Nio (Minutes): Plans for achieving a gross margin of 20% for the NIO brand and 15% for the ONVO brand in 2025

The following are the minutes of the NIO FY24Q4 earnings call. For the earnings interpretation, please refer to《 Nio is down, the joy is fading, can Nio still have a future? 》

I. Core Information Review of the Earnings Report

II. Detailed Content of the Earnings Call

2.1 Key Information from Executives' Statements

1. Deliveries:

① Q4 2024: Delivered 72,689 smart electric vehicles, setting a quarterly record, with monthly deliveries in December exceeding 30,000 for the first time.

② Full year 2024: Total deliveries reached 221,970 vehicles, a year-on-year increase of 38.7%. High-end brand deliveries were 201,209 vehicles, accounting for 40% of the pure electric market above 300,000 yuan in China; ONVO brand delivered 20,761 vehicles, with market share steadily rising after the launch of L60, ranking among the top three in the 200,000 - 300,000 yuan pure electric SUV market.

③ Q1 2025 forecast: Due to seasonal factors and the Spring Festival, deliveries in January and February are expected to be 27,055 vehicles, with total Q1 deliveries expected to be 41,000 - 43,000 vehicles, a year-on-year increase of 36% - 43%.

b. Product Planning:

① ET5, ET5T, ES6, EC6 will launch the 2025 models in Q2, upgrading design, experience, and intelligent driving chips. In the second half of the year, a heavyweight product will be launched to enhance the product line, solidifying high-end market leadership and improving profitability.

② The flagship SUV L90 will debut in Q2 and deliver in Q3, with a third product launched in Q4 to create a complete SUV lineup serving the mass market.

③ The Firefly is set to debut in December 2024, attracting attention from young buyers and families purchasing a second vehicle, with plans to launch and deliver in April, leveraging Nio's network to expand the market.

Through these three brands, the company is building a comprehensive product matrix covering the price range of 150,000 to 800,000 yuan to meet the diverse needs of user groups. As we expand our sales and service network, we will be able to reach more users and drive sustainable growth c. Intelligent Driving:

In terms of intelligent driving technology and experience, artificial intelligence technology continues to drive us towards the vision of stress-free driving and reducing accidents. Prioritizing AI-based safety enhancement features, NIO has launched the industry-leading automatic emergency steering function. It is at the forefront of the market in terms of object detection and use case coverage over a wide range. To date, NIO's intelligent safety system has prevented over 3.4 million potential accidents for users, and the launch of the automatic emergency steering function further enhances driving safety.

Meanwhile, we have made significant progress in transitioning to the next-generation architecture based on new word models, which will provide driving, parking, and safety assistance features in all scenarios. An early trial program will begin in early April, followed by a gradual large-scale rollout globally.

d. Channels:

Globally, NIO has 183 Nio vehicles and 462 Nio spaces, while Leidao has 449 stores in China, ensuring a balanced sales coverage. In terms of services, the company has 388 service centers and 4 distribution centers.

e. Battery Swap Stations:

To date, the company has deployed 3,240 battery swap stations and 45 energy storage stations worldwide, including 970 battery swap stations on highways in China, completing over 6.969 million battery swap services for new and existing users. Additionally, NIO has built over 25,000 charging piles and destination charging piles. Fast battery swapping remains the preferred charging solution for NIO users during long-distance travel. During the Chinese Lunar New Year holiday, we set a new record for over 130,370 battery swaps in a single day, with some top battery swap stations exceeding 180 swaps in a single day. The unparalleled speed and convenience of battery swapping make it the best charging solution for long-distance travel and holiday trips.

This is a strategic advantage that enhances our competitive edge in the pure electric vehicle market and lays a solid foundation for the sales growth of our three brands in the upcoming product cycle.

f. Future Outlook:

In 2025, the three brands will launch 9 new vehicles to complete the lineup, with technology-driven cost optimization to enhance profitability, global expansion to explore revenue sources, and improved operational capabilities to ensure value and efficiency, with confidence in achieving the annual operational goals.

2.2 Financial Situation:

Total Revenue: Our total revenue reached RMB 19.7 billion, a year-on-year increase of 15.2% and a quarter-on-quarter increase of 5.5%.

Automobile Sales Revenue: Automobile sales revenue was RMB 17.5 billion, a year-on-year increase of 13.2% and a quarter-on-quarter increase of 4.7%, mainly due to the increase in delivery volume, but partially offset by a decrease in average selling price due to changes in product mix.

Other Sales Revenue: Other sales revenue was RMB 2.2 billion, a year-on-year increase of 33.8% and a quarter-on-quarter increase of 12.7%. The annual growth mainly came from increased sales of parts, accessories, after-sales services, and automotive services, as well as the provision of power solutions, while sales of technology research and development services also saw growth The month-on-month growth is driven by increased sales of automotive services in technology research and development services, used cars, as well as parts, accessories, and after-sales services.

Automotive Business Gross Margin: The gross margin for the automotive business this quarter is 13.1%, compared to 11.9% in the fourth quarter of last year, remaining flat with the previous quarter. The year-on-year growth is mainly due to a decrease in unit material costs, while the positive gross margin this quarter is primarily due to the provision of relatively high-margin technology research and development services, as well as increased sales of automotive services related to parts, accessories, and after-sales services.

Overall Gross Margin: The overall gross margin is 11.7%, higher than 7.5% in the fourth quarter of last year and 10.7% in the previous quarter.

Operating Expenses: Research and development expenses are RMB 3.6 billion, a year-on-year decrease of 8.5% and a month-on-month increase of 9.6%. The year-on-year decrease is mainly due to a reduction in personnel costs within design and development costs, while the month-on-month increase reflects additional investments in design and development, partially offset by the decrease in personnel costs.

SG&A: Stands at RMB 4.9 billion, a year-on-year increase of 22.8% and a month-on-month increase of 18.7%. The year-on-year growth is mainly due to increased sales and marketing expenses for new brands and products, as well as rising personnel costs from the expansion of the sales and service network. The month-on-month growth is primarily due to strengthened sales and marketing efforts, as well as increased professional service costs for general corporate functions.

Operating Loss and Net Loss: The operating loss is RMB 6 billion, a year-on-year decrease of 8.9% and a month-on-month increase of 15.2%. Interest and investment losses are RMB 200 million, while investment income in the fourth quarter of 2023 was RMB 1.4 billion, and RMB 300 million in the third quarter of 2024, mainly due to changes in the fair value of equity investments.

Other net losses in the fourth quarter amounted to RMB 500 million, primarily due to losses arising from the depreciation of the RMB against the USD, leading to the revaluation of overseas RMB-related assets.

Cash and Cash Equivalents: Finally, as of the end of this quarter, our total cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits reached RMB 41.9 billion.

2.2 Q&A

Q: The current market is focused on your company's latest round of restructuring. What cost reductions does management expect, and when will the cost-saving effects be reflected in the coming quarters?

A: Regarding cost reductions, Nio initiated systematic cost optimization starting in 2023. In 2024, through supply chain optimization (such as reduced unit material costs), improved R&D efficiency (lower personnel and design development costs), and comprehensive cost control (CBU mechanism), we aim to increase the automotive gross margin to 13.1% (year-on-year +1.2pct).

This year, we will continue to focus on the supply chain, R&D, and other areas, expecting the automotive gross margin to continue to grow starting in the second quarter.

In terms of expenses, after launching the ONVO brand and products in the fourth quarter of last year, we invested in expanding its sales and service network and conducting brand activities, which continued into the first quarter of this year. At the same time, we initiated a comprehensive cost reduction action involving all employees in the first quarter of this year, covering R&D, supply chain, and sales and service teams, requiring everyone to be accountable for operational goals. Currently, the R&D, sales, and service teams have voluntarily taken action to reduce costs and improve efficiency These actions will be reflected in the balance sheet starting from the second quarter. With continuous strengthening of cost and expense control in the second half of the year, along with increased sales and improved gross margins, we are confident in achieving profitability in the fourth quarter.

Q: What are the cost reduction and efficiency improvement measures?

a. Making products platform-based to enhance versatility, such as a unified structure for seats shared by two brands, the platform design for seats reduces BOM costs by 10%;

b. Standardization of smart hardware interfaces: reducing the cost of single vehicle cables and connectors from 2000 yuan to 1000 yuan;

c. Self-research of components: significant results in self-researched components over the past two to three years, with the ET9 and 2025 models of the 5th and 6th series equipped with self-researched chips, the self-researched chip NX9031 (equipped in 2025 models) reduces costs by 10,000 yuan per vehicle compared to external solutions.

d. There is also a professional cost control team, and any quotes exceeding the cost estimate by 7.5% must be reported for approval.

Result aspect: The material list cost has been reduced by 10% for 2024, and will continue to be promoted in 2025.

Goal: Maintain a gross margin of 13.1% for automotive in Q4 2024, with an annual target of 20% for the Nio brand and 15% for the ONVO brand, and plan to achieve overall breakeven in the fourth quarter.

Standardization of smart hardware interfaces, on the other hand, relies on launching new models. Nio will launch 9 new cars this year, with high gross margin and high positioning products in the second half of the year to enhance brand gross margin; the ONVO brand will launch the L90 in Q2 and another model in Q4, targeting high-margin niche markets. Cost reduction and new car launches will work together to help achieve the annual gross margin target.

Q: What actions will ONVO take to regain growth momentum?

A: ONVO's sales did not meet expectations earlier this year for the following reasons:

First, low brand awareness; as a new brand, its recognition is only one-third of Nio's. As the initial orders are digested, there is significant pressure to acquire new orders. Therefore, we have increased offline advertising at train stations and elevators around the Spring Festival and intensified social media promotion, which has shown initial results.

Second, issues with sales network coverage: when launched last year, there were about 105 stores, with an additional 100 stores added by the end of last year, now totaling over 400. However, most new stores have immature efficiency and productivity, potentially producing three times less than mature stores. However, as operations mature, performance will improve. Although there was significant investment and pressure from Q4 last year to Q1 this year, we believe there will soon be returns.

Third, insufficient maturity of the sales team, with 60% of members having been employed for less than 3 months, requiring time to hone skills. The team is now growing rapidly, with improved signing capabilities, and we encourage members to go out and expand potential customers. New orders and test drive volumes have been steadily increasing month by month this year, likely to convert into sales.

Fourth, the availability of ONVO user battery swap stations. In recent months, we have modified battery swap stations to adapt products and increased battery supply, with over 1500 battery swap stations available for users in the country. Initially, there was insufficient battery supply for products, leading to poor user experience with battery swapping, but this has improved, enhancing reputation. From the data, ONVO sales have surpassed Nio in 12 regions in the country, demonstrating the synergistic effect of the dual brand In addition, recent sales have declined by about 30% - 40% due to intense competition, negative public opinion, and PR attacks. However, ONVO's L60 product has high customer satisfaction and a considerable referral rate, which gives us optimism for future performance. With the acceleration of orders and test drives, increased brand awareness, expansion of the sales service network, team maturity, and optimization of battery swap station coverage, we believe that L60 sales can rebound to expected levels.

Q: Will Nio stick to a multi-brand strategy, and is there a possibility of turning ONVO into a Nio sub-brand to save costs and improve efficiency?

A: Regarding efficiency improvement and dual-brand synergy, after-sales, battery swap stations, and support functions such as finance and human resources have been shared from the beginning. Recently, some regions have adjusted management roles to trial a single team managing dual brands, and sales service management has shown results. However, the ONVO sales network remains independent of Nio, as it targets different user groups and belongs to different market segments. Currently, incentive policies are being implemented to encourage sales personnel to sell across brands, and the pilot results have been good.

Q: What are the expected gross margin and sales for ONVO?

A: The first quarter is a slow season for the auto market, especially in the south, where Nio's 5 and 6 series are clearing inventory, putting pressure on brand gross margins; ONVO's sales and gross margin are poor due to amortization and other factors. The company's automotive gross margin in the first quarter is lower than that of the last quarter of last year, but the annual goal is to achieve breakeven in the fourth quarter, with Nio and ONVO brands aiming for gross margins of 20% and 15%, respectively.

Q: Previously, you expected sales to double year-on-year after the first quarter of 2025. Can you update this sales expectation?

A: The first quarter delivery guidance indicates a year-on-year growth of 36% - 43%, approximately 40%, with the annual goal being to double sales. There are three main driving factors: first, the Nio automotive effect, with nine new models set to be delivered sequentially starting next week, which can significantly boost sales; second, the ONVO brand, although it did not meet sales targets in the first quarter, is expected to gradually improve through the enhancement of the sales service network, team capabilities, and brand awareness; third, the battery swap network effect, with half of Nio's sales coming from the Yangtze River Delta, Jiangsu has achieved full coverage of county-level battery swap stations, and other provinces will also basically achieve this by the end of the month. After cooperating with CATL, the battery swap network will cover more than ten provinces and counties in the first half of the year, expanding to 27 provincial administrative regions by the end of the year. The coverage at the county level has a significant promotional effect on sales, and this year will continue to expand to increase the market share and coverage of both brands.

Q: Can you share your latest thoughts on AI autonomous driving and robotics technology?

A: Nio is the first car company to introduce the AI partner NOMI in its vehicles, which is loved by users and has its large language model NOMI GPT, also supporting third-party large language models. Satisfaction and interaction rates continue to rise, and as a high-profit IP, surrounding products are popular with high purchase rates.

In the field of intelligent driving, last year we launched the NIO World Model (NWM), and the latest intelligent driving version will be built based on it, demonstrating excellent active safety and overall experience Artificial intelligence is an important foundational capability. In the future, we will focus on the core automotive business, allowing AI to help optimize products, operations, and management, which will run through all aspects of the business. Although there is a trend for automotive products and companies to shift towards AI agents, the short-term focus remains on core business and operational goals. Additionally, Nio Capital has invested in many AI companies, especially industry-leading enterprises, connecting us closely with cutting-edge technology and excellent teams. There are also AI talents within the company dedicated to related research and development.

Q: The company currently has 8 models, and the number will change after new launches this year. Considering the competition between models, and that some peers achieve sales targets with just one model, should we focus on creating blockbuster models and eliminate less popular ones to concentrate our efforts? What do you think is the ideal number of models for each brand?

A: The Nio brand will retain its existing product line, covering a price range of 300,000 to 800,000 yuan, targeting personal, family, and business segments. The delivery of the ET9 has improved coverage in this high-end market price segment. Users in this niche market emphasize vehicle personalization and unique identification. High-end brands like BMW and Mercedes-Benz have four to five dozen products, making differentiation and personalization key.

The ONVO brand will cautiously control the number of products, launching two new products this year, along with the L60, totaling three products by the end of the year, without significantly expanding the existing lineup, but rather keeping it within a reasonable range.

As a high-end small car brand, Firefly does not require excessive products. Overall, we aim to create differentiated product combinations and lineups for different brands, maintaining a stable and reasonable product layout for the three brands, with each vehicle highlighting its features and targeting specific users.

Q: From the supply chain perspective, what is the current situation and potential financing needs? Currently, net cash exceeds 25 billion, but there are fluctuations between quarters. From a conservative supply chain perspective, how long can this financial situation be maintained? Is additional financing needed, whether through bond issuance or equity fundraising? Can you elaborate?

A: First, as of the end of 2024, the company's cash reserves will reach 49.1 billion yuan. In the first quarter of this year, due to a decline in sales, there was an outflow of operating cash flow. However, this year is a key year for product launches, and starting from the second quarter, sales are expected to rebound, significantly improving operating cash flow. Additionally, the series of adjustments and streamlining activities initiated in the first quarter will also be reflected in the financial performance of the second quarter. Overall, the company will prudently manage cash flow to ensure resource support for sustainable development.

Secondly, in terms of financing, the company has diversified financing channels, covering the U.S. capital market and the RMB market, involving public offerings, private placements, etc. We will plan financing needs and activities based on the company's operations and market changes.

Q: Can you elaborate on this year's latest CapEx guidance? It was previously mentioned that there would be investments in the battery swap network, and now there is cooperation with CATL. What changes are there in capital expenditure construction? Will CapEx gradually decrease this year?

A: This year, we will launch significant products, and the company will invest CapEx in molds and production equipment in collaboration with supply chain partners. Additionally, the third factory will also be put into operation according to the production plan, so this year's CapEx will be higher than last year. Even so, we will still cautiously control the investment pace and cash situation, strictly managing expenditures In terms of CapEx for battery swap stations, since we began expanding the battery swap network last year, we have adhered to a principle: to leverage the resources of our battery swap partners as much as possible. Last year, we launched the "Charging Partner Program," inviting partners to co-build battery swap stations and networks. This year, in the "County Power Enhancement Plan," most stations are co-sponsored or constructed by both parties, making the CapEx investment for battery swap stations relatively controllable.

Q: When will the end-to-end model be launched? In the future, will you consider using Thor chips, or will all Nio models adopt self-developed chips?

A: In fact, we have already applied the end-to-end solution to active safety functions since last year. Different companies may prioritize technology applications differently, but for us, safety is the most important. That’s why we first adopted the end-to-end model in active safety functions, and we have indeed seen a 40% weekly improvement in safety levels, which is significant. Therefore, the end-to-end model plays a very important role in providing users with safer travel.

Regarding the city road enhanced navigation assistance (Navigate On Pilot Plus) function based on the end-to-end solution, we have also begun small-scale testing and internal testing. After completing a series of preparatory work and submitting relevant approval applications, we plan to push it to users by the end of April.

As for the use of intelligent driving chips, the ET9 will be the first to be equipped with our self-developed intelligent driving chip. This chip uses advanced manufacturing technology, namely the NX9031 chip. After the ET9, our 2025 models of the 5 Series and 6 Series will also be launched, equipped with self-developed intelligent driving chips. Therefore, all new models in the future will be equipped with this self-developed chip. As for the ONVO brand, its intelligent driving function currently uses the Orin-X chip, and there are no plans to use the Thor chip.

Q: In the past few quarters, the company's gross margin has improved quarter by quarter. Is there any latest guidance and new plans regarding operating expenses? It was previously mentioned that R&D expenses would stabilize at 13 billion per year; has this figure been updated? Additionally, what is the target proportion of sales and marketing expenses in operating expenses?

A: In terms of R&D investment, this year the intensity remains unchanged, approximately 3 billion RMB per quarter according to non-GAAP. This year, we are implementing the CBU mechanism, focusing on high-return projects, optimizing the approval process, and making R&D investment more reasonable and efficient.

For sales, general, and administrative expenses, the first quarter of this year faced challenges due to being in the off-season for sales, resulting in lower sales volume and a higher proportion of these expenses relative to sales revenue. At the same time, this quarter is also expanding the sales and service network for the ONVO brand to enhance sales capabilities, which has also increased SG&A expenses. However, we will take a series of actions: improving team efficiency, streamlining non-frontline sales functions, integrating some sales functions of Nio and ONVO brands, and leveraging the Nio network to sell Firefly brand products.

After taking these actions, as sales grow, we expect subsequent financial performance to improve, gradually achieving a balance between income and expenditure in the fourth quarter. At that time, the proportion of SG&A expenses to sales revenue will decrease, and we will see results in sales volume, labor efficiency, and expense control.

Q: Regarding other sales revenue, the gross margin turned positive in the fourth quarter, reaching 1.1%. Can you explain the reasons?

A: The gross margin of other sales revenue is mainly composed of three parts: after-sales service, power service, and technical service income provided to supply chain partners and related parties.

The gross margin turned positive in the fourth quarter of last year primarily due to improved efficiency in after-sales service. In terms of power service, losses have not significantly narrowed as we are still vigorously deploying and building networks. The positive turn in the fourth quarter mainly relied on technical service income to partners, amounting to approximately 220 million RMB; however, this is project-based and related to the rhythm and progress of services, not a continuous regular income.

By 2025, with an increase in vehicle ownership, after-sales service efficiency is expected to continue improving. As for the power network, the deployment of battery swap stations is ongoing, and if we exclude technical services, the combined gross margin of after-sales and power services will still be slightly negative.

Q: By 2030, will you still maintain the previous sales and profit margin expectations? Discuss the sales scale target at that time, as well as the overall gross margin and operating profit margin situation.

A: The company is currently making every effort to achieve break-even in the fourth quarter of this year. In the long run, for smart electric vehicle companies and the entire automotive industry to establish a foothold and maintain an advantage in competition, an annual sales volume of 2 million vehicles, a gross margin of 20%, and a net profit margin of 7% - 8% are basic thresholds. These are key indicators for long-term sustainability.

Risk Disclosure and statement of this article: Dolphin Research Disclaimer and General Disclosure