Nio Inc (NIO) Q3 2022 Earnings Call Transcript

Nio Inc (NASDAQ:NIO) Q3 2022 Earnings Call dated Nov. 10, 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:

Ming Hsun Lee — Bank of America — Analyst

Paul Gong — UBS — Analyst

Tim Hsiao — Morgan Stanley — Analyst

Bin Wang — Credit Suisse — Analyst

Jeff Chung — CITI — Analyst

Nick Lai — J.P. Morgan — Analyst

Xue Deng — CICC — Analyst

Yuqian Ding — HSBC — Analyst

Shin Chilean — CITIC Securities — Analyst

Presentation:

Operator

Hello ladies and gentlemen. Thank you for standing by for NIO Incorporated Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s conference call is being recorded.

I will now turn the call over to your host, Ms. Eve Tang from Capital Carkets. Please go ahead, Eve.

Eve Tang — Investor Relations

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 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 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 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 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 third quarter 2022 earnings conference call. [Foreign Speech] In the third quarter 2022, NIO delivered a total of 31,607 smart electric vehicles, up 29.3% year-over-year, setting a new quarterly high. [Foreign Speech] Based on our latest technology platform NT2.0, we have launched and the delivered three 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. [Foreign Speech] 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 component supply and to 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.

[Foreign Speech] Next. I would like to share some recent highlights of over R&D and operations. [Foreign Speech] In September, at the show cars of ET5, a smart electric sedan beginning 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. [Foreign Speech] Over the past couple of months, Banyan, the digital system of NT2 has iterated and upgraded multiple times. With continuous user experience improvement, we have strong confidence in the market competitiveness of the new models based on the NT2 platform.

[Foreign Speech] With respect to the sales and service network, we now have 399 NIO Houses and NIO Spaces in 149 cities and 280 service centers and delivery centers in 163 cities. [Foreign Speech] 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 2055 charging stations with 5,765 for power chargers and 6,077 destination chargers in place. In the meantime, over power map has connected to over 590,000 third-party charges in China and more than 380,000 chargers in Europe.

[Foreign Speech] 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. [Foreign Speech] On October 7, 2022, we held NIO Berlin 2022 where we comprehensively introduced our products and services to users in Europe, marking of official market entry in Germany, the Netherlands, Denmark and Sweden. [Foreign Speech] NIO Berlin drew a lot of attention and recognition from users and auto industry in Europe. We are now organizing large-scale test drives and kicked-off user delivery in Europe.

[Foreign Speech] 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. [Foreign Speech] To better serve user communities in Europe, we plan to open NIO Houses and NIO 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.

[Foreign Speech] In addition, we have established an R&D center in Berlin for localized development and deployment of digital cockpit and ADAS to continuously improve for the intelligent digital experience of local users. [Foreign Speech] On September 27, NIO announced the collaboration with The Danish Society for natural conservation and The Danish Nature Foundation under Clean Parks initiated. NIO hopes to actively engage with the local communities, share their responsibilities and jointly make contributions to a more sustainable future. [Foreign Speech] 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.

[Foreign Speech] 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 change in microenvironment. 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.

[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 third quarter 2022. Over to you Steven.

Steven Feng — Chief Financial Officer

Thank you, William. I will now go over our key [Technical Issues] for the third quarter of 2022 and to be mindful of the length of the call, as a reference 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 third quarter we’re RMB 13.0 billion, representing increase of 32.6% year-over-year and 26.3% quarter-over-quarter. Our total revenues are made of two parts, vehicle sales and other sales. Vehicle sales in the third quarter was 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 the 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 was RMB 1.1 billion, representing a decrease of 8.5% year-over-year and increase of 48.2% quarter-over quarter. The decrease in other sales year-over-year was mainly due to the decreased revenues 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 2012. The decrease of gross margin year-over-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 in other sales margin resulting from expanded investment in power and service network. The increase in gross margin quarter-over-quarter was mainly attributed to sales of automotive regulatory credits with high sales margin.

More specifically, vehicle margin in the third quarter was 16.4%, compared with 18.0% in 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.

Our R&D expenses in third quarter were RMB 2.9 billion, which is an increase of 146.8% year-over-year and 37% quarter-over-quarter. The increase in 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 third quarter were RMB 2.7 billion, representing 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 the general corporate functions; second, increase in 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 in Europe.

Loss from operations in the third quarter 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 RMB 495.6 million, representing an increase of RMB 528.2 million from other income of RMB 32.6 million in the third quarter of 2021 and 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 loss from the revaluation of our overseas RMB related assets as a result of the depreciation of RMB against U.S. dollar 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, which is an increase 44.9% year-over-year and 50.9% quarter-over-quarter. Our balance cash and cash equivalents, restricted cash, short-term investment and long-term deposits were RMB 51.4 billion as of September 30, 2022.

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

Questions and Answers:

Operator

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

Ming Hsun Lee — Bank of America — Analyst

[Foreign Speech] Previously, your capacity is curbed by component supply specialty and welding part, as well as the chips. So, could you also update your latest capacity — component capacity if there is no COVID control impact? Thank you.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech] 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 the several solvent. One factor is because of supply like you mentioned, but we expected 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 too 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 this new EDS plant. due to the ramp-up of volatilities off of the EDS, our production 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 of 1 week. So, overall speaking, all those factors have affected the production in October, but we have resumed a 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 will — we have already solved the suffering issue and I believe probably in December ET5 production will not be an issue. And as of now, I don’t believe that there’s any production issue for the ET7 and the ES7.

Ming Hsun Lee — Bank of America — Analyst

[Foreign Speech] U.S. semi ban, how will this impact the development for industry and also NIO, besides NVIDIA currently can sells 800 chips to China if compared to a 100. How do you see the impact to the progress of our autonomous driving training?

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech] Thank you for your question. Regarding the CHIPS Act, I believe that this many affected 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 iteration of our AD solutions. As of now. I don’t actually see any impact on overall operations. Thank you, Ming.

Ming Hsun Lee — Bank of America — Analyst

[Foreign Speech]

Operator

Your next question comes from Paul Gong with UBS. Please go ahead.

Paul Gong — UBS — Analyst

[Foreign Speech] So, my first question is regarding the ET5 order. Just now you mentioned that the satisfaction level has beat your expectation and so you did mentioned how the orders intake has been. How do you see the orders intake since the launch and especially after the late October after Tesla launched another wave of sports cars. Do you see any impact from that? This is my first question.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech] 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 ways 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’re do delighted to pay more attention to the quality improvement and to 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 opened its prices, so we don’t actually think this factors the user demand regarding new products. If we look at the specific product like the Model 3, there is a big price gap compare with our product and if we compare the Model Y with our ES6, we don’t actually believe 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.

Paul Gong — UBS — Analyst

[Foreign Speech] S,o 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 it 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?

Stanley Qu — Senior Vice President of Finance

Hi Paul, this is Stanley. The increase of SG&A in Q3 compared to Q2 is because our sales and service network in China and also in Europe since we entered more country market in Europe 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 with — as I check this resulted 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 the stable trend for further improvement for this ratio. Thank you Paul.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech] 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 over new product development cadence, as well as other initiatives like the battery chipsets and the test 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 thing there is any other additional R&D expenses that is out of the planning of the company.

[Foreign Speech] Regarding the R&D operations, I believe right now we have entered a relative 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’ll continue to improve the sustained efficiency of our R&D efforts, but for some time for now, I believe it will stay at this level to make sure we can have more products and technology innovations to provide a better experience for the users.

Paul Gong — UBS — Analyst

[Foreign Speech] So what is roughly ratio of Europe accounted for this quarter session?

Steven Feng — Chief Financial Officer

Hi 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, yeah that’s basically the information for our Europe business.

Paul Gong — UBS — Analyst

Okay, thank you very much. [Foreign Speech]

Stanley Qu — Senior Vice President of Finance

Thank you.

Operator

Our next question comes from Tim Hsiao with Morgan Stanley. Please go ahead.

Tim Hsiao — Morgan Stanley — Analyst

[Foreign Speech] 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 go around 17,000 to 19,000. So what would be the peak monthly ARPU NIO can reach by end of this year? And how the trajectory looks like into first half of next year? With the supply-chain bottlenecking, the kind of structural issue given the unchanged COVID policy and more new model, new players and likely longer time for supply to expand their capacity to increase the production yield? [Foreign Speech]

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech] Overall speaking, it’s quite difficult to factor to negative 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 we set 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 capability to meet the demand and the target we set out for ourselves.

[Foreign Speech] 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 one shift, I believe the production of the vehicle will be carried out in a very smooth manner.

Tim Hsiao — Morgan Stanley — Analyst

[Foreign Speech] So, my second question is about the profitability because based on our observation, we noticed the lifecycle of smart EV in China is actually getting shorter rather than longer than traditional cars. So, considering a very sizable R&D and manufacturing investment, what would be the more reasonable terminal growth in your operating margins? And we should look for, especially, I think the competition is getting more intense. Thank you.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech] Thank you for your questions. Regarding the smart electric vehicles, I believe, we have a much faster iteration cycle compared with transitional vehicles and we believe the iteration cycle should be around three years and this is how we’re 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, so we actually have the same kind of hardware and software for all the vehicles based on data technology platform. So, for example, previously, we have explained, we have in the new technology 1.0 and the new technology 2.0 for all the products based on new 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 new technology 2.0.

At the same time, we also have the unified battery pack and we also share a lot of commonalities that when it comes to the vehicle platforms, of course, previously we mentioned we would like to offer different kind of a top hat to meet the diversified demands and taste 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 sky rocketed. 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 margins. Previously, we have also achieved a 20% vehicle gross margin in the past. 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 comes down to a reasonable level, I think it’s possible for us to maintain 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 a 25% to 30% vehicle gross margin.

If we look at the mass market, we see the challenge is much biggest because if we combine all of the companies in the mass market right now, I think the overall gross margin is actually inactive. 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 these capabilities in place, I think it’s possible for us to also achieve 20% to 25% with our mass market products.

Operator

And next question comes from Bin Wang with Credit Suisse. Please go ahead.

Bin Wang — Credit Suisse — Analyst

[Foreign Speech] My question, first one is the about your guidance, you actually has [Indecipherable] number one, the ET5 will be higher volume than BMW 3 Series; and number two guidance is that you were breakeven in the number four quarter next year; and number three guidance is that this year you have 18% to 20% gross margin for the vehicle. Did you maintain this guidance for this? Thank you.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech] Thank you, Bin, for your question. Overall speaking that’s still the direction we are aiming. 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 the strategic new business. For example, we have two 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 new businesses aside, we are still very confident to achieve a breakeven for NIO core business in the fourth quarter of 2023.

[Foreign Speech] So, for the second question regarding ET5, you mentioned previously one of our Co-Founder had mentioned that the ET5 volume is going to exceed the volume of the BMW 3 Series in an event. And of course, this is not a guidance, but because I believe ET5 is much, much better than BMW 3 Series, so we’re very confident to achieve these targets.

[Foreign Speech] 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 the lithium carbonate cost still stays at a very high level. Previously, it has dropped to around RMB 400,000 and now 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 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 impacts. I don’t think 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 there’s any car companies that cannot deliver their products because of the battery shortage. So, of course, in the future, we believe that the lithium carbonate cost will go down, but we cannot predict when. This has a relatively big impact on us because for all the products we have a relatively high battery capacity, averagely speaking for each of our vehicle, 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 100,000 the cost for the lithium carbonate, this is actually affecting our vehicle gross margin by around 0.02% and if we can see the lithium carbonate cost dropped 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 our vehicle gross margin can improve by probably around 8%. So, this is the reality we are facing.

Bin Wang — Credit Suisse — Analyst

[Foreign Speech] So, my question is about what [Indecipherable] ET5 vehicle and we see this is going to be showcased in the upcoming NIO Day in December this year. Thank you.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech] So, for the product lineup in the first quarter of next year — in the first half of next year we are going to have five new products and I believe probably one 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 of from RMB 300,000 to RMB 500,000, we will provide different products to satisfy the diversified user demand and taste. So, I believe with over product line up, we should be able to achieve a good overall delivery volume that can meet our expectations. I don’t actually expect that one product can sell around — 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.

[Foreign Speech] 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 one model because this is different market segment and different target user group. Thank you, Bin.

Bin Wang — Credit Suisse — Analyst

Thank you.

Operator

Our next question comes from Jeff Chung with CITI. please go ahead.

Jeff Chung — CITI — Analyst

[Foreign Speech] So, my first question is about the sales volume growth into November and December. So, in order to meet our mediums quarterly target for the 3,000 units and if the month-on-month improvement to be linear, 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 linear with most of the weight concentrated in December, so could you tell us what kind of elements would be determined our run rate overshoot in December, but not in November? Thank you.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech] Thank you Jeff for your question. In November, we will still need some time to ramp up the production, including ET5, considering the factors I just mentioned like the EDS. In December, except silicon carbides 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.

Jeff Chung — CITI — Analyst

[Foreign Speech] No more questions. Thank you.

William Li — Founder, Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from Nick Lai with J.P. Morgan. Please go ahead.

Nick Lai — J.P. Morgan — Analyst

[Foreign Speech] First question is about the cash burn and the capex that [Indecipherable] been moved into ’23 and ’24 and also taking into account of incremental investment [Indecipherable]. The second question again is on the AI industry and shifted price strategy and you can just talk about the potential alternative — you have enough stock of NVIDIA A100 chip [Indecipherable] solution that’s related [Indecipherable]. Thank you.

Stanley Qu — Senior Vice President of Finance

Hi 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 stable compared with — relatively stable compared with 2022. So, operating cash-flow wise. I think we are quite optimistic to achieve the positive working — like operating cash-flow in future years. So, our cash burn mainly depends on the capital investments. Now, we are planning our next year’s budget and from — generally. I think the totals to give us of capex in next year will not increase so significantly compared with this year, but we are planning more like sales and service networks and also we are planning more production and also supply chain capacity. So, at this moment. I won’t give you clear guidance and we are also confident that our cash-on-hand can supply our ongoing operation till breakeven is finally achieved.

William Li — Founder, Chairman and Chief Executive Officer

Yes thank you. [Foreign Speech] Overall speaking, we understand there are still many uncertainties in the market, but do I believe with of our current cash reserves and also the bank facilities that 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. [Foreign Speech] Regarding the chipset, previously, we have already addressed the AI trending that is the NVIDIA A100 and now I’d like to probably elaborate more on the onboard chipsets. We are the first company in the world to launch of our product that is equipped with NVIDIA Orin, which is actually six months earlier than other companies. And we also have a very close collaborations with NVIDIA. But at the same time, last year, we have already kicked-off the R&D of over AD chipsets. Right now, we have around 500 people working on the AD chipsets. 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 contributed to our vehicle gross margin. So, the overall progress of the AD chipset R&D is on track and we have seen some positive achievement from the team.

Nick Lai — J.P. Morgan — Analyst

[Foreign Speech] Yeah. Thank you. [Foreign Speech]

Operator

Our next question comes from Xue Deng with CICC. Please go ahead.

Xue Deng — CICC — Analyst

[Foreign Speech] 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 R&D expense further extents to RMB 2.8 billion. So, consider the current capital market environment and the much more intense competition in Chinese CV 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 see in regards to MPV market? Will we launch a new product pipeline in this segment in the future? That’s all my three questions.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech] For the factory too we are still working together we can JAC, I believe our joint manufacturing cooperation 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 have already mentioned that for one plant we should be able to achieve 150,000 units under one shift and if we combine the two plants together, the factory one and factory two dynamic that under one shift we should be able to achieve a production capacity of 300,000 units. If we double this to two 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 the delivery, I believe we have the capability to mitigate the risks of the supply chain. For the second question regarding the boundaries of our investments. Previously, I have already mentioned that we do have a sufficient cash reserve to support the company’s operations and when it comes to the overall investment of our R&D, every quarter we expect to have — to invest around RMB 300,000 — RMB 3 billion sorry — every quarter we expect to invest around RMB 3 billion for R&D efforts and so this includes all the R&D initiatives we have explained previously. For the capex, we will improve the efficiency on the capex investments and we do have a very strict management regarding the finance and the investment of the company.

Steven Feng — Chief Financial Officer

Okay and Xue, with respect to the MPV market, our strategy is very simple. In the short-term, we have no plan to launch NPV model. Of course, long-term, we’ll keep monitoring this niche market. [Indecipherable]. On 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 our niche market. That’s why we’ll actually keep monitoring and then set up what to do in the next several years.

Operator

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

Yuqian Ding — HSBC — Analyst

[Foreign Speech] I’ve 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 on the mix side, it was more ET5 in the mix could be coming down a little bit. And also we talked about our Q4 breakeven that then based on the current lithium price assumption or in our Q4 breakeven assumption that basically baking normalizing of the lithium price? And the second part is to ask what’s the city pilot on the autonomous driving sides with our timeline to push for city pilot? And when do we expect our autonomous driving capability to improve from help selling vehicle item to support materially on the margin side?

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech] Thank you, Yuqian, for your question. As of now, of course, the leading carbonate cost is not going down as we expected in the fourth quarter, but like I explained previously, I don’t believe that 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 year — 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 our judgment regarding the lithium carbonate cost probably for the next year.

[Foreign Speech] For the autonomous driving, I believe we 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, part is because of the feature and function development and the part is because of the legislations. 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 one to two 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 contributions from the autonomous driving to the vehicle gross margin and to the overall gross margin.

Operator

Our next question comes from Shin Chilean [Phonetic] with CITIC Securities. Please go ahead.

Shin Chilean — CITIC Securities — Analyst

[Foreign Speech] So, my first question is about inventory. So, the inventory is around RMB 6.7 billion on quarter three, it is nearly doubled compared with quarter two, so this number imply around 10,000 more inventory cars on your balance sheet? My second question is about ET5. it was really hot on the 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? Thank you for taking my question.

Stanley Qu — Senior Vice President of Finance

Hi, Shin, 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 impacted by our rear subframes in Q3, so we increase the production of ES8, ES6 and EC6 in Q3. Secondly, it’s because 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 of those factors lead to the increase of our inventory stock.

William Li — Founder, Chairman and Chief Executive Officer

[Foreign Speech] Yes for the ET5 different tires may have different impact and the different performance when it comes to the power consumption. If the users choose a performance prior then the power consumption will be higher, but if the user chooses the 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’d like to experience the acceleration of ET5 within four 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 long range tire, which will have a much better performance of when it comes to the range.

Operator

As there are no further questions, now I’d like to turn the call back over to the company 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]