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NIO Inc. (NYSE:NIO)
Q2 2020 Earnings Call
Aug 11, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello, ladies and gentlemen. Thank you for standing by for NIO Inc.'s second-quarter 2020 earnings conference call. [Operator instructions] Today's conference call is being recorded. I will now turn the call over to your host, Mr.

Rui Chen, director of investor relations of the company. Please go ahead, Rui.

Rui Chen -- Director of Investor Relations

Thank you, operator. Good evening, and good morning, everyone. Welcome to NIO's second-quarter 2020 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted at the company's IR website.

On today's call, we have Mr. William Li, founder, chairman of the board, and CEO; Mr. Steven Feng, CFO; Mr. Stanley Qu, VP of finance; and Mr.

Jade Wei, AVP of investor relations. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the safe harbor provision 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 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 financial measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Li.

William. Go ahead, please.

William Li -- Founder and Chairman of the Board

Hello, everyone. Thank you for joining NIO's 2020 Q2 earnings call. In the second quarter of 2020, NIO achieved record quarterly deliveries of over 10,000 units and delivered an aggregate of 10,331 ES8s and ES6, representing a strong growth of 190.8% year over year and 169.2% quarter over quarter. In July 2020, NIO delivered 3,533 units, marking the second-highest monthly delivery results.

The cumulative deliveries in the first seven months of 2020 increased by 111.3% over the same period of 2019. Starting from October 2019, ES6 has ranked as the top-selling SUV across all EV sectors in China. For the first half of this year, ES8 has also achieved No. 1 in sales among mid- to large-sized luxury electric SUVs priced above RMB 400,000 in China.

In the third quarter, we are confident to achieve a new quarterly record of 11,000 to 11,500 deliveries. As for the gross margin, with the strong momentum of quarterly deliveries, rise of average selling price, reduction of battery pack, and other BOM costs and improvement of manufacturing efficiencies, our gross margin has substantially increased in the second quarter. The vehicle margin and the gross margin reached 9.7% and 8.4%, respectively, far above our previous guidance of 5% and 3%. We will continue to improve our gross margin and expect our vehicle margin and the gross margin to both exceed 10% in the second half of this year.

With the gross margin turning positive and the operational efficiency improving comprehensively across the company, the operating loss of the second quarter has further narrowed to RMB 1.16 billion, representing a decrease of 64% year over year and a decrease of 26.1% quarter over quarter. The significant increase in deliveries and the direct sales model and the great support from supply chain partners have enabled us to achieve positive operating cash flow for the first time in our history. In the second quarter of 2020 -- the second quarter of 2020 is a milestone quarter for us. NIO has made significant breakthroughs in sales, gross margin, operational efficiency, and cash flow.

After our enduring efforts in the past year, we have found our pace to implement efficient management and solid execution of near-term operational objectives and, meanwhile, to make decisive investments in R&D and services for our long-term competitive edges. Next, I would like to share with you our recent key priorities. With respect to R&D, as the company's overall situation improves, we have accelerated the new product development and will increase our investment in the autonomous driving technology, so we can develop industry-leading technologies to maintain the long-term competitiveness of our products. In terms of our project, the EC6, our smart electric coupe SUV was officially launched on July 24 with a pre-subsidy price starting from RMB 368,000.

It has been very well received by the users and the market and presented a stronger order performance above our expectations. The mass production of EC6 is proceeding well according to plan, and we will commence deliveries in late September. As for production capacity, the manufacturing team is going to increase the production rate of the Hefei plant from 15 jobs per hour to 20 jobs per hour, while working together with supply chain partners to improve their capacity at the same time. By late August or early September, the overall supply chain capacity on a single shift is expected to reach 4,500 to 5,000 units per month.

Regarding sales and service network, we have opened 22 new houses and 119 new spaces in 89 cities and 142 battery swap stations in 63 cities in China. Moving forward, we will further expand the coverage of the battery swap stations and new spaces to better serve our users. In the meantime, we have also made profound progress with the innovative business model of battery-as-a-service, namely decoupling the battery from the vehicle. We have completed the necessary product communications and the certification required to be qualified to sell vehicles and batteries separately.

The process of the first vehicle under the BaaS model has been validated including insurance purchase, loan application, and license plate registration. This is a breakthrough moment in our technology and business innovation. Currently, we are still working on the final preparation for the official offering of our BaaS solution, which will be released publicly in the third quarter along with the increasing recognition from the users, government, and industries. We believe the advantages of our chargeable, swappable, and upgradable products and the services systems will become more self-evident.

As we deliver more and more vehicles, our user base is growing while the user community is maturing. On August 8, 2020, the Nio Day 2020 host city bidding campaign came to a conclusion. Over 40,000 NIO users actively participated in the voting. After fierce, but friendly competition, Chengdu stood out among 10 cities and won the bid to host the Nio Day 2020.

Every little bit of our progress will not be achieved without the trust and the support of our users. The bidding campaign of Nio Day 2020 has once again demonstrated the vibrancy and the enthusiasm of the Nio community. I would like to thank our users and everyone for their support. With that, I will now turn the call over to Steven to provide the financial details for the quarter.

Steven, please go ahead.

Steven Feng -- Chief Financial Officer

OK. Thank you, William. I will now go over our key financial results for the second quarter of 2020. And to be mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online for additional details.

Our total revenues in the second quarter were RMB 3.72 billion or USD 526.4 million, representing an increase of 146.5% year over year, an increase of 171.1% quarter over quarter. Our total revenues are made of two parts: vehicle sales and other sales. Vehicle sales in the second quarter were RMB 3.49 billion or USD 493.4 million, accounting for 94% of total revenues in this quarter. It represented an increase of 146.5% year over year, an increase of 177.6% quarter over quarter.

The increase in vehicle sales year over year was primarily due to the increase of vehicle deliveries of ES6, which began its first deliveries in late June 2019. Other sales in the second quarter were RMB 232.8 million or USD 33 million, representing an increase of 147.7% year over year, an increase of 100% quarter over quarter. The increase in other sales year over year was mainly attributed to increased revenues derived from a service package and energy packages subscribed, home chargers installed, and accessories sold, which were in line with increased volume in the second quarter of 2020. Cost of sales in the second quarter was RMB 3.41 billion or USD 482.1 million, representing an increase of 69.2% year over year, an increase of 121.2% quarter over quarter.

The increase in cost of sales year over year was mainly driven by the increase of delivered volume in the second quarter of 2020. Gross profit in the second quarter of 2020 was RMB 313.1 million or USD 44.3 million, representing increase of 162.1% year over year, an increase of 286.9% quarter over quarter. The increase in gross profit year over year was mainly contributed by increased vehicle sales and higher gross margin in the second quarter of 2020. Gross margin in second quarter of 2020 was 8.4% compared with negative 33.4% in the same quarter of 2019 and negative 12.2% in the first quarter of 2020.

The increase of gross margin year over year was mainly driven by the increase of vehicle margin in the second quarter of 2020. More specifically, weaker margin in the second quarter of 2020 was 9.7% compared with negative 24.1% in the same quarter of 2019 and negative 7.4% in the first quarter of 2020. The increase of vehicle margin was mainly driven by the decrease in purchase price of certain materials and lower unit manufacturing costs, attributed from increased production volume in the second quarter of 2020. Besides above, the increase of vehicle margin year over year was also attributable to impact of one-off cost in relation to the company's voluntary battery recall in the second quarter of 2019.

R&D expenses in the second quarter were RMB 545.2 million or USD 77.2 million, representing a decrease of 58.1% year over year and increase of 4.4% quarter over quarter. The decrease in R&D expenses year over year was primarily attributable to the incurrence of expenses relating to rigorous testing activities of ES6 in the second quarter of 2019 before its mass production. SG&A expenses in the second quarter were RMB 936.8 million or USD 132.6 million, representing a decrease of 34.1% year over year and increase of 10.4% quarter over quarter. The decrease in SG&A expenses year over year was primarily driven by the company's overall cost-saving efforts and improved operating efficiency in marketing and other supporting functions.

Loss from operations in the second quarter was RMB 1.16 billion or USD 164.2 million, representing a decrease of 64% year over year and a decrease of 26.1% quarter over quarter. Share-based compensation expenses in the second quarter were RMB 45.3 million or USD 6.4 million, representing a decrease of 50.9% year over year and increase of 39.8% quarter over quarter. The decrease in share-based compensation expenses year over year was primarily due to less options granted, driven by the decline in the number of employees and impact of part of the share-based compensation expenses being recognized by using the accelerated method, under which the expenses decreased gradually over the vesting period. Net loss in the second quarter was RMB 1.18 billion or USD 166.5 million, representing a decrease of 64.2% year over year and a decrease of 34.4% quarter over quarter.

Net loss attributable to NIO's ordinary shareholders in the second quarter was RMB 1.21 billion or USD 171 million, representing a decrease of 63.6% year over year and a decrease of 29.9% quarter over quarter. Basic and diluted net loss per ADS in the second quarter were both RMB 1.15 or $0.16 per ADS, excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value. Non-GAAP adjusted basic and diluted loss per ADS were both RMB 1.08 or $0.15 per ADS in second quarter. Our balance of cash and cash equivalents, restricted cash, and short-term investments was RMB 11.17 billion or USD 1.58 billion as of June 30, 2020.

And now, for our business outlook. As William mentioned, for the third quarter of 2020, the company expects deliveries to be between 11,000 to 11,500 vehicles, representing an increase of approximately 129.2% to 139.6% from the same quarter of 2019 and increase of approximately 6.5% to 11.3% from the second quarter of 2020. The company also expects the total revenue of the third quarter 2020 to be between RMB 4.05 billion to RMB 4.21 billion or between USD 572.9 million to USD 596.2 million. This would represent an increase of approximately 120.4% to 129.3% from the same quarter of 2019, an increase of approximately 8.8% to 13.3% from the second quarter of 2020.

This business outlook reflects the company's current and the preliminary view on the business situation and market condition, which is subject to change. Now, this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

Questions & Answers:


Operator

Yes, sir, certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator instructions] Thank you. We have the first question from the line of Tim Hsiao from Morgan Stanley.

Please go ahead.

Tim Hsiao -- Morgan Stanley -- Analyst

Hi. Congratulations on the strong results and thanks for taking my questions. So two quick questions. The first one, regarding second quarter's gross margin because you came in as a strong beat versus previous guidance, I think, in addition to the strong scale because you just mentioned also attributable to the high average revenue per vehicle.

So could we have a rough idea what's the gross margin difference between like ES8 and ES6 at the moment? And could we expect ES6 margin to reach similar level as ES8 with additional contribution from EC6 later this year? And my second question is about R&D expenses because if you look at the state in the first half, I think the R&D expenses are under great control with around like $500 million to $600 million per quarter despite the model launch. So would this be the normalized level because -- as William mentioned about the investment in new vehicle development and also the autonomous driving technology? So could we have the -- also have the rough breakdown? About how many percentage of the R&D is now for the vehicle development and the rest like autonomous driving and other technology? Thank you.

Stanley Qu -- Vice President of Finance

OK. This is Stanley. For the first question about the gross margin of ES8 and ES6, generally, the gross margin of ES8 is higher than ES6. And we are trying to improve both the two models in the future, but we won't break down details of margins of each model, OK?

William Li -- Founder and Chairman of the Board

I would like to answer the second question regarding the R&D investment. Right now, we'd like to control our R&D investment within RMB 3 billion every year, including the labor cost to suppliers' EDD cost. In terms of the breakdown, of course, the percentage we invested for the vehicle-related R&D is higher. But just like I mentioned, we will increase our investment on the autonomous driving technology.

Right now, we have already got a team, about 200 people focusing on the autonomous driving technology development, which accounts a fixed part of the R&D cost. For the next generation of autonomous driving technology, we are going to increase our investment, but at a normal pace, just like you mentioned, it should be around $500 million to $600 million for one quarter. But for some quarters, because of our product development cadence, we may need to increase this investment. Thank you.

Tim Hsiao -- Morgan Stanley -- Analyst

Got it. Thank you very much.

Operator

Thank you. We have our next question from the line of Bin Wang from Credit Suisse. Please go ahead.

Bin Wang -- Credit Suisse -- Analyst

Actually, I've got three questions about autonomous. Question number one about launch timing of their two features. One is the NGP, navigation guide pilot, and second about their standard features, when will it be launched because they are being showed in your NIO APP where maybe come up this year. So I just want to know the exact timing.

The second thing is, call it, penetration because if you want to get such a feature, you got to pay additional RMB 39,000 as a package. So what's the penetration right now? And what's the ratio has been moving in the past few months or quarter? And the third one is that for the next-generation autonomous, which is Level 4. According to the media you partnered with Mobileye on the EyeQ5 chips. So what's the timing for the launch of the Level 4? Thank you.

William Li -- Founder and Chairman of the Board

Thanks for the questions. Regarding the Navigate on Pilot feature, we are now doing rigorous tests on this feature, and we plan to release this within 2020. However, regarding the NIO new buy assembling feature, because of the hardware constraints, our feature is not as competitive as is Tesla's new buy assembling because our feature can only support getting out and in the parking space. So I don't want to mislead to the users.

But together with the HD map, we believe our Navigate on Pilot can achieve a very good performance. Regarding the second question for the take rate of the Navigate on Pilot, we have the Founders Edition, which account for around 10,000 units. This Founders Edition has the NOP as a standard feature. So this is quite helpful with the take rate of speaking.

But normally speaking, the take rate for the NOP right now is around -- right now, for the take rate of the NIO Pilot is around 25%. This year, we have released a selected NIO Pilot, which priced around RMB 10,000, which has enjoyed a much better take rate. For the next-generation autonomous driving technology or our NIO Technology Platform 2.0, right now, we are speeding up our development pace for this new technology platform, but it's still too early to share any specific information regarding the technology road map. All I can say right now is we set very high bar for ourselves for this next-generation platform.

And we have been working on the autonomous driving technology development. In 2018, when we released the ES8, we were the first car to be equipped with the Mobileye EyeQ4 chipset. Other competitors, they launched the car with the EyeQ4 chipset around one year later. So it shows we have much more experience in terms of the mass production and autonomous driving.

Our experience in this regard has been tested and verified. So for the next-generation platform, we would like to set much higher standards for ourselves. And we will keep you guys updated at a timely manner. But here, I would like to emphasize that we don't actually use the Level 3 or Level 4 to define our AD technologies.

We have two different criteria from the user's interest perspective. The first one is, we focus on how much time we can free up for our users, and the second criteria is how many accidents we can reduce compared with the human driver. We believe these two criteria are more important than the definition of Level 3 and Level 4. Thank you for questions.

Bin Wang -- Credit Suisse -- Analyst

[Foreign language] Thank you for all of that argument. Can I have another follow-up?

William Li -- Founder and Chairman of the Board

Please, please.

Bin Wang -- Credit Suisse -- Analyst

OK. Thank you. Actually, I found on website that NIO may go to Germany later this year. So I just wanted to know your global game plan or just limited to China.

What's your future plan for overseas expansion?

William Li -- Founder and Chairman of the Board

From day 1, NIO is different from other companies. We are a global start-up. So we have kept our normal operation in the San Jose and German office even despite the most difficult times in last year. Even with the COVID-19, we still operate normally in the overseas office.

So we are now doing the preliminary research regarding the international market entry, including the product appropriation, team building, and also the market entry planning. But this year, I believe everyone understands it's not a very good year for us to enter the international market. We understand many overseas media pay great attention to our product after the renowned European, U.S. media tested our vehicle.

They also speak very highly of our vehicle, so we would like to do this step by step and build up our capabilities to enter the global market. So I would like to ask for your patience.

Bin Wang -- Credit Suisse -- Analyst

Thank you. Congratulations for a great result.

Operator

Thank you. We have our next question from the line of Lei Wang from CICC. Please go ahead.

Lei Wang -- CICC -- Analyst

Thank you. Good evening, William and Steven. This is Lei Wang speaking from CICC. Congratulations on the positive cash flow and better-than-expected gross margin.

That's, for sure, a good move. I have three questions on the financials. So the first question goes with the gross margin. I know William just guided a GPM above 10% by end of this year.

But considering we just have hit a 9.7% vehicle gross margins by second quarter already, can we have an updated gross margin target if you have any? That's the first question.

Steven Feng -- Chief Financial Officer

OK. Hi, Lei. I would like to answer the first question. Generally, in Q3 and Q4, we expect the -- vehicle average selling price remains relatively stable.

And for the battery pack cost, we foresee there will be still some room for us to further reduce its cost. Together with other cost savings for the BOM, I think generally, the over 10% target for vehicle margin and the overall margin can be achieved. But as you mentioned, whether we want to further like increase our targets for the gross margin, I don't think we want to do this at this moment. I think we still keep like the guidance of our double digit in the second half.

Yes.

William Li -- Founder and Chairman of the Board

Of course, we understand that there is still room for improvement in terms of the gross margin and many other aspects. But we would like to move forward according to our own pace. Just like the last quarter, we would like to keep a more conservative attitude regarding those targets.

Lei Wang -- CICC -- Analyst

All right. So the second question goes with the operating cash flow. I think that's primarily driven by optimized working capital, and I wanted to see if you or Steven could kindly provide a breakdown.

Stanley Qu -- Vice President of Finance

Hi, Lei. This is Stanley. Regarding the positive cash flow, yes, generally, there are the following reasons, which drive the positive cash flow. The first is operating loss we control that at relatively lower level.

And second, yes, as we mentioned, we renegotiate the credit term and also the payment methods with our suppliers. And for example, we asked the supplier to extend the credit terms from 60 days to 90 days and also asked for them to accept the banknotes instead of cash for the payment of the purchase. So the third one, as William mentioned, the direct sales model and also the leading -- make us to receive cash collections earlier than the payment to suppliers. So generally, all these reasons drive us to achieve positive cash flow in Q2.

Yes.

Lei Wang -- CICC -- Analyst

All right. All right. And I think the payment terms is very positive signal as the supplier already has some confidence on NIO. That's pretty good.

So the third question and the last question, William mentioned monthly production capacity of between 4,500 to 5,000 units, and Steven just guided roughly 11,000-unit car deliveries in next quarter. Why do we see a gap between the production capacity and the sales?

Steven Feng -- Chief Financial Officer

This is Steven. First, we increased our product capacity at end of August. And for any plant, which tries to increase its product capacity, there is a ramp-up period, OK? So our production capacity in July and August is still below 4,000 units, and that is a constraint for our delivery in Q3. And why do we increase our product capacity to 4,500 to 5,000, that's because that's the preparation for our Q4 delivery.

William Li -- Founder and Chairman of the Board

We want to improve the production capacity because of the strong demand in the market. Many of my friends have asked me to check whether it's possible to have their ES8 delivered early, so there is a very big ES8 order backlog right now. As I mentioned, the ES6 delivery will commence at late September this year, so we also need some time to ramp up the production of the EC6 in the front. Before we started the delivery of the EC6, we will start to accumulate orders for the EC6.

So it means that in the fourth quarter of this year, we're going to witness significant pressure on our delivery and production. That's why we would like to increase our production capacity at the end of August, then we can be fully prepared for the EC6 ramp-up and the Q4 delivery.

Lei Wang -- CICC -- Analyst

All right. Thanks, William, Steven.

Operator

Thank you. We have our next question from the line of Ming-Hsun Lee from BofA. Please go ahead.

Ming-Hsun Lee -- Bank of America Merrill Lynch -- Analyst

Thank you, Will, Steven, and the management. Congrats on the good results. Two questions. So the first question is that I think the market seems -- does not understand too much on the battery-as-a-service.

So probably, I think you can take this opportunity to give more explanation on the business. First of all, I would like -- I want to know that right now, how much of battery assets on your book? And once you set up a new factory asset management company, around how much asset you can reduce from your balance sheet? This can ease your pressure on balance sheet going forward. And also, the second question is that once the BaaS business model is confirmed, then I believe you can start over an auto-finance program for both the vehicle as well as the battery. So I think that the down payment for consumers will be much lower compared to the previous stages.

So how much more new demand do you think you can create through battery-as-a-service, right? So that's my first question.

William Li -- Founder and Chairman of the Board

Thanks for your questions. Battery-as-a-service is a very innovative business model, and it's quite difficult to validate this process. Just like I mentioned in my previous prepared remarks, we have now got the government approval and the first vehicle without the battery has already finished the validation process regarding the insurance purchase, loan application, and the license plate registration. Basically, it means that you buy the car without the battery, and it means that when you pay for the car, you do not need to pay the cost of the battery.

Previously, we tried to launch similar plans, but because of the restrictions with the government policy, we didn't fully implement the real battery-as-a-service business model. But now since we have already got the support from the government and the related policies, we believe it's the right time for us to do this. I would like to explain a little bit about the difference. Right now, if the user wants to do the financing for the batteries, then it means that at the beginning of the vehicle purchase, they can pay less money, that is around RMB 100,000 less.

Then they will have the monthly payment, but for that monthly payment, they cannot get the loan. So it means that we can use the ES6 as an example. The price is around RMB 358,000. Then it means that the users can pay RMB 258,000 at the beginning, but for this, they cannot get the loan from the bank because of the government policy restrictions.

But if we can go with the BaaS solution, then it means that with the new product homologation policy and the certification policy, the users can have less payment at the beginning, but they can still enjoy the loan for their monthly payment, which, just like you mentioned, should be able to lower the down payment as well as the monthly payment for the users. We believe this is not going to affect our gross margin or probably it's even going to help us with the gross margin, but with this solution, we should be able to help the users to lower their down payments and the monthly payment. And we believe that this is going to be a very good boost to our vehicle sales. Just like I mentioned before, we will release the detail in the third quarter.

We are now at the final commercial preparation stage. A very important task for us is to prepare the setup of the battery asset management company. We are one party out of this endeavor, but we are not the main stakeholder. So it means that it's not going to affect our balance sheet.

But we would like to set up this company around August. This asset company is going to own the battery assets and then lease it to the users. We believe that this is going to be a very innovative move for the whole industry and attract more parties to join this asset management company and build a virtuous cycle.

Ming-Hsun Lee -- Bank of America Merrill Lynch -- Analyst

Thank you, William. That's my question. Thank you.

William Li -- Founder and Chairman of the Board

Thank you.

Operator

Thank you. We have our next question from the line of Paul Gong from UBS. Please go ahead.

Paul Gong -- UBS -- Analyst

Hi. Thanks. Thanks for taking my question. I have two questions.

I remember at the early stage of NIO, it had planned the ET7 as a sedan as well as a new plant, but they get either delayed or canceled last year. But nowadays, since you have received a lot of refinancing and have a much stronger balance sheet than last year, will you consider to build the second plant by yourself? And will you consider to launch the ET7 at certain time or with the fourth model via different model? Can you give us a little bit of color on the next model coming in NIO day later this year?

William Li -- Founder and Chairman of the Board

Thanks for the questions. We have kept our cadence of launching one new product every year. After we released the ET preview in the Shanghai Auto Show, we have attracted great attention from the market and the users. People are looking forward toward the product development.

What we can say now is the next product will be a sedan, but I would like to ask for your patience. We have a very comprehensive and detailed planning for our product development for the coming years. In the future, we see there is a need for the second plant, but right now, we have a very successful cooperation with JAC. The product that we manufactured together with the JAC has ranked at the top in many quality assessments conducted by the third parties.

I'm very confident with our cooperation with JAC, and we do have room for improvement for the production capacity in our current plant. So we do not have an immediate need to kick off the second factory, but we are now working on the planning of the second factory because of our product development cadence. We don't need to say that we will build this plant by the clock. So what we need from the company's perspective is to make sure we have a sufficient capacity to support our product development and deliveries.

We are now preparing sufficient capacity for the product that we're going to launch in 2022. Another point is about the current new JAC plant. Without significant investment, we should be able to increase the production capacity of our current plant to 150,000 units under two shifts.

Paul Gong -- UBS -- Analyst

Thank you. That's helpful.

Operator

Thank you. We have our next question from the line of Alex Potter from Piper Sandler. Please go ahead.

Alex Potter -- Piper Sandler -- Analyst

Hi. Thanks very much. I have one question on selling regulatory credits. You probably have seen that Tesla gets a fair amount of revenue, several hundred million dollars a quarter from selling regulatory credit to non-compliant auto brands, primarily in Europe.

And I know that China is considering a similar credit trading system, and I'm wondering if you are having discussions with any foreign auto brands or other auto brands to prepare to sell those automotive credits in the future in China. That's my first question.

William Li -- Founder and Chairman of the Board

Thanks for the question. This year, the Chinese government launched the NEV and the -- Thanks for the question. This year, the government has updated their policy of the NEV and CAFC credit, which they have launched in the past, which has helped us to increase the value of the credit. We're now on other end, so we have accumulated around 100,000 due credits last year.

According to the current pricing in the market, we should be able to generate RMB 120 million for the revenue of the credit. We are now talking to some OEMs. We plan to sell those credits in the third quarter or the fourth quarter. We believe this is going to help us with the gross margin improvement.

Different from Tesla, we're not going to account this as part of the vehicle margin, we're going to consider this as part of the gross margin. This year, we believe we are going to accumulate around 200,000 credits, which will be sold next year with an increased pricing. Of course, the pricing will depend on the demand and the supply in the market, but we believe this is the future direction because the Chinese government would like to make sure they can use the credit to replace the subsidy and encourage OEMs to produce EVs. And we believe there will be a very big market for the credit trading between different OEMs.

Last year, with 20,000 units, we have achieved RMB 120 million revenue, which means that for each vehicle it can generate RMB 60,000 revenue. With increased pricing, we believe this is going to benefit our gross margin in the long term. Thank you.

Alex Potter -- Piper Sandler -- Analyst

Thanks very much. That's very interesting. I'll pass it on.

Operator

Thank you. As there are no further questions, I would like to hand the call back to our presenters for any closing remarks. Thank you.

Rui Chen -- Director of Investor Relations

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

Thank you and stay safe.

Stanley Qu -- Vice President of Finance

Thank you.

Steven Feng -- Chief Financial Officer

Thank you.

Operator

[Operator signoff]

Duration: 73 minutes

Call participants:

Rui Chen -- Director of Investor Relations

William Li -- Founder and Chairman of the Board

Steven Feng -- Chief Financial Officer

Tim Hsiao -- Morgan Stanley -- Analyst

Stanley Qu -- Vice President of Finance

Bin Wang -- Credit Suisse -- Analyst

Lei Wang -- CICC -- Analyst

Ming-Hsun Lee -- Bank of America Merrill Lynch -- Analyst

Paul Gong -- UBS -- Analyst

Alex Potter -- Piper Sandler -- Analyst

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