NIO - Q2 2024

Transcript

Operator (participant)

Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I'll now turn the call over to your host, Mr. Rui Chen, Head of Investor Relations of the company. Please go ahead, Rui.

Rui Chen (Head of Investor Relations)

Thank you. Good morning, and good evening, everyone. Welcome to NIO's Second Quarter 2024 Earnings Conference Call. The company's financial and operating results were published in the press release earlier today and posted on the company's IR website. On today's call, we have Mr. William Li, Founder, Chairman of the Board, and Chief Executive Officer, and Mr. Stanley Qu, Chief Financial Officer. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission, the Stock Exchange of Hong Kong Limited, and the Singapore Exchange Securities Trading Limited.

The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that NIO's earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to 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 CEO)

Hello, everyone. Thank you for joining NIO's 2024 Q2 Earnings Call. In the first half of this year, the NIO brand completed the 2024 model year facelift, further enhancing the competitiveness of its NT2 product. In the meantime, as NIO's technologies, products, services, and the user community were recognized by more people, its order intake and the delivery continued to grow. NIO's delivery in Q2 reached a quarterly record of 57,373 units, up 143.9%. In China, NIO models had over 40% market share among all BEVs, with a transaction price higher than RMB 300,000. Since Q3, NIO's product mix has been continuously optimized. In July and August, the delivery was 20,498 and 20,176, respectively.

With that, NIO's monthly delivery has been more than two hundred thousand for four consecutive months. The total delivery in Q3 is expected to be between 61,000 and 63,000 units. In terms of NIO's financial performance, with continuous cost optimization of core components and the supply chain, the vehicle margin Q2 increased to 12.2%. As the user community became larger and more vibrant, the second quarter also witnessed rapid growth in revenues from after-sales and power services. The gross margin of other sales continued to improve. Now, I would like to share with you the recent highlights of our products, R&D, and operations. On July 27, NIO hosted NIO IN 2024. At the event, we introduced the full domain operating system, SkyOS, and the smart system, Banyan 3.

Moreover, we also announced the successful tape-out of Shenji NX9031, our in-house developed chip for smart driving. As for NAD, NIO continued to integrate its system capabilities. In July, the industry's first AEB function based on end-to-end architecture was released. With the scenario coverage 6.7 times better than traditional AEB, it makes driving safer. At the NIO IN, we also introduced the NIO World Model, NWM, the brand new architecture for smart driving. NADArch 2.0 were also released. This is the most advanced end-to-end architecture based on NWM. New features and the experiences of NADArch 2.0 will be released in the second half of this year. On September 19, our family, our family-centric mass-market brand, ONVO, is going to celebrate launch of its fourth model, L60, and the user delivery will start in late September.

With strong confidence in this all-round product, we will spare no effort in ramping up production and fulfilling the market demand. For sales and services, as of now, the NIO brand has 161 NIO Houses and 408 NIO Spaces, as well as 351 service centers and 63 delivery centers. The ONVO brand has already opened 105 stores in 55 cities, and we have over 200 stores by end of the year, by the year-end. About the charging and swapping network, so far, NIO has over 2,561 Power Swap Stations worldwide, and has provided over 52 million swaps. Besides, NIO has installed over 23,000 Power Chargers and Destination Chargers. Quick and hassle-free recharging is critical for convincing ICE owners to drive EVs.

On August 20, they hosted the NIO Power Up event, where we announced the plan of Power Up Counties. In the first half of 2025, NIO's charging network will become available in every county in mainland China. By the end of 2025, the swapping network will become available in more than 2,300 counties in China. To better support this initiative, we also announced the Power Up Partner Plan and signed the agreements with the further partners. The continuous deployment of the charging and the swapping network will help expand the market reach of NIO and ONVO, and further drive sales growth. As for market development, we are accelerating the international expansion. On August 20, NIO's UAE website went live, and in Q4, the product will be launched and delivered in UAE.

While ensuring controllable investment and efficient operations, we will also actively evaluate opportunities worldwide, introducing products to more markets. In the NEV quality study released by J.D. Power in early June, NIO models ranked the highest in their respective segments. NIO is also the only NEV company winning top ranking for six consecutive years. Ever since its establishment, NIO has been committed to making itself a global benchmark of quality and providing great user experience through lifecycle quality management. As NIO has been founded for almost ten years, with the multi-brand strategy and the international business rollout, as well as the external change, we upgraded the company's value system in July. In the quest of Blue Sky Coming, NIO aspires to shape a sustainable and bright future, and envisions itself as a User Enterprise where innovative technology meets experience excellence.

With new brands and the products being launched step by step, the fundamental tech capability and the long-term strategic planning that NIO has been developing will have a great effect, greater effect. NIO's cumulative R&D investment, sophisticated community operations, and the efficient infrastructure deployment will lead to better sales and margin. We look forward to NIO's performance in the second half. Thank you for your support. With that, I will now turn the call over to Stanley for Q2's financial details. Over to you, Stanley.

Stanley Qu (CFO)

Thank you, William. Now let me go over our key financial results for the second quarter of 2024. I will refer to RMB only in my discussion today, unless otherwise stated. Our total revenue were RMB 17.4 billion, up 98.9% year-over-year, and up 76.1% quarter-over-quarter. Revenues from vehicle sales were RMB 15.7 billion, representing an increase of 118.2% year-over-year, and an increase of 87.1% quarter-over-quarter. The increase year-over-year was mainly attributed to higher deliveries, partially offset by lower average selling price due to changes in product mix and user rights adjustments since June 2023. The increase quarter-over-quarter was mainly attributed to higher deliveries.

Other sales were RMB 1.8 billion, representing an increase of 11.3% year-over-year, and an increase of 15.6% quarter-over-quarter. The year-over-year increase was mainly due to the increase in sales of parts, accessories, and after-sales vehicle services, and provision of power solutions, which both grow with our user base and partially offset by lower sales of used cars. The increase quarter-over-quarter was mainly attributed to the increase in sales of parts, accessories, and after-sales vehicle services, provision of power solutions and other products, and the increased revenues from technical R&D services. Vehicle margin was 12.2% in this quarter, compared with 6.2% for the same period of 2023, and 9.2% for the last quarter.

The year-over-year increase was mainly due to the decreased material costs and was partially offset by a lower average selling price. The quarter-over-quarter increase was mainly due to decreased material costs. Overall gross margin was 9.7%, compared with 1% in the same period of last year and 4.9% in the last quarter. R&D expenses were RMB 3.2 billion, decreased 3.8% year-over-year and increased 12.4% quarter-over-quarter. The quarter-over-quarter increase was mainly due to the incremental design and the development costs and the increased personnel costs in R&D functions. SG&A expenses were RMB 3.8 billion, increased 31.5% year-over-year and increased 25.4% quarter-over-quarter, which was mainly driven by higher personnel costs related to sales functions and increased sales and marketing activities.

Loss from operations was RMB 5.2 billion, representing a decrease of 14.2% year-over-year, and a decrease of 3.4% quarter-over-quarter. Net loss was RMB 5 billion, representing a decrease of 16.7% year-over-year, and a decrease of 2.7% quarter-over-quarter. As of June 30, 2024, our company had cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits in total of RMB 41.6 billion. For more information and details of our audited second quarter 2024 financial results, please refer to our earnings press release. Now, this concludes our prepared remarks. I will turn the call over to the operator to facilitate our Q&A session. Thank you.

Operator (participant)

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Tim Hsiao from Morgan Stanley. Please go ahead.

Tim Hsiao (Managing Director)

Hi, management team. Thanks for taking my question. I have two questions. The first question is about our new model, L60, because L60 started pre-sale in mid-May, and since then, I think the model has received tens of thousands of pre-orders, which is very robust compared to all the new launches YTD, but how can you also ensure a high conversion rate this time after the official launch on September 19 ? Would the company consider getting more aggressive with the official pricing, given the competition? And in the meantime, what kind of supply chain preparation the team has done to avoid any potential supply disruption after the delivery starts? That's my first question. Thank you.

William Li (Founder, Chairman, and CEO)

Thank you, Tim. [Foreign language]

Thank you for the question. On August 15, we have witnessed the offline of the very first mass-produced L60, and the head of sales of the ONVO brand is actually driving this very first mass-produced car, having a road trip in China, and he has been driving the car for almost 20 days while doing the broadcast on the social media. It has received a lot of attention from the public. Every day, there are several million views of the broadcast by the members. In terms of the pre-order intake, it actually is pretty good and has surpassed our expectations, so we are quite confident with the overall competitiveness of this product. Regarding the pricing strategy, well, we launched the product in mid-May. We have announced a pre-sale price, which is RMB 299,900.

That is around RMB 30,000 cheaper than Model Y. Before the official launch of the product on September 19, we still have some time and room for the final price adjustments and decision. But overall speaking, we will try to strike a balance between the vehicle margin and the price point of the product to find the sweet spot. In general, we will not be very aggressive as we needed to realize a reasonable margin for the product. Regarding the supply chain security, our target is that by the end of this year, which is in September, we hope that we can realize a supply capacity of 10,000 units, and sometime next year, we will be able to realize a supply capacity of 20,000 units per month.

Tim, next question?

Tim Hsiao (Managing Director)

Sure. Thank you, William, for sharing your details. My second question is about the NIO brand vehicles on the NIO brand. Because we noticed the monthly sales of models on the NIO brand have stabilized at the 20,000 units in second quarter. So, will there be any further upside to the vehicle sales and the gross profit margin based on the current product portfolio? If yes, could you share with us where the upside to the volume and the margin of NIO brand vehicles would be coming from? That's my second question. Thank you.

Stanley Qu (CFO)

Hi, Tim, this is Stanley. [Foreign language]

Thank you for your question. Regarding the vehicle margin of the NIO brand, in the second quarter, we have achieved the vehicle margin of 12.2%. That is mainly because of the efficiency improvements on the supply side and also in the production. As in the past four months, we have realized the monthly delivery volume of more than 20,000 units. We also see the opportunities for further improvements, including the cost optimization of the product, as well as to improve the high margin products in the product mix from the marketing side. With that, we will keep improving the vehicle margin in the following two quarters of this year, and expect to realize a vehicle margin of around 15% by the end of the year.

William Li (Founder, Chairman, and CEO)

Yeah. [Foreign language]

And also, a comment to add here is that, we also see opportunities to improve our delivery volumes month over month. Yet, we will also needed to strike a balance between the vehicle delivery volume and the vehicle margin. Both will increase, but it will not be in a very drastic manner, for either margin or the vehicle volume, as we, ultimately we pursue a very good gross profit with our product, so we need to find the sweet spot in between.

[Foreign language]

And for the much longer time as NIO brand targets premium segments priced over RMB 300,000, as we are going to launch new products and also do facelifts and upgrades on the products, we believe that in the battery electric vehicle segment, realizing a monthly volume of around 30,000-40,000 units is a reasonable target and the volume.

[Foreign language]

So I'll sum up, for the NIO brand, our long-term operational target is to realize a monthly volume of 40,000 units at a vehicle margin of 25%.

[Foreign language]

As for the ONVO brand, it faces a much larger market with a total car park of more than 8 million. In that case, leveraging our battery as a service as well as our well-established charging and swapping network, we believe that ONVO's products will be competitive even against the competition with PHEV, RAV4 and other best models. So, for ONVO products, they do have a higher potential or bigger potential for a higher sales volume month over month. And for the longer term, our operational targets for ONVO products will be more than 15% for the vehicle market, and we believe that it's also a reasonable target.

Thank you, Tim.

Tim Hsiao (Managing Director)

Thank you very much, William and Stanley. Thanks for all the insight, and looking forward to the L60 launch. Thank you.

Stanley Qu (CFO)

Thank you.

Operator (participant)

Thank you. Your next question comes from Bin Wang from Deutsche Bank. Please go ahead.

Bin Wang (Head of Asia Autos and Auto Technology Research)

Okay, thank you so much. My first question is also about the ONVO L60. You previously mentioned that this year your volume target is about 20,000 units. Given the strong order, do you still maintain such a volume target? And if you could break down by month, because we are not exactly in the end of this month. So what's the progress for, say, October, November, December? So that is my first question. And second question is about the expense, SG&A expense. It seems that expense has kept increasing. What's your target for this quarterly SG&A expense? Do you have guidance for each quarter in the upcoming second half? Thank you.

William Li (Founder, Chairman, and CEO)

[Foreign language]

I will take the first question. This is William. Regarding the ONVO L60, we will start the delivery of the products from late September, but it will take some time for us to ramp up the production and supply of a new product. So most of our deliveries this year will happen in Q4. We will start delivery from September, but not in a very significant volume. And towards the end of the year, we hope that our monthly delivery will be around 10,000 units for the month of December. In terms of the supply side, as the car is equipped with many new technologies, it will also take some time for the supply side to ramp up their production. Thank you.

Stanley Qu (CFO)

[Foreign language]

This is Stanley. I will take the second question. Regarding expenses, there are two categories. The first is R&D expenses. We will still keep the similar R&D investment pace and intensity on a quarterly basis, so roughly on the non-GAAP basis, it will be around RMB 3 billion every quarter, but there will also be fluctuations or slight differences from quarter to quarter, as they are relevant to our actual R&D activities conducted, and regarding the second category, SG&A expenses, as we have mentioned, that in late Q3, we will start the delivery of the L60. With that, there will be increase in our SG&A expenses, but as we ramp up the delivery volume of the product, we also think that we will keep optimizing the percentage of the SG&A expenses against the overall sales revenue from L60. Thank you.

William Li (Founder, Chairman, and CEO)

Thank you, Bin Wang.

Bin Wang (Head of Asia Autos and Auto Technology Research)

Thank you.

Operator (participant)

Thank you. Your next question comes from Tina Hou from Goldman Sachs. Please go ahead.

Tina Hou (VP and Head of China Autos Equity Research)

Thanks for taking my question. So my first question is also regarding on L60. So, just wondering at, let's say 10,000 volume in December this year and 20,000 volume next year, what kind of gross margin should be reasonable for this model? Also, as we are ramping up to higher and higher volume, what is our capacity expansion plan and also CapEx plan for 2025 and maybe 2026? Should we expect CapEx to become higher versus 2024? So that's the first question. The second question is also regarding the sales marketing expense. So we had over 30% SG&A expense growth in the second quarter. Wondering, could you give more details on the sub items, which is the one that's growing the fastest? And also is any of the sales policy recorded in the SG&A expense? Yeah, so that's my second question. Thanks.

William Li (Founder, Chairman, and CEO)

Thank you, Tina. [Foreign language]

Thank you for your question. This is William. I will take your first question. Regarding L60, when its overall production volume reaches a reasonable and expected targets, we believe that it will naturally realize a 15% vehicle margin. Of course, against the fierce competition, we have also reserved some room for the variable marketing of the product, so that we will be more flexible in the competition. Yet overall speaking, as the product itself is designed for efficiency and the cost, 15% vehicle margin is a reasonable target for this model, as we actually manage to realize a good balance between the technology advancement and the cost competitiveness.

Regarding the capacity preparation, we are having the mid and long term planning for our production capacity in 2025 and 2026. As of now, we already have two factories in operation. F2 has already started to upgrade to double shifts to support the production of L60. In late September or early October, the upgrade to two shifts will be completed in F2, and in the meantime, we are also planning our third factory, and around Q3 next year, the third factory will be ready to produce the products, which means that by Q3 next year, we will have three factories in operation and it will be sufficient to support our production.

[Foreign language]

Overall speaking, we don't think production capacity will be a bottleneck for us, especially it will not be a long term bottleneck for us. Here in China, the production capacity and capabilities of vehicles and parts are quite competent. Maybe some companies will face short term disturbance in their capacity and supply, yet for long term, it will not be a bottleneck. Especially last year, we have obtained the independent manufacturing qualification, this has also laid a foundation for our long term stable capacity.

Stanley Qu (CFO)

Thank you, [Foreign language]

This is Stanley. I will take your second question. Regarding the CapEx, according to the status quo of the company, we are making prudent control and the management of the pace of our investment and expenses. Especially starting last year, we have already started such management by postponing certain projects or even canceling some projects. So overall speaking, the R&D or the CapEx in the year of 2024 will be significantly lower than that in 2023. As for 2025, as we haven't started budgeting for the next year, we don't have a clear picture over that, but we believe that the overall expense intensity will be similar to this year. Thank you.

[Foreign language]

As for the increase in the SG&A expenses in Q2, it's mainly contributed to two reasons. The first is that in Q1, we delivered around 30,000 units, and in Q2, we delivered a total of more than 57,000 units. The increase of our sales volume naturally drove up the staff costs, mainly because the team size has grown and also the incentives for the sales force has increased as well. The second reason is that in the first half of this year, we have launched our model year 2024, and many of the new products were launched around April, around May, and around March and April. In that case, we have also started a series of communications and marketing campaigns relevant to our model year products. That has also increased the development expenses from Q1.

William Li (Founder, Chairman, and CEO)

Thank you, Tina.

Tina Hou (VP and Head of China Autos Equity Research)

Thank you so much. Can I have a very quick follow-up? So in terms of ONVO Store, do you have the average store rental cost versus a NIO store? And also, how many employees do you plan to deploy in the ONVO store versus that of a NIO store? Thank you.

Stanley Qu (CFO)

[Foreign language]

Regarding the opening of ONVO stores, we actually require the team to open up the stores in a quick and efficient manner. So in terms of the CapEx as well as the rent of a single ONVO store, it is significantly lower than that of a NIO store. But we don't have the specific numbers for comparison, as the actual expenses may be quite different, depending on the locations and the type of the store. But overall, the expense is lower, significantly lower than that of NIO.

[Foreign language]

And in terms of the renovation fee for each of the NIO store, we actually have a very strict requirement. For the existing 100 NIO stores we have just opened, for each store, the renovation fee was no more than RMB 1 million. And for the following 100 stores we are going to open by the end of the year, we will have an even more strict requirement on renovation. With that, we will be able to make full use of the existing resources and to renovate the store in a more efficient manner. In terms of the team size for each of the store, it depends on the actual number of orders and the deliveries we planned for each store in each city. But in general, we will make sure that the team is also set up in the most efficient and compact way.

Tina Hou (VP and Head of China Autos Equity Research)

[Foreign language] William and Stanley.

William Li (Founder, Chairman, and CEO)

Thank you, Tina.

Operator (participant)

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

Yuqian Ding (Head of China Autos Research)

Thank you, Yuqian Ding here, I've got two questions. First is about autonomous driving progress, and second is about market and competition dynamics. First question, could you share the NIO NOP+ progress, especially could you break down in terms of the consumer take rate, our disengagement rate, scenario coverage, the regional expansion, these aspects. The second question is to ask against the backdrop of in the premium EV segment, there's a couple of new models coming, especially in the coming months to the end of the year.

And also we noticed the high-tier city versus the low-tier city, the consumer consumption is sliding in general and more so than the low-tier city. So could you help us to get comfortable and a conviction on NIO and ONVO's portfolio, product technology and service expansion could counter these macro headwinds and still book growth, quarter-on-quarter perspective, maybe in an aspect of channel, order momentum and latest consumer feedback? Thank you.

William Li (Founder, Chairman, and CEO)

[Foreign language]

Thank you for your question. We also noticed the fierce competition in the area of smart driving, yet we are also confident that NIO is among the top players in this area. Regarding NOP+, it is now being used by more than 300,000 users, as it is now offered as a standard feature on our NT2 products. In the meantime, the cumulative knowledge driven with NOP and NOP+ has reached or has surpassed 1.1 billion km. So in terms of the user base as well as the total mileage driven with the functionality, we are also a top player in China.

Yeah. [Foreign language]

Regarding the technology roadmap, right now inside of the industry, many players are converging their technology solutions and the roadmap into end-to-end model, be it Tesla or other players in China. For NIO, we are also working on our end-to-end model, and we have already released our first end-to-end based feature that is end-to-end AEB. Its performance has been significantly improved than the traditional AEB functionality, as its scenario coverage is 6.7x better than the traditional AEB. In the meantime, at the NIO IN, we have also released our end-to-end architecture based on the new world model.

Because end-to-end is an architecture, but its foundation technology is also very important, and we are the first company to develop and announce such world model and the end-to-end architecture based on the model. We have also released the NADArch 2.0, so the end-to-end architecture will be based on the new world model, where you can see that the new world model is developed with the end-to-end architecture solution.

Overall speaking, we believe that we are still leading the block in terms of the smart driving technologies. We have already tested the latest functionality on an NADArch 2.0 at the small scale, and its performance is pretty impressive. Overall speaking, with world model and end-to-end architecture, we will be able to realize quicker functionality, iteration, better experience at a lower cost. In terms of the ONVO brand, its product will come with a single Orin with pure vision technology solution. But even with that, it has realized a very good performance in the urban driving scenario. The other days I have tested the functionality in Shanghai, and it's also pretty good. So overall speaking, we believe that, and we also saw facts that the smart driving functionalities will help users improve the safety of driving. In terms of the actual usability of the functionality, we will also keep working on that.

Yeah. [Foreign language]

Regarding your second question, we also understand the intensity of the market competition, and this is not the first time for us to face such fierce competition. Yet the NIO brand has been realizing a pretty stable market share in the premium segments for years. This is mainly because we have a diversified and rich product portfolio to offer for the premium segment. We have ET5, ET5T, ES6, EC6, ET7, EC7, ES7, plus ES8. So it's a pretty wide range of a product offering that will be enough to cover many pro product segments. And many of these products are also leading the sales volume in their respective BEV product segment.

Not to mention that for some niche products like ET5T, EC7 or EC6, in their respective segments, their volume is even higher than some of the ICE competitors. So overall speaking, we have made a quite successful product portfolio and offering strategy. Plus, we also have other advantages, such as charging and the swapping network, leading technologies, good product experience, service, and the user community. This has further enhanced and solidified our foothold in the premium segment. Of course, in the meantime, we also hope that more players can also come into this segment, so that we can work with them together to enlarge the size of this premium segment, premium BEV segment.

[Foreign language]

In the meantime, for the entire new company, we actually have a pretty clear and straightforward strategy for the continuous business growth. The first is via wider price range. From next year, we are going to have three brands in the market. With actually our price range or the price range that can be covered by these three brands will be pretty wide, ranging from RMB 140,000 all the way to RMB 800,000. And with Battery as a Service, the price range will be from RMB 100,000-RMB 700,000, which will be a very strong competition to the ICE cars in the respective segments. With three brands with a wider price range, we will be able to reach a broader market than many of our other competitors.

The second approach is via our products, wide product range. We have three brands. We also have a very diversified product portfolio of each brand. In that case, we will be able to cover a pretty comprehensive product segments with clear differentiation between each brand, and the third approach is through the markets and the regional coverage. Right now, we are expanding our points of sale into the lower-tier cities, especially for NIO. At the moment, most of our sales are in the first- and second-tier cities, so such coverage expansion is also very important. We have also announced other plans, like the Power County Power Up Plan, where we will expand our charging and swapping network to the counties at all levels. With that, it will help us to further enhance the reach of all three brands.

Plus, we also have the business development plan for the overseas market. So overall speaking, for the long-term growth and the development, we have a clear roadmap that is via wide price range, wide product range, and also broader regional coverage.

Thank you, Yuqian.

Yuqian Ding (Head of China Autos Research)

Awesome. Thank you.

Operator (participant)

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

Paul Gong (Head of China Autos Research)

Hi, William. Thanks for taking my questions. Two questions here. The first one is regarding the flagship sedan, ET9. I think it was announced to schedule for launch in Q1 next year. Is it still on schedule? And can you give some updates regarding this model in terms of the positioning, new technology adoption, as well as, say the targets volume outlook? Yeah. The second question is regarding the overseas expansion. You are going to open the store in UAE and start delivering there. Is it a signal of the change of that direction as a result of the EU tariff that you are switching the direction from Europe into Middle East?

Also, one of your peers has nowadays been delivering over 10% of their volume into the overseas markets. Do you think this serves as a benchmark for your overseas expansion over the next one or two years? Thank you.

William Li (Founder, Chairman, and CEO)

Thank you, Paul. [Foreign language]

Thank you for the question. Regarding the first question on the ET9, we're still proceeding the ET9 launch preparation according to the plan, and we haven't made any changes on the SOP of this product. But in the meantime, as you know that the ET9 is equipped with many new technologies, including steer-by-wire, fully active suspension, in-house developed chip, as well as SkyOS. So we will need to spare no effort in making sure and preparing for the successful launch of this product next year. Regarding your second question on our international expansion, we haven't changed our direction. Yes, because of the tariff in Europe now, selling or exporting cars from China to Europe becomes more expensive, so we will focus on the existing five European markets that we have already started.

We also know that to establish NIO, such a premium brand, in the European market, will also take a longer time, and we are very patient with that. But in the meantime, it doesn't mean that we have stopped our activities there. Earlier this year, we have just opened our new house in Amsterdam, and we are still installing and deploying our Power Swap Stations in Europe, so we will still keep the same plan. In terms of the market entry into UAE, as you may know that last year we have received a $3 billion strategic investment from the Abu Dhabi government, and then the market entry into UAE is part of the plan. With that, we will work with our strategic partners in UAE to offer our products and services to the local market.

Starting next year, a big difference is that we not only have new brand and products, but also products from ONVO and the Firefly, which are more suitable for the global market. With that, we will be actually more active with our international expansion. But in the meantime, we will also need to keep a good balance between our investment skill and the efficiency, to make sure that we enter into the global market in a smarter and more efficient way. Thank you.

Paul Gong (Head of China Autos Research)

Thank you. That's helpful.

William Li (Founder, Chairman, and CEO)

Thank you, Paul.

Operator (participant)

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

Ming-Hsun Lee (Managing Director and Head of Greater China Auto Research)

Hello, William, Stanley. I also have two questions. So my first question is more related to the overall macro. So, in your view, what is the potential growth rate for the China EV market in the next few years? Because I think recently some investors expect that the EV penetration will slow down because right now the EV penetration is already very high. So, yeah, just your view, what is the EV penetration in the next three years? Yeah, this is my first question. And my second question is regarding the Firefly pipeline. Right now, will you launch one or two models in 2025 for Firefly? Yeah. Thank you. That's my second question.

William Li (Founder, Chairman, and CEO)

Thank you, Ming. [Foreign language]

Thank you for the question. If you look at the overall passenger vehicle market, in the first half of this year, it has increased by around 3.6%. For the longer term, actually, if you look at the total PV population in China, it's as big as 20 million-30 million units, so it's already a very significant amount. Definitely, it will keep growing, but probably not a very, not at a very significant growth rate. And it's even normal for the PV segment or PV market to suffer a slight decrease. But even with that, the Chinese market will still be the largest passenger vehicle market in the world. In terms of the penetration rate of the new energy vehicle, it has already surpassed 50%, and I think that it will continue to increase and at a even faster manner.

Because for the replacement of the ICE costs by BEVs or PHEVs, it will be much faster once it has surpassed this 50% tipping point. We can take Norway as a reference or example. It actually grew at a 50% penetration rate at first, and then it has quickly increased to 80% and 90%. So similarly for China, I believe that in two to three years, the penetration rate of new energy vehicles among new vehicle sales will surpass 80%.

Yeah. [Foreign language]

If we look at the ICE cars in China, actually they have entered into a unsustainable cycle or a vicious cycle, because many ICE brands have to cut their prices to keep their market share, be it premium brands or mass market brands, these brands from China or from other countries. Many of these ICE cars are having a price slashed for the sake of a market share. But as they cut prices, it also hurts the profit and interest of their dealers, hurts the image of the brands as well as the residual value of their products. With that, it is even more difficult for them to keep a very strong market share in their segments. So the decline of their market share is even faster than it should be.

For the recent years, we have already witnessed the significant decline of the market shares of Korean brands like Hyundai, Kia, including Ford and General Motors. And for the recent years, Japanese brands like Toyota, Honda and Nissan are also entering the same phase. So in general, we believe that the ICE cars from these joint venture brands will face quite difficulties in the future competition. And when they lose the market shares, they normally lose market shares to other new energy vehicle brands, including brands from China and Europe. So in that regard, I believe that the penetration rate of the new energy vehicle will grow, will grow at a pretty quick pace, even faster than we expected.

Yeah, [Foreign language]

Regarding your second question, yes, we are going to deliver the product from Firefly from 2025. We are in smooth progress with our product preparation.

Thank you, Ming.

Operator (participant)

Thank you. Your next question comes from Jing Chang from CICC. Please go ahead.

Jing Chang (Equity Analyst)

Okay, thank you for taking my questions. I have two questions. The first is regard to our new operating system, SkyOS, which has been released in July. So it has shown a very comprehensive and in-depth our software self-development ability. So can you just introduce and add more details of what are the technical challenges we have faced, and what advantages and also improvement of our product can be brought by the new system? So this is the first question. The second is regard to the other income, gross profit margin.

We have seen the second, in the second quarter, the gross profit margin has improved significantly. So how to understand these major drivers? And also what's our forecast for the trend and continuity of the margin improvement in the future? So also, with our growth of our sales volume, can we see that our charging, especially charging and battery swap business, can turn to profit in the future?

William Li (Founder, Chairman, and CEO)

Thank you, Jing Chang. [Foreign language]

Thank you for the question regarding SkyOS. It's the world's first full-domain vehicle operating system. That is the special thing with SkyOS, which is also the difficulty or the challenge we have faced when developing the SkyOS. Because when it comes to the era of the smart electric vehicles, we cannot use the fragmented operating systems to manage the electric architecture of the car anymore. With that, we have developed the SkyOS. It comes at three levels. At the bottom, we have the SkyOS-H, that is the hypervisor, and in the middle we have four kernels for the SkyOS, and on the top we have a SkyOS middleware.

So it's a very comprehensive solution we have developed. We've used the four years with 20,000 person months with this great work. In terms of its benefits, the SkyOS is definitely making the car safer and more secure. It also makes the system stabler, and it also help us to realize more efficient R&D process and iteration process. It also help us solve the problems faced by the smart electric vehicles, like huge data throughput, domain field, cross-domain fusion and also the latency along the communication.

Because we know that it's impossible to realize such benefits by simply working on the application layer adaptation, we need to do something at the foundational level, and we are very happy that we have made it happen. The SkyOS will be applied to our other brands, including NIO, ONVO and Firefly. We can say that SkyOS is a software cornerstone for our future products and development.

Stanley Qu (CFO)

[Foreign language]

Regarding the revenues or the loss on other sales in Q2, we have significantly narrowed the losses on other sales in Q2. It's mainly because of the two reasons. As in Q2 we have improved or increased our user deliveries with that.

Well, actually, there are two reasons. The first is that we have improved the profitability and the efficiency of our after-market sales. Earlier this year, in February, on February 20th, we have released the 2024 Worry-Free Service policy. With the new policy, our after-sales services become more efficient and also more profitable. And secondly, we have also decoupled the lifetime free Power Swap from the sales of the vehicles.

With that, many more users, especially new users, have to pay for the Power Swap services. This has also helped us improve the revenues and the margin on the Power Swap related services. With that, we have significantly narrowed the losses on the other sales, and we believe that in the future, as we continue to grow the total user base and the sales volume, especially with the launch and delivery of the ONVO products, the profitability of the other sales will also become stronger, and we look forward to the breakeven or even a profit from this part.

[Foreign language]

In terms of the profitability of the Power Swap service or in general Power Swap Station, if we look at the single swap station, if it can offer more than 60 power swaps per day, it itself will. In the meantime, if we charge all the Power Swap services at the same level for the supercharging, then the single station will become break even. Right now in China, we have more than 2,500 Power Swap Stations, and on average, each station can complete around 30-40 swaps per day. From 30-40 to 60, it is not a long way to go for us to make the Power Swap Station break even. In the meantime, we still suffer the loss on the Power Swap business.

It's mainly because of two reasons. The first is that at the early stage, for the early adopters of the NIO products, we have offered free lifetime power swaps to many of these users, which has, actually worsened the burden on the, cost of the Power Swap Stations and the Power Swap services. And secondly, we, as we roll out our business and the network, we, also came to realize that the network effect of the Power Swap Station actually has a very significant meaning to the boost of the sales volume. In that case, we are more active in installing Power Swap Stations, even ahead of the actual need. So this swap station deployed in advance, also bring additional, losses or burden to the business.

So in general, if we look at the Power Swap Station itself, it's not far away from break-even and profitability. Yet considering its actual contribution to the sales volume, we have decided to deploy many stations in advance, and this has caused the loss on the business.

Jing Chang (Equity Analyst)

Thank you. Thank you, that was very clear. Thank you.

Operator (participant)

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

Rui Chen (Head of Investor Relations)

Thank you again for joining us today. If you have further questions, please feel free to contact NIO's IR team through the contact information on our website. This concludes the conference call. You may now disconnect the line. Thank you.