reaching around 19,000 units monthly run rate by December. So from which could you break down the volume of ET5? And the second question is if this ramp-up pace is going to be nonlinear with most of the wait happening concentrated in December. So could you tell us what kind of elements will determine our run rate overshoot in December, but not in November?

[Interpreted] Thank you, Jeff, for your question. In November, we do need some time to ramp up the production, including ET5, considering the factors I just mentioned like the EDS. In December, except the silicon carbide I just mentioned, I believe we will have more production compared with the production of November. Of course, in December, we hope that we can still achieve over 20,000 production run rate.

The next question comes from Nick Lai with JPMorgan.

[Foreign Language] I have two simple questions really. The first question is about the cash burn and CapEx expectation as we move into '23 and '24, and also take into account incremental investment CapEx as well as potential CP. The second question, again, is on the AI and [indiscernible] price strategy. And you can just talk about the potential automotive provisioning. We have enough stock of NVIDIA A100 chips, but also looking for carve-out solution, that related algorithm, but what about the chip that's been used in the car.

Nick, this is Stanley. As introduced by William and myself, we will further improve our SG&A operating efficiency. And furthermore, our R&D expense will keep relatively stable compared with 2022. So operating cash flow wise, I think, we are quite optimistic to achieve a positive operating cash flow in future years. So our cash burn mainly depends on the capital investment. Now we are planning our next year's budget. And generally, I think, the total segue of CapEx in next year will not increase so significantly compared with this year. But we are planning more like sales and service network. And also, we are planning more production and also supply chain capacity. So at this moment, I won't give you a clear guidance. And we are also confident that our cash on hand can supply our ongoing operation until breakeven is finally achieved.

[Interpreted] Overall speaking, we understand there are still many uncertainties in the market. But I believe with our current cash reserves and also the bank facilities, we should be able to support the company's operation until we breakeven. So we don't think this is going to be a huge challenge for the company. Regarding the chipset, previously, we have already addressed the AI training chipset that is the NVIDIA A100. And now I would like to probably elaborate more on the onboard chipset. We are the first company in the world to launch our product that is equipped with NVIDIA Orin, which is actually 6 months earlier than other companies. We also have a very close collaboration with NVIDIA. But at the same time, last year, we have already kicked off the R&D of our AD chipset. Right now, we have around 500 people working on the AD chipset. I believe it is commonly acknowledged that AD chipset is closely coupled with the AD algorithm. If we can use the AD algorithm to define the design of the AD chipset, the overall efficiency can be significantly improved, which can also contribute to our vehicle gross margin. The overall progress of the AD chipset R&D is on track, and we have seen some positive achievement from the team.

Our next question comes from Jane Chang with CICC.

[Foreign Language] So my first question is about, in the current external environment, everyone encountered a lot of difficulties in production. So in the longer term, will we consider switching from OEM mode to self-build production? Are there any difficulties in obtaining qualification and will it optimize our new product ramp-up speed or manufacturing cost? And my second question is regarding R&D investment and CapEx, about the boundary of our in-house R&D. As we can see that in the third quarter, on the further expense to RMB 2.8 billion. So considering the current capital market environment and the much more intense competition in Chinese EV market in a few years, will we adopt a more conservative strategy for R&D and CapEx? So under what circumstances we will adjust our current strategy? And whether our organization is flexible enough to adjust? And the last question is about just mentioned MPV models. So what do we think of the MPV market? Will we launch a new product pipeline in this segment in the future. That's all my 3 questions.

[Interpreted] For the factory 2, we are still working together with JAC. I believe our joint manufacturing corporation has been quite positive. Regarding the vehicle production, I believe the vehicle production capacity can support the company's delivery target in the short term. Previously, I've already mentioned that from 1 plant, we should be able to achieve 150,000 units under 1 shift. And if we combine the 2 plants together, the factory 1 and factory 2, then it means that under 1 shift we should be able to achieve a production capacity of 300,000 units. If we double this to 2 shifts, then the production capacity can also be doubled. When it comes to the supply chain, of course, there are some volatilities for the whole industry, not just for NIO. But as we ramp up our production capacity and delivery, I believe we have the capability to mitigate the risk of the supply chain. For the second question regarding the boundaries of our investment. Previously, I have already mentioned we do have a sufficient cash reserve to support the company's operations. And when it comes to the overall investment for R&D, every quarter we expected to invest around RMB 3 billion for R&D efforts. So this includes all the R&D initiatives we have explained previously. For the CapEx, we will improve the efficiency on the CapEx investment, and we do have a very strict management regarding the finance and the investment of the company.

Okay. And with regard to the MPV market, our strategy is very simple. In the short-term, we have no plan to launch MPV model. Of course, long term, we'll keep monitoring this big market. We've also noted that this market is very hot. From the supply side, several Chinese brands have launched their high-end MPV model. But from the demand side, at least right now, the MPV segment still remains a rich market, but that's why we would like to keep monitoring and then decide what to do in the next several years.

Our next question comes from Yuqian Ding with HSBC.

[Foreign Language] I got two questions. First is to follow up on the margin side. So next year's gross profit margin improvement, will that be mainly coming from the increasing economic scale? Could we have some quantification over there? Because we see, from the mix side, with more ET5 in the mix, could be coming down a little bit. And also, we talked about a Q4 breakeven. Is that based on the current lithium price assumption, or in our Q4 breakeven assumption, they are basically baking normalizing of the lithium price? And the second part is to ask what's the City Pilot on the autonomous driving side, what's our time line to push for City Pilot? And when do we expect our autonomous driving capability to improve from a help-selling vehicle items to support materially on the margin side?

[Interpreted] Thank you, Yuqian, for your question. As of now, of course, the lithium carbonate cost is not going down as we expected in the fourth quarter. But like I explained previously, I don't believe this is a supply issue because if we look at the market right now, all the car companies can actually get sufficient supply of the batteries. For us, regarding the lithium resources, we have seen some lithium resources enter the market in the past. And we expect probably next year the cost of the lithium carbonate is going to be around RMB 300,000 to RMB 400,000. When it comes to the budget planning of the company, of course, we would like it to be more conservative. So our assumption is around RMB 400,000. This is basically over judgment regarding the lithium carbonate cost probably for the next year. For the autonomous driving, I believe we will still need some time to see the contributions of autonomous driving to the vehicle gross margin and the overall gross margin. There are several factors. Partly it is because of the feature and function development and partly because of the legislation. Recently, we do see some positive progress on the legislation front. For example, MIT has launched some pilot programs for the autonomous driving, and for us, we believe it will still need probably 1 to 2 years to get mature when it comes to autonomous driving technologies and also the legislations. So in the short term, we expect probably there will not be any significant contribution from the autonomous driving to the vehicle gross margin and to the overall gross margin.

Our next question comes from [ Shen Chi Yin ] with CITIC Securities.

[Foreign Language] So my first question is about inventory. So the inventory is around RMB 6.7 billion on quarter 3. It is nearly doubled compared with quarter 2. So does this number imply around 10,000 more inventory cars on your balance sheet? My second question is about ET5. It was really hot on September. But recently, we see some negative comments and news on the social media because of its poor performance on energy efficiency. So I was wondering what's your next move to deal with the consumers' concerns?

This is Stanley. For the inventory increase in Q3, I think mainly two reasons. One is about our increase of inventory cars in Q3. Our production was negatively impacted by our rear subframes in Q3. So we increased the production of ES8, ES6, and ET6 in Q3. Secondly, it's because of the increase of the component inventory. To secure the production in the coming months, we stored more key materials like chips and also other raw materials in Q3. So all those factors led to increase of our inventory stock.

[Interpreted] Yes, for the ET5, different tires may have a different impact and different performance when it comes to our consumption. If the users choose a performance tire, then the power consumption will be higher. But if the user chooses a long-range tire or the low resistance tire, then the power consumption performance is going to be much better. So we would also like to remind our users, if you really enjoy driving and handling and you would like to experience the acceleration of ET5 within 4 seconds, then of course, you can go with the performance tire. But if you care more about the drive range, then it's better for you to go with the long-range tire, which will have much better performance when it comes to the range.

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.

The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]