NIO Inc. (NIO) Q4 2021 Earnings Call Transcript

NIO Inc. (NIO -0.48%)
Q4 2021 Earnings Call
Mar 24, 2022, 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 Incorporated's fourth quarter and full year 2021 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded.

I will now turn the call over to your host, Ms. Eve Tang from capital markets and investor relations. Please go ahead, Eve.

Eve Tang -- Investor Relations

Good morning and good evening, everyone. Welcome to NIO's fourth quarter and full year 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 the chief executive officer; Mr.

Steven Feng, chief financial officer; and Mr. Stanley Qu, senior VP of finance. 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 recent filings of the company with the U.S. Securities and Exchange Commission and the Stock Exchange of Hong Kong Limited.

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

[Foreign language] Hello, everyone. Thank you for joining NiO's fourth quarter and full year 2021 earnings call. [Foreign language] In the fourth quarter of 2021, we delivered 25,034 ES8, ES6, and EC6, representing an increase of 44% year over year. [Foreign language] 2021 was a year full of challenges for NIO and the global auto industry.

By overcoming the pandemic, semiconductor shortages, supply chain volatilities, and many other difficulties, we have continued to lift the premium smart electric vehicle market in China, with a total delivery of 91,429 new vehicles in 2021, representing a strong increase of 109.1%. [Foreign language] In January 2022, NIO delivered 9,652 vehicles, increasing by 34% year over year. In light of the Chinese New Year holiday, NIO delivered 6,131 vehicles in February 2022, representing a growth of 10% year over year. During the holiday, we adjusted the production lines to prepare for the delivery of 87 in late March 2022.

[Foreign language] Although the user demand and order momentum remains strong, the production and the delivery have been affected by the COVID and the volatility of the supply chain production capacity. We expect that the total delivery in the first quarter of 2022 to be between 25,000 to 26,000 vehicles. [Foreign language] We will start the delivery of ET7, the first product on NT2, on March 28, 2022. In early March, we kicked off the test drive of ET7 nationwide.

Users who test drove ET7 have spoken highly about the product. The test drive that order conversion rate exceeded our expectations, which gives us great confidence toward the competitiveness of NT2. [Foreign language] In 2021, the battery electric vehicle market maintained a faster-than-expected uptrend. According to China Passenger Car Association, the retail penetration rate of the battery electric vehicles has grown from 5.9% in January to 18.6% in December last year.

In Tier 1 and Tier 2 cities in China such as Shanghai, the penetration rate of a battery electric vehicle witnessed a more prominent growth. In Shanghai, among the sales of all ICE and electric SUV priced above RMB 350,000, NIO Inc. joined a market share of a 23% with -- is the shares -- with ICE sales that ranked at the top in 2021. We believe that these EV growth trends were also gradually expanded to Tier 3 and Tier 4 cities in the future.

[Foreign language] In terms of gross margin benefited from the increase of our revenue per vehicle and the cost optimization brought forward by the 75-kilowatt hour LFP/NCM hybrid battery. The vehicle gross margin reached 20.9% in Q4 2021 and 20.1% for the full year of 2021, respectively. Currently, the whole industry is confronted with the pressure of a cost increase. We are paying close attention to the dynamics in the supply chain and are working closely with other partners to enhance efficiency in order to reduce the impact to the vehicle gross margin.

[Foreign language] On a separate note, NIO started to be listed by way of introduction on the Stock Exchange of Hong Kong under the stock code 9866 from March 10, 2020. The listing in Hong Kong marks another milestone in the history of NIO and enables it to serve more investors in the future. [Foreign language] Next, I would like to share some recent key highlights of our R&D and operations. [Foreign language] In 2021, we started to step up our investment in R&D with all of our non-GAAP R&D expenses exceeding RMB 4.1 billion in 2021.

We have sped up the development of new product and increased of our investments in full-stack autonomous driving and other core technology.  [Foreign language] Investment in R&D is also of critical importance for NIO's long-term competitiveness. Starting from this year, we will be able to be part of the fruitful results from last year's R&D investment and efforts. In 2022, we plan to deliver three new products based on NT2, with ET7 being the first. The mass production of ET7 is well on track.

The product itself has led the industry in various aspects, including computing power of autonomous driving. [Foreign language] At the NIO Day on December 18, 2021, we unveiled ET5, a mid-size smart electric sedan. As a perfect combination of NIO's  supercar DNA and the concept of design for AD, ET5 is equipped with NAD, NIO Autonomous Driving and PanoCinema, panoramic digital cockpits enabled by AR and VR technologies. It comes as standard with 100 configurations for comfort, safety, and smart technologies.

After its launch, ET5 has attracted a wider and more diversified user base, and received more orders than our expectations. The delivery of ET5 is expected to start in September this year. [Foreign language] Soon, we will also launch ES7 of our first SUV model on NT2, which is positioned as a large, premium five-seater SUV, and expected to start to delivery from the third quarter of this year. [Foreign language] In the coming years, we will continue to elevate our R&D investment and efforts in core technologies, especially in key capabilities such as the full-stack autonomous driving and battery technologies.

We believe that the investment in core technologies will not only enhance our sustainable competitiveness in both of our technologies and products but also improve overall gross margin and profitability in the long run, and ultimately, create long-term value for our shareholders. [Foreign language] With regards to production capacity, the production line operates at the JAC-NIO Advanced Manufacturing Center is in progress phase by phase. By mid-year, the production cadence across all workshops there will reach 60 jobs per hour. [Foreign language] We have largely completed the building construction of our second manufacturing facility, F2, located in NeoPark.

Finished the equipment installation and are now working on the calibration, F2 is planned to be put in operation in third quarter this year with a designed production cadence of 60 jobs per hour. On March 16, the first validation view of ET5 rolled off at the production line from the F2 vehicle-powered production center. [Foreign language] On the side of supply chain, we are still faced with the challenges of growing chip supply volatility, raw material costs increase, COVID, and the challenge -- the changing international situation. In the past two years and more, our teams and partners have accumulated a rich experience in securing supplies of production.

We will continue to work closely and try our best to safeguard the production and delivery going forward. [Foreign language] 2021 had been a year of a decisive investment in charging and swapping infrastructure, as well as the sales and the service network. [Foreign language] In terms of the sales and the service networks, we now have 46 NIO Houses and 341 NIO Spaces in 155 cities worldwide. In China, we have 60 NIO service centers and 179 authorized service centers in 146 cities.

[Foreign language] As the sales and the service and network expands quickly, we have been continuously optimizing the network deployment and the operational efficiency of each touchpoint while delivering high-quality services to users. In 2022, we plan to open more than 100 NIO sales outlets and over 50 NIO service centers, and authorized service centers. [Foreign language] In terms of the charging and swapping networks, we have deployed 866 battery swap stations in 190 cities and completed over 7.6 million swaps in China. So far, we have 711 supercharging stations and 3,786 destination chargers in China.

[Foreign language] In 2022, we're well at 30 NIO destination charging routes to the power-up plants. With that, NIO will cumulatively operate over 1,300 battery swap stations, 6,000 power chargers, and 10,000 destination chargers in China. We will further expand our power network to provide a better charging and swapping experience to users. [Foreign language] In the global market, ES8 has formed the appreciation of users in Norway.

This year, our monthly deliveries have ranked Top 2 among the six-seater or seven-seater passenger cars. The successful delivery and high-quality user service in Norway also helped us accumulate valuable experience in providing services in other countries and regions, and gain confidence in entering more NIO markets. [Foreign language] In 2022, NIO will bring its products and comprehensive services to Germany, the Netherlands, Sweden, and Denmark. The team building and market entry preparation are moving forward smoothly.

[Foreign language] The mass-market brand has been progressing according to plan. We have established the core team, specified the strategic direction and the brand positioning, and reached a critical research and development stage after the first batch of product. [Foreign language] The development of NIO won't be possible without the continued support of our users. In 2021, 3,756 user volunteers to contribute their time and efforts in events like auto shows and NIO Day.

More than 20 -- more than 12,000 users participated in our 260 charity events to make active contributions to society. [Foreign language] At NIO Day 2021, we announced the user partner program with which NIO users can share benefits with each other and build even deeper connection among users in the community. [Foreign language] In addition, NIO launched Clean Parks, an ecosystem co-construction initiative. So far, we have rollout the initiative in six national parks and natural reserves in China.

We aim to contribute to ecosystem building, support the adoption of smart electric vehicles and clean energy infrastructure in the natural reserves, and establish a clean and low-carbon energy situation to protect the authenticity and integrity of ecosystems. [Foreign language] 2021 was a year for NIO to develop fundamental powers and make comprehensive appropriations for the next stage of development. 2022 is a year for NIO to press ahead at full speed. We will deliver three new products, continue to invest in R&D and infrastructure to improve our long-term competitiveness, expand our production capacity to meet the faster-growing usage demand, and serve users in more countries and regions.

We will always stay true to our original aspiration of putting users' interests to first, make continuous improvement, and deliver products and services beyond the user's expectations. [Foreign language] 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 fourth quarter and full year 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 revenue in the fourth quarter were RMB 9.9 million, or $1.6 million, representing an increase of 49.1% year over year, an increase of 1% quarter over quarter.

Our total revenues are made up two parts: vehicle sales and other sales. Vehicle sales in the fourth quarter were at RMB 9.2 million, or $1.4 million, accounting for 93% of total revenues in this quarter. It represented an increase of 49.3% year over year, an increase of 6.7% quarter over quarter. The increase in vehicle sales year over year was mainly attributed to higher deliveries.

The increase in vehicle sales quarter over quarter was mainly attributed to higher average selling price, decrease in subsidization, user vehicle financing arrangements, and higher deliveries. Other sales in the fourth quarter was RMB 0.7 million, or $107.5 million, representing an increase of 46.8% year over year and a decrease of 41.3% quarter over quarter. The increase in other sales year over year was mainly attributed to the increased revenues derived from sales of service and energy packages and accessories in line with the incremental vehicle sales as we add increased revenues from used car sales and auto financing services in the fourth quarter of 2021, which was partially offset by sales of automotive regulatory credit in the fourth quarter of 2020. The decrease in the other sales quarter over quarter was mainly attributed to sales of automotive regulatory credit in the third quarter.

Cost of sales in the fourth quarter was RMB 8.2 million, or $842.8 million, representing an increase of 49.1% year over year, an increase of 5% quarter over quarter. The increase in cost of sales year over year was mainly driven by the increase of delivery volume in the fourth quarter of 2021. Gross profit in the fourth quarter was RB 1.70 million, or $266.7 million, representing an increase of 48.8% year over year and a decrease of 14.7% quarter over quarter. The increase in gross profit year over year was mainly contributed by increased vehicle sales and increased vehicle margin.

The decrease of gross profit quarter over quarter was mainly resulted from the sales of automotive regulatory credits in the third quarter of 2021, which contributed a high profit. Gross margin in the fourth quarter of 2021 was 17.2%, compared with 17.2% in the fourth quarter of 2020 and 20.3% in the third quarter of 2021. The decrease of gross margin quarter over quarter was mainly resulted from sales of automotive regulatory credit in the third quarter of 2021, which contributed a higher gross margin. More specifically, vehicle margin in the fourth quarter was 50.9%, compared with 17.2% in the fourth quarter of 2020 and 18% in third quarter of 2021.

The increase of vehicle margin year over year was mainly driven by the high average selling price, with higher rate of 100-kilowatt hour battery. The increase of vehicle margin quarter over quarter was mainly attributed to decrease in subsidization, use vehicle financing arrangements. R&D expenses in the fourth quarter was RMB 1.83 million, or $286.9 million, representing an increase of 120.5% year over year, an increase of 53.3% quarter on quarter. The increase of R&D expenses quarter of a quarter and year over year was many attributed to the increased personal costs in research and development functions, as well as the incremental design and development costs for new products and technologies.

SG&A expenses in the fourth quarter were RMB 2.36 million, or $370.1 million, representing an increase of 95.4% year over year and an increase of 29.2% quarter over quarter. The increase in SG&A expenses year over year and quarter over quarter was primarily due to the increase in personnel costs in sales and service functions, and costs related to sales and service network expansion, as well as incremental marketing and promotional expenses, including for the host of the NIO Day in December 2021. Loss from operation in the fourth quarter was RMB 2.45 million, or $383.7 million, representing an increase of 162.5% year over year and increase of 146.5% quarter over quarter. Share-based compensation expenses in the fourth quarter were RMB 396.7 million, or $62.3 million, representing an increase of 559% year over year, an increase of 49.4% quarter over quarter.

The increase in share-based compensation expenses year and a quarter of cultural was primarily attributed to additional options and restricted shares granted. Net loss in the fourth quarter was RMB 2.14 million, or $336.4 million, representing an increase of 54.4% year over year and increase of 156.6% quarter over quarter. Net loss attributable to NIO's ordinary shareholders in the fourth quarter was RMB 1.49 million or $208.7 million, representing a decrease of 48.4% year over year and an increase of 25.6% quarter over quarter. Basic and diluted net loss per ADS in the fourth quarter were both RMB 1.36, or $0.51 per ADS.

Excluding share-based compensation expenses and accretion on redeemable noncontrolling interest to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB 1.07, or $0.16 per ADS. Our balance of cash and cash equivalents, restricted cash, and short-term investment was RMB 55.4 billion, or $8.7 billion as of December 31, 2021. Additionally, achieved positive cash flow from operating activities for the full year 2021. And now, for our business outlook, as William mentioned, for the first quarter of 2022, the company expects deliveries to be between 25,000 to 26,000 vehicles, representing an increase of approximately 24.6% to 29.6% from the same quarter of 2021.

The company also expects the total revenues on the first quarter of 2022 to be between RMB 9.63 million and RMB 9.99 million, or between $1.51 million and $1.7 million. This would represent an increase of approximately 26% to 25.1% from the same 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

Thank you. [Operator instructions] First question comes from the line of Tim Hsiao of Morgan Stanley. Please go ahead.

Tim Hsiao -- Morgan Stanley -- Analyst

Hi, William, Stevens, Stanley. Congratulations on this lovely result, and thanks for taking my questions. Basically, I have two questions. The first question is about cost and margin because we know that NIO is better positioned to cope with the battery cost inflation even without price hike.

But may I know if the rise in mix of the high margin, the 100-kilowatt hour, 75-kilowatt hour hybrid battery pack, or other initiatives could sufficiently offset the margin pressure this year? And separately, if any, or only if, we need to raise the prices one day, can NIO increase the price to the consumers who bought the batteries and also the battery asset management companies simultaneously, or either it take longer to renegotiate the terms and contract with the battery management company if it's more like to beat business? So that's the first question. And the second question is on automotive. Currently, I think ES6 and ES8 have comprehensively covered the SUV market, which is driving range from 350 to 600, 000. Since we will soon launch ES7, as William just mentioned, how could we effectively differentiate ES7 from a common SUV model without avoiding dilution? And are you going to adjust the pricing strategy or reposition current SUV models along with the launch of ES7? So those are the two questions from my side.

Thank you. 

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

[Foreign language] Thank you, Tim. Regarding the first question, actually, starting from the fourth quarter of last year, we started to deliver the 75-kilowatt hour LFP and NCM hybrid battery pack to the users, which has contributed to the cost optimization and benefited our vehicle gross margin growth in the fourth quarter. But I believe everyone knows about that starting from the third quarter and the fourth quarter of the last year, we have been seeing some raw material cost increase in the industry, and there has been a lot of cost increase in the upstream of the whole industry chain, which means that we won't need to share the pressure across the whole industry gradually. At this moment, we do not have any plan to increase our pricing yet, but because of -- during the year, we are going to upgrade of a product the competitiveness and the capabilities.

So at that time, probably, based on the cost of the raw materials in the industry, we will reevaluate our pricing strategy as well. But at this moment, we're not going to increase our price for the products. On another point, because of the sales growth, we believe that this has also contributed to the amortization of the cost and benefited our vehicle gross margin increase. But regarding the raw material cost increase, it's not just about the battery but also other commodities like the copper and aluminum.

Those raw material cost increase have also affected our vehicle gross margin as well. [Foreign language] In light of the cost increase for those raw materials I've just mentioned and other bond costs, our full year vehicle gross margin for 2022 will still target to reach around 18% to 20%. [Foreign language] The second question is about the ES7. This is going to be the first SUV product based on the NT2 and it's positioned as a mid-large five-seater SUV.

In this specific segment we have witnessed some user demand increase recently. For example, the BMW X5 we believe is going to start the local production very soon. For the ES7, it's going to have industry-leading battery electro power train and also the smart technologies as well. And we believe it's going to showcase the high-performance capabilities of the product, and also satisfy users demand in terms of the premiumness and luxury feeling.

And we also believe this is going to attract users who will have a very high requirement regarding the product quality and the premiumness. So, all in all, we believe the ES7 is going to contribute and going to be complementary to other current ES8, ES6, and ET6 instead of affecting the sales of the current products. [Foreign language] We're going to launch the ES7 in the second quarter of this year and will share the pricing information as well at that time. At this moment we can see that regarding the market segment of the mid-large SUV priced above RMB 400,000 is actually has an addressable market size of over 200,000 units, and this market size is also growing.

That's why we're very confident with the performance of the ES7 after its launch.

Tim Hsiao -- Morgan Stanley -- Analyst

Thank you.

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

[Foreign language]

Operator

Thank you for the questions. Next question comes from the line of Bin Wang of Credit Suisse. Please go ahead. 

Bin Wang -- Credit Suisse -- Analyst

[Foreign language] I actually have got a question about the ET7 service because recently there was a media call. First one, ET, they say that ET7 received very good order flow about 15,000 order backlog, which indicate a monthly volume could be around 5K. So, what's your comment about this? And second thing is about the margin because we've seen in the fourth quarter last year that service actually had very big negative cost margin, more than 30%. And what's also the reason behind that and what's the outlook of this fixed margin going forward? Meanwhile, you just provided 18% to 20% margin guidance.

Is this just the vehicle gross margin or actually including the service margin already? Thank you. [Foreign language]

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

[Foreign language] Regarding the first question of the ET7, of course, we cannot discuss the specific order number at this moment. But what I can say is that it is actually much more than the media report. And for the ET7 market segment, we can see some other benchmarks. For example, the BMW 5 Series, Audi A6, and the Mercedes C-Class.

ET7 has the similar pricing and the target group with those products as well, especially regarding the BMW 5 Series. So for BMW 5 Series we can see that the monthly delivery number is around 12,000 to 15,000. Of course, for the ET product it will need some time for the users to adopt and accept. But if we look at the examples of the Shanghai market -- right now, in the premium SUV segment in Shanghai, our market share is around 23%.

So if we also mirror this to the sedan market, we believe there is a lot of room for growth and also potential for our ET7. So, at this moment, we cannot see how much we're going to deliver every month, but according to the user feedback that we receive right now, we're very confident with the ET7's performance in the future. OK. Stanley [Foreign Language] 

Eve Tang -- Investor Relations

[Foreign Language]

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

[Foreign Language]

Eve Tang -- Investor Relations

William [Foreign Language]

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

[Foreign Language] Regarding the ES7, previously I have also mentioned that the ES7 is positioned in the mid-larger premium SUV segment. If we talk about the specific benchmark, we can refer to BMW X5. After the local production of the BMW X5, we can see that the market actually has very high expectations for BMW X5's performance. The current market buy of this segment is over 200,000 units.

So if we look at the comparables, we can use the BMW X5 as a reference. And based on this, we're very confident with our ES7 because we believe it can actually outcompete the BMW X5.

Stanley Qu -- Vice President, Finance

OK, for the second question, as the service flows, we accelerated the construction of power cell station in 2021, and more power cell station actually provide service to end users, which lead to the cost increase of other revenue, other business compared with Q3. And in 2022, we will continue to deploy the batteries charging and swapping facilities. The anticipated depreciation of operating expenses will keep rising. But we believe the upfront deployment of battery swap stations can contribute to our branding, user experience, and also sales and -- with the long-term value to the company.

So bearing a short-term loss of power cell station constitutes a strategic decision of the company, and in the long run, the cumulative vehicle deliveries going up and the improvement for service efficiency. We expect that the next two margins resulting from power, maintenance and repair service, and also other services will gradually improve. And other revenues and margins contributed by innovative business models like BaaS, NIO Life, and also AD as a service will keep growing.

Bin Wang -- Credit Suisse -- Analyst

OK.

Stanley Qu -- Vice President, Finance

And the gross profit margin target, 18% to 20% for 2022, is for vehicle, not the overall gross margin. Yeah. Thank you.

Operator

Thank you for the questions. Next question comes from the line of Ming-Hsun Lee of Bank of America. Please go ahead.

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

[Foreign language] So my question is regarding the capacity in lidar hybrid battery and also the chip, especially CATL also announced the chip shortage will cause the price hike. So I also want to know whether the NVIDIA Orin chip will constraint your vehicle delivery this year? [Foreign language]

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

[Foreign language] So regarding the production capacity, previously, I have also mentioned that by the middle of this year, our first factory that is the JAC-NIO Manufacturing Centre is going to reach a production cadence across the different workshops that is around 60 jobs per hour. And the designed production capacity of the Factory 2 is also going to be around 60 jobs per hour. But, of course, for the Factory 2, because this is a new factory, then we will need some time to ramp up the production gradually. So if we think about the 60 jobs per hour, it means that if we work with 4,000 hours every year, then the annual production capacity is going to be 240,000 units and for every month is around 20,000 units.

If we work overtime a little bit to 5,000 hours per year, then it means that the annual production capacity is going to reach around 300,000 units. So this is about the vehicle production capacity. We believe that in the fourth quarter of this year, we will see some fundamental improvements regarding the vehicle production capacity, which is going to support our next step of production. For the battery production capacity bottleneck, yes, previously, we have also mentioned about this, and starting from last year, we have been working together with our partner, CATL, to add additional production lines for the battery cells.

And we believe, according to the current plan in 2022, the battery production capacity should be able to meet our demand. Of course, the cost increase of the battery is another matter. Actually, I believe the chip shortage is a bigger challenge for us, because in our vehicle we have over 1,000 chips, and among those 1,000 chips, we have probably around 10% of the chips may face the supply shortages or challenges from time to time. So, for us, starting from 2021, we started to see some chip cost increase, and this has affected our vehicle gross margin in 2021.

Based on this experience in 2021, we have already taken into consideration of the chip cost increase in terms of setting our target for the vehicle gross margin. We believe the main challenge regarding the chip is more about the supply. But regarding those high-end chips like the NVIDIA Orin chips and the Qualcomm 8155, we have a long-term and direct strategic cooperation with NVIDIA and Qualcomm. So we believe we should be able to have sufficient supplies for our production.

For those common chips or the cheaper chips, like from TI and Infinium, we may face some challenges from time to time, and this is going to affect our production. Of course, we have some other ways to mitigate those challenges. For example, we can find some other chips to replace those chips or we can probably scan the market to build up our strategic inventory to avoid those risks. We believe, overall speaking, in the second half of this year or around the fourth quarter of this year, we should be able to see some fundamental improvement in terms of our vehicle production capacity and the battery production capacity.

But we may still face some challenges in terms of the supply chain volatility, especially the semiconductors.

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

Thank you.

Operator

Thank you for the questions. Our next question comes from the line of Jeff Chung of Citi. Please go ahead.

Jeff Chung -- Citi -- Analyst

[Foreign language] I've got three questions. So number one is should we consider any MSRP hike in the near term to offset potential battery and aluminum cost hike? If yes, how? And if no, why not? The second question is about the existing EC6 product sales volume visibility over the next few months. Any confidence we can maintain 10,000 units a month, as well as the -- could you give us more color on the ET7 ramp-up pace in the second quarter? Last but not least is the lithium spot price in China. Do you think it has already peaked due to the recent government intervention? Thank you.

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

[Foreign language] For the current ES8, ES6, and EC6, of course, if we look at the digital copy of that, this is actually based on the NIO Technology Platform 1.0, which was developed in 2018. So for this chip, the efficiency may be impaired if we run some complicated software. So that's why starting from this year or within this year, we're going to upgrade to the smart hardware of our existing products. And we are also going to provide after-sales upgrade services for the users regarding the smart hardware upgrades.

We're going to launch this program at an appropriate time. For the existing ES8, ES6, and EC6, we believe, we do not need to adjust the pricing at this moment. But, of course, based on the smart hardware upgrade of the existing products and also we are going to launch some model year product, then at that time, we believe probably we can reevaluate our pricing strategy based on the cost increase in the supply chain. You have also asked about the performance of our current product, whether it should be able to still maintain the 10,000 units per month.

According to our order momentum in March, we believe, that this can meet our expectations, and we believe that user demand is not a problem for us because if we compare our current ES8, ES6, and EC6 with other EV products and ICE products in the market, we believe we still have a lot of competitive advantages. So the overall demand momentum stays quite strong. [Foreign language] For the ET7 product ramp-up, because the ET7 is going to be manufactured in the first factory we called F1 and they're going to share the production line with the current product ES8, ES6 and EC6. At the same time, we will also introduce some new manufacturing technologies and techniques in the production of ET7.

So that's why, starting from last year, we started to adjust the production lines in the F1 to support the new product production. In the meantime, I have also mentioned about the ES7, which is going to start delivery in the third quarter of this year. This product is also going to be manufactured in the F1. So the situation in F1 is quite complicated, as you can see, because we need to make sure we have sufficient production capacities to support the current ES8, ES6, and EC6, but at the same time, we also need to produce the ET7 and also prepare for the production of the ES7.

So that's why we believe the ramp-up progress of the ET7 is probably going to be a little bit slower compared with that of the ET5. So it seems ET5 is going to be manufactured in a separate new plant called F2. So we believe that probably around the third quarter of this year, we should be able to reach a normal production cadence for the ET7. [Foreign language] Regarding the lithium carbonate cost increase, we have done very in-depth research regarding the overall industry chain, especially the upstream.

We believe the cost increase or the price hikes is mainly due to the opportunistic price hikes, and there is no specific big gaps in terms of the demand and the supply of the lithium carbonate materials. Of course, right now, we can see some Chinese authorities like MIIT have already started to set up some mechanisms to manage the situation. At the same time, we also like to urge the companies in the upstream of the industry chain that they should think more from the long-term benefit of the overall development of the whole industry instead of manipulate or take the opportunity of the cost increases to increase their price.

Jeff Chung -- Citi -- Analyst

[Foreign language]

Operator

Thank you for the questions. Next question comes from the line of Nick Lai of J.P. Morgan. Please go ahead.

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

Yes, thank you for taking my question. Two simple questions, first on margin and the second on export business. I mean, William and then -- maybe talked about the GP margin already. Let me switch focus to the OP margin, yeah.

Last year, we understand the R&D spend and -- assumed an increase a lot in part -- largely part due -- largely due to the top-line increase. So looking to 2022, how should we think about SG&A and R&D expense in terms of either dollar terms or percentage to revenue? Is it fair to state RMB percentage to revenue should increase -- should drop meaningfully while SG&A should move more or less in tandem with the top-line sales? And the second question is regarding [Inaudible]. I understand it's probably not a big portion of auto total sales, but considering the latest dynamic in Europe and advising stronger RMB against either dollar or Euro, any update on the [Inaudible] front? Thanks.

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

[Foreign language] Regarding the OP margin, last year, in terms of the company's strategy, we would like to make sure that the gross profit can cover the SG&A cost. And we believe through the efficiency improvement and execution, we have followed through this strategy in 2021. In the coming years, we will continue to make decisive investments in terms of the R&D and the infrastructure. Of course, our strategy will stay the same, that is, we would like to make sure we can use the gross profit to cover the SG&A costs.

If we look at the EU market, of course, last year, because that was the first year for us to enter the global market, then it means that last year we need to make some advance investment, and we believe this year the efficiency is much higher than last year. But in terms of the R&D front, we are going to step up our R&D investments. This year, we believe, the R&D investment is going to be more than doubling than that of 2021 because we are going to invest in some long-term core technologies and some fundamental technologies, as well as the new products for 2023, as well as some product adaptation for the global market. By the year-end of 2022, our R&D headcount is going to reach around 9,000, and we believe this is going to be a big increase compared with our current R&D team size.

So this is the overall plan for the 2022. In terms of the overall strategic direction for the company, our target is that we can achieve breakeven for a single quarter in the fourth quarter of 2023, and we can achieve breakeven or reach profitability in 2024 for the full year. [Foreign language]

Steven Feng -- Chief Financial Officer

OK. So the second question is about our global business, right? No, actually, right now, every month we deliver about 108 in Norway, so that boosts our confidence a lot. It proves our product's competitive and also our business model. However, since we will kick off our SUV in Europe in the second half of this year, so the contribution of the European market to sales volume won't be very significant in this year.

But now on, NIO continues to develop and improve its product portfolio and service network, establish local user communities, and pursue a high user satisfaction. With that, we believe that market share and sales volume in Europe will come along naturally.

Operator

Thank you for the questions. I'll now take the next questions. 

Steven Feng -- Chief Financial Officer

[Inaudible]

Operator

Please continue. Allow me to take the next questions from Fei Fang of Goldman Sachs. Please go ahead.

Fei Fang -- Goldman Sachs -- Analyst

[Foreign language] Let me just quickly translate for myself. Can management talk a little bit about the utilization metrics of your infrastructure in battery swap stations, supercharging stations? How often people use it? What's the unit economics, or what's the difference between top cities versus lower-tier cities? Thank you.

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

[Foreign language] Previously, we have also mentioned that, accumulatively, we have completed over 7.6 million swaps, and it means that the current status for the swap station is that every day, we can complete around 30,000 swaps. For some areas with more users, of course, we will be able to accommodate over 1,000 swaps for one power swap station in one day. But highways, probably, in one day, the power swap station is going to accommodate around 10 to 20 swaps per power swap station because we have deployed the power swap station network in advance, probably one or two years in advance. Because of the design target of the power swap station network is that the ratio between user -- the ratio between the power swapper to the user should be around 1-to-1000.

But if we look at our current power network, especially for the power swap network, we have over deployed some power swap stations at this moment to make sure we have a much better experience for the users.

Fei Fang -- Goldman Sachs -- Analyst

[Foreign language]

Eve Tang -- Investor Relations

[Foreign language]

Fei Fang -- Goldman Sachs -- Analyst

OK. Good. [Foreign language]

Steven Feng -- Chief Financial Officer

Next question.

Operator

Certainly. Next question comes from the line of Edison Yu of Deutsche Bank. Please go ahead.

Edison Yu -- Deutsche Bank -- Analyst

Thank you for taking our questions. First one, can you give us some sense of the feature rollout cadence in the autonomous driving? What kind of features do you think the lidar will enable, and when can we expect those to arrive on the car? And then the second question is about the NIO ecosystem more broadly speaking. There are reports that you're working on a smartphone. How do we think about, you know, what's going on beyond the car? I know there's -- VR could be a big part.

Any thoughts there would be appreciated. Thank you.

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

[Foreign language] Thank you for your question. Of course, and the timing of the delivery of the ET7, we are going to start to provide the enhanced ADaaS features first to the users. But on top of that, we have already queued up the full-stack autonomous driving capabilities from the perception to the controlling strategy. So we target to start providing the AD as a service probably in the fourth quarter of this year with our NAD technology.

[Foreign language] Of course, we have always been actively explore the possible connections and the synergies between the vehicle and smartphones and other mobile terminals because we believe there are lots of synergies between these two products in terms of the fundamental technologies, the supply chain, and the software. At the launch of the ET5 at the NIO Day, we have also introduced some AR and VR technologies as well, and we believe there should be lots of room for innovation and we can also think about some innovative applications in the vehicles. [Foreign language] Edison.

Operator

Thank you for the questions. Next question will come from the line of Xue Deng from CICC. Please go ahead.

Xue Deng -- CICC -- Analyst

[Foreign language] So my next question is, what's the capex budget in 2022, and will you please introduce the detail about the main directions and the exact amount of money? Thank you.

Steven Feng -- Chief Financial Officer

[Foreign language] Thank you, Deng Xue. Yes, as mentioned by William, our gross profit margin already can cover our SG&A expense and this is also our target for 2022. So, our cash on hand will mainly be used to -- for our R&D activities and also capital expenditures for our new product developments and production facilities, sales -- service network and expansion, and also the charging and working infrastructures. And overall, also as mentioned in our previous explanations, we will increase our swap stations to 1,300 stations by the end of 2022.

And we will further open 100 NIO House and NIO Space, and 60 NIO service centers -- 50 new service centers in 2022. So -- and we will further to -- construct our NeoPark, located in Hefei, in 2022. So the total expenditure, I think, is over -- could be a big increase compared with 2021. Yeah, thank you.

Xue Deng -- CICC -- Analyst

[Foreign language]

Operator

Thank you for the questions. The next question comes from the line of Paul Gong from UBS. Please go ahead.

Paul Gong -- UBS -- Analyst

Yeah. Hi, thanks for taking my question. Glad I still have a chance to ask how you went at this late moment. Yeah.

Let me just limit my question to one. I want to know more about your thoughts about the mass-market brand. Obviously, you have to compromise some of the features that NIO has for more attractive pricing points or some cost competitiveness. So among all the features for the NIO offering, including, say, the exterior, the interior, the autonomous driving features, the acceleration, the driving range, the battery swap stations, as well as, let's say, the digital experience, and also the service.

So what do you think is the things that you are waiting to compromise on your mass-market brands that would be reserved exclusively for the NIO brands and you're not expecting from the mass-market brands? Just this question. Thank you.

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

[Foreign language]Thank you for your question. Of course, if we want to increase our volume and expand our user base, different companies will have very different strategies. For example, some peers like Tesla, they have adopted very different strategies compared with ours. For Tesla, they basically differentiated the Model 3 and Model Y from the Model X and Model S with a very big price gap.

So by doing this, they entered the mass market with the Model 3 and Model Y. So far, this has been quite successful, but at the same time, we have also seen some downside. For example, the sales of the Model X and Model Y have decreased significantly despite the product cycle. So we believe there are some underlying fundamental rules of the auto industry, that is there is a limited bandwidth of a specific brand.

It's very difficult to imagine a single brand can actually support the pricing range from RMB 100,000 to RMB 1 million. It's not feasible, and I believe this is against the common sense. So, for NIO, right now, we target the market segment that is around $50,000 to $100,000 and if we want to reach down to the mainstream market, that is priced around $30,000 to $50,000. We believe this is a much bigger market, and there is a reasonable market size for us to grow and we can also achieve a reasonable growth margin.

We also need to take some lessons learned from the Model 3 and Model Y. We understand, of course, for this mass market, we will also need to rethink the fundamental architecture of our product and also need to think about using different kinds of materials and also different manufacturing technologies for our products because, in terms of the mass-market brand, of course, they also needs to be efficiency-driven. And for this specific market segment, priced from $30,000 to $50,000, we believe, a more sensible approach versus to use a new brand to enter this new market segment. And we believe this is a better strategy for us.

We can also see some successful examples in the market with this strategy. For example, Audi and Volkswagen, and the Lexus and Toyota. We believe this can also be a strategy for us to disrupt the market as well. But, of course, for the mass-market brands, the prerequisite for this is to make sure we can achieve high efficiency and also achieve a reasonable vehicle gross margin.

Paul Gong -- UBS -- Analyst

Thank you.

Operator

Thank you for the questions. Now, I would like to turn the call back over to the company for closing remarks. 

Eve Tang -- 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.

Duration: 107 minutes

Call participants:

Eve Tang -- Investor Relations

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

Steven Feng -- Chief Financial Officer

Tim Hsiao -- Morgan Stanley -- Analyst

Bin Wang -- Credit Suisse -- Analyst

Stanley Qu -- Vice President, Finance

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

Jeff Chung -- Citi -- Analyst

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

Fei Fang -- Goldman Sachs -- Analyst

Edison Yu -- Deutsche Bank -- Analyst

Xue Deng -- CICC -- Analyst

Paul Gong -- UBS -- Analyst

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