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NIO Inc. (NIO) Q3 2020 Earnings Call Transcript

NIO Earnings Call - Final Transcript

NIO Inc. (NYSE: NIO) Q3 2020 earnings call dated Nov. 17, 2020

Corporate Participants:

Rui Chen — Director of Investor Relations

Bin Li — Chairman and Chief Executive Officer

Wei Feng — Chief Financial Officer

Stanley Qu — Vice President of Finance

Analysts:

Tim Hsiao — Morgan Stanley — Analyst

Ming Lee — Bank of America Merrill Lynch — Analyst

Bin Wang — Credit Suisse — Analyst

Edison Yu — Deutsche Bank — Analyst

Nick Lai — JPMorgan Chase & Co. — Analyst

Jeff Chung — Citigroup — Analyst

Mei He — US Tiger Securities — Analyst

Presentation:

Operator

Hello, ladies and gentlemen, thank you for standing by for NIO Incorporated Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s conference call is being recorded.

And I will now turn the call over to your host, Mr. Rui Chen, Director of Investor Relations of the company. Please go ahead, Rui.

Rui Chen — Director of Investor Relations

Thank you. Good morning and good evening, everyone. Welcome to NIO’s third quarter 2020 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, VP of Finance; and Ms. Jade Wei, AVP of Capital Markets and Investor Relations.

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. 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 the 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, go ahead, please.

Bin Li — Chairman and Chief Executive Officer

[Foreign Speech] Hello everyone, thank you for joining NIO’s 2020 Q3 earnings call.

[Foreign Speech] In the third quarter of 2020, NIO delivered 12,206 ES8, ES6 and EC6, representing a strong growth of 154.3% year-over-year and 18.1% quarter-over-quarter. In October 2020, we delivered 5,055 vehicles, achieving another monthly delivery record.

[Foreign Speech] ES6 has been the best selling electric SUV in China for 13 consecutive months. ES8 has reached the number one in sales this year in the premium electric SUV segment, priced above RMB400,000 in China. Our third product, EC6 has started the deliveries in September. We have obtained and maintained a great word-of-mouth reputation for our products’ quality and service and continuously received positive feedback from our users. In the 2020, China New Energy Vehicle Experience Index released by JD Power in September, NIO has once again ranked highest in NEV new vehicle quality among all brands.

[Foreign Speech] After the launch of Battery-as-a-Service or BaaS, NIO’s products and services have been increasingly accepted by more users. The new order intake in October broke the historic record and exceeded our expectations. In the fourth quarter, we are confident that the deliveries will further grow to between 16,500 and 17,000 units.

[Foreign Speech] In terms of our gross profit, supported by the steadily growing quarterly deliveries, increase of higher margin products in our product mix as well as continuous improvement of material cost and manufacturing efficiency, our gross margin in the third quarter has continued to the upward trend, with the vehicle margin and overall gross margin reaching 14.5% and 12.9% respectively, surpassing our previous expectations.

[Foreign Speech] NIO’s existing efficiency is getting more and more self-evident. The operating loss has further narrowed to RMB946 million in the third quarter of 2020, representing a 18.4% decrease month-over-month and a 60.7% decrease year-over-year. In addition, we have achieved positive cash flow from operating activities for the second sequential quarter in Q3. We are confident to achieve positive operating cash flow for the full fiscal year 2020.

[Foreign Speech] Next, I would like to share with you some key topics of the company.

[Foreign Speech] With respect to R&D, we released the Navigate on Pilot feature, or NoP to users via FOTA in October, which has further boosted the competitiveness of NIO Pilot over ADAS system and received great reviews from users and media [Indecipherable] the environmental data from the central suit with high definition maps. NoP can guide the vehicle to follow the navigation route, automatically drive from on-ramp to off-ramp and overtake slower cars. It can engage not only in a highway, but also urban expressways, with optimizations based on specific use cases in China.

[Foreign Speech] We are accelerating the development of the second-generation technology platform NT 2.0. The core of NT 2.0 is industry-leading mass production autonomous driving system. We will share more details of NT 2.0 at NIO Day 2020.

[Foreign Speech] On November 6th, NIO launched a 100-kilowatt hour battery pack. It features a highly integrated cell-to-pack architecture with 37% energy density increase, which significantly extends the drive range of our product alignment [Phonetic]. It has also adopted other advanced technologies, including thermal propagation prevention design, all-climate thermal management and bi-directional cloud BMS to make the battery safer and better. The 100-kilowatt hour battery pack we’re beginning deliveries in December. Together with the launch of the 100-kilowatt hour battery pack, we also provide permanent upgrades and flexible upgrades by month or by year to users of the 70-kilowatt hour battery pack. As of today, we have successfully closed the loop [Phonetic] for our innovative BaaS model through vehicle battery separation, battery subscription and chargeable, swappable and upgradable battery solutions.

[Foreign Speech] At full production capacity, our supply chain production capacity has already reached 5,000 units per month in September. The teams are working diligently together with our partners to further elevate of our production capacity. We target to expand the overall supply chain production capacity to 7,500 units per month in January 2021, to meet the growing user demand.

[Foreign Speech] In regards of the sales and service network, NIO has opened 22 NIO houses and the 159 NIO Spaces in 106 cities and 169 power swap stations in 70 cities in China. Moreover, we’re developing the second generation power swap stations with lower cost and better experience and are planning to deploy the second generation swap stations in the first half of 2021.

[Foreign Speech] As our user base continues to expand, the new user community is becoming ever more vibrant. November marks the second anniversary of New User Volunteer initiative. As of November 10th, 2020, there are 3,101 user volunteers from 118 cities. They take it upon themselves to promote new and contribute it to the community at the showroom, auto shows, live streaming platform, delivery centers and NIO Day. Users trust and support have always been the biggest motivation for NIO to do more and be better.

[Foreign Speech] On November 26th, 2020, NIO will embrace its sixth anniversary with seamless support and team effort, we have achieved milestone performance, but we are still a start-up with a rather short history. In the face of a fierce competition and intense challenges, we will remain committed to making decisive investments into product and the core technologies and offering the best service and holistic user experience to live up to the expectations of our loyal user community.

[Foreign Speech] Thank you for your support. With that, I will now turn the call over to Steven to provide you the financial details for the quarter. Steven, please go ahead.

Wei Feng — Chief Financial Officer

Thank you, William. I will now go over our key financial results for the third quarter of 2020, and to be mindful of the length of this call, I encourage listeners to refer to our audit with press release, which is posted online for additional details. Our total revenues in the third quarter were RMB4.53 billion or $666.6 million. This is an increase of 146.4% year-over-year and increase of 21.7% quarter-over-quarter. Our total revenues are made of two parts; vehicle sales and other sales. Vehicle sales in the third quarter were RMB4.27 billion or $628.4 million, accounting for 94% of total revenues in this quarter, it represented an increase of 146.1% year-over-year and an increase of 22.4% quarter-over-quarter. The increase in vehicle sales year-over-year was primarily due to the increase in sales of ES6 and ES8. Other sales in third quarter were RMB259.2 million or $38.2 million, representing an increase of 150.7% year-over-year and an increase of 11.3% quarter-over-quarter. The increase in other sales year-over-year was mainly attributed to the increased revenues derived from the home chargers installed, service package and energy package subscribed, and accessories sold, which were in line with increased vehicle sales in the third quarter of 2020.

Cost of sales in the third quarter were RMB3.94 billion or $580.3 million, representing an increase of 91.4% year-over-year and increase of 15.7% quarter-over-quarter. The increase in cost of sales year-over-year was mainly driven by the increase of delivery volume in the third quarter of 2020.

Gross profit in third quarter of 2020 was RMB585.8 million or $86.3 million, representing an increase of RMB807.4 million from a gross loss of RMB221.6 million in the third quarter of 2019 and an increase of RMB272.7 million from the second quarter of 2020. The increase in gross profit was mainly driven — contributed by increased vehicle sales and increased vehicle margin. Gross margin in the third quarter of 2020 was 12.9%, compared with negative 12.1% in the same quarter of 2019 and 8.4% in the third [Phonetic] quarter of 2020. The increase of gross margin was mainly driven by the increase of vehicle margin in third quarter of 2020. More specifically, vehicle margin in the third quarter of 2020 was 14.5%, compared with negative 6.8% in the same quarter of 2019 and 9.7% in the second quarter of 2020. The increase of vehicle margin was mainly driven by the decrease in purchase price of certain materials and lower unit manufacturing cost attributed from increased production volume of the ES6 and ES8 in the third quarter of 2020.

R&D expenses in third quarter were RMB590.8 million or $87.0 million, representing a decrease of 42.3% year-over-year and an increase of 8.4% quarter-on-quarter. The decrease in R&D expenses year-over-year was primarily attributable to higher design and development costs incurred in the third quarter of 2019 for EC6 and all-new ES8 launched in the fourth quarter of 2019 and the company’s overall cost-saving efforts and improved operational efficiency in R&D functions since the fourth quarter of 2019.

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SG&A expenses in third quarter were RMB940.3 million or $138.5 million, representing a decrease of 19.2% year-over-year and an increase of 0.4% quarter-over-quarter. The decrease in SG&A expenses year-over-year was primarily driven by the company’s overall cost-saving efforts and the improved operating efficiency in marketing and other supporting functions.

Loss from operations in third quarter was RMB946 million or $139.3 million, representing a decrease of 60.7% year-over-year and a decrease of 18.4% quarter-over-quarter. Share-based compensation expenses in third quarter were RMB49.2 million or $7.3 million, representing a decrease of 30.1% year-over-year and an increase of 8.3% quarter-over-quarter. The decrease in share-based compensation expenses year-over-year was primarily due to less options granted driven by the decline in the numbers of employees and the impact of part of the share-based compensation expenses being recognized by using the accelerated method, under which the expenses decreased gradually over the vesting period.

Net loss in the third quarter was RMB1.05 billion or $154.2 million, representing a decrease of 58.5% year-over-year and a decrease of 11% quarter-over-quarter. Net loss attributable to NIO’s ordinary shareholders in the third quarter was RMB1.19 billion or $175 million, representing a decrease of 53.5% year-over-year and a decrease of 1.6% quarter-over-quarter. Basic and diluted net loss per ADS in the third quarter were both RMB0.98 or $0.14 per ADS. Excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB0.82 or $0.12 per ADS in the third quarter.

Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB22.2 billion or $3.3 billion as of September 30, 2020. Additionally, we achieved positive cash flow from operating cash activities for the second sequential quarter.

And now [Indecipherable] outlook. As William mentioned, for the fourth quarter of 2020, the company expects deliveries to be between 16,500 and 17,000 vehicles, representing an increase of approximately 100.6% to 106.7% from the same quarter of 2019 and an increase of approximately 35.2% to 39.3% from the third quarter of 2020. The company also expects the total revenues of the fourth quarter 2020 to be between RMB6.26 billion to RMB6.44 billion or between $921.8 million to $947.9 million. This will represent an increase of approximately 119.7% to 126.0% from the same quarter of 2019, and an increase of approximately 38.3% to 42.2% from the third quarter of 2020. 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 operator to facilitate our Q&A session.

Questions and Answers:

Operator

Certainly, sir. Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] The first question we have is from the line of Tim Hsiao from Morgan Stanley. Your line is now open.

Tim Hsiao — Morgan Stanley — Analyst

Hi, William, Steven, Jade and Tim. This is Tim from Morgan Stanley. Congratulations on a strong result, and thanks for taking my questions. And so I have two questions and will quickly go through them in Mandarin first.

[Foreign Speech] So my first question. We saw NIO making solid operational progress this year at all fronts. For example, like in the launch of EC6, BaaS and 100-kilowatt hour battery pack. So looking to 2021, in addition to the fourth model launch and ongoing investment in the autonomous driving, what else would be our key focuses for R&D investment and if possible, could management share any rough guidance regarding the overall R&D spending versus 2020.

My second question is about BaaS, battery-as-a-service. Could you please share some market feedbacks on the battery-as-a-service program, with the launch of the 100-kilowatt hour battery pack? What’s our expectation of the take rate of BaaS services for 2021 and beyond? These are my two questions. Thank you.

Bin Li — Chairman and Chief Executive Officer

Thank you Tim. [Foreign Speech] Thank you for your questions. Regarding the R&D focuses for next year or our recent focus, just like I mentioned in my prepared remarks, the NT 2.0 is the focus in terms of the core technologies. The core of NT 2.0 is industry-leading mass production of autonomous driving system. Of course, we also have other ongoing projects. In terms of the vehicle models, we have already successfully launched three SUVs. For the next product, we are going to launch is going to be a sedan under NT 2.0 platform. It means that we’re going to enter the sedan market. At the same time, we are also developing other vehicle models. For example, the second new product in the pipeline is also going to be a sedan. So with the launch of the next two new products, we believe that we can complete our product portfolio.

[Foreign Speech] In terms of the BaaS take rate, after we announced BaaS in August, we are very happy to see the increase with the take rate every week. And in November, we can see that amount all those new orders. The take rate of BaaS is around 35%, which is faster and better than our previous expectations. Because our model is make-to-order, so this will be reflected a little bit later in other deliveries. We are very happy to see this BaaS take rate momentum and we believe that this is also going to improve in the future. BaaS can help us to lower the initial purchase price and eliminate users’ concerns regarding the battery deprecation and also provide flexible upgrades services to the users. The purpose of BaaS is to convert more gasoline car users to EVs. After the launch of a 100-kilowatt hour battery pack, we believe the competitiveness of the BaaS has been significantly enhanced. And as with the users, it can get much better understanding about the benefit of BaaS, we believe this take rate will increase in the future in the long run.

Tim Hsiao — Morgan Stanley — Analyst

Perfect. Clear. Thank you, William and congratulations again on the result. Thank you.

Bin Li — Chairman and Chief Executive Officer

Thank you, Tim.

Operator

Thank you. And the next question we have is from Ming Lee from Bank of America. You may now proceed with your question.

Ming Lee — Bank of America Merrill Lynch — Analyst

[Foreign Speech] So my first question is regarding the margin expansion from second quarter to third quarter, your gross margin increased around 5 percentage points. Could you give a rough breakdown, how would you improve your gross margin? And do you also see any extra contribution from the sales of NEV credit? So that’s my first question. Thank you, William.

Bin Li — Chairman and Chief Executive Officer

[Foreign Speech]

Stanley Qu — Vice President of Finance

Hi Ming, this is Stanley. The vehicle margin increased in Q3 compared with Q2, mainly contributed by two factors. The first is the average selling price increased by RMB10,000 per vehicle, mainly because the — more ES8 with higher price are sold in Q3. Second is BOM costs reduced by RMB7,000 per vehicle, also — which are contributed by the cost reduction of battery pack and also EDS. You mentioned the revenue from outstanding secured credit points. We received the revenue in Q4 with total amount of RMB120 million and we will recognize this as other revenue in Q4. So in Q3, we’ve not included in the financial results. So that’s your question about the vehicle margin.

And regarding the service revenue I think we are continuing to working on to improve the — like the service margin to reduce the loss. So I think the trend will be positive in future. Okay. Thanks, Ming.

Bin Li — Chairman and Chief Executive Officer

[Foreign Speech] About — speaking regarding the gross margin, relative to other service and results. We believe it will be further optimized as our user base continue to expand and this is going to be reflected with the growing economics of [Indecipherable]. In the Q2 and Q3, the change is not very evident, but we are quite confident that, this is going to have a continuous optimization in the future.

Ming Lee — Bank of America Merrill Lynch — Analyst

[Foreign Speech] [Technical Issues]

Rui Chen — Director of Investor Relations

I think your line got dropped. So I think because —

Operator

I’m sorry. The participants — sorry, the participants’ line got disconnected. [Operator Instructions] I will move onto the next one, we have Bin Wang from Credit Suisse.

Rui Chen — Director of Investor Relations

Operator, let the management to answer the question first.

Bin Li — Chairman and Chief Executive Officer

[Foreign Speech]

Operator

Sure, sir please go ahead. Just to recap a little bit on the question, basically the question is about the average selling price in the fourth quarter. Answering to that, the average selling price will increase compared with the third quarter by around RMB12,000 to RMB13,000. So we would like to know whether this is driven by the EC6 or the 100 kilowatt hour battery pack and we also would like to know for the battery packs, what is the take rate ratio between the 100-kilowatt hour battery pack and the 70-kilowatt hour battery pack.

Bin Li — Chairman and Chief Executive Officer

[Foreign Speech] In terms of the sales revenue guidance, we’re delighted to clarify a little bit. Just like as Stanley mentioned, for the due credit to revenues, this is going to boost the revenue for the other sales and in our guidance, so we don’t have to re-consider the increase of the average selling price as part of the target. We believe the average selling price in the fourth quarter is going to be at the similar level as the third quarter, according to the orders we received right now and we just started the deliveries of the 100 kilowatt hour battery pack in the fourth quarter. So we believe, this is not going to have any impact on the gross margin in such a short time, but we are very confident to continuously improve our gross margin throughout the fourth quarter.

Rui Chen — Director of Investor Relations

Operator, we can move on to next question.

Operator

Certainly, sir. The next question is from Bin Wang from Credit Suisse. Your line is now open.

Bin Wang — Credit Suisse — Analyst

[Foreign Speech] Actually, I just wanted to know what’s the margin factors, going forward — in the past? Going forward, we’re seeing a few factors, for example, BaaS adoption, launch of kilowatt hours battery, some removal of the interest rate subsidy following the [Indecipherable] battery and what factors will impact of margin in the past. That’s about the margin.

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Second about new product, because we’ve seen the [Indecipherable] will be the sedan, likely to be lower pricing or maybe lower margin. So is there any plan for even bigger SUV or even bigger one because some, for example [Indecipherable] actually running for much bigger one, so basically what’s the upcoming plan for even bigger products? Thank you.

Stanley Qu — Vice President of Finance

Hello, this is Stanley. I will break down into the sectors to further explain the gross margin improvement. The first you mentioned is about the subsidy. We further reduced the subsidy to the end users in Q3 with the launch of our BaaS model. And so in Q3, there is a little bit light sector kind of — like to — due to the subsidy reduction. And the second is the security of economy. As you can see, the production volume in Q3 is 10,000 vehicles and almost a 20 — over 20 [Phonetic] increase compared with Q2. As mentioned William mentioned also prior and we invest more to improve our production capacity in September to 5,000 units. So the manufacturing cost, I think almost all the same with the second quarter and about the BaaS and also the 100 kilowatt impact, to William to answer the questions. Yeah.

Bin Li — Chairman and Chief Executive Officer

[Foreign Speech] I would like to add some points regarding the manufacturing cost and efficiency. In the long run, of course, we will further improve our manufacturing efficiency and the cost and we believe this is going to reduce gradually, but we’re going to stop with the reduction at a certain point. Of course, we can see more contribution in the third quarter compared with the second quarter, but this is going to diminish in the future, but we will continue to work on the optimization of the manufacturing efficiency and the cost.

[Foreign Speech] For the Battery-as-a-Service, we will sell other cars to the users and the battery to the battery as a company under the BaaS model. So it means that this is not going to affect the vehicle gross margin, but with our battery upgrade service, this is going to provide us some good benefits to other revenues. So in the long run, this is not going to have any significant impact on the vehicle gross margin, but it will give some incentives to other revenue.

[Foreign Speech] For the due credits, we actually included this in other revenues or other sales. We have different approaches compared with Tesla because Tesla consider the revenue of the credit in the vehicle margin, but we include that in the other revenue.

[Foreign Speech] For the new product planning, we have a very common sense of the product and the market include planning. This is going to be carried out step by step. For example, we started with our flagship SUV ES8 in the mid and large segments, then we entered the mid-sized SUV segment with the ES6, then the coupe SUV with the EC6. This is a very systematic approach. For the next step, we’re going to enter the sedan market. When selecting different market segments, we need to balance the size of the segments and the volume objectives. At this moment, the rich markets are not going to be our focus.

Stanley Qu — Vice President of Finance

I think, what else from the automation, the one-time factors in Q3. We did not receive significant live sales rebate from the suppliers in Q3. So I don’t think, yeah, we have, so — also the material contractors. Yeah. Okay.

Bin Wang — Credit Suisse — Analyst

Okay, I think you also answered me about the 100 — sorry, on 100 kilowatt hours battery, whether that were improving your margin? Also I think that in this process, you also mentioned about 150 kilowatt hour batteries are coming. So did you think that margin for up sale from the battery upgrade?

Bin Li — Chairman and Chief Executive Officer

[Foreign Speech] For the 100 kilowatt hour battery pack, the users can purchase the battery pack as an option, which is going to improve the vehicle gross margin, but at the same time, we’re also providing a flexible upgrade, which can contribute to the gross margin of other services and sales. These are two different stories and approaches. After the launch of the 100 kilowatt hour battery pack, we have seen some users choose to install the 100-kilowatt hour battery pack as an option. And at the same time, we’ll also provide the flexible upgrade, so we also have some users opted to the flexible upgrades by month or by year. We believe this is going to improve the gross margin of the company, but in terms of the new car gross margin or new vehicle gross margin, we think it’s not going to have a significant impact, but in the long run, this is going to give us some boost to the gross margin of the other sales and revenues.

[Foreign Speech] Our logic for this approach is basically the 70-kilowatt hour battery pack can meet the daily needs of the users and if the users need to travel for long distance, then they can subscribe to the bigger batteries or the batteries with higher density or capacity. Users can choose these facilities on demand. This is quite flexible and this is the advantage of our service. We believe this is also going to contribute to the possibilities of a gross margin growth in the long run and the battery pack is going to provide a very good opportunity for us to improve the gross margins among the existing users and this is a very unique advantage of our business model.

[Foreign Speech] The 100 kilowatt hour battery pack or the future bigger battery pack can, in the end, improve the attraction of the 70 kilowatt hour battery pack, because the users of the 70 kilowatt hour battery pack will have the opportunity to upgrade the battery pack on demand. They don’t actually need to have the 100 kilowatt hour battery pack or 150 kilowatt hour battery pack right from the beginning, they can just use their 70 kilowatt hour battery pack to meet their daily usage needs. Then when it made it, they can upgrade to the bigger batteries and we believe this is going to significantly improve the competitiveness of over 70 kilowatt hour battery pack.

Bin Wang — Credit Suisse — Analyst

Thank you.

Bin Li — Chairman and Chief Executive Officer

Thank you, Wang Bin.

Operator

Thank you. [Operator Instructions] The next one is from Edison Yu from Deutsche Bank. Your line is now open.

Edison Yu — Deutsche Bank — Analyst

Thanks everyone for taking the questions. First, can you talk a little bit about the plan — the operational plan to boost the production target in January, what needs to get done just underground?

And then secondly, as it relates to the next-gen autonomous platform, can you talk about your latest thinking in terms of in-sourcing the chip design, maybe the implications for Mobileye and that relationship and how you think about the use of LIDAR?

Bin Li — Chairman and Chief Executive Officer

Thank you, Edison. [Foreign Speech] We have always been emphasizing on the awards of plan change, production capacity, not just about the production capacity of our own plant. We would like it to work together with all the supply chain partners to make sure they can support us to boost our production capacity. The users right now will need to wait for some time to pick-up their parts because of the production capacity constraints. We are also trying to speed up the deliveries to satisfy the users’ demand. So right now, we are working on our own plants’ production capacity expansion and also working together with the supply chain partners to improve their production capacity. We’re very confident to be able to improve our production capacity to 7,500 units.

[Foreign Speech] The second question is about the chipset of the NT 2.0. We understand this attracts lot of attention in the industry and in the market, but we still need some time to disclose the specific information at the NIO Day 2020, it’s still too early for us to share those information. Of course, we have already made our decision internally. We believe that we should be able to provide the most advanced chipset with the best performance in the industry and this can also help us to guarantee our leading position in the industry for the coming years.

[Foreign Speech] For the LIDAR question, I would like to share some thoughts on the autonomous driving directions first. When thinking about autonomous driving, we should evaluate the two aspects. The first one is how much time we can free up for the users, this is a question of availability or usability. The second question is, how many accidents can we prevent with the autonomous driving system. This is a matter of a reliability. So we need to think about these two aspects when we evaluate the strategy of autonomous driving. We believe LIDAR should be able to help with both aspects, this is a very simple math, but we will need to tackle the issue of cost when it comes to LIDAR and that we need to balance this out with our product strategy. In the future, with the improvement of cameras and the computer power, we do believe that LIDAR can play a role in some cases and the domains because they can help us to reduce the extended rate, in some corner cases, so LIDAR is a very good addition to the technology competent.

[Foreign Speech] If a company put users’ interest first, then they should find ways to tackle these technical issues in terms of cost and performance.

Rui Chen — Director of Investor Relations

Thank you, Edison.

Operator

Thank you. We have the next question from Nick Lai. Your line is now open.

Nick Lai — JPMorgan Chase & Co. — Analyst

[Foreign Speech] Let me translate my question very briefly. The first question is regarding the cash burn and the capex and the investment in the next one year. For instance, William just mentioned that our monthly capacity can ramp up to 7,500 in January. And would that mean that in the next one year also, we need to expand our capacity at the Zhangzhou plant? On top of that, how should we think about the capex needed to build the swap station as well as new space? So the first question is about cash burn and capex related.

And second question on longer term autonomous driving solution or strategy based on what, William, Chairman, just commented just now. Is it correct to understand that our long-term strategy is to procure chip from top vendor, but at the same time, we will do most of the operating capability solution in-house. Thank you?

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Wei Feng — Chief Financial Officer

So Nick, with regard to the capex to improve our production capacity, most of the capex will be covered by JMC [Phonetic]. Of course, we will spend very little capex our own, but the majority will be covered by JMC.

Stanley Qu — Vice President of Finance

Yeah. And those we’ll use more in the expansion of sales and service network and also the power substation, but we will manage well with the progress. So I don’t think there will be a very big, big cash burn in — I think next year. So yeah, that’s about the question about the capex.

Bin Li — Chairman and Chief Executive Officer

[Foreign Speech] Of course, for the current development plan and cash position, we believe we have no need for financing in the short-term. We should be able to have sufficient resources to support the business development of the company. With respect to autonomous driving directions, our objective is to build in-house full stack capabilities for autonomous driving. Of course, we have always had this capability in our company in- house. Recently, we have even enhanced over capabilities in terms of the algorithm and system development. Starting from 2016, we have developed the new pallet first generation by ourselves in-house. But for the first-generation, NIO pallets, chipset is closely bundled together with the algorithm. For the second-generation NIO pallet, we would like to make sure we can have the in-house capabilities, especially in terms of the algorithms, data and system development.

Rui Chen — Director of Investor Relations

Thank you, Nick.

Nick Lai — JPMorgan Chase & Co. — Analyst

Thank you.

Operator

Thank you. We have the next question from the line of Jeff Chung from Citigroup. Your line is now open.

Jeff Chung — Citigroup — Analyst

[Foreign Speech] So my first question is about first quarter next year sales volume outlooks, whether they can still expand Q-on-Q?

And second question is about the differences between vehicle GP margin and non-vehicle GP margins growth outlook and forecast. Thank you.

Bin Li — Chairman and Chief Executive Officer

[Foreign Speech] Thank you for your question, Jeff. It’s very early to provide the guidance for the first quarter of 2021, but of course, we need to be fully prepared in terms of the production capacity to make sure we can meet the user demand and the order backlog. According to the current order momentum and the current backlog, we will need to have a sufficient production capacity for the first quarter of next year to meet the order backlog right now. So in our company, our business model is make-to-order, so we would like to focus on the level of orders. For other companies, they talk about the inventory level, but we focus on the order level. We would like to control the order level within a reasonable range, so users don’t need to wait for long time to pick up their cars. We would like to improve our production capacity to make sure we can control the order level within one month. It means from the order placement to the user delivery, the wait time should be between three to four weeks. Then we can achieve good user experience. At this moment, we still need a long time to meet these targets, but we will need to ramp-up our production to make sure we can improve the experience and we’re quite confident that we can achieve this target in the future.

[Foreign Speech] The gross margin has been on the rise. In the past, we have witnessed a consistent trend, that is the non-vehicle gross margin is lower than the vehicle gross margin. In the past few quarters, we have seen both the vehicle gross margin and the non-vehicle gross margin have been increasing. Just like I’ve mentioned, the carbon credit revenue will be included in the non-vehicle gross margin in the future. And this year, we can see the value of the carbon credit has become more and more evident in China. In the coming years just going forward, we believe that carbon credit is going to contribute to the improvement of the non-vehicle gross margin. At the same time, the revenue from our services and the power swap can also help us to narrow the operating loss. So this is going to improve together with the expansion of our user base. About speaking the non-vehicle gross margin is going to improve in the long run and the battery-as-a-service, BaaS can also improve the non-vehicle gross margin, everything is going according to the plan.

[Foreign Speech] In the fourth quarter, we’re going to receive the revenues on the carbon credits, which is generated by the vehicles sold in 2019. In this year because of the sales increase, the carbon credit number has increased by over 2.5 times and we believe with price of the carbon credit will also double next year. So the overall revenue on the carbon credit will be 4 times to 5 times more next year compared with this year. Now, a lot of OEMs are in discussion with us about the purchase of the carbon credits. So we believe that this due credit system and mechanism is going to be very beneficial to the development of the EV industry.

Jeff Chung — Citigroup — Analyst

[Foreign Speech] So my last two question is about the carbon credit, will it be impacting on our P&L next year in 4Q, as well, rather than spread evenly throughout the four quarters, this is number one. Number two is about the attach rate on our NoP and BaaS right now and going forward? Thank you.

Bin Li — Chairman and Chief Executive Officer

[Foreign Speech] The confirmation of the carbon credit revenue is quite flexible. We are not going to put the revenue confirmation in a specific quarter next year, because this depends on the specific market conditions. If we sell too early, maybe it’s little bit too cheap. For the BaaS take rates, just like I mentioned, in November, the take rate of the BaaS has reached 35% among the new orders. Going forward, we believe this is going to further improve in the long run and the take rate of the NIO pilot is around 50% after the launch of Navigate on Pilot, we believe this is going to have a much better performance.

Rui Chen — Director of Investor Relations

Thank you.

Jeff Chung — Citigroup — Analyst

[Foreign Speech]

Bin Li — Chairman and Chief Executive Officer

[Foreign Speech]

Operator

Thank you. We have the next question from the line of Mei He from US Tiger Securities. Your line is now open.

Mei He — US Tiger Securities — Analyst

Hi, thanks for taking my question. Great quarter guys. My question, first is could you please comment on your thoughts about Tesla’s made in China Model Y. Will this impact your order momentum?

And secondly, could you please give us some updates on your internationalization plan? For instance, do you have a timetable for multiple steps of going global? Where could be your social market? What kind of models are you going to introduce to international market? And how to hire local and competent team? [Foreign Speech]

Bin Li — Chairman and Chief Executive Officer

[Foreign Speech] Thank you for your question, Mei. Tesla has officially announced that they’re going to have the local production of the Model Y. We believe this is actually good for the users, because if we have more options for the users, this kind of helps us to accelerate the popularization of EVs in the market. Of course, we believe the Tesla’s strategy is quite different from NIO. Starting from last year, Tesla has cut their price multiple times and they basically have the pricing strategy based on the cost. At the end of last year and the beginning of this year, their price cuts has affected us for about one week, but afterwards our order intake bounced back very quickly. After this pricing trend, they also had several rounds of price cuts, the most recent one is around the 1st of October, the price cut is around the 10%. We didn’t see any specific impact on — over order intake. Actually in October, our order intake has broken the historic record and exceeded our expectations.

Our transaction price is around hundreds of thousand RMB higher than Tesla’s average selling price. So we believe this proves that we have our own unique advantages with our products and services. Model Y’s introduction to the China market is going to be beneficial for the overall market, but we believe the competition is more about the competition between Model Y And the Model 3 because we have our own unique advantages regarding our product and services. For the market, the situation basically we believe that the pie is growing bigger and our main competitors in that market should be the gasoline cars, as the China premium market is a very big market with the volume of millions and this gives us a great confidence that we can have a sustainable growth in the long run.

Wei Feng — Chief Financial Officer

Okay. This is Steven. I’ll give you some high-level update of our globalization efforts. First, we have a very concrete short-term target, that is when we enter EU market in the second half of 2021. At the same time, globalization is of the long-term vision for NIO. So NIO is a global brand and we will be very patient to implement this strategy step-by-step. And so we have three principles. First, we will speak to our users on the price of this model. We believe it’s global and universal, this philosophy. Second, we will retain our premium brand positioning. So our key competitors are Benz, BMW, Audi and Tesla. Third, our sales and service must be localized to suit the European customers’ needs. That’s the update of our globalization efforts.

Rui Chen — Director of Investor Relations

Thank you, Mei.

Mei He — US Tiger Securities — Analyst

Perfect. Thank you.

Operator

Thank you. That will be last question for today. I’d like to turn the call back over to the company for closing remarks.

Rui Chen — Director of Investor Relations

Thank you again for joining us today. If you have any further questions, feel free to contact NIO’s Investor Relations team through the contact information on our website. So this concludes the conference call. You may now disconnect your lines. Thank you.

Bin Li — Chairman and Chief Executive Officer

Thank you, everyone.

Wei Feng — Chief Financial Officer

Thank you, everyone.

Stanley Qu — Vice President of Finance

Thank you everyone.

Operator

[Operator Closing Remarks]

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