Xpeng, Inc. (XPEV) Q1 2021 Earnings Call Transcript

Xpeng, Inc.  (NYSE: XPEV) Q1 2021 earnings call dated May. 13, 2021

Corporate Participants:

Yeling Ma — Director of Investor Relations

Xiaopeng HE — Co-Founder, Chairman, and Chief Executive Officer

Hsuehching LU — Vice President of Finance and Accounting

Brian Hongdi GU — Vice Chairman and President

Analysts:

Jeff Chung — Citi — Analyst

Edison Yu — Deutsche Bank — Analyst

Tim Hsiao — Morgan Stanley — Analyst

Nick Lai — J.P. Morgan — Analyst

Bin Wang — Credit Suisse — Analyst

Ming Lee — Bank of America — Analyst

Presentation:

Operator

Hello, ladies and gentlemen, thank you for standing by for the First Quarter 2021 Earnings Conference Call for Xpeng Incorporated. [Operator Instructions] Today’s conference call is being recorded.

I will now turn the call over to your host, Mr. Yeling Ma [Phonetic], Director of Investor Relations of the company. Please go ahead, Mr. Ma.

Yeling Ma — Director of Investor Relations

Thank you. Hello, everyone, and welcome to Xpeng’s first quarter 2021 earnings conference call. Our financial and operating results were issued via newswire services earlier today and are available online. You can also view the earnings press release by visiting the IR section of our website at ir.xiaopeng.com.

Participants on today’s call will include our Co-Founder, Chairman and CEO, Mr. HE Xiaopeng; Vice Chairman and President, Dr. Brian GU; Vice President of Finance, Mr. Dennis LU; and Managing Director of Strategy, Mr. Charles Zhang and myself. Management will begin with prepared remarks and the call will conclude with a Q&A session. A webcast replay of this conference call will be available on the IR section of our website.

Before we continue, please note that the day’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the company as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required on the applicable law.

Please note that Xpeng’s earnings press release and this conference call include the disclosure of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures. Xpeng’s earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures.

I will now turn the call over to our Co-Founder, Chairman and CEO, Mr. HE Xiaopeng. Please go ahead.

Xiaopeng HE — Co-Founder, Chairman, and Chief Executive Officer

[Foreign Speech] Hello, everyone. Thank you for joining Xpeng’s first quarter 2021 earnings conference call today.

[Foreign Speech] Heading into 2021, the electrification, as modification, are accelerating the disruption of internal combustion vehicles. Notably, in March, the penetration rate of high-energy passenger vehicles in China surpassed the 10% threshold for the first time. And the adoption in top-tier cities experienced a record high growth with the penetration rate reaching around 20%. Being part of this unprecedented disruption opportunity, I strongly believe that XPeng is well-poised to lead the development and transformation of the industry. My belief is firmly underpinned by our long-term strategic investment and a leadership in Smart EV technology that we have been building out over the past year.

[Foreign Speech] Our strong momentum continued in the first quarter of 2021 with another quarter of record vehicle deliveries despite traditionally slower season demand and challenges of industry-wide chip shortage. Our total vehicle delivery number in the first quarter reached 13,340, representing a 487.4% year-over-year increase, consisting of 5,366 G3s and 7,974 P7s. According to the new car insurance registration data reported by China Automotive Technology and Research Center, in terms of volume, the G3 ranked Number 1 amongst A Class BEV SUVs and the P7 ranked Number 3 among B Class BEV sedans in Q1. We attribute this outstanding performance to our industry-leading full-stack in-house-developed software technology and our solid differentiated product strategy. Fueled by strong delivery growth, our revenue reached RMB2.95 billion in Q1, representing year-over-year and quarter-over-quarter growth of 616.1% and 3.5%, respectively. Meanwhile, our profitability continued to improve, highlighted by a gross margin of 11.2%, an increase of 3.8% from the prior quarter.

[Foreign Speech] On January 26, we began to push OTA updates for XPILOT 3.0 to our customers and started to recognize revenues from XPILOT software. As such, our vehicle revenues in the first quarter now includes software revenues for the first time in our history. I believe that Xpeng is the only Chinese automaker that has been able to charge full-stack self-operated autonomous driving software separately. Since mass delivery of the P7 began in June 2020, we have delivered over 23,000 P7s as of March 31. And on a cumulative basis, the attach rate of XPILOT 3.0 has exceeded 20% as of March, 31. That attach rate further increased to approximately 25% in March 2021.

I believe that XPILOT software monetization will become a recurring lasting model and generate profits in addition to our sales of vehicles. Going forward, building on our rapid technology iterations, powered by our full-stack in-house R&D capabilities and hardware software integration solutions, we’ll roll out XPILOT 3.5 and XPILOT 4.0, our next generation of autonomous driving technology, in the next few years. Our XPILOT will make the end autonomous driving experience accessible across a wider range of those scenarios and ultimately bring about end-to-end highly automated driving. We will also help to further distinguish our brand leadership in the Smart EV market.

[Foreign Speech] Next, I would like to share our latest achievement in technology advancements for Smart EV.

[Foreign Speech] Since launching our Navigation Guided Pilot for the highway, or NGP, in late January this year, NGP has assisted our customers in driving from 3.3 million kilometers, which is approximately 1 million kilometers a month with the NGP-assisted mileage penetration rate exceeding 50% amongst those P7s that activated it as of March 31, 2021. This strong usage frequency not only reflects the broad applications of NGP, but also testify to the strong passion and trust customers have in using it.

[Foreign Speech] In March, we successfully accomplished our NGP-guided expedition that crossed highways from Guangzhou to Beijing. This expedition of over 3,000 kilometers marked the nation’s longest [Indecipherable]. During the entire expedition, the NGP’s human intervention was only 0.7 times per 100 kilometers on average. Notably, more than 90% of autonomous lane changes, overtaking other vehicles, switching ramps and going through tunnels, were executed successfully, which I believe outperformed all other mass-produced autonomous driving system in the market.

[Foreign Speech] Here, I would like to highlight the strategic importance of our capability of deploying our autonomous driving technology on mass-produced vehicles. With vehicles equipped with NGP capabilities, we’re able to collect highly valuable rate cases with our customers using NGP. We’re now able to achieve fast iterations of our algorithm on a weekly basis, based on our advanced closed-loop data capabilities. With the growing number of P7s on the road, I believe Xpeng will have the largest and fast growing Smart EV fleet close-loop data capabilities on China’s road network.

[Foreign Speech] Recruiting and retaining excellent technical talent is the foundation of our ability to lead innovation in technology and development in the Smart EV industry. As of March 31, 2021, our R&D team represent approximately 40% of our total headcounts. With our firm commitment to build a strong R&D team, we aim to strengthen our leadership’s cutting edge innovations and including electrification as modifications for Smart EVs and further technological leadership in the industry.

[Foreign Speech] We will be able to continuously introduce new vehicle models featuring more powerful hardware to support our fast iteration of software.

[Foreign Speech] At the Shanghai Auto Show on April 19, we unveiled the P5, the world’s first mass-produced Smart EV equipped with LiDAR. The market warmly welcomed the P5 with enthusiasm supporting pre-order reservations that exceed our expectations and surpassed 10,000 in just 53 hours following its debut.

[Foreign Speech] The P5 designed is a A-plus Class sedan with a roomier inner space than most of the B-Class sedans in the markets. With more autonomous driving systems and smart cockpit technology and roomy space, we have created for our customers a completely new experience of a smart third space beyond their homes and workplaces. Our customers can now use this space to take a nap, watch films like in a private cinema and enjoy outdoor camping and more.

[Foreign Speech] We plan to start deliveries of the P5 in the fourth quarter of this year. Additionally, we plan to start internal user testing of XPILOT 3.5 with NGP autonomous driving capabilities on the major open roads at the end of this year and we’ll give the OTA update at the end of next year. In our continuing efforts to improve software and engineering performance, we provide customers with the most powerful mass-produced autonomous driving system available for the Chinese road system at an attractive price point. Such approach significantly differentiate us from many of our peers.

[Foreign Speech] In addition, we are making solid progress in the research and development of our next generation autonomous driving hardware platform and next generation powertrain system, including high-voltage and supercharging systems. We look forward to updating you on these developments in due course.

[Foreign Speech] As the Smart EV market continues to grow fast, we are accelerating the build-out of our infrastructure facilities as part of a long-term strategic roadmap and investments. As of March 31, Xpeng’s physical sales and service network consists of 178 sales stores and 61 service centers across 70 cities in China. Out of 178 stores, 88 were directly operated by us. Notably, in this regard, in April, we entered into a long-term strategic partnership with China’s biggest auto dealership company, the Zhongsheng Group. Especially, this partnership will serve to provide both XPeng’s industry-leading Smart EV products and Zhongsheng’s high-quality services to consumers across China and further accelerate Smart EV adoption. We remain committed to expanding our nationwide sales network to approximately 300 stores, covering 110 cities by end of the year.

[Foreign Speech] We also continue to expand our supercharging network. As of March 31, the number of Xpeng-branded supercharging stations expanded to 172, covering 60 cities. Additionally, our free charging program has been available on more than 1000 supercharging stations as of April 30 this year, covering over 160 cities. We expect that there will be more than 500 XPeng-branded supercharging stations by the end of this year.

[Foreign Speech] In terms of production at our Zhaoqing factory, we have completed upgrading the production line so that they can produce both the P7 and the aforementioned P5 concurrently. We now are conducting internal production runs of the P5 model. We believe our manufacturing cost will be meaningfully declined when we are able to produce the P7, P5 and even G3 in the same production plant. In addition, with financial support from the Wuhan government in April, we entered into a cooperation agreement with the City of Wuhan to build our third factory there. The new manufacturing base will contain both manufacturing and powertrain plants and have an annual capacity of 100,000 units. With funding support from local governments in Wuhan and Guangzhou, we’ll expedite investment and construction on our plants in these two cities.

Once fully completed, Xpeng’s three factories located in Zhaoqing, Guangzhou and Wuhan will have a total annual design capacity of 300,000 units. Moreover, with minimal factory revamps and increase to work shifts, the potential peak outlets can come close to 500,000 units in total. This provides us an excellent foundation from which we can capture widespread demand in the transformation towards Smart EVs.

[Foreign Speech] Turning to our overseas development. In the first quarter, we exported more than 300 G3s to Norway. We plan to start deliveries of the P7 to Norway in the second half of the year. Moving forward, we’ll actively boost our efforts in Norway and other European markets to expand our global sales delivery and service mechanisms.

[Foreign Speech] As a Smart EV designer and manufacturer that knows China better than any other peer, Xpeng will remain focused on delivering differentiated and smart products build upon our industry-leading autonomous driving technologies that meets the vast market demands. This relentless effort will further our mission to shape the mobility experience of the future.

[Foreign Speech] Now, moving on to our guidance. Excluding pre-order reservations of the P5, we are already seeing a historical high of our order backlog. We’ll strive to ramp up production and minimize the impact from industry-wide chip shortage. In the second quarter of 2021, we expect our Smart EV deliveries to be approximately 15,500 to 16,000 units, and our total revenues to be approximately RMB3.4 billion to RMB3.5 billion.

[Foreign Speech] Thank you. With that, I will now turn the call over to our VP of Finance, Mr. Dennis LU to discuss our financial performance for the first quarter of 2021.

Hsuehching LU — Vice President of Finance and Accounting

Thank you, Xiaopeng, and hello, everyone. Xpeng’s robust performance in the first quarter of 2021 validates our strong capability to make differentiated Smart EV appeal to various needs of the large and growing customer base. Thanks to our record-breaking deliveries in the traditional weak season, in quarter one, we witnessed the quarter-over-quarter increase in our top-line and further improvement in our profitability. In particular, our gross margin continue an upward trend sequentially hitting double-digits in the quarter.

Additionally, for the first time, revenue from our XPILOT software were recognized in top-line and affecting in gross margin, making a significant milestone in our Chinese EV industry. Moreover, our sound financial condition and strong cash position enable us to better execute our growth strategies, cement competitive advantages and see tremendous growth opportunity in the Smart EV sector.

Now I would like to walk you through our detailed financials for the first quarter of 2021. Total revenues were RMB2.95 billion for the first quarter of 2021, representing an increase of 616% from RMB412 million for the same period a year ago and an increase of 3.5% from RMB2.85 billion for the fourth quarter of 2020. Revenues from vehicle sales were RMB2.81 billion for the first quarter of 2021, representing an increase of 655% from RMB372 million for the same period of 2020, and an increase of 2.7% from RMB2.74 billion for the first quarter of 2020. The year-over-year increase were primary due to delivery of the P7 which stopped at the end of June last year. The quarter-over-quarter increase was primarily attributable to the revenue of the conventional XPILOT 3.0 software in the first quarter of 2021 since the functionality was fully delivered to the accumulated group of the software purchases, partially offset by the lower requirements of CV [Phonetic] for the new energy vehicle starting from January this year.

Gross margin was 11.2% for the first quarter of 2021 compared with negative 4.8% for the same period of 2020 and 7.4% for the first quarter of last year. Vehicle margin was 10.1% for the first quarter of 2021, compared to negative 5.3% for the same period of 2020 and 6.8% for the first quarter of 2020. The improvement was primarily attributable to the material cost reduction and revenue — the commission of the XPILOT software sales.

Research and development expenses were RMB535 million for the first quarter of 2021, representing an increase of 72% from RMB311 million for the same period of 2020, and an increase of 16% from RMB460 million for the first quarter of 2020. The year-over-year increase was mainly due to: number one, the increase in employee compensation as a result of expanded research and development staff; number two, higher expenses relating to the P5 development; and number three, share-based compensation expense recognized in the first quarter of 2021. The quarter-over-quarter increase was mainly due to: number one, increase in employee compensation in line with increasing engineering staff; and number two, higher expenses related to the development of the P5.

Selling and general and administrative expenses were RMB721 million for the first quarter of 2021, representing an increase of 124% from RMB322 million for the same period of 2020, and a decrease of 22% from RMB918 million for the first quarter of 2020. The year-over-year increase was mainly due to: number one, higher marketing, promotional and advertising expenses to support vehicle sales; number two, the expansion of our sales network and associated personnel cost, lease expenses for the sales and service stores, and commission for the franchised stores; and number three, the share-based compensation expenses recognized in the first quarter of 2021. The quarter-over-quarter decrease was mainly due to lower marketing, promotional and advertising expense compared with the peak sales season in the fourth quarter last year.

Loss from operations was RMB904 million for the first quarter of 2021 compared with RMB649 million for the same period of 2020, and RMB1.1 billion for the fourth quarter of 2020. Excluding share-based compensation expense, the non-GAAP loss from operations was RMB814 million for the first quarter compared with RMB649 million for the same period of 2020, and RMB1.1 billion for the fourth quarter of 2020.

Net loss was RMB787 million for the first quarter compared with RMB650 million for the same period a year ago, and RMB787 million for the fourth quarter of 2020. Excluding share-based compensation expense, the fair value change on derivative liabilities related to the redemption right of preferred shares, the non-GAAP adjusted net loss was RMB696 million for the first quarter of 2021 compared with RMB645 million for the same period a year ago, and RMB713 million for the fourth quarter of 2020.

Net loss attributable to the ordinary shareholders of Xpeng Incorporation was RMB787 million for the first quarter compared with RMB935 million for the same period of 2020, and compared with RMB787 million for the fourth quarter of 2020. Excluding share-based compensation expenses, fair value change on derivative liabilities related to the redemption right of preferred shares and accretion of the preferred shares to redemption value, the non-GAAP net loss attributable to the ordinary shareholders of Xpeng Incorporation was RMB696 million for the first quarter of 2021 compared with RMB645 million for the same period of 2020, and also RMB713 million for the fourth quarter of 2020.

Basic and diluted net loss of American Depositary Share were both RMB0.99 for the first quarter of 2021. The non-GAAP basic and diluted net loss per ADS were both RMB0.88 for the first quarter of 2021. Each ADS represents two Class A ordinary shares.

Now, turning back to balance sheet. As of March 31, 2021, our company had cash and cash equivalent, restricted cash, short-term deposits, short-term investments and long-term deposits in total of RMB36.2 billion compared with RMB35.3 billion as of December 31 last year.

To be mindful of the length of our earnings call, for our first quarter financial results, I will encourage listeners to refer to the earnings press release for further details.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from the line of Jeff Chung with Citi.

Jeff Chung — Citi — Analyst

Hi. Excellent results. This is Jeff from Citi. So I have two questions. The first question is about the software. Could you break down the software revenue and gross profit in first quarter this year? What was specific? How much software revenue was derived from the first quarter of this year and how much from the rest of the 2020 ended GP margin? How should we see this software income and profitability in the second quarter and the second half? This is my first question.

Second question is about the vehicle GP margin. It seems that the G3 equipping with the LFP is curated to the GP margin. So how much better compared with the LCM battery? Secondly, in the 1Q announcements, you mentioned that the first quarter cost of goods sold came down Q-on-Q due to a lower material cost. Could you quantify in terms of what kind of materials are leading to a lower cost? And how you see the cost strategy to the second quarter? [Foreign Speech]

Hsuehching LU — Vice President of Finance and Accounting

Okay. Thank you, Jeff. Very good questions. I will try to handle the questions and then Brian or Charles or Xiaopeng can supplement later. Number one is the software. Actually in Q1, our total revenue from the XPILOT 3.0 software was about RMB80 million. Among that RMB50-some million was from those contracts we purchased — the customers purchased last year and the other of around RMB30 million is from those software we sold this year. So in general, the software accounts for about 2.5 percentage points of the margin. Among the 2.5 points, 1.5 will be contributed from those contracts we sold last year and the other 1 percentage point is from those contracts we sold in the first quarter.

Because we have a very good NGP team from Guangzhou to Beijing, we actually are seeing the software and also the hardware for the XPILOT is increasing actually in March and also in April. So we foresee the software penetration will be even higher in the second quarter. But again in the first quarter, the total revenue — or the total margin includes around 3,000 units of those software we — the customer purchased last year. So the second quarter would not be as high as 2.5%, but definitely it will be higher than 1 percentage points for the first quarter. That’s number one.

The second question is for the G3. Yes, in — actually we have material advantage compared with the LFP battery versus the LCM battery. I cannot tell you exact number. We have seen, for example, we maintain the same MSRP — same available marketing. However, we have the better material cost. So that would improve our G3 margin as well. We start with the delivery of the LFP G3 in April, so we can — we will foresee the margin improvement for G3 in the second quarter.

And number three is for the material cost reduction. Yes, we have the material good news compared with the quarter four. The good news is primary from the battery cost reduction. We actually — we negotiated with our battery supplier to get the battery cost reduction. That basically was — the negotiation was completed earlier this year. So we have some material cost reduction. The percentage would be from 5% to 10% in terms of the cost reduction versus the variable at the end of last year. I hope I answered your questions.

Jeff Chung — Citi — Analyst

[Foreign Speech] Thank you. No more questions. Thank you.

Operator

Your next question comes from the line of Edison Yu with Deutsche Bank.

Edison Yu — Deutsche Bank — Analyst

Hi, thank you and congrats on the quarter. First question is, could you give us an update on the LiDAR testing and validation with Livox? Is it meeting your performance requirements? And are you confident that the P5 with a LiDAR on it will be hitting the streets in the fourth quarter? And then second question is on the reservation number. I know you disclosed it shortly after the release. Could you maybe provide us an update? And if it’s not the exact number, I know you don’t give that, but some sense of relative to your own expectations, how much higher is this number tracking? I’ll translate. [Foreign Speech]

Xiaopeng HE — Co-Founder, Chairman, and Chief Executive Officer

[Foreign Speech] So we have tested multiple LiDAR’s of different brands and we compare it on different parameters in terms of their human cost, the craftsmanship, their cost and also their capability of being mass-produced. And so the LiDAR that we use on P5 is actually [Indecipherable] and — but we are very open to other options. So by 2022 to 2023, the new models that we are launching will adopt different brands that makes — that produce LiDAR’s. So basically, we are very confident that right now with our capabilities of all lines full-stack sensing about the performance on our vehicles and also on our production capabilities. We can actually be complementary to some of the LiDAR technology shortage or LiDAR technology disadvantage out there. However, in the long run, I hope that we can achieve a good balance between the cost of the LiDAR technology and their capability of being mass-produced. At the same time, we can achieve a well-balanced along with different performances across different parameters.

[Foreign Speech] So we are very confident that by Q4 this year, we can launch P5 equipped with LiDAR. And regarding your second question about reservation number, obviously, we can’t disclose the exact number, but compared to P7s launch on the Shanghai Auto Show last year in the same period, actually P5 reservation number is a few times more than that of P7.

[Foreign Speech] And also getting the feedback from our frontline sales force, the same period last year, when these guys launched P7, they do feel some pressure from the market regarding the price of P7. However, this year, with the launch of P5, every single feedback has been very positive regarding the launch of P5. So we’re really confident that the actual performance in terms of the orders and deliveries of P5 will be very, very encouraging.

Edison Yu — Deutsche Bank — Analyst

Many thanks.

Operator

The next question comes from the line of Tim Hsiao with Morgan Stanley.

Tim Hsiao — Morgan Stanley — Analyst

Hi, management team. Congratulations on the solid result and thanks for taking my questions. So my first question is about the components. Because compared to other EV start-up peers, Xpeng, this year, apparently, had much more new models and basically it’s especially in second half. So while we expect the chip shortage to ease in second half, but what else has Xpeng done to ensure how their major component for either phase link or new launches would have sufficient component supply later this year? Especially, I think there are lot of new markets who will also be coming to the market in the second half.

My second question is just a quick follow-up on the guidance. What kind of visibility do you have so far around chip supply? How much inventory do we have at the moment to support the production plan throughout the whole second quarter and meet the guidance of the sequential volume growth in the second half — the sequential volume growth? [Foreign Speech]

Xiaopeng HE — Co-Founder, Chairman, and Chief Executive Officer

[Foreign Speech] Thank you for your questions. Regarding the shortage in chipsets, basically it is now a big challenge for all the automakers out there and nobody out there can really promise that they can solve the problem in a dark time. And for Smart EV manufacturers, actually I think Q2 — our upcoming Q2 will be the most challenging timing. And we hope that by Q3 this year, things will get better. However, if not, then Q1 next year maybe, things will become — the tension may become more released. So in order to prevent ourselves into — getting into a difficult situation, we have then several measures, for example, we have made a lot of pre-orders with our existing suppliers, we communicate directly with the suppliers ahead of different supplies of chipsets to make sure that we have enough inventory, and orders come in place to support our future development and production.

And also because we have lot of closed-loop automated R&D technology, that allow us to be really flexible in adapting to different chipsets in manufacturing, our vehicles. We are able to actually look out for new partners and new manufacturers for chipsets so that we can actually become more adaptive to market change and through this chipset shortage. So in the long run. We believe that, and we have confidence that these can be resolved, but we can’t promise anything right now.

Brian Hongdi GU — Vice Chairman and President

Hey, Tim, this is Brian. I just want to add, in terms of the guidance we gave for this quarter, we have considered the constraints of the chip shortage situation that Xiaopeng described. So that reflected the constrained numbers. Without constraints, obviously, the delivery number will be higher than what we have given out. But on the other hand, I think the chip shortage visibility is still not very clear. So it will be subject to changes, but we keep a very close eye on the situation.

Xiaopeng HE — Co-Founder, Chairman, and Chief Executive Officer

[Foreign Speech] Now in terms of other components as we deliver more new models in Q3 or Q4 this year, we are going to face some constraints in terms of other components, other than chip shortage. For example, when including LCM battery supply, right now, we are using LFP for some of our vehicle models and the rest of the adoption of LFP — sorry, will take about one quarter and so by Q3 this year, we estimate that we will reach a comfortable level of adopting the LFP batteries. And also the market demand for LFP battery is actually larger than expected, and that is why in Q3, Q4, this year, we are going to be able to reach a more comfortable level of production adopting this new battery. And as was mentioned by Brian before, our guidance for this year, later on, actually included the calculation of all of those component that I’ve mentioned.

Tim Hsiao — Morgan Stanley — Analyst

Great. Thank you, Mr. HE and Brian. Thank you.

Operator

The next question comes from the line of Nick Lai with J.P. Morgan.

Nick Lai — J.P. Morgan — Analyst

[Foreign Speech] My two simple question, the first question is margin impact of chip shortage and related chip price hike. And I guess management have done and Mr. HE had already answered, talked about pricing regarding chip supply. And so maybe just on the margin outlook in light of the resulting chip price hike, can you give us some indication or guidance how we mitigate such kind of high price — material price headwinds? And the second question, really regarding business model and R&D on XPILOT 3.0. At the moment our customer pays up to around RMB20,000 together as part of [Indecipherable] service. I’m curious as we launch or as we roll out XPILOT 3.5 in the future, do customers have the flexibility to pay that on demand or more under subscription model? [Foreign Speech]

Hsuehching LU — Vice President of Finance and Accounting

Hey, Nick, this is Dennis. Let me handle your first question. Actually in our first quarter margin, we did not have the material impact on the margin due to the chip or raw material. So, not in the first quarter. But looking at the second quarter, we do have some impact due to the raw material, for example, the steel, the aluminum, those component — those raw material have some slight cost impact to our margin. And also in terms of chip, we are also sourcing some alternative chip and also probably to help our supplier to get chip. So there are some material — some cost increase. But in total, these two components together, the impact will be less than 1 percentage points in terms of margin. The amount is somewhere around RMB1,000 to RMB1,500 but less than 1% of the margin impact to the second quarter. For the third quarter, we need to closely monitor, but the situation probably will be released in the third quarter.

Xiaopeng HE — Co-Founder, Chairman, and Chief Executive Officer

[Foreign Speech] Let me take the second part of your question. Actually, in my opinion, paying by on-demand model or subscription model will actually cost our customer more than paying a one-off fee for that software and service charge. Going forward, we are also considering other service charge possibilities and we will communicate in a timely manner, but we have to update to the market. Thank you.

Operator

The next question comes from the line of Bin Wang with Credit Suisse.

Bin Wang — Credit Suisse — Analyst

[Foreign Speech] My question is about some serving capability of the XPILOT more to the 3.5 XPILOT, what’s the comparison between a vital solution and quality solution compared to XPILOT 3.5 open NGP. Thank you.

Xiaopeng HE — Co-Founder, Chairman, and Chief Executive Officer

[Foreign Speech] Now, actually, in terms of XPILOT 3.0 and its functionality, we will have an official release when we launch the P5 later on this year. However, right now, I can comment on different solutions and different criteria for evaluating different solutions. Basically, we have to balance several things, also aspects. First of all, you have to look at the combination of different functionality. Second of all, you have to combine the — you have to look at their integration of the hardware and software and the overall cost of using the solution. The third aspect is that you have to look at the scenario of the usage or the scope of the usage of that particular solution. Last but not least, you have — also have to take into consideration the data feedback from the users, whether or not they consider it a good experience to use that particular solution.

Now in the market right now, you might come across some videos of some solutions that claim that they are doing very good in certain aspects, but that is only in certain functionality or at a very high cost. Right now, what Xpeng is trying to do is that we are coming up with solutions — alternative strategies that can balance all of those aspects at a reasonable cost, so that we can deliver the most superior experience in terms of autonomous driving to our customers and we are launching different versions and we want to go into the future where we can actually use these technologies to support not just NGP but also to cover all of the other roads in China and then later on to all-terrain off-traffic road scenarios in China and even go above that as we go to the global scenario and scope. And so that is an art, by managing to balance all these different aspects in order to achieve the best solution for our customers.

Bin Wang — Credit Suisse — Analyst

Thank you. [Foreign Speech]

Operator

The next question comes from the line of Ming Lee with Bank of America.

Ming Lee — Bank of America — Analyst

[Foreign Speech] Okay. My question — I have two questions. The first question is regarding the mid-period Q3 upgrade. So, when will you start to do this? And will you use a contract manufacturing business model or you will use your own capacity to make upgrade? And if you manufacture it by yourself, will it be margin-neutral or it is slightly helpful to your margin? And the second question is regarding the LFP battery orders. Last time, during your earning call, you mentioned that around 10% of orders of G3 is for LFP battery version and the 20% orders of P7 is for LFP battery version. So after two months, do you see any structural change regarding your order combination? Thank you.

Xiaopeng HE — Co-Founder, Chairman, and Chief Executive Officer

[Foreign Speech] Okay. About the newer version of G3, we actually wouldn’t do any upgrade in terms of it’s autonomous driving capability because we hope that by the next time, another new upgrade of G3 will be able to support higher level of autonomous driving. And regarding the second part of your first question, if we were to produce the next version or next model of G3 in our own battery, definitely the margin will be improved. And it will also impact other models’ gross margin as well in a very positive manner. And the second question regarding the demand for LFP battery, basically we’ve seen more demand for that battery than expectation.

So for G3 and P7, that number — that order for LFP battery definitely have surpassed that was disclosed in last conference call. And so right now we are in the process of negotiating with a lot of the battery suppliers and hopefully that they can ramp up their capacity of production of that battery, so that we can support that order demand for Q3 this year. In the long run, we are very confident that actually demand for LFP will continue to go up and we are very confident that it will help us to drive up the margin in general. Thank you.

Brian Hongdi GU — Vice Chairman and President

So, Ming, this is Brian. Let me just add on the LFP battery front. What we see is that the increased demand is actually additive to our existing demand with the NCM battery-powered models. In fact, we have not seen the number of NCM models decline as a result of the launching of LFP batteries. We believe that LFP battery actually expanded our customer base and the reach because of the wider pricing. And also I think, given the capacity ramp up, we think that the mix will reach probably steady-state percentage by sometimes in third quarter. And that’s where we think we will see the most significant contribution on volume side.

Ming Lee — Bank of America — Analyst

Thank you, Brian.

Operator

As there are no further questions, now, I would like to turn the call back over to the company for closing remarks.

Yeling Ma — Director of Investor Relations

Thank you once again for joining us today. If you have further questions, please feel free to contact Xpeng’s Investor Relations through the contact information provided on our website or the TPG Group Investor Relations. Thank you.

Operator

[Operator Closing Remarks]