Nio Inc (NIO) Q1 2022 Earnings Call Transcript

Nio Inc (NASDAQ: NIO) Q1 2022 earnings call dated Jun. 09, 2022

Corporate Participants:

Eve Tang — Investor Relations

William Li — Founder, Chairman and Chief Executive Officer

Steven Feng — Chief Financial Officer

Stanley Qu — Senior Vice President of Finance

Analysts:

Jeff Chung — Citi — Analyst

Tim Hsiao — Morgan Stanley — Analyst

Bin Wang — Credit Suisse — Analyst

Ming-Hsun Lee — Bank of America — Analyst

Nick Lai — J.P. Morgan — Analyst

Paul Gong — UBS — Analyst

Yuqian Ding — HSBC — Analyst

Vijay Rakesh — Mizuho — Analyst

Xing Chang — CICC — Analyst

Presentation:

Operator

Hello, ladies and gentlemen, thank you for standing by for NIO Incorporated’s First Quarter ’22 Earnings Conference Call. [Operator Instructions]

I’ll now turn the call over to your host, Ms. Eve Tang from Capital Markets. Please go ahead, Eve.

Eve Tang — Investor Relations

Good morning and good evening, everyone. Welcome to NIO’s first 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 Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; Mr. Stanley Qu, Senior Vice President of Finance; and Ms. Jade Wei [Phonetic], Vice President of Capital Markets.

Before we continue, please be kindly reminded that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the US 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 US 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 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.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech]

Hello, everyone. Thank you for joining NIO’s first quarter ’22 earnings conference call.

[Foreign Speech]

In the first quarter of 2022, we delivered 25,768 premium smart electric vehicles, another record quarter with a growth of 37.6% year-over-year.

[Foreign Speech]

During the second half of March new wave of coronavirus outbreaks in certain regions in China has impacted our vehicle production and deliveries. In April and May, we delivered 5,074 and 7,024 vehicles respectively starting from June while the supply chain and vehicle production has basically returned to normal. Our vehicle deliveries have also gotten back on track in Shanghai and several other important markets. We will continue to work closely with our supply chain partners to further improve the overall supply chain production capacity and accelerate vehicle deliveries. We expect the total delivery in the second quarter of 2022 to be between 23,000 to 25,000 units.

[Foreign Speech]

Despite of the outbreak our product has continued to witness robust demand. Our order intake stays strong, especially for ET7 and reached a new high in May. We believe for the launch of new products will drive continuous order growth. In the meantime, governments at all levels in China have also introduced positive policies to encourage vehicle consumption and purchase of electric vehicles. This will further promote the upgrading and new purchase of premium smart electric vehicles. Going forward, we will further increase the overall supply chain production capacity and we’re competent of ramping up our deliveries at a much faster pace in the second half of this year.

[Foreign Speech]

In terms of vehicle gross margin, the whole industry is faced with the rising cost of batteries, raw materials and chips which has also affected our vehicle margin. In the first quarter, our vehicle margin stood at 18.1%. As the battery cost continued to surge and the chip [Phonetic] in April, the vehicle margin in the second quarter will be under even higher pressure. To mitigate the impact of the rising material cost, we have taken a series of countermeasures such as adjusting product prices with the deliveries of new products, higher revenue per vehicle and increasing production output. We expect the vehicle margin to start bouncing back from the third quarter.

[Foreign Speech]

On May 20, 2022 NIO was listed on the main board of the Singapore Exchange which marked another important milestone of NIO. That will further enhance our footprint in the global capital markets, which led us to better connect with the investors, and serve investors from around the world. It is also of insignificance for our Global Business development.

[Foreign Speech]

In addition, according to the announcement made by the Hang Seng Indexes Company Limited, NIO will be included in the Hang Seng TECH Index and the Hang Seng Composite Index starting from June 13.

[Foreign Speech]

Next, I would like to share with you some updates on our recent operations and R&D.

[Foreign Speech]

Research and development of new products and core technologies has been one of NIO’s long-term strategic focuses. We have been making positive progress on various related fronts.

[Foreign Speech]

On March 28, we started to deliver ET7 for the extraordinary handling and riding experience has been well-recognized by the users and the media. Since the delivery of ET7, we have made fast iterations and released more smart features via portal updates on a continuous basis. We have introduced over 200 new features on the NT 2.0 platform with the next generation voice interaction and emotion engine technologies. NOMI’s interactive experience is comprehensively upgraded. The driver assistance system powered by NIO’s full stack in-house algorithm has achieved outstanding performance in external reviews and the build test. In the third quarter, NIO released and NOP plus based on the HD map, co-developed with our partner. Enabled by the powerful software and hardware platform, full stack in-house algorithm and end to end approach to data collection and operations capabilities. NT 2.0 is capable of a fast iteration and upgrade.

Laying a solid foundation for releasing NEV [Phonetic] services in more scenarios and providing the autonomous driving experience beyond expectations.

[Foreign Speech]

This month, we will unveil ES7, a brand new large five-seater SUV based on the NT 2.0 and while start but delivery in late August.

[Foreign Speech]

We will continue to set up our investments in battery-related fields. As of now, we have over 400 employees working on battery-related technologies, including battery materials, cell and pack design, battery management systems and manufacturing processes. We aim to build and enhance our comprehensive battery R&D and industrialization capabilities to improve the competitiveness and the profitability of our products in the long run.

[Foreign Speech]

With regards to productions, F1 has fully resumed capacity to the level before the recent outbreak. In addition, we will further ramp up the production output on a gradual basis to support the mass production of the new products. NIO F2 at NeoPark has completed the production line installation and tooling and has entered into the production validation phase. It will be put into operation from the third quarter this year. It only took us 12 months from kicking off construction to rolling off the first tooling trial build in F2 which is a record construction speed in the industry.

[Foreign Speech]

In terms of the sales and service network, we now have 381 new houses and new spaces in 152 cities as well as 247 new service centers and delivery centers in 149 cities worldwide.

[Foreign Speech]

With regards to charging and swapping network, we’ve installed over 960 battery swapping stations in 197 cities. So far, we have 829 supercharging stations and 1,140 destination chargers.

[Foreign Speech]

The continued deployment of our sales, service and the power network will bring long-term benefits to our brand awareness, user satisfaction rate and the sales growth.

[Foreign Speech]

With respect to the global market, while further expanding our sales and service network and improving the user satisfaction in Norway, our teams have been accelerating preparations to launch our products and services in Germany, The Netherlands, Sweden and Denmark.

[Foreign Speech]

In terms of our mass market brands, our product development and production preparation are in steady progress. On May 10, NIO signed a strategic corporation agreement with Hefei on the second phase of vehicle production plant and the facilities for key components at NeoPark. The agreement marks the start of the planning and preparation of the production capacity of the new brand.

[Foreign Speech]

NIO [Phonetic] originate strong vision fueled with the blue sky. We are fully committed to making continuous investments in environmental protection and social welfare and contributing to global sustainable development.

[Foreign Speech]

Since we announced the Clean Parks, a global ecosystem construction initiative last December, NIO has been actively cooperating with several organizations to roll out various projects to support national parks and natural reserves. On April 22, NIO reached a strategic cooperation with World Wide Fund for Nature who has joined hands with us in establishing a clean and low carbon energy separation system in national parks and natural reserves in China and beyond.

[Foreign Speech]

Although we went through many challenges in the first half of 2022, 2022 is still a critical year for NIO to make committed investments and efforts in new products, core technologies, global market entry and the mass market brand. In the second half of this year, we will accelerate our new product delivery and the capacity expansion. We are confident of and look forward to realizing satisfying results in 2022.

[Foreign Speech]

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.

Steven Feng — Chief Financial Officer

Thank you, William. I will now go over our key financial results for the first quarter of 2022. And to be mindful of the length of this call, I will refer to 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 first quarter were RMB9.9 billion, representing increase of 24.2% year-over-year and remained stable quarter-over-quarter. Our total revenues are made of two parts, vehicle sales and other sales. Vehicles sales in the first quarter were RMB9.2 billion, representing an increase of 24.8% year-over-year and remained relatively stable quarter-over-quarter. Increase in vehicle sales year-over-year was mainly attributed to higher delivery.

Other sales in the first quarter were RMB0.7 billion, representing an increase of 15.6% year-over-year and remained relatively stable quarter-over-quarter. The increase in other sales year-over-year was mainly attributed to the increased sales of service and energy packages and others in line with the incremental vehicle sales in the first quarter of 2022 which was partially offset by a decrease in revenue from battery upgrade services.

Gross margin in the first quarter was 14.6% compared with 19.5% in the first quarter of 2021 and 17.2% in the fourth quarter of 2021. The decrease of gross margin year-over-year was mainly attributed to the decrease of vehicle margin and reduction in other sales margins resulting from expanded investment in our service network. The decrease of gross margin quarter-over-quarter was mainly attributed to the decrease of vehicle margin.

More specifically, vehicle margin in the first quarter was 18.1% compared with 21.2% in the first quarter of 2021 and 20.9% in the fourth quarter of 2021. The decrease of gross margin year-over-year was mainly driven by the lower average selling price due to changes in our product mix. The decrease of vehicle margin quarter-over-quarter was mainly attributed to the increased battery cost per unit.

R&D expenses in the first quarter were RMB1.76 billion, representing an increase of 156% year-over-year and remained stable quarter-over-quarter. The increase of R&D expenses year-over-year was mainly attributed to the increased personnel costs in research and development functions as well as for incremental design and development costs for new products and technologies.

G&A expenses in the first quarter were RMB2.01 billion, an increase of 68.3% year-over-year and a decrease of 14.6% quarter-over-quarter. The increase in SG&A expenses year-over-year was primarily due to the increase in personnel costs in sales and service functions and costs related to the sales and service network expansion. The decrease in SG&A expenses quarter-over-quarter are mainly attributed to the decrease of marketing and promotion expenses — marketing and promotion expenses incurred from the hosting of NIO Day in December 2021 as well as decrease of professional services expenses.

Loss from operations in the first quarter was RMB2.19 billion, representing an increase of 639.7% year-over-year and decrease of 10.5% quarter-over-quarter. Net loss in the first quarter was RMB1.78 billion, representing an increase of 295.3% year-over-year and decrease of 16.8% quarter-over-quarter. Net loss attributable to NIO’s ordinary shareholders in the first quarter was RMB1.83 billion, representing a decrease of 62.6% year-over-year and a decrease of 16.3% quarter-over-quarter. Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB53.3 billion as of March 31, 2022.

Now this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Jeff Chung from Citi. Please ask your question.

Jeff Chung — Citi — Analyst

[Foreign Speech]

So I have two questions. One is the second quarter GP margin outlook. So it looked like the high-margin products as a percentage of sales in the second quarter could reach about 37% versus 17% in the first quarter. I think this is one of the positives that may potentially lift up the GP margin trend. And secondly is that there has been some MSRP hike recently. And we would like to know how much of the sales volume from the second quarter has been a price hike versus the first quarter. Obviously, this is the first question.

And the second question is that our new model cycle suggests that our current aging products, three products, is going to turn into six new products into the next six to 12 months. So my question is whether the third quarter production capacity can reach above 48,000 units since, by referring to Tesla, we saw a strong week-on-week and month-on-month recovery from the past weeks. And my understanding is that a lot of our supply, auto part suppliers are overlapped with the Tesla. So, if Tesla recover fast would that mean that we are going to enjoy the similar pace into June and the third quarter? Thank you. [Foreign Speech]

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech]

Thank you for your question, Jeff. Starting from April, we actually updated our agreement with our battery supplier CATL. And right now, our battery cost is connected with the raw material indexes. So basically, it means that if in the second quarter we can see the battery cost is going to significantly increase compared with that of the first quarter, and this is going to affect of vehicle gross margin performance, but there’s going to be some latencies.

The battery prices increase in the prior month is going to be reflected in the battery cost of the later months and this is going to incorporate it into offer bigger gross margin performance. According to the current forecast and the market trend, we can see the battery cost is going down a little bit starting from May and we have also taken some measures, for example, increasing our product prices. This is going to help us improve our performance in the third quarter.

Right now, we are still delivering vehicles without the price adjustment and we expect to start to deliver the vehicles with the price adjustment starting from the third quarter because our business model is made to order or order to delivery. So just now you have also mentioned that our products with higher gross margin is also going to kick in, in terms of the performance of the vehicle gross margin. Just as the ET7 that is launched in the second quarter and we expect the production of ET7 is going to gradually ramp up starting from June. And then starting from the third quarter is going to maintain at a normal level.

Overall speaking, we believe our vehicle gross margin is going to face a higher pressure in the second quarter. So this is mainly due to the battery cost impact. The vehicle gross margin of the second quarter is going to be lower compared with that of the first quarter. But with the price adjustment, we expect we are going to start to deliver the vehicles with higher prices starting from the third quarter which is going to contribute to our vehicle gross margin.

[Foreign Speech]

With the production capacity expansion in the F1, we expect that this is going to start to improve the overall production output starting from June. Of course, it will need some time to gradually ramp up the production, but we believe the vehicle production is not going to be a bottleneck. And the demand is not an issue for us. The main challenges that we’re facing right now is the supply chain, especially in terms of the chipset and also the production capacity of our suppliers. We are very confident of our delivery performance starting from the third quarter.

[Foreign Speech]

Thank you.

Operator

Thank you. Our next question comes from Tim Hsiao from Morgan Stanley. Please ask your question.

Tim Hsiao — Morgan Stanley — Analyst

[Foreign Speech]

So let me translate my questions. The first question is about orders. So could you please provide further details? Do order ET7 dominate the current order intake while the demand for carbon SUV are falling more meaningful? And are we going to have say on our current SUV model in time soon? And you mentioned the record order book does that include the orders of ET5?

My second question is about batteries. Because during the presentation, I think William mentioned, NIO now has more than 400 related — battery-related technology covering cell, pack, BMS and more. Will NIO consider evolving more in battery production over time? Or seek for fashionable battery OEMs vendors help to produce the battery base on NIO’s home patents and the technology? So those are my two questions. Thank you.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech]

Thank you, Tim, for your question. Regarding your first question for order, basically, in May, our order growth is quite significant and this actually includes the order intake for the existing ES8, ES6 and EC6. The overall order intake performance of the existing ES8, ES6 and EC6 is quite steady and we have witnessed certain growth. You have also mentioned whether we are planning for some upgrades of our very existing models? We are planning for incorporating some smart hardware and some new software features for the upgraded version of the existing models.

[Foreign Speech]

After we launched the ET5 in last year’s NIO Day, we have witnessed the steady growth of the order intake. Recently, because of the auto shows and exhibitions, we have witnessed a very positive order performance of ET5.

[Foreign Speech]

Just now, for the 400, this is actually about the R&D teams focusing on the battery technologies. We have over 400 employees. For this, we plan to leverage our R&D capabilities in terms of the battery to launch an 800-volt high-voltage battery pack which will also support the battery swapping technologies in 2024. We understand that this is going to bring many innovative technologies and revolutional solutions. We believe that this unified pack concept is going to redefine the battery technologies in terms of the battery cost and the battery safety.

Our plan right now is to start the production of this new next-generation battery pack in the second half of 2024. Our long-term battery strategy is going to be a combination of in-house production and also outsourcing. We believe that this long-term strategy is going to benefit the overall competitiveness and the vehicle gross margin as well as the profitability of NIO’s products. This is also going to be of [Technical Issues].

Thank you, Tim.

Operator

Thank you. Our next question comes from Bin Wang from Credit Suisse. Please ask your question.

Bin Wang — Credit Suisse — Analyst

[Foreign Speech]

I actually want to quantify the margin because you actually said that second quarter will be a low margin. Can you say what’s the level of the decline in margin because you actually raised the price for current by around RMB10,000. Can you notice the decline in the gross profit margin across product just RMB10,000? You also mentioned that in the third quarter we’re back to normal. What’s the back to normal are you referring to? You referred to 18% gross margin in the first quarter or an after peak level of around 21%. Meanwhile, I suppose you will further increase the price for the upcoming battery semiconductor intention corporate version of content product. Is that going to be another increase in the gross margin? Thank you.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech]

Thank you, Bin, for your question. Regarding the price increases for our products, previously, I have also explained that this is going to be reflected in our vehicle gross margin in the third quarter because right now we are still delivering vehicles without the adjusted price.

For the second quarter, the battery cost is higher than that of the first quarter, but the impact of this is still uncertain. Specifically, we believe it’s going to be higher than the RMB10,000 you have just mentioned. But we believe there’s still many uncertainties that we need to weigh out a little bit because, just like I mentioned, right now, the battery cost of products is actually based on the raw material trends and the index.

So it means that for the third quarter, we will probably see some trends of the raw material cost going down a little bit. And with our vehicle gross margin improvement based on the new technology platform 2.0, the vehicle gross margin in the third quarter, we believe it’s going to bounce back. But there are still many uncertainties because the battery cost is very difficult to forecast and to determine at this moment.

[Foreign Speech]

Operator

Thank you. Our next question comes from the line of Ming-Hsun Lee from Bank of America. Please go ahead.

Ming-Hsun Lee — Bank of America — Analyst

[Foreign Speech]

My first question, could you also give us some guidance regarding your potential product pipeline for 2023, especially for the A66. Will you consider to launch the new generation next year? Second question is regarding your services others business. First, revenue starting kind of Q-on-Q, is it because of COVID impact? And secondly, gross margin of this business is also not very good for the quarter. It’s also — is this because of the lower utilization when you build a new battery swap station? And what do we expect the margin improvement for this business?

[Foreign Speech]

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech]

Thank you, Ming, for your question. Of course, for the existing models, including the ES8, ES6 and the EC6, our plan is to upgrade all those models to the platform in the next year.

Stanley Qu — Senior Vice President of Finance

Hi, Ming, this is Stanley. The other operating loss mainly, because the increase in depreciation and also operating expenses related to our power swap stations, and in this year, we will continue to build the battery charging and swapping network, which can bring the unique experience to our users and can benefit the further improvement of our user satisfaction and also brand image. So from a short term, I think the other loss will increase along with the expansion of the network. And from the long run, the numbers of the delivery and also users grow, we will make our charging service — charging and swapping services more efficient. The losses arising from the charging and swapping service will gradually narrow down. And our innovative business models, including NIO Life and also ADAS, can also bring extra gross profit and booked in this account. Thanks, Ming.

Operator

Thank you. The next question comes from Nick Lai from J.P. Morgan. Please ask your question.

Nick Lai — J.P. Morgan — Analyst

[Foreign Speech]

Let me explain very quickly my two questions. First is regarding supply chain. Can you give us an update on supply condition in June as well as second half as well as the pricing with battery supplier. Has recent price hike reflect the cost increase in the first half and will battery cost continue to rise in the second half? Are we going to revise our price again in the second half as well so? And second, a quick update on our mid-market brand strategy? Thank you.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech]

Yes. Thank you for your question. There are many uncertainties in terms of the chip supply. Because in our vehicle we probably have over 1,000 chips and the chip shortage situation for those 1,000 chips may vary from time to time. And this totally depends on the upstream suppliers of the Tier 1 suppliers of NIO.

Many of the chip shortage is actually caused by the basic chipsets used by those Tier 1 suppliers or the upstream suppliers of those Tier 1 suppliers. For example, like TI and Infineon, they provide various kinds of chips to OEMs and it’s very difficult to actually identify specific risky chips that we are going to face a shortage of. That is why we do have a risky chip list. Normally, it includes probably around 1 to 20 different kinds of chips and this list may change month to month. Of course, we will try to mitigate all those risks with different kinds of measures.

Previously, our plan is to expand our production capacity starting from the second half of this year. So that’s why starting from last year, we have already started to work closely with all our suppliers to make sure we can secure sufficient supplies for our products.

We have some risks in terms of the chip supply, but we believe this is actually manageable and is under control. For the production capacity of the — in the month of June, this is actually not specifically related to the chip shortage or other supply chain rates because this is just a part of the normal ramp-up process for the production capacity expansion.

[Foreign Speech]

Regarding the second question of the battery, starting from April, our battery cost is linked together with the raw materials of the batteries in the market. We can see the raw material costs actually picked in April, and we started to see some trend of going down, specifically for the lithium carbonate. In China, we have already started to see there are more resources for the lithium and there are some companies trying to mine the lithium to make sure they can supply to the market and meet the demand. So I believe the general consensus of the industry already peaked in April. So it’s going to gradually go down.

But of course, people have a different forecast in terms of what is going to be the final cost of those raw materials. Some people may think that the lithium carbonate is going to go down to around probably 30,000 per ton. This means that we are going to reduce the cost of lithium carbonate by 20% to 30%. And we also have a similar forecast for the nickel material as well. So we believe the general trend is the cost of those battery materials is going down, but — and it’s not going to go up again.

The next question is about the mass-market brand. Our plan is to start the delivery of the products of the mass market brand starting from the second half of 2024. This product is going to be based on the new technology platform 3.0. And we believe the mainstream products of the mass market brand is going to be at the price range from 200,000 to 300,000. Of course, the mass market brand products will also support battery swapping and we are going to use our in-house development and manufacture the batteries for the mass market brand product.

Of course, this platform is going to support high-voltage technologies. And we believe with all those advanced technologies and the competitive pricing, those products under the mass-market brands are going to be very competitive.

Operator

Thank you. Our next question comes from Paul Gong from UBS. Please ask your question.

Paul Gong — UBS — Analyst

Let me translate my questions. The first question is related to ES7. Why from unveiling launch until delivery, it seem to be a lot faster than the previous ET7 or ET5? And how do you think about the cannibalization versus ES8, ES6, and EC6 given they are all kinds of SUVs of similar size?

My second question is regarding the supply chain preparation for the NT.2 platform. Currently, it seems that the ET7 production remains to be relatively slow in terms of power with pretty long waiting period. In view, we are going to have an ET5 with major volume and ES7 in the pipeline. Have we done enough work to secure the key components supply to enable the ramp-up of the overall NT.2 platform models?

William Li — Founder, Chairman and Chief Executive Officer

Thank you, Paul, for your question. Regarding the first question, we have always been working on the development of our new products and we have been working on the development of the ES7 for some time. And the launch time of the ES7 is actually already planned when we were developing the product.

It may seem right now is very close to the delivery of the ES7. But previously our plan is to launch the ES7 earlier. Due to the impact of the COVID-19, we delayed a little bit. That is why it seems that the — it’s much closer to the actual delivery of the ES7. But everything is actually going forward according to our plan.

ES7 is going to be based on the new technology platform 2.0, which is going to be offering higher and smarter technologies compared with the current NT.2 — NT.1 technology platform. So — and the current ES8, ES6, and EC6 are actually based on the NT.1 technology platforms.

There will also be some price differences. The price positioning of the ES7 is going to be between that of the ES8 and ES6.

We believe that there are not going to be cannibalizations between the ES7 and the existing models because we have different positioning and pricing strategies for those products. For example, the ES8 is mainly focusing on the six-seater and seven-seater markets. And the ES7 is positioned as a mid-to-large, five-seater SUV, which has higher pricing compared with that of the ES6.

For the second question, of course, we have already and actually started at a very early stage to plan for the production ramp-up of the products based on the NT.2 platform. And we have already done this for some time. Of course, there are going to be some risks, but because we have planned ahead, we believe, it is still manageable.

Operator

Thank you. Our next question comes from Yuqian Ding from HSBC. Please go ahead.

Yuqian Ding — HSBC — Analyst

So I’ve got two questions. The first is to ask about whether our price hike in May is enough to cover the cost headwind from the battery side, aluminum body, and also the chip alignment in the channel? And what’s the management’s thoughts about the actual cost and also the pricing strategy coming forward?

And the second question is to ask about ET5 volume and margin conviction. We know there’s a bit of auto splash on the entry-luxury, which is the currently ET7 that has been located within the segment. And also, previously, we have designed 20% above the margin. But back in time, we haven’t considered — we might not consider the cost headwind coming from the commodity side might persist longer.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech]

Stanley Qu — Senior Vice President of Finance

Yuqian, this is Stanley. For the cost increase of the battery, I think William has given us a lot of guidance. And regarding the price increase of other materials and also chip costs, I think we have absorbed through close cooperation with our partners and also internal efficiency improvements.

And also, as William introduced, the whole market for the key raw materials is quite dynamic. At this moment, we cannot give a precise estimation of the following months or quarters, the trend. So, for the second question, William.

William Li — Founder, Chairman and Chief Executive Officer

For the ET5, because we have already accumulated a significant amount of reservation orders, so if we consider the production of the ET5, we believe, for this year, the production of ET5 will only be sufficient to meet the backlog for the ET5 orders. So this price increase of the ET5 is not going to have any impact of our vehicle gross margin performance this year.

Operator

Thank you. Our next question comes from Vijay Rakesh from Mizuho. Please ask your question.

Vijay Rakesh — Mizuho — Analyst

I have quick two questions. On your in-house capacity with Hefei, you have talked about 240,000 annual capacity. Do you think you get to that 20,000 a month run rate by end of Q3 of this year, Q3 ’22?

And the second question is on the NeoPark, that obviously has an incremental additional 300,000 per year capacity. You talked about the ramp, starting that in Q3. Can you walk through how that ramp should look? Will it be like 10,000 a month exiting this year and then gradually increase next year? That’s it.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech]

Steven Feng — Chief Financial Officer

Okay. So Vijay, thanks for your question. For the production capacity of our first plant with JAC-NIO, as we have mentioned, we will continue to ramp up its production capacity in Q3. I think probably at least in the second half of the year, our overall plant capacity should reach 20,000 units per month. It can be — it’s not probably too hard for us to see when.

And then for the F2’s ramp-up pace, actually, first, we will kick off the delivery of ET5 from this plant in Q3. So it will start production in Q3 and that we try to reach 10,000 units within quite a short period, probably three, four months. I think that’s our plan.

Of course, next year, as we introduce more models into this factory, the overall production volume of F2 will continue to rise.

Operator

Thank you. Our next question comes from Xing Chang from CICC. Please ask your question.

Xing Chang — CICC — Analyst

My first question is about it was reported in May that we have relevant recruitment information in the United States. So can you share more details about it? How do you see the breakthroughs in the overseas market, which potential market do we think has more potential for us to deployment, and what are the difficulties?

And my second question is about NAD. Can you share more details about its current testing progress?

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech]

Steven Feng — Chief Financial Officer

Okay. And Chang Xing, thank you for your question. So first, with regard to the U.S. market, the short answer is we’ll definitely enter the U.S. market. And actually, we’ve started a comprehensive study of the U.S. market and have a dedicated team in charge of the business plan for the market. We’re talking to the U.S. market in an innovative manner, but now it’s still in the study phase. So, we’ll share more information when it’s appropriate.

And also then for the difficulties or difference in the laws in the European market, first actually with a lot of energies between China and the European market from the bus model to the aspiration for green smart EV products. The Norwegian users also enjoy the concept of smart EVs and even the price.

But if we do need to name some difference, of course, first, the culture and also the cost structure. So in Europe, surely, the delivery cost would be higher. And also, we need to be — accumulate enough understanding of the local culture and get integrated into the local community.

William, back to you.

William Li — Founder, Chairman and Chief Executive Officer

For the second question regarding NAD, the current ADAS functions and features based on the NIO technology platform 2.0 is actually derived from the full-stack technologies developed in-house by our own AD teams. We have comprehensive full-stack capabilities starting from a sensing algorithm and control strategy.

Starting from the delivery of the ET7 on March 28, we have witnessed the data closed-loop management and collection, which has helped us to achieve a very fast iteration and upgrades of the vehicle autonomous driving or ADAS experiences based on the NT.2.

So for us, we have witnessed many improvements in the last two months because we can collect our data and we can actually see all those data we can see that the performance of the NT.2 is actually several times better than that of the NT.1 Because after we collect all those data, we can use the data to train our algorithm and our ADAS and AD technologies.

So, I have also just mentioned that we’re going to release the NOP plus. We are very confident with the performance of the NOP plus. This NOP plus is going to be based on the high-definition map developed together by ourselves together with Tencent. And this is going to be an in-house high-definition map.

We are going to integrate all those different technologies, including the high-definition map, with our AD and ADAS closed-loop data management. So we are going to use the same kind of technology stack to improve our autonomous driving and ADAS features. That is why we are very confident with the NAD performance in the long run based on our sensing capabilities the closed-loop data management and also fast iterations and systematic capabilities.

Operator

Thank you very much for all your questions. We have reached the end of the question-and-answer session. I’ll now turn the call back to the management team for closing remarks.

Eve Tang — Investor Relations

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.

Operator

[Operator Closing Remarks]