NIO Inc. (NIO) Q2 2021 Earnings Call Transcript

NIO Inc. (NIO 8.72%)
Q2 2021 Earnings Call
Aug 11, 2021, 9:00 p.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. second-quarter 2021 earnings conference call. [Operator instructions] Today's conference is being recorded.

I will turn the call over to your host, Ms. Eve Tang, investor relations of the company. Please go ahead, Eve.

Eve Tang

Good morning, and good evening, everyone. Welcome to NIO's second-quarter 2021 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted at the company's IR website. On today's call, we have Mr.

William Li, founder, chairman of the board,  and chief executive officer; Mr. Steven Feng, chief financial officer; Mr. Stanley Qu, VP of finance; and Ms. Jade Wei, AVP of capital markets and investor relations.

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 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 of the Board,and Chief Executive Officer

Hello, everyone. Thank you for joining NIO's second-quarter 2021 earnings call. In the second quarter of 2021, NIO delivered 21,896 ES8, ES6 and EC6, a new quarterly record, representing a strong increase of 111.9% year over year. In July, NIO delivered 7,931 vehicles, representing a strong 124.5% growth from last year.

All three models have achieved a solid performance in the premium SUV market. According to the data published by China Passenger Car Association, in the first half of 2021, the penetration rate of battery electric vehicles has reached 8.4% in China. NIO's penetration in the Tier 1 and the Tier 2 cities in China has been growing at a much faster pace. In Shanghai, the first half of this year has witnessed our penetration in the premium SUV segment, reaching 13.7% among all ICE and electric vehicles.

Our monthly order intake keeps it growing, but the delivery volume will be determined by the overall capacity of the supply chain. We expect the total delivery in the third quarter to be between 23,000 and 25,000 vehicles. In terms of our gross margins, we have achieved a steady performance with vehicle gross margin and overall gross margin standing at 20.3% and 18.6%, respectively. Next, I would like to share with you some recent operational highlights of the company.

Since the first validation build of ET7 rolled off the production line in May, a series of rigorous tests of vehicle functionality, performance and homologation have been kicked off. We are very confident with the on-time delivery of ET7 next year. Meanwhile, the development of NAD, new-generation autonomous driving system, is also advancing smoothly. We believe that NAD will deliver the best experience of autonomous driving and lead the charge of autonomous driving technology development in the industry.

In 2022, we plan to deliver three new products based on NIO Technology Platform 2.0, including ET7. Our teams are devoting every effort to press forward the development of the new products. In the meantime, we are also constantly optimizing and upgrading the NIO Technology Platform 1.0 to strengthen the competitiveness of our current three models. In late August, we will release the NIO OS 3.0, which will roll out with a fresh new look of UI/UX design, new features and further optimization of the existing functions through continuous over-the-air update.

The functionality and experience of NIO Pilot have also been improved. As a result, more and more users have chosen and enjoyed NIO Pilot. In the second quarter, the take rate of NIO Pilot exceeded 80%. As of July, NIO Pilot has been engaged for a total of over 200 million kilometers.

In terms of production capacity, despite the semiconductor supply volatilities in the second quarter with joint efforts of the teams and our partners, the production and delivery have met our expectations in the quarter. Since July, the COVID-19 pandemic and extreme weather events have posed a series of challenges to the global supply chain. The most recent COVID situation in certain regions in China have already affected our production. We will continue to work closely with our supply chain partners to minimize the impact on the production and delivery in the third quarter.

With regards to the sales and service network we now have 25 NIO Houses and 243 NIO Spaces in 128 cities in China. We will continue to deploy our NIO Houses and NIO Spaces, improve operational efficiency and quality and expand sales network coverage to quickly build our presence in the Tier 2 and Tier 3 cities. As of now, we have set up 36 NIO service centers and 171 authorized service centers in 133 cities. We will further increase the number of service centers to meet the rapidly growing user service demand.

Up until now, we have deployed 361 swap stations in 103 cities and completed over three million battery swaps for our users. In July, we announced new power battery swap station deployment plan by 2025. We plan to increase the total number of battery swap stations to over 700 by the end of 2021 and to over 4,000 globally by the end of 2025. On the other hand, we are also expanding our power charging and destination charging network.

As of now, we have established over 238 power charging stations and installed 2,416 destination chargers in China. With the accelerated deployment of the charging and swapping network and deepening understanding of BaaS, many more people can truly experience and recognize the benefits of battery swapping and BaaS, which has attracted more users to choose Battery as a Service. On the front of the global market, the Norway market entry has been progressing as planned. The first batch of ES8 has been shipped and is expected to arrive in Norway in mid or late August to be ready for the preorder and delivery in September.

Starting from September, NIO APP, NIO Life, NIO House, NIO Power's chargeable, swappable and upgradable service system, NIO service center and delivery center will gradually become available to users in Norway. As a user enterprise, our users are playing an increasingly important role in the NIO community. The preparation for NIO Day 2021 has been kicked off with the active participation of our users. Suzhou, out of 10 candidate cities, has been voted to be the host city of this year's NIO day.

Our user community has also joined us in making a positive difference in the world. In July, the city of Zhengzhou and a few places in Henan province were hit by heavy rainfalls and floods. NIO dispatched service resources nationwide to support users in Henan, provided real-time usable charging power information to both NIO users and users of other EV brands and supported the disaster response and relief work with donation under the special purpose fund of NIO user trust. 2021 is a critical year for NIO to lay a solid foundation for its long-term development.

Going forward into the second half of 2021, we will accelerate the pace of new products and full stack technology development, enhance our charging and swapping network as well as sales and the service network to be fully prepared for the delivery of the three new models in 2022. At the same time, we have also stepped up our mass market entry preparation. We will enter the mass markets with a new brand. The core team of the new brand has been assembled, marking the first step of the strategic initiative of NIO.

As always, thank you for your support. With that, I will now turn the call over to Steven to provide the financial details for the quarter. Steven, please go ahead.

Steven Feng -- Chief Financial Officer

Thank you, William. I will now go over our key financial results for the second quarter of 2021. 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 8.45 billion or USD 1.31 billion, representing an increase of 127.2% year over year, an increase of 5.8% quarter over quarter.

Our total revenues are made of two parts: vehicle sales and other sales. Vehicle sales in the second quarter were RMB 7.91 billion or USD 1.23 billion, accounting for 94% of total revenues in this quarter. It represented an increase of 127% year over year, an increase of 6.8% quarter over quarter. The increase in vehicle sales year over year was mainly attributed to higher deliveries achieved from more product mix offered to our users.

The increase in vehicle sales quarter over quarter was mainly due to higher deliveries. Other sales in the second quarter were RMB 536.2 million or USD 83.1 million, representing an increase of 130.3% year over year and a decrease of 7% quarter over quarter. The increase in other sales year over year was in line with the incremental vehicle sales in the second quarter of 2021. The decrease in other sales quarter over quarter was mainly due to the less revenues derived from 100 kilowatt hour battery upgrade service.

Cost of sales in the second quarter was RMB 6.87 billion or USD 1.06 billion, representing an increase of 101.8% year over year and an increase of 6.9% quarter over quarter. The increase in cost of sales was in line with revenue growth, which was mainly driven by the increase of vehicle delivery volume in the second quarter of 2021. Gross profit in the second quarter was RMB 1.57 billion or USD 0.24 billion, representing an increase of 402.7% from the same quarter of 2020 and increase of 1.2% from the first quarter of 2021. The increase in gross profit was mainly contributed by increased vehicle sales.

Gross margin in the second quarter was 18.6% compared with 8.4% in the same quarter of 2020 and 19.5% in the first quarter of 2021. The increase of gross margin compared to the second quarter of 2020 was mainly driven by the increase of vehicle margin in the second quarter of 2021. Gross margin remained relatively stable compared to the first quarter of 2021. More specifically, vehicle margin in the second quarter was 20.3% compared with 9.7% in the same quarter of 2020 and 21.2% in the first quarter of 2021.

The increase of vehicle margin year over year was mainly driven by the increase of vehicle delivery volume, higher average selling price as well as lower material cost. Vehicle margin remained relatively stable quarter over quarter. R&D expenses in the second quarter were RMB 883.7 million or USD 136.9 million, representing an increase of 62.1% year over year and an increase of 28.7% quarter over quarter. The increase of R&D expenses year over year and quarter over quarter was mainly attributed to incremental design and development costs for new products and technologies as well as the increased the number of employees in research and development functions.

SG&A expenses in the second quarter were RMB 1.5 billion or USD 0.23 billion, representing an increase of 59.9% year over year and an increase of 25.1% quarter over quarter. The increase in SG&A expenses year over year was primarily due to the increased marketing activities as well as the increased number of employees in sales and service functions. The increase in SG&A expenses quarter over quarter were primarily due to the increased marketing and promotional activities and professional services. Loss from operations in the second quarter was RMB 763.3 million or USD 118.2 million, representing a decrease of 34.2% year over year and an increase of 158% quarter over quarter.

Share-based compensation expenses in the second quarter were RMB 251.4 million or USD 38.9 million, representing an increase of 455% year over year and an increase of 160.5% quarter-on-quarter. The increase in share-based compensation expenses was primarily attributed to additional options and restricted shares granted. Net loss in the second quarter was RMB 587.2 million or USD 90.9 million, representing a decrease of 50.1% year over year and an increase of 30.2% quarter over quarter. Net loss attributable to NIO's ordinary shareholders in the second quarter was RMB 659.3 million or USD 102.1 million, representing a decrease of 45.4% year over year and a decrease of 86.5% quarter over quarter in the second quarter of 2021.

Basic and diluted net loss per ADS in the second quarter were both RMB 0.42 or USD 0.07 per ADS. Excluding share-based compensation expenses and accretion on redeemable noncontrolling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB 0.21 or $0.03 per ADS. Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB 48.3 billion or USD 7.5 billion as of June 30, 2021. And now our business outlook.

As William mentioned, for the third quarter of 2021, the company expects deliveries to be between 23,000 and 25,000 vehicles, representing an increase of approximately 88.4% to 104.8% from the same quarter of 2020, and an increase of approximately 5% to 14.2% from the second quarter of 2021. The company also expects the total revenues of the third quarter of 2021 to be between RMB 8.91 billion and RMB 9.63 billion, representing an increase of approximately 96.9% to 112.8% from the same quarter of 2020, and an increase of approximately 5.5% to 14% from the second quarter of 2021. This business outlook reflects the company's current and 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

[Operator instructions] And our first question comes from the line of Tim Hsiao from MS.

Tim Hsiao -- Morgan Stanley -- Analyst

Congratulations on the result. Just two quick questions for me. First question is about the new models. Could you please elaborate a little bit more about the two new models scheduled for 2022, either the ET7 regarding the timing, spec, rough price range, etc.

As market previously anticipated, you have just one new model next year. So I think this [Inaudible]. So any colors would be highly appreciated. So that's the first question.

And my second question is, with NIO's total battery consumptions likely reaching 16 or 18 gigawatt hour next year, will there be any major changes to NIO's battery sourcing strategy? Will CATL stay as the sole supplier or NIO might consider looking for a second source? And in light of such a close tie-up with CATL -- between CATL and NIO for both EV and battery asset management company, can you diversify to other partners to hedge the risk if needed? Those are my two questions.

William Li -- Founder, Chairman of the Board,and Chief Executive Officer

I believe everybody knows that the NIO Technology 2.0 is going to be first applied to ET7. The current development progress of ET7 and NAD is on track, and we are quite confident about the on-time delivery of ET7 next year, although the challenge is quite significant. For the other two products, I believe probably it's better for me to share more information at a more appropriate time. Regarding the pricing.

Of course, in recent years, the battery cost has declined a little bit. And as our volume goes up, our BOM cost will also have some opportunity to go down. So for the next year's product, we probably will have one of the lowest pricing products under the NIO brand. But as I explained before, we are going to have a NIO brand for the mass market.

So under the NIO brand, we're not going to have many low-pricing products. Next year, we believe the demand for the battery capacity is going to go up significantly, especially considering the new product lineup. We believe the battery production capacity demand is going to jump significantly compared with this year. We are having intense discussions with CATL regarding the battery capacity supply.

Currently, we believe CATL is a very good and important partner for us, and we also have a very good relationship with CATL. We have very in-depth discussions regarding the battery technology as well as the battery production assurance. So we believe this current strategy can serve the best interest of the company at the current stage of development.

Operator

And your next question comes from the line of Ming-Hsun Lee from BofA Securities.

Ming-Hsun Lee -- Bank of America Securities -- Analyst

William, Steven, and team, congrats for the good results. I have two questions. The first question is regarding the component supply. We know you already have more large-sized battery supply starting in June.

But right now considering the pandemic in China and also overseas countries such as Malaysia, what kind of impact do you expect on the production side, especially for your component supply capacity. So that's my question, first question. And the second question is regarding your business in overseas markets. So in your third quarter volume guidance, how many units do you expect to ship in Norway? And will you start to provide Battery as a Service in the overseas market? Yes.

That's my two questions.

William Li -- Founder, Chairman of the Board,and Chief Executive Officer

Yes. The pandemic situation is affecting the global supply chain. Last year, I believe our supply chain partners and NIO have been trying significantly to cope with this kind of challenges. In my prepared remarks, I have also mentioned, our -- the recent COVID situations in certain regions in China have affected our production.

Specifically, a just-in-time component partner located in Nanjing's high-risk area. This partner has already suspended their production, and we have seen some good news coming out of Nanjing that the COVID cases in Nanjing has already dropped to zero. So we hope this partner can resume the production as soon as possible. The third quarter delivery volume will mainly be determined by the overall capacity of the supply chain.

So there will be a lot of challenges that we need to deal with. For example, you also mentioned about the pandemic situation in Malaysia. This has also affected the semiconductor supply to the global market, not just for NIO but also many other companies. But the pandemic situation in Malaysia, basically, we believe, the impact for us is not that big and that it should be under control.

Another situation is the flood in Germany. Our partner is also affected in the flooding because one factory is flooded during the extreme weather event in Germany, and our partners have been working with us to identify the solution. Right now we believe that the situation is under control. So overall speaking, the delivery volume in the third quarter will mainly be restrained by the overall capacity of the supply chain.

Regarding the delivery in Norway, we believe for this year, the contribution is not going to be that significant because our priority is to make sure we can ensure high user satisfaction in the Norway market by building our brand, expanding our sales and service network. For the global market, we believe the more important thing is to focus on the long-term thinking, and we would like to ask everyone's patience in this regard. Recently, we have been working together with our prospective users in Norway to set up a user advisory. They have helped us significantly and provided many constructive and good feedback to us.

So we believe this is a very good beginning for us, and this is part of our long-term strategy for the global market.

Steven Feng -- Chief Financial Officer

And Ming, of course, in global markets, we also offer our BaaS model because we believe BaaS together with battery swap have offered user a very holistic experience and combined together in a very efficient way for our users to get the cars charged at home and on the go.

William Li -- Founder, Chairman of the Board,and Chief Executive Officer

According to the preliminary feedback we got from the Norway User Advisory Board, it seems that everyone is quite excited about the battery swapping stations and the Battery as a Service business model.

Operator

[Operator instructions] And your next question comes from the line of Nick Lai from J.P. Morgan.

Nick Lai -- J.P. Morgan -- Analyst

William and Steven, a great result indeed. I have two number-related questions. The first one is related to gross profit margin. Yes, I mean 2Q against 1Q, roughly, margin was flat, but still at the vehicle level over GP margin, it was still down roughly about one percentage point.

Yes, can you help us understand or explain a little bit more on the margin, slight shortfall in 2Q? Is that related to BOM or improvement in material price or other factors? I mean I noticed the second-quarter ASP is slightly down from 1Q. And how should we think about 3Q? So that one is a margin-related question. Can you help us understand a bit more or explain a bit more on 2Q margin dynamic against 1Q? And how should we think about that as we enter third quarter? And the second question related -- also related to number is look at the cash on balance sheet. Altogether, cash equivalent and short investment by the end of first half, we have RMB 48 billion cash that's roughly about $7.5 billion, and that's a lot of cash on balance sheet.

If you can help us understand what's our cash -- what's our strategy using the cash on balance sheet in terms of capex investment? I noticed JAC has new capacity expansion. And presumably, we are launching more model in 2022. We'll need to invest in R&D new model tooling altogether. So if you can help us understand a bit more on our capex investment in the next one year also, that will be very useful.

Stanley Qu -- Vice President of Finance

Nick, this is Stanley. Regarding your first question about the gross profit margin, there are tworeasons if we break down into details. The first is, average selling price decreased about RMB 8,000 per vehicle in Q2. The main reason is more ES6 were sold in Q2 compared with Q1, since ES6 is with a little bit lower gross profit margin and selling price.

But due to our costing efforts in Q2, the average vehicle cost also decreased about 3,000 per vehicle. So combining the two factors together, our net gross profit margin per vehicle decreased about 5,000, OK? That's the reason for the vehicle margin. And we announced -- today, we announced like three new, brand-new products we will deliver in 2022. And we also refreshed our product plan.

And from a conservative perspective, we shortened our depreciation and amortization periods for our existing products. So that will lead to the D&A increase. So for the second half year of 2021, this impact to gross profit margin will be like 2% per vehicle. So yes, that's the first question.

And the second one is regarding the cash balance. As you mentioned, the cash balance at the end of Q2 is RMB 48 billion. As we mentioned, we will still focus on the research and development of our new product technology. So -- and about the other usage, we will also increase our capex investments, including our NIO plant and NIO sales and marketing network infrastructure in the coming years.

So it will be in line with our business plan in the next year.

Nick Lai -- J.P. Morgan -- Analyst

Can you remind us what our capex target for the year? Do you have any number or guidance, please?

Stanley Qu -- Vice President of Finance

Yes. We expect the total capex in this year will be RMB 5 billion, including the new plant and also the service and sales network and also power swap station.

Operator

And your next question comes from the line of Bin Wang from Credit Suisse.

Bin Wang -- Credit Suisse -- Analyst

My first one is more a follow-up about our gross margin. Because you actually guided that the NIO Pilot has been increased quite substantially in the attach rate to 80%, what's the number in the first quarter? And what's the margin increase from this increasing NIO Pilot take rate. That is the number one question. And number two is about your long-term market share because the peers actually -- one peer actually has now 10% market share and the other one 20%.

What's the NIO's plan for 2025 for the market share? Because we have a mass market brand. Can I assume that the mass market brand will start to sell in 2023? Because this year, three products seem to be -- all came from NIO brand, because you already accelerated in the R&D, is it not going to be 2023? That is the second one. And the third one is about your data of authorized store expansion plan. If you see your peers who actually gained more strategic cooperation with the big data groups such as Tencent, I heard that some of your existing partner for NIO Spaces will be buy back by NIO, so which means, in the long term, maybe NIO will not have any third-party partners for NIO Spaces.

Is that true? What's your long-term strategy about the offline store expansion plan?

William Li -- Founder, Chairman of the Board,and Chief Executive Officer

So regarding the margin contribution of the NIO Pilot, as we mentioned, the take rate of NIO Pilot has reached 80%. For this 80%, it includes both the selected pack and the full pack of the NIO Pilot. So we believe the overall contribution from the NIO Pilot is around 3% to 4%.

Stanley Qu -- Vice President of Finance

Yes. Since NIO Pilot -- the price of NIO Pilot is included in the selling price of vehicles. So we have no separate gross margin calculation for the NIO Pilot.

William Li -- Founder, Chairman of the Board,and Chief Executive Officer

For the NAD, because we are going to use the AD as a Service model to provide the NAD services to our users, long term speaking, we believe the AD as a Service contribution is going to be included in our margin and the long-term plan for the margin of the NT 2.0 is going to be much better than the margin of the NT 1.0. For the vehicle gross margin, we believe the target for us in the long run is 25%, excluding the carbon credits because the carbon credit should be included in other margins. And we believe the logic of other margin is about the installed base or the installed base of our users. For the long run, it will get better, considering the future possibilities and opportunities, including AD as a Service, Battery as a Service, upgrade in your life, carbon credit.

So we believe, overall speaking, the overall gross margin and the vehicle gross margin will improve. Regarding the long-term target of the market share for us, of course, we pay attention to our specific market share or the penetration in the corresponding segment of our products, for example, the ES8 in the large and midsized SUV market segment and ES6 in the midsized SUV segment. Internally, of course, we have a very aggressive market share target by 2025, but we don't actually want to disclose this target. For us, we believe, our target as a company should be to build a company with the highest user satisfaction rate.

So that is why our focus is on the product and service. We believe if we can achieve the highest user satisfaction rate with our product and service, then it should be a natural thing for us to achieve satisfactory market share. In the China market, so I would like to talk a little bit about the battery electric SUV premium market segment. For this segment, I would like to emphasize a little bit about the pricing because when we compare the specific sales volume of one brand or one product, I think it does not make sense to compare those kind of metrics without thinking about the specific pricing segment.

For example, it does not make sense for us to compare the sales volume of Wuling Mini EV with the sales volume of NIO because we don't have the same pricing, and we don't actually compete in the same segment. In our specific pricing segment, we have companies like Audi, BMW, Mercedes. And for Tesla, they also have Model S and Model X and Model Y. So in this specific pricing segment, our overall market share has already exceeded 50%.

So we are quite confident to further improve our market share in this specific segment. In Shanghai, as I mentioned before, in the premium SUV segment, including the ICEs and the electric vehicles, we have already reached close to 14% market penetration in the first half of this year. This is already quite high, and we have already achieved this in the Tier 1 cities. So we believe this is a very good indicator for our next step to penetrate into more markets in different cities.

Because, as I mentioned, our focus is to make sure we have the best product and services and achieve the highest user satisfaction, so we believe as long as we stick to this vision and this objective, it should be quite natural for us to achieve our market share target in the long run. Yes. From the second half of 2019 to the first half of 2020, we have tried the NIO Spaces partner approach. We believe the NIO Spaces partners have contributed to our expansion of the sales network and the sales volume growth.

But right now when we look at the overall brand and the management complexity, we believe it makes more sense for us to manage the NIO Spaces by ourselves. So starting from the third quarter of 2020, we have changed this strategy. And we would like to make sure for the NIO Spaces, we can manage and build by NIO. So we discussed with our NIO Space partners and reached agreements with the majority of the NIO Spaces partners to transform their NIO Spaces to the NIO Spaces operated by NIO.

So the majority of the NIO Spaces partners have already signed the agreement with us. And for the rest of the NIO Spaces partners, we will continue our cooperation with them until the termination of the contract. For all the new NIO Spaces, these are all built and operated by NIO.

Bin Wang -- Credit Suisse -- Analyst

By the way, can you answer the question about whether it will be 2023 for the NIO's mass market brand business?

William Li -- Founder, Chairman of the Board,and Chief Executive Officer

Yes. Regarding the launch of the mass market products, of course, our R&D efficiency is quite high, and I believe this is the common standing of everyone. NIO has been able to launch a product one after another in a very fast manner. So for the mass market brand, this is part of our long-term thinking, and we believe the efficiency and the speed of the product launch is going to be probably even faster built on top of the capabilities that we have already accumulated under the NIO brand.

But regarding the specific timing and the launch cadence of those products under the mass market brand, we can still have time to decide based on the market conditions and the R&D progress of those products. So we believe it's still too early for us to share those information for now.

Operator

And your next question comes from the line of Chan Liu from CICC.

Unknown speaker -- Investor Relations

My first question is about R&D. We know that there is a fierce competition in acquiring talented people in autonomous driving development. So could you share with us NIO's advantages in acquiring them? And in more detail, could you share with us our current team size of AD development and our targeted team size? And is there any update on our R&D expenditure for this year? And my second question is that could you update the take rate of BaaS and NIO Pilot for us?

William Li -- Founder, Chairman of the Board,and Chief Executive Officer

Thank you for your question. AD is a very important R&D initiative for us, and we are quite decisive to make investments in the autonomous driving technology and organization. Other autonomous driving organization is quite different from other companies probably because we have four VPs that report directly to me personally. So as you can see that the autonomous driving is not just one department, it is actually an initiative for the -- of our company.

We have teams focusing on hardware, autonomous driving systems, autonomous driving algorithm and the autonomous driving operations. So we believe that this is not just the efforts of one AD department, we will need to leverage all the capabilities we have across the company. Right now for our AD department, we have around 500 people. By the end of this year, we expect to have additional 300 to 800 people for the AD team.

We will continue to make a decisive investment in the autonomous driving technology and the talent acquisition. Starting from 2016, we have already built our ADAS team and autonomous driving team. And NIO is the first company to have mass production of the EyeQ4 chipset. And we have built our domain controller, the autonomous driving system in-house right from day 1.

So we have already accumulated many experiences and capabilities in this regard. Starting from last year, the main focus of us is to build up the capabilities in terms of the autonomous driving algorithm and the computer vision. We believe right now we have already built a very strong team. Regarding the R&D expenses, starting from the second quarter, we have accelerated our research and development in the company.

As I mentioned, in 2022, we're going to deliver three new products. And in 2023 and beyond, probably we're going to deliver even more products. I believe NIO is the fastest company in the industry to deliver products to the market. Averagely speaking, the R&D timeline for us is around twoyears, which is already the fastest in the auto industry.

This year, we have already kicked off many different R&D programs. Starting from the third quarter of this year, we believe we are going to step up our R&D expenses due to the team size and the programs that we have in the R&D pipeline. So previously, we also mentioned that the R&D expenses in 2021 should be around RMB 5 billion, and we would like to see this RMB 5 billion spent according to the plan because this shows that our R&D progress is actually on track. So the current focus of us is to build up our R&D team and make sure all the development project is on track according to the plan.

And we believe probably by the end of this year, the size of our R&D team is going to be doubled compared with the size last year. The take rate of Battery as a Service in July has reached 60% and is growing month over month. Previously, I have also mentioned the take rate of NIO Pilot has reached 80%, including the selected package and the full package. So overall speaking, the take rate of BaaS and NIO Pilot is on the rise.

Operator

And your next question comes from the line of Edison Yu from DB or Deutsche Bank.

Edison Yu -- Deutsche Bank -- Analyst

I have two follow-ups on Europe. First, it seems there's quite a bit of hiring going on in the Netherlands and a little bit in Germany. Could you maybe discuss the next phase of Europe after Norway? And then second question on Europe. It's very encouraging to see this user advisory board.

Can you maybe discuss some of the things that you're doing differently in Europe relative to what's been going on in China?

Steven Feng -- Chief Financial Officer

I think for parity, I would like to share some numbers with our investors. First, in Norway, our team size has already increased to 40 employees in Norway. And of course, Norway is only our first stop to go overseas, to go global. So in the following years, we will also enter other European countries and also other regions.

So that's why we continue to hire more people after that.

William Li -- Founder, Chairman of the Board,and Chief Executive Officer

Another point, starting -- actually, in the second quarter of this year, we have appointed the CEO of Europe. He is already on board, and he has been building up the team for Europe. Of course, we're going to enter more markets in Europe, including Germany. For most of the products we're going to deliver to Europe is going to be based on the NIO technology platform 2.0 except the ES8.

So this is our current strategy for the European market. For NIO, as a user enterprise, when we enter the market or different regions, we have always believed the user participation and the support is a very important principle that we should uphold. Of course, for different markets, they have different cultures, different environment, different use cases. We will need to adapt to those different situations.

But -- so we believe the user community and the user enterprise concept should apply to overall markets in the world because our vision is to make sure that we can put the user experience and the user interest first. This is a general principle for us. A very interesting fact that I would like to share with you is that in Norway, when we initiated the user advisory board, we thought that probably we should have around 200 people. But in the end, 700 to 800 people signed up for the user advisory board.

So from this example, we can see that actually, the Norwegian people are quite willing to participate in those community events because previously through the media report and other literatures, it seems that Norwegian people are more cautious toward socializing with other people. But this example has proven this is the wrong interpretation or the wrong stereotype of the Norwegian people, and we believe that the user community concept should apply to all people in the world.

Operator

And your next question comes from the line of Paul Gong from UBS.

Paul Gong -- UBS -- Analyst

I have two questions. The first question is regarding your plan to address three new models based on the NT 2.0 in 2022. Given most of the NIO Spaces, probably cannot put six models together, will you try to expand the average size of your NIO Spaces? Or are you going to gradually phase out the existing first generation of the products? Just now you mentioned that you have shortened the depreciation and amortization of the first generation of your products. Does that mean it would be gradually phased out and migrated to the second generation of the platform? This is my first question.

My second question is regarding the mass market brand. I understand at this moment, you are still pending decision in terms of the timing and how to position itself. But can we have a little bit color, when you think about the relationship of NIO brand versus your NIO mass market brand, would it be more similar to, let's say, Mercedes-Benz and Smart or BMW and NVIDIA or Audi versus, say, Volkswagen brand. How do you think about the relationship of the two brands? I recall in the last quarter's results, you mentioned that there is only one model in the Shanghai Auto Show that is Wuling Hongguang Mini EV Cabrio version.

Is that an indication that somehow the recent online discussions say NIO's mass market brand would also announce some tiny, small vehicles? Is it something you are bearing in mind at this moment?

William Li -- Founder, Chairman of the Board,and Chief Executive Officer

Overall speaking, we understand that different companies will have different strategies regarding their product offering. We would like to offer more diversified choices to our users, but we also need to strike a balance because we're not going to like traditional OEMs to launch a sea of products for the users to choose from, and we are also not going to like other companies to just offer two to three products for the users to choose. We believe different users will have different preference and taste regarding the body size, the body type, the design. So that is why we would like to offer limited but diversified product offerings to our users.

We understand the era of Model T happened 100 years ago. And right now, the time and age is quite different for us. So that is why this is our strategy. Regarding the product and the NIO Houses and NIO Spaces, of course, we are going to adopt the digital technologies or probably use the rotation mechanism to make sure users can still experience our products in the NIO Houses and NIO Spaces.

But according to the current data we have right now, it seems that the majority of users actually placed their orders online. So we believe this is not going to pose a significant issue for us. Regarding the NIO technology platform 1.0, we understand our current product based on the NT 1.0 is actually quite competitive if we compare with Audi, BMW, for example, their EV products. I believe our products are still quite competitive.

And when it comes to their ICE product, I think our product actually does not belong to the same generation with their ICE products. So the NIO technology platform 1.0 product, we believe, they are still quite competitive, and we'll continue to sell those products in the market. Regarding the three new products that we're going to deliver in 2022, we believe that this is not going to affect the upgrade pace or the normal upgrade pace of the products on the NIO Technology Platform 1.0. But just now, Stanley has also mentioned that we have taken a more prudent to shorten the depreciation and amortization period for the NIO Technology Platform 1.0.

So this also shows that in the future, we are going to upgrade our product on the NT 1.0. I believe you have a very good question and you made a very good comparison. Yes, if we just take the positioning of the NIO brand and the NIO mass market brand, a simple comparison is going to be more like the relationship between Audi and Volkswagen and Lexus with Toyota. But this is more about the positioning of these two NIO brands.

Of course, we are not going to enter the segment of Wuling Hongguang. We believe that they have already done a very good job in their specific segment. We would like to do something different and offer different products for the mass market. Basically, our thinking is that we would like to launch a product that can have a competitive pricing compared with Tesla's products but have much better products and services -- and have better products and much better services compared with Tesla.

Operator

And your next question comes from the line of Jeff Chung from Citi.

Jeff Chung -- Citi -- Analyst

William, Steven, great results. And I have three questions. One is the about ET7. If this price is being set above RMB 400,000, can we say that the GP margin should be much higher than the current level, let's say, around 30% to 35% level GP margin, which is a potential? And secondly, it's about the export margin.

So let's say, if the scale reached like 2,000 to 3,000 units a month, can we say that, that is GP margin accretive? Because we heard that export to overseas ASP could be much higher. So could you give us a little bit color? Or do you think the export margin will be similar than the China domestic? Yes. That is the first area. And the second question is about the D&A.

And as you've just mentioned, it's going to accelerate into the second half of the year. And I just heard you said that equivalent with the cost per car to increase by about 3%, right? So can I clarify this a little bit whether this will mainly reflect in the GP margin or the EBIT margin? And finally is about the R&D and SG&A. So previously, we expect this year's R&D to be around RMB 5.2 billion, SG&A around -- above RMB 6 billion. So going forward into 2022, do you see that there could be still a potential that this cost should be increasing faster than our revenue growth? And when do you think this cost growth will be slower than our revenue growth? Will it start from 2023 or 2024? Yes, that's my three questions.

William Li -- Founder, Chairman of the Board,and Chief Executive Officer

Thank you for your question, Jeff. Overall speaking, for the gross margin target, previously, I have also mentioned that on the NIO technology platform 2.0, the vehicle gross margin target should be at the level of 25%. From the current data we gathered, it seems that the ET7 should be able to reach these targets, but the actual vehicle gross margin of ET7 will need to be validated until the mass production and the delivery of ET7 to our users. So for the other products or for the products on the NIO technology platform 2.0, including ET7, it will probably meet the 25% vehicle gross margin level, and this is the overall target for us.

And for the other margins, just like I explained that we have AD as a Service and NIO Life, Battery as a Service upgrade and the swapping services, all this is included in the other margins. So this will also contribute to the improvement of other margins. For the export business, our current strategy is that we would like to have a global pricing, but for the specific pricing in different markets, it will vary a little bit considering the tax and the tariffs in different countries.

Stanley Qu -- Vice President of Finance

Yes. We accelerated our depreciation and amortization for the fixed assets for NT1 products. That will be booked in the cost per vehicle. So gross profit margin starting from Q3 will decrease by 2%, as I mentioned in prior questions.

Yes.

Steven Feng -- Chief Financial Officer

And also, Jeff, with regard to the expense ratio, we believe from now on, the next 12 months is a very decisive window for us to accelerate our product development and also service and track infrastructure deployment. However, from the second half of 2022, our economy of scale will gradually manifest, and our expense ratio will start to decline again.

Operator

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

Unknown speaker -- Investor Relations

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

Thank you.

Operator

[Operator signoff]

Duration: 99 minutes

Call participants:

Eve Tang

William Li -- Founder, Chairman of the Board,and Chief Executive Officer

Steven Feng -- Chief Financial Officer

Tim Hsiao -- Morgan Stanley -- Analyst

Ming-Hsun Lee -- Bank of America Securities -- Analyst

Nick Lai -- J.P. Morgan -- Analyst

Stanley Qu -- Vice President of Finance

Bin Wang -- Credit Suisse -- Analyst

Unknown speaker -- Investor Relations

Edison Yu -- Deutsche Bank -- Analyst

Paul Gong -- UBS -- Analyst

Jeff Chung -- Citi -- Analyst

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